Keynesian Checkers versus Monetarist Three Dimensional Chess
You can almost smell the frustration pouring off Paul Krugman these days, as he once again proclaims the latest in a series of victories of Keynesian economic theory over its monetarists opponents.
“Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”
Krugman’s argument, which is a continuation and expansion on a more extensive argument by Mike Konczal can be simplified: Keynesian policies are better at generating an overworked working class than monetarist policies.
The Keynesians complaint against the Monetarists is so sharp right now, it is easy to miss both schools of bourgeois economic thought are trying to accomplish the same thing, namely, increase profits in conditions of absolute over-accumulation of capital. This problem can be stated simply: in a condition of absolute over-accumulation some portion of the existing mass of capital must be taken out of circulation to make room for newly created capital seeking its place in the process of capitalist reproduction.
Keynesians rightly point out this cannot happen unless the fascist state consumes some portion of existing capital unproductively. Unproductive consumption of this sort typically happens by increasing state spending on things businesses would not normally produce: bridges, drones, roads, aircraft carriers, etc.
Monetarists argue this unproductive consumption can be accomplished through monetary policy alone by encouraging non-state borrowers to consume unproductively. An example of this is the so-called housing bubble of the early 2000s, where Americans were encouraged to go on an orgy of residential construction and improvements.
Of course, bubbles like the housing bubble are very short-lived simply because the great mass of society lives very near poverty, i.e., their wages generally fluctuate around the point that keeps them barely solvent from paycheck to paycheck. Even with the sudden availability of easy consumer credit, the wages of this mass is soon overtaken and exhausted by debt service. Consumer debt is a quick and easy hit for an economy seeking false prosperity through debt, and can sometimes be confused with real capitalist expansion, but the effects peter out in a matter of months, not years. When petering out began to occur in 2006-2007, as the very least solvent consumers — subprime borrowers — went belly up, this generated a cascade of defaults. The Federal Reserve stepped in with ultra-low interest rates in an attempt to stem the collapse, but there really wasn’t anyone left who could take advantage of these rates. The only beneficiary of ultra-low interest rates is the fascist state, as Keynesians point out — and, moreover, it has unlimited capacity to borrow.
Unlike consumer debtors, the state has no limitation on its income that serves as a hard barrier to further expansion of consumer credit. If necessary, in a crunch the fascist state can counterfeit currency to pay its debt service and keep on borrowing. For this reason, Keynesians argue the reluctance of the Washington consensus to support more fascist state spending is basically ideology driven. This ideology is supported by a number of fallacies about state sector spending that add to and support the ideological agenda of powerful interests in Washington.
One of these fallacies is the state must balance its budget, i.e., that it faces the same sort of borrowing constraint as subprime debtors. Actually, since the state has a monopoly on the national currency, it can counterfeit as much of it as it desires, so long as the currency itself is not threatened by a generalized loss of confidence produced by excessive money printing. There is, Keynesians admit, a limit of sorts on fascist state counterfeiting of the currency: no one wants the US dollar to end up like the Zimbabwe dollar. But there is no reasonable likelihood of that happening in this crisis or in the foreseeable future. All the talk in Washington about some fiscal D-day is encouraged for its political effect.
How do we know this might be true? I mean, apart from the Krugmans of this world, who have their own ideological agenda, how do we know the fascist state faces no limit now?
Well, I am glad you asked that question.
A paper was published in early 2012, by two researchers,Krishnamurthy and Vissing-Jorgensen, that essentially argues US treasuries are behaving like a currency. By this, the authors mean when the US issues treasuries these treasuries buy shit just as if they were dollars. Creditors treat US government debt as if it is money and hand their goods over in return for the treasuries as if they were dollars. And, like dollars, the treasuries accrue next to no real interest at all. If the researchers’ empirical findings are to be believed, essentially, it does not matter whether you accept dollars or treasuries in a transaction right now. Treasuries can be thought of as just a huge bundle of dollars in a convenient, easy to carry container. As long as this is happening, the US can issue as much debt as it wants to absorb the superfluous capital that must be consumed unproductively in order to begin the next phase of capitalist expansion.
There is a problem with the Keynesian argument, however: Keynesians are, on average, no smarter than Monetarists, i.e., they are all simpletons. But as simpletons, Monetarists are no more simple-minded than Keynesians, and they have access to the same research Keynesians have. Which means both Keynesians and Monetarists read that research paper and knows its implications. Given this, Krugman and the Keynesians suggest the difference is only political:
“the Keynesians have overwhelmingly won the debate everywhere except where it matters…”
Which is to say, the Keynesian argument has been borne out by the empirical data, but has not, thus far, changed actual policy in Washington. So, is this just a matter of ideological differences? Is it true the only reason Washington policy is neglecting fiscal stimulus is because of an ideological prejudice against fiscal stimulus?
To answer this question we have to look not toward the political in-fighting in Washington, but the structure of the euro-zone. The euro-zone is interesting because, unlike the Fed it was completed during the heyday of monetarist dominance on the basis of the assumption monetary policy was all that would be necessary in a depression. This means, among other things, the euro-zone was designed to prevent any fiscal policy action during a depression.
Now why would the creators of the euro-zone deliberately set out to hobble fiscal policy in a depression? Obviously this was an attempt to prevent the working class majority of Europe from determining how this fiscal policy would be effected. The euro-zone was designed, in other words, to kill democratic control over the economic processes managed by the fascist state and allow for the uncontested rule of capital. Behind the resistance in Washington to fiscal policy is the determination, insofar as this is possible, to prevent the fascist state from being responsive to the political pressure of the proletarians.
In theory at least, every depression forces the capitalists to face the possibility of conflict between the two classes over who rules. The more this conflict can be limited prior to the depression, the more it can be decided in favor of one class or the other. The monetarists reject fiscal policy not because of ideological prejudices, but because of the danger posed by democracy.
Of course, this is just my working hypothesis based on the history of the school, but it is useful to me because it allows me to think past the debate to the implications of monetarism: In any case, without Washington’s fiscal policy tool, the monetarists are in desperate need of another non-state source of debt. But here the term “non-state” has to be defined as “other than Washington”, not simply non-state in general. Which is to say, from the point of view of monetarism, all other states have to be considered non-states, i.e., states without sovereignty.
This does not mean these states must lose their “democratic institutions”, but that these institutions do not have any control over the fiscal and monetary policies of the nation. In its most ideal form all other nations would borrow dollars to fund their deficits just like any US state. They would lose monetary sovereignty, and their credit worthiness would be subject to the same sorts of determination as US states are subject at present.
This means while Keynesians are playing checkers, the monetarists are playing three dimensional chess. Keynesians are debating post-Fordist national fascist state fiscal policy, while monetarists are engaged in global monetarist policies. In the monetarist world view, national borders are lines on a map — there is no longer something called the nation state.
Krugman is entirely correct that monetarism doesn’t work as well as Keynesian fiscal policy to boost the US economy, but although correct, his point is equally irrelevant. Monetarism doesn’t aim at growth of the US economy, it aims (as Keynesian policy aims without knowing it) at maximization of profit.
In labor theory the rate of profit is not important; rather the concern is the mass of profits created. And this mass of profit depends on the mass of capital that can actually be mobilized at any given rate of profit. Even if the growth rate is very low in the United States, the mass of profits can be expanded if the mass of capital mobilized is expanded. The best opportunity for such expansion is in the outlying nation-states who have no choice but to borrow in dollars. In this sense, they are not unlike the sub-prime borrower, who, as her real income fell, turned to easy credit to maintain her subsistence.
And, as might be expected, this will end as badly as did the sub-prime credit bubble.