28 March 2011

In defense of 'fiat money'

According to unorthodox economist William Mitchell, America's two-party system conceals an oppressive "neoliberal" consensus that dictates austerity measures during recessions on the zero-sum assumption that government spending and the taxes that make it possible drain financial resources from the job-creating private sector. Writing in The Nation, Mitchell dismisses the logic of austerity as a myth founded on the false assumption that state debt is the same as private debt. The difference, he insists, is that "the government can never run out of money." Mitchell credits deficit spending with keeping economies from collapsing completely during the Great Depression. The idea was only discredited, he argues, when it was wrongly identified as the cause of the inflation that began in the 1960s and accelerated during the 1970s. This association was congenial to the "personal responsibility" conservatives who emerged in that era. They preferred to see unemployment, the minimization of which once justified deficit spending, as a matter of, of course, personal rather than social responsibility, while arguing that governments had the same responsibility as individuals to live within their means. Mitchell's argument that state debt is different and less burdensome than personal debt will certainly be the most controversial part of his article, because he claims that governments, in effect, have a "get out of debt free" card.
When British Prime Minister David Cameron said that the government deficit is just like credit-card debt and that Britain was facing bankruptcy, he was invoking the false neoliberal analogy between national budgets and household budgets. This analogy resonates strongly with voters because it attempts to relate the more amorphous finances of a government with our daily household finances. We know that we cannot run up our household debt forever and that we have to tighten our belts when our credit cards are maxed out. We can borrow to enhance current spending, but eventually we have to sacrifice spending to pay the debts back. We intuitively understand that we cannot indefinitely live beyond our means. Neoliberals draw an analogy between the two, because they know we will judge government deficits as reckless. But the government is not a big household. It can consistently spend more than its revenue because it creates the currency. Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like whenever there are goods and services for sale in the currency they issue.
Mitchell describes what is usually and pejoratively called "fiat money," currency that purportedly has value only because the government says it does. While many economists and politicians recoil from the idea, Mitchell embraces it, arguing that fiat money actually makes government borrowing unnecessary. Governments still do it, apparently, for the same reason Alexander Hamilton advocated a funded debt in the first place: to give wealthy people a stake in the nation. As Mitchell puts it, "public borrowing provides corporate welfare in the form of risk-free income flows to the rich because it allows them to safely park funds in bonds during uncertain times and provides a risk-free benchmark on which to price other, riskier financial products." Rather than putting ourselves deeper in debt to people who seem to believe that we really do have to repay them, Mitchell would have us print money without limit -- and, presumably, make everyone we deal with accept it. Countering the charge that deficits are inflationary, Mitchell argues that they're inflationary only when the economy is already running at full capacity (which for him means full employment), because under such conditions the public would already be spending as much money as they want. Recessions are exactly the time to run deficits, on the assumption that they'll stimulate production, job creation and spending. Mitchell acknowledges that what he regards as generation of neoliberal brainwashing makes his logic difficult for contemporaries to understand. I know that I have at least one problem with his ideas. Mitchell's model seems to require what we might call a sovereign vacuum, an environment in which the state's will is unchallenged and non-negotiable. Mitchell's rosy scenario depends on a degree of national sovereignty that some troubled European countries lack because they've surrendered some control over currency. The U.S., Mitchell claims, is under no such constraint. But is that so? In an increasingly globalized economy, one has to wonder. Will foreign countries accept that the dollar has whatever value the U.S. government says it does? It seems that they'd have ways of voting with their feet if they disagreed. Their opinion might also find expression in higher prices for imports and higher costs for American tourists around the world. Can the dollar remain the preferred currency for global trade if it doesn't have any "objective" value? I have my doubts. I'm more convinced by Mitchell's arguments for the other benefits of deficit spending, but I wonder whether those benefits would be compromised should his assumptions about the universal acceptance of fiat money be proven wrong. Mitchell has only renewed an argument as old as the republic about inflation and the volume of currency. Governments have always been torn between the need to create opportunity by making a circulating medium as widely available as possible and the pressure from entrenched wealth against any measures that threaten to reduce the value of their own property. This dispute may really be the essence of all "liberal" vs. "conservative" divides in American politics, and it may belie our alleged collective commitment to equal opportunity, so long as creating opportunity is seen as subverting existing wealth. It's possible that Mitchell himself considers the issue as simple as it was to either side in 1787, and if so, that may be a crucial fault in his analysis. But if he's right that today's two-party system has effectively suppressed this fundamental debate in favor of a neoliberal consensus -- the paradoxical label for the domestic counterpart of neoconservative foreign policy, -- then that's further proof that the American Bipolarchy isn't doing its supposed job.

No comments: