William Saas, Jorge Amar, David Glotzer, and Scott Ferguson
This is the second part of a three-part series on Spain’s economic crisis, the program of the new leftist political party Podemos, and both the limitations and potential of the Spanish left today. This installment focuses on the relevance of Modern Monetary Theory (MMT) in transcending conventional balanced-budget thinking. Part 1 is available here.
William O. Saas is an assistant professor of rhetoric at Louisiana State University. His work has appeared in symplokē and Rhetoric & Public Affairs.
Jorge Amar is a Spanish economist, president of Asociación por el Pleno Empleo y la Estabilidad de Precios, or Full Employment and Price Stability Association), and a doctoral candidate in applied economics at the Universidad Valencia. Recently, Amar served as economic advisor for Spain’s Unidad Popular party.
David Glotzer is a valuation analyst at Solidifi, and freelance writer whose background is in Economics and Mathematics. His writings have appeared in CounterPunch, Investig’Action, Strategic Culture Foundation, and Young Progressive Voices.
Scott Ferguson is an assistant professor of humanities and cultural studies at the University of South Florida. He is also a Research Scholar at the Binzagr Institute for Sustainable Prosperity. His essays have appeared in CounterPunch, Naked Capitalism, and Flassbeck Economics International.
When one shifts focus from the public spectacle of political discord to the more vital behind-the-scenes debate over political economy, the prospects for the Spanish left look a lot more promising. Several major figures in Unidos Podemos, besides Garzón, do understand that the fiscal strictures forced upon Spain by the Troika institutions foreclose any hope for true economic recovery. Informed by the insights of Modern Monetary Theory (MMT), a select and well-placed few clearly see that monetary union without fiscal union is a tried-and-true recipe for endless austerity (see Alejandro Reuss, “Eurpoean Social Democracy and the Roots of the Eurozone Crisis: Part 1—Monetary Union and Fiscal Disunion,” D&S, July/August 2016). They recognize that jobs and demand, not equilibrium and “confidence,” are the key ingredients of economic well-being. Most importantly, they understand that the last best hope for Spain is to again become sovereign in its own currency.
The impending collapse of PSOE will leave masses of Spanish voters alienated and in search of alternatives to the newly formed PP-led government. While some voters might prefer the familiar feel of PP’s austere embrace, it is a safe bet that many more will defect to the parties that make up the Unidos Podemos coalition. This is, we feel, a very promising development. But in order for a reinvigorated Unidos Podemos to follow through on its promise to deliver the Spanish working class from austerity, the coalition must finally disavow, without apology or regret, the utopian dream of a single-currency Europe.
Modern Monetary Theory
Modern Monetary Theory (MMT) is a school of heterodox economic theory that describes how monetary systems operate in modern states. MMT’s critical insight is that states that are sovereign in their own currency cannot ever run out of money, and so can always afford to purchase anything that is priced in their own currency. This is true for any state that does not “peg” the value of its currency to a metallic standard (like the gold standard) or other government currencies (like a “dollar peg”), but instead issues its currency by “fiat” and allows its value to “float.” The only real spending constraints in such a system are 1) access to real resources and 2) concerns about inflation (though such concerns can be, and often are, overstated). Any additional constraints on domestic spending—e.g., a balanced budget rule—are artificial, political, and hence contestable.
Furthermore, MMT explains that taxation and public borrowing are both fiscal policy instruments designed to regulate the growth of the economy—not means for generating necessary revenue. This is because states that are sovereign in their own currency have no natural need to raise revenue. For this reason, MMT suggests that fiscal policy decisions ought always to be taken in service of the “public purpose.” Typically, the public purpose is best served by the full employment of national resources, including and especially labor. Toward that end, MMT advocates conclude that a government-supported jobs guarantee is the optimum policy for full employment of national resources in a state with a sovereign monetary system. Such a program, they argue further, will function as both a price floor and an economic stabilizer. MMT advocates have long objected to the euro currency project on the grounds that the monetary union deprives EU states of the fiscal authority necessary to adequately provide for the care and employment of their citizens.
The Story So Far
That the euro currency experiment has been an abject failure is a truism across the European left. Most non-centrist leftists recognize that what was sold as a means to achieve the dream of an open and unified Europe has in practice resulted in more deeply entrenched nationalism and still greater economic division. As Podemos leader Pablo Iglesias pithily summarized, “This Europe doesn’t work. This Europe is dying.”
It is one thing to notice that Europe is dysfunctional and dying. It is quite another to identify precisely what is killing Europe and, following from that diagnosis, to do what is necessary to restore individual European nations to good health. While Iglesias and his cohort on the European further-left seem to grasp the severity of the pathology, their prescriptions for ailing European nations have so far been shockingly modest in scope and frustratingly palliative in nature. What’s more, these prescriptions exhibit signs of contamination by the sorts of groupthink and denial that are endemic to the neoliberal European consensus. They have only extended Europe’s suffering.
Spain’s current case of chronic and intractable debt deflation—sky-high private debt levels and suppressed wages and pensions that make paying down private debts impossible—exemplifies neoliberalism’s dead-end political-economic wisdom. Between 1998 and 2007, rapid expansion of private credit precipitated the tripling of property prices in Spain. When the global credit bubble burst in 2008, property prices crashed but private debt levels remained high. The next part of the story mirrors events in the United States: millions of people lost their homes, their jobs, and their access to easy credit. What separates Spain’s experience from that of the United States, however, is that the Spanish government was not empowered to defend and stimulate its economy through proactive fiscal policy. Rather, because it is not sovereign in its own currency, Spain was forced to borrow €100 billion from the European Stability Mechanism to stop the collapse of its banks. The rules of the monetary union strictly prohibited the Spanish government from deficit spending to keep its citizens fed, housed, and employed. Meanwhile, the United States was able spend as needed by issuing Treasury bonds payable in its own currency (deficit spending).
The sustained annual deficits needed to get Spain out of its current depression likely exceed 9% of GDP—roughly three times the limit imposed by the EU. If Spain were to breach that limit, it could set in motion the EU’s Excessive Deficit Procedure (EDP), an arbitrary law that would drain up to 0.2% of Spain’s total economic output. The social and economic costs of a possible EDP fine are outstripped by the potential output currently being sacrificed in the name of budgetary balance, only underscoring the fickleness of the Troika’s rules and the misguidedness of obedience to them. To make matters worse, the Spanish government cannot control the interest rates on its national debt. This leaves the Spanish economy almost entirely subject to the whims of both the international bond market and the supranational European Central Bank.
To be sure, of all the proposals to address Spain’s debt deflation problem, Podemos’ has been among the least terrible. Much like the budget plans of so-called “deficit doves” in the United States, Podemos’ plan prescribes increased domestic spending in the near-term and balanced budgets over the long-term. To pursue the doves’ path within the strictures of the EU is difficult if not impossible. To hear Podemos’ Nacho Álvarez tell it, however, all that is needed for Spain to save its citizens and balance its budget is better and more consistent tax collection. Revenue gained through more effective tax collection could be used immediately to increase funding for vital social welfare programs. Over time, Álvarez argues, this process would have the salutary effect of bringing government revenues into balance with public expenditures.
This policy agenda has its heart in the right place, but it is irretrievably diluted by wrong-headed economic analysis. MMT’s “deficit owls” will immediately notice the sources of error. First of all, there is little reason to believe that Álvarez’s plan for more effective tax collection will work, so long as Spain remains in the euro currency union. This is because adequate tax collection in a free capital zone is nearly impossible without a supranational tax authority that is empowered to both enforce and collect. Otherwise it’s entirely too easy for private citizens and corporations to shuffle their euros between EU countries without notice.
More importantly, the idea that governments are naturally revenue-constrained and so always ought to strive to balance their budgets is a debilitating economic myth. Typically, governmental revenue constraints are artificial and self-imposed. That is, revenue constraints are first and foremost political constraints. In the eurozone, the balanced budget political constraint was formally codified with the Maastricht Treaty in 1992. Against the advice of numerous, ideologically diverse economists, the signatories of the Treaty entered into an economic system governed by what Scott Ferguson and Jorge Amar (two of the co-authors of this article) have recently called a “phantom gold standard.” Like the gold standard of old, the EU’s phantom standard functions to constrain the number of euros in circulation. Instead of precious metal, however, the Troika backs the euro with a capricious moralism. We will not allow your government to spend in excess of its current and anticipated revenues, the institutions protest, because to do so would be imprudent. It is unfortunate that millions must meanwhile starve and go without shelter, but such concerns are only incidental to the greater moral responsibility of the institutions to maintain euro-equilibrium.
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