The Brooklyn Rail

OCT 2020

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OCT 2020 Issue
Field Notes

Money Magic

It’s comforting to know that in the midst of this national and global economic, medical, political, and ecological crisis the science of economics has not been sitting on its hands. In the early days of the COVID-19 pandemic, some effort went into calculating the dollar value of the human lives that might be lost to the disease, or saved by the shutdown of polluting industries. Now a more important question seems to be understanding whether or not the $600-a-week unemployment benefit supplement that ended in late July “deterred workers”1 from taking work by giving them so much income that they didn’t want to go back to low-wage jobs. The question is not entirely academic, as varied answers provide ammunition for the ongoing struggle between congressional Republicans and Democrats over whether to reinstate the benefit as part of a new multi-trillion dollar stimulus bill. That the feasibility of using the ongoing depression to further drive down wages, cut benefits, and worsen working conditions is being discussed via a social-scientific dispute—whether a short-term relief measure is a disincentive to work at a time when 30 million jobs have vanished—tells us more about the nature of economics than about the motivation for employment. It provides further support, if any is needed, for historian of science Jerome Ravetz’s description of economics as a “folk science,” “a body of accepted knowledge whose function is not to provide the basis for further advance but to offer comfort and reassurance to some body of believers.”2

In this case the believers prominently include the small-business people for whom, as a New York Times reporter put it, “On a gut level, the Republicans’ argument makes sense,” and who seem to be, along with assorted white supremacists and conspiracy-theory enthusiasts (these are not exclusive categories), the main voter supporters of the current US government. While there is also some verbal gesturing towards the problem of the expanding federal deficit, this seems to play a role only in arguing for limits to support for the unemployed, not for refusing further corporate relief, and certainly not for a restoration of higher tax rates on businesses and the wealthy, something in which the Democrats are equally uninterested. That is, the specter that has haunted economic policy-makers since the last Great Depression—the fear of an out-of-control national debt—has ceased to perturb them, despite the fact that the debt is set to meet and exceed the American GDP itself any day now.

A high national debt was feared because it was expected by economists to unleash damaging levels of inflation, surging interest rates, and loss of confidence in the dollar. These evils are not, however, making an appearance. As a result, without having much to say about why this is, economists have taken a newly blithe tone on the question. For instance, Olivier Blanchard, formerly of the International Monetary Fund and now a Senior Fellow at the free-trade-boosting Peterson Institute for International Economics, has been quoted as saying, “At this stage, I think, nobody is very worried about debt. It’s clear that we can probably go where we are going, which is debt ratios above 100 percent [of GDP] in many countries. And that’s not the end of the world.”3 According to Kenneth Rogoff, a Harvard expert on government debt and economic growth whose work was frequently cited in support of deficit reduction under President Obama, “Any sensible policy is going to have us racking up the deficit for a long time, if you can. If we go up another $10 trillion, I wouldn’t even blink at that now.”4 The cognitive dissonance was perhaps most clearly embodied in recent remarks by Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, who urged both that “We should think and worry about the deficit an awful lot, and we should proceed to make it larger.”5

It’s obvious why even former “deficit hawks” are embracing GDP-level debt, though economic science has little to do with it. The alternative is a colossal worldwide financial crisis, together with a sudden plunge into mass immiseration on a scale the authorities are not yet prepared for, although they are clearly more worried about the first of these. Despite the constant assertion that the current recession is a result of efforts to contain the pandemic, the world economy was well on the way to crisis before COVID-19 struck.6 The stimulus has failed to stimulate; the V-shaped recovery hoped for early on has not materialized; unemployment is rising again as businesses continue to close or don’t reopen; hunger and homelessness are increasing to classic depression levels, while cities and states, starved for taxes, are cutting their budgets savagely. Hence Loretta Mester, president of the Federal Reserve Bank of Cleveland, told reporters

that her own forecasts for the economic recovery hinge in part on continued fiscal support, and that without it, the United States might struggle to make it through shutdowns and onto a sustained growth path.

While Ms. Mester said that she was “not one of those people who think that deficits don’t matter,” the United States cannot worry about loading up on debt in the middle of a nascent recovery.

“This isn’t the right time to have that conversation,” she said.7

When would the right time be? So far no one has said. Presumably it would be when the recovery really gets on track, which the economic belief system can only predict as coming sometime soon. Meanwhile, the deficit can is kicked further down the road, just as the just-instituted moratorium on evictions puts them off until January, with no cancellation of unpaid and unpayable rent, or even of interest charges on it.

If, on the one hand, the continued expansion of the debt is required to prevent further economic contraction (even if this is politely described as supporting economic recovery), on the other the policy-makers feel free to kick that can because the long-predicted inflation has not materialized. It’s worth asking why not, since the bad odor the theory of government counter-cyclical spending, Keynesianism, acquired in the late 1970s reflected the actual high rates of inflation that spending had apparently produced in those good old days, when even Nixon proclaimed, “We are all Keynesians now.” Basically, mainstream economists believed, commonsensically, that inflation was due to “too much money chasing too few goods.” Government spending—especially giveaways like welfare—put money in the hands of consumers, whose competitive shopping bid up the prices of goods. This idea, of course, leaves unasked the question why the expansion of purchasing power did not lead to an expansion of production of goods and services for purchase, restoring the balance between supply and demand.

Despite economists’ beliefs, what determines the scale of production is neither the human need for goods and services nor the quantity of money in the hands of consumers, but the profitability of monetary transactions or paid businesses. Goods are not produced in capitalism because people need them, but when they can be sold at a satisfactory profit. An economic recession signals a decline in profitability, which makes business owners uninterested in further investment on a scale adequate to employ the potential wage-earning population. The Keynesian idea was that governments could take (by taxation) or borrow the money entrepreneurs were not spending to expand production, to purchase goods or hire workers directly. This additional spending, by increasing demand, would “jump start” a slowed economy, leading to a return to prosperity. Under prosperous conditions, expanded profitable production would produce money available for taxation to pay off the government debt.

As we know, this is not what happened. Government spending did not in itself increase the profitability of private capital, since the money the government handed out for paid businesses for such products as fighter jets and bombs was taken from already-existing business profits, through taxation or borrowing. The most this spending could accomplish by recirculating uninvested funds was to tamp down the hardship, to businesses and workers alike, while the processes of the business cycle—basically, the devaluation of invested capital, including the liquidation of unpayable business debt, along with the decline of labor costs as unemployment rises—opened the way to an increase in profitability and the renewal of prosperity. Meanwhile, paying off the debt and the interest on it required taxing business profits, or further borrowing on the capital market, which raised interest rates, a cost for businesses. Businesses defended their bottom lines by raising prices; workers fought for higher wages to defend their standard of living, usually more slowly than the price increases to which they were reacting. Prices increased throughout the economy as different business sectors struggled to make others pay the costs of the debt: the dread stimulus-induced inflation.

Despite Ronald Reagan’s insistence on the evil character of government spending, the continued weakness of the capitalist economy did not permit an actual end to it—in fact, the national debt rose to record levels under Reagan. But the modality of government economic intervention evolved towards the direct subsidization of select corporations, with less regard for the maintenance of “full employment” (a number steadily revised upward in any case). Inflation was the enemy. Around the world, governments reacted to the continuing decline of capitalist prosperity by cutting state payments for health, welfare, education, and unemployment relief, either directly or by the device of “privatization,” transferring such governmental functions as package delivery and education to private businesses.

At the same time, the continuing mechanization of production led to the decline of manufacturing as a percentage of economic activity, an effect particularly marked in the capitalistically-developed countries as manufacturing capacity shifted to low-wage areas like Central America, China, Southeast Asia, and Eastern Europe. In its place, financial speculation in a range of assets expanded as an arena for money-making. The growth of speculation was regularly interrupted by various banking, real-estate, stock-market, and other crises; when they threatened the political and social stability of important business centers, governments and international agencies moved to support the financial system directly by injecting money into it. Tried out by the Bank of Japan in response to the onset of quasi-depression conditions in the 1990s, this became the main weapon wielded by central banks in the US, Europe, and China to fight the Great Recession of 2008. Unlike classical deficit spending, however, the money used for what was called “quantitative easing” was not acquired by taxation—since this would defeat the purpose of supporting business—or borrowing from private owners of wealth. Instead the central banks—in the case of the US, the Federal Reserve—simply expanded their liabilities (“printed money”8) to buy bonds, both Treasuries and private debt, such as mortgage-backed bonds, from private financial institutions. This at once injected money into the financial system and raised bond prices, which by lowering bond yields pushed investors towards the stock market. Basically, none of this costs business anything, while the rise in stock prices disproportionately benefits the small super-wealthy minority who disproportionately own stocks, so there is no motivation to raise prices—especially under the deflationary conditions of a global business slowdown—producing an inflation-free expansion.9

It’s clear that economic policy-makers are still worried about the long run, even as they see no alternative to continuing the course. No doubt this is in part because the lack of a theory all economists agree on means that nobody feels sure about what’s going to happen. There is of course a theory to rationalize the new normal, the turn-of-the-20th-century doctrine called Chartalism, reborn as Modern Monetary Theory. MMT’s theoretical demonstration that deficits can be expanded indefinitely was taken up excitedly by the Democratic left, seeing in it a theoretical warrant for a no-tax-and-spend policy that might overcome some of the effects of economic inequality without seriously redistributing income. Just as Keynes provided a (not very convincing) theory to explain policies already put into action by Hitler and Roosevelt, MMT owes its move from the fringe to serious attention to the actual policies of central banks, rather than the other way around. Nevertheless, it just seems unlikely that money can be printed and handed out indefinitely without any problems.

This suspicion on the part of economic pundits and government officials has a basis in the fact that the financial system to which the bulk of their efforts is directed is part of an economy that must continue to produce material goods and services. Ultimately, the viability of finance rests on the success of capitalist firms in making actual profits from the sales of these goods, some of which can be invested to expand the system while some flow to the holders of various forms of debt. If capitalists can’t make enough money to pay their workers enough to afford the rents or mortgages on their homes, for example, mortgage-based bonds and venture-capital investments in real estate will not turn a profit.10 And apart from the circulation of money through the system with the goal of its accumulation in the hands of the owners of capital there is the matter of the physical existence of the working class, aka the 99 percent, increasingly unable to pay for food, housing, and medical care even while the stimulus operations of the central banks deposit newly created money in selected accounts. The Democrats wish to send them another few months of $600 checks, while the Republicans baulk at more than $200 or $300. But both are simply assuming that the situation will soon solve itself, with a return to prosperity, somehow eased by government actions forestalling the deep social disruptions produced by earlier depressions. The self-contradictory nature of policy-talk, caught between the Scylla of endlessly growing debt and the Charybdis of societal collapse, reflects the inability of economic science even to explain current events, much less dominate and shape them. If it were able to explain them, it would also have to conclude that nothing much can be done about them: Society will have to face the miseries imposed on it by the workings of the economic machinery, either by suffering through decades of destruction so that the system can win a new temporary lease on life, or by finally abolishing the social relations of wage labor and capital on which the mechanism rests.

  1. Patricia Cohen, “Do Jobless Benefits Deter Workers? Some Employers Say Yes. Studies Don’t” New York Times, September 10, 2020.
  2. Jerome Ravetz, Scientific Knowledge and Its Social Problems (New York: Oxford University Press, 1971), p. 366.
  3. Matt Phillips, “We Have Crossed the Line Debt Hawks Warned Us About for Decades,” New York Times, August 21, 2020.
  4. Jim Tankersley, “How Washington Learned to Embrace the Budget Deficit,” New York Times, May 16, 2020.
  5. Jim Tankersley, “Federal Borrowing Amid Pandemic Puts U.S. Debt on Path to Exceed World War II,” New York Times, September 2, 2020.
  6. See Paul Mattick, “Their Money or Your Life,” Brooklyn Rail Field Notes, May 2020,
  7. ibid. Tankersley, “Federal Borrowing.”
  8. Unlike printing money, as the Weimar government of Germany did in order to pay off the state debt—inflated by unsustainable reparations payments—this is printing money to increase the state debt, so that it can be pumped into the economy.
  9. This is not quite correct, since the prices of assets traded within the financial system, such as stocks, real estate, and art are wildly inflated.
  10. See Nathan Eisenberg and Richard Hunsinger, “The Rent Is Too Damn High,” Brooklyn Rail Field Notes, September 2020,

The Brooklyn Rail

OCT 2020

All Issues