By William K. Black
Part 7 of the MMT Series
April 8, 2019 Bloomington, MN
Tom Friedman’s April 2, 2019 column concluded “The United Kingdom Has Gone Mad.” To which, the only possible response is – ‘you just noticed?’ The UK went ‘mad’ 22 years ago when Parliament elected the odious Tony Blair Prime Minister. I think many Tory policies were mad long before that date, but the Labour Party opposed them. The entire UK did not go ‘mad’ until Blair created “New Labour” and adopted Tory policies and became PM in 1997. Blair explicitly modeled the name and the adoption of neoliberal economic and military policies on Bill Clinton and the “New Democrats.” The UK became ‘mad’ when both of its major parties adopted the neoliberal economic and military policies that Friedman celebrates and proselytizes.
Friedman’s April 2, 2019 column was about Brexit, which understandably sticks in the craw of the populist spreader of the myth that the world is becoming ‘flat’ and a ‘hyper-meritocracy.’ The wealthy rig the world to make it tilt sharply. Plutocrats tilt it to ensure that a huge and increasing share of the world’s wealth flows to them. Friedman is the most infamous shill for those plutocrats. The plutocrats tilt and warp the economy unevenly to favor not simply the wealthy, but a favored subset that is typically the opposite of a meritocracy (kakistocracy). Worse, the world tilts toward catastrophe because the ultra-wealthy kakistocracy’s political pawns have produced environments so criminogenic that they produce our recurrent, intensifying financial crises. Friedman is shocked that one of the two epicenters of the global kakistocracy and plutocracy – the City of London – has forced the UK to follow policies so self-destructive and rapacious that vast swaths of the UK rose in opposition by voting for Brexit. The City of London, of course, hates Brexit.
Friedman’s column does not consider the data on the primary reason a majority of UK citizens voted in favor of Brexit – a policy he considers ‘mad.’ Austerity was the decisive factor that changed the expected vote on Brexit from ‘remain’ to ‘leave.’ (The linked article discusses what drove support for Ukip. That UK party’s single issue was pushing Brexit.) Polling data confirms that these predominantly working class voters devastated by austerity were the key to the public’s vote in favor of Brexit.
Research published by the Social Market Foundation suggests the best indicator of a person’s referendum vote was not age or education, but happiness or sadness about their personal finances – with unhappy people tending to vote Leave and contented ones preferring Remain.
The report, which analysed the level of cuts in each area of the UK alongside each area’s growth in support for Ukip, argues that had it not been for austerity, the referendum would not have turned out the way it did.
It found that in districts that received the average austerity shock, Ukip vote shares were on average 11.62 percentage points higher in the most recent local elections prior to the referendum than in districts with little exposure to austerity.
As well as area-level analysis, the report looked at individual-level data and found that some people directly affected by welfare cuts shifted their political support to Ukip and rejected the political establishment.
“Households exposed to the bedroom tax increasingly shifted to support Ukip and experienced economic grievances as they fell behind with their rent payments due to the cuts,” the paper stated.
As much as 9 percentage points of the 52 per cent support for Leave – around 3 million votes – was decided by concern about austerity and related issues, the researchers estimated.
It suggests that without the effect of the “austerity shock” on welfare and public services, the Leave share of the referendum vote could have been as low as 43 per cent, delivering a comfortable win for Remain.
Austerity means that Modern Monetary Theory (MMT) is relevant to the story. MMT scholars protested against UK austerity and warned it would harm the recovery. It did. Austerity always inflicts its harm unevenly. It is an enormous economic advantage to the wealthy, and a horrific burden on the working class and the poor. In the UK context, that meant that austerity made the City of London elites that did so much to cause and profit from the orgy of “control fraud and predation” that caused the Great Financial Crisis (GFC) even wealthier while devastating huge parts of the UK inhabited by working class families. (“Control fraud and predation” is a criminology term that describes what happens when those who control a seemingly legitimate firm use it as a ‘weapon’ to defraud or predate on others.)
Friedman, Blair, and Clinton’s Four Defining Acts of Madness
Why did Friedman ignore austerity? The UK went ‘mad’ when Tony Blair championed four neoliberal policies that caused massive harm.
- The three ‘D’s’ – deregulation, desupervision, and de facto decriminalization
- The ‘race to the bottom’ between the City of London and Wall Street to attract the biggest, most fraudulent bankers
- The U.S. invasion of Iraq in 2003
- Austerity in response to the Great Financial Crisis (GFC)
Friedman, infamously, was among the most prominent cheerleaders for these ‘mad’ policies. Friedman loves ‘globalization’ and the most far reaching, dominating, and harmful form of it is global finance. Friedman has a ‘mad’ view about financial crises and globalization. In The Lexus and the Olive Tree: Understanding Globalization (1990: 462), he admitted that deregulation and globalization would cause immense harm. He was writing in the heart of the savings and loan debacle. “Global financial crises will be the norm in this coming era.” He added to emphasize that point: “crises will be endemic” (emphasis added).
Friedman was correct to admit that the policies he cheered would produce “endemic” financial crises. What he did not discuss was the “endemic” financial crises’ costs. He did not discuss how we should prevent the crises or respond to them when they occurred. Professor Alexander Field of Santa Clara University published a study in 2017 that estimated the U.S. cumulative output losses over the course of the GFC and its recovery as $41.7 trillion (Table I, p. 95). A trillion is a thousand billion. The figure for the EU should be substantially larger because its infliction of austerity slowed its recovery.
The U.S. figure, however, would have been smaller had President Obama not made his infamous pivot towards austerity and the “Grand Bargain” that he sought to negotiate with Republicans to weaken the safety net. It was really the Grand Betrayal of his campaign promises and the American people. Friedman does not want to discuss his praise of the three “De’s” and the “race to the bottom” between the City of London and Wall Street that created the intense “criminogenic environment” in both financial centers and drove the control fraud and predation epidemics that drove the GFC. Friedman does not want to discuss his praise of EU austerity and Obama’s effort to negotiate the Grand Betrayal.
Blair, Clinton and Gore, Obama, and Friedman went “mad” long before Obama sought to negotiate the Grand Betrayal. Consider Friedman’s admission that the trends he champions are certain to cause “endemic” global financial crises. That is a ‘mad’ trend. We desperately need to reverse it. The S&L regulators contained the ‘debacle’ before it caused any economic crisis, but it cost $150 billion to resolve. We did so by reversing the deregulatory trend. The Enron era frauds, at peak, caused a $7 trillion dollar loss of market capitalization and helped spark a moderate recession. The GFC caused a $41.7 trillion loss in U.S. output, a larger loss in EU output, a global financial crisis, and the Great Recession. If the trend continues, the “endemic” global financial crises will cause catastrophic harm. What is Friedman’s policy answer to such a devastating trend? Friedman gives this sage advice in his column decrying the UK going ‘mad.’
What do the most effective leaders today have in common? They wake up every morning and ask themselves the same questions: “What world am I living in? What are the biggest trends in this world? And how do I educate my citizens about this world and align my policies so more of my people can get the best out of these trends and cushion the worst?”
What Friedman describes and praises is mad. It is mad to treat a “trend” as inevitable. Trends are the product of institutional factors that create incentives. Institutional structures – the three “de’s” plus a race to the bottom creates the perverse incentives that create an environment so criminogenic that it will produce “control fraud” and “control predation” epidemics so harmful that they will make global financial crises “endemic.” The “most effective leaders” would never accept “trends” that were so harmful. They would work on an emergency basis to end the trends producing “endemic” global financial crises.
Similarly, the “trends” on climate change are catastrophic. It is “mad” to accept those trends – we must urgently reverse those trends.
Friedman pretends to be vigorous on climate, but his own words demonstrate that he thinks the goal should be to “cushion the worst” harms. He wants to allow a suicidal trend to continue. That is mad.
“Effective leaders” do not ask: “what world am I living in?” They ask: “what world should we make?” We make our world through the democratic process when we create our institutions and our rule of law. When we create a criminogenic or predatory environment, we ensure that fraud and predation will become epidemic and crises “endemic.” It is mad to do so, yet that is what we have been doing for nearly 40 years. It is mad to continue a mad policy when we see it produce endemic and growing financial crises that cause catastrophic harm. Friedman is the world’s most willing apologist for the plutocrats that create these perverse environments. He celebrates their alleged brilliance and claims they are spurring huge gains in productivity. Data destroys his apologies. Productivity in the EU and the U.S. has fallen sharply during the period we have been making finance ever more criminogenic. That, of course, is what economists and criminologists would predict. Thinking that by eroding the rule of law to the point that we have made global financial crises “endemic” is a good way to spur economic growth is mad. Austerity and public bailouts of fraudulent financial firms is, however, a spectacularly effective policy to aid plutocrats and kleptocrats.
Friedman’s heroes and their ‘mad’ neoliberal policies made the world so criminogenic that global financial crises became “endemic.” Friedman’s heroes and their ‘mad’ decision to invade Iraq was one part farce and twelve parts tragedy. President Bush, of course, leads the list of those who were ‘mad’ when it came to Iraq. Again, the tragedy is that the leaders of both major parties in the U.S. and the UK shared this madness. Friedman was their most notorious cheerleader and apologist for their “muscular” military policies that invading Iraq epitomized. His ‘mad’ policies, 16 years later, continue to cause immense suffering and disrupt the Middle East. Friedman has a bro-crush on Blair, so his trademark obsequiousness to powerful males reached nauseating levels in his writings about Blair.
Two years ago, Friedman wrote a column praising Blair as the exemplar of the ideal leader, but admitting that Blair was enormously “unpopular” among UK citizens. The UK public despises Blair for championing the four acts of madness that produced the GFC, a ‘mad’ response (austerity plus bailouts of the City’s fraudulent and predatory bankers) to the GFC that made it far more damaging, particularly to the working class, and the catastrophic invasion of Iraq. The UK citizenry also detests Blair for his greed since leaving office in becoming wealthy by shilling for the world’s worst dictators and for his hypocrisy in presenting that odious behavior as ‘charitable.’ (Yes, he continued to copy Bill Clinton’s tactics after leaving office.) Blair got as wrong as it is possible to get wrong the six great issues he faced.
- Blair optimized the criminogenic policies that produced the epidemics of control fraud and predation that drove the GFC.
- He responded to that catastrophe by bailing out the biggest and worst bankers and banks.
- He failed to hold accountable those elite crooks and predators for their actions or even ‘claw back’ their gains from fraud and predation.
- He and his successor he chose created the self-inflicted wound of austerity that further enriched the elites and impoverished the working class.
- He championed and was the leading defender of the invasion of Iraq
- He disgraced his Nation after leaving office.
Friedman’s Juvenile Enthusiasm for ‘Muscular Diplomacy’ (Invading other Nations)
Friedman ignores the reasons his nation despises Blair, except for Blair’s push to invade Iraq and defending it even when the facts proved that the pretexts for invasion were falsehoods and the horrific harm of the invasion became evident. Friedman, following our family rule that is impossible to compete with unintentional self-parody, presented Blair in and April 22, 2005 column as a martyr torched by an ignorant public for his courageous and ‘principled’ championing of invading Iraq. By that date, Friedman knew that the pretexts for the invasion of Iraq were falsehoods, that the war had caused catastrophic harm, and that invading Iraq had harmed the allied efforts in Afghanistan. The invasion had failed to produce a movement to real democracy in the Mideast, a fantasy that Friedman promoted. It was a strategic gift to Iran, which Friedman hates.
In deciding to throw in Britain’s lot with President Bush on the Iraq war, Mr. Blair not only defied the overwhelming antiwar sentiment of his own party, but public opinion in Britain generally. “Blair risked complete self-immolation on a principle,” noted Will Marshall, president of the Progressive Policy Institute, a pro-Democratic U.S. think tank.
Neither Marshall nor Friedman presented an honest ‘principle’ one advances by invading another nation on the basis of fake facts and turning the nation you invade into a vast charnel house. The U.S. and the UK lost lives and treasure and the invasion was a geopolitical blunder of epic proportions for the U.S. and UK.
Friedman’s claimed ‘principle’ was actually despicable propaganda.
Mr. Blair took a principled position to depose Saddam and keep Britain tightly aligned with America. He did so, among other reasons, because he believed that the advance of freedom and the defeat of fascism — whether Islamo-fascism or Nazi fascism — were quintessential and indispensable “liberal” foreign policy goals.
Saddam Hussein was many bad things, but he neither a ‘fascist’ nor driven by ‘Islamic’ views. He was notoriously secular. There is no such thing as ‘Islamo-fascism.’ That was a phrase invented by bigots to attack Islam. There are scores of anti-democratic world leaders. Deciding to invade and ‘liberate’ nations only when their populations were overwhelmingly Islamic is the opposite of “principle” – it is prejudice powered by propaganda.
Friedman’s April 22, 2015 column had to abandon the lies that formed the pretext for the invasion of Iraq. There were no ‘weapons of mass destruction’ (WMD) and Iraqis government had nothing to do with the 9/11 attacks on the U.S. Friedman was happy to supply new lies (‘Islamo-fascism’). By 2015, Friedman was at his most despicable and juvenile.
In sum, Tony Blair has redefined British liberalism. He has made liberalism about embracing, managing and cushioning globalization, about embracing and expanding freedom — through muscular diplomacy where possible and force where necessary — and about embracing fiscal discipline.
Seriously, ‘real men’ (gender intentional) embrace “muscular diplomacy.” We “expand[ed] freedom” by invading Iraq! In 2005, when he knew that the pretexts for the invasion were lies and the invasion had produced a catastrophe, Friedman enthused like a 16 year old boy about the masculine joys of “muscular diplomacy” (invasion) and chastised Democrats for not being sufficiently enthusiastic about invading Iraq.
[T]heir own ambivalence toward muscular diplomacy, cost Democrats just enough votes in the American center to allow a mistake-prone Bush team to squeak by in 2004.
The Friedman doctrine is that Democrats should have beaten the “mistake-prone” Bush by enthusiastically embracing Bush’s worst mistake – invading Iraq. How did that sentence not sound “mad” to Friedman when he wrote it?
Friedman is the exemplar of our family rule that it is impossible to compete with unintentional self-parody. He reached his lowest level, literally blasphemous, in a March 16, 2013 column claiming that Blair invaded Iraq in an act of selfless religious devotion to cure the ills of the world.
What does Tony Blair get that George Bush doesn’t? The only way I can explain it is by a concept from the Kabbalah called ”tikkun olam.” It means, ”to repair the world.” If you listened to Tony Blair’s speeches in recent weeks they contain something so strikingly absent from Mr. Bush’s. Tony Blair constantly puts the struggle for a better Iraq within a broader context of moral concerns. Tony Blair always leaves you with the impression that for him the Iraq war is just one hammer and one nail in an effort to do tikkun olam, to repair the world.
I leave the disproof of this blasphemy to the reader.
The Faux ‘Progressive’ Faux ‘Think’ Tank and Faux Growth
The obvious question is what the “Progressive Policy Institute” is that shared Friedman’s masculine joy about invading Iraq – a quintessentially anti-progressive and “mad” policy. It is the New Democrats’ and New Labour’s anti-progressive shop. At all times, Blair copied Clinton. A 2015 Guardian article demonstrated PPI’s message discipline and its blindness to reality. The PPI talisman was “growth.”
At Columbia University in New York this weekend, the Progressive Policy Institute, which helped Bill Clinton and Tony Blair pioneer so-called third way politics in the 1990s, held a closed-door strategy session for congressional staffers that was designed to find ways of promoting growth.
“There is no question that the prevailing temper of the Democratic party is populist: strongly sceptical of what we like to call capitalism and angry about the perceived power of the monied elite in politics,” said PPI president and founder Will Marshall.
“But inequality is not the biggest problem we face: it is symptomatic of the biggest problem we face, which is slow growth.”
Al From, a leading figure of the centre-left who chaired the Democratic Leadership Council during the first Clinton presidency, argues that a focus on inequality, though understandable after the banking crash, risks driving all candidates too far from policies that would promote growth.
“Culturally, the country has progressed a lot and we are not going back,” says From, who points especially to changing attitudes to gay marriage and women’s rights. “But the question is whether a major political party can sustain itself solely on cultural issues and can have a real shot at governing, if it doesn’t have a growth agenda as part of its programme.”
Representative Kind, the head of the House caucus of New Democrats and a strong Hillary supporter, was willing to give a quotation explaining that Hillary was lying about her opposition to Obama’s Trans-Pacific Partnership (TPP) in order to deceive Democratic primary voters.
“I’d lie if I said I wasn’t disappointed with the statement that she made on TPP,” says Representative Kind. “Everyone knew where she was on that and where she will be, but given the necessities of the moment and a tough Democratic primary, she felt she needed to go there initially.”
Al From, the long-time leader of the New Democrats, was willing to quoted presenting an even more cynical illustration of New Democrat realpolitik and another ode to growth.
Paradoxically, some New Democrats may even relish a Sanders resurgence, pointing to the similar experience of Ed Miliband and Jeremy Corbyn in the British Labour party, which they claim will ultimately prove the folly of pandering to the left.
“If we are going to be a governing party we have to [focus more on economic growth], but there is not going to be any pressure in the presidential process until we lose an election or two,” concludes From.
The New Democrats’ problems include nominating their candidate (Hillary) and losing to Donald Trump. The bigger problem is that they think that we should tolerate extraordinary “income inequality” to “promote growth.” What has happened to U.S. growth rates as inequality surged? Growth has fallen sharply. Epidemics of control fraud and predation cause (real) growth to become negative. Bubbles hide this reality by creating data that are nonsense, but once the bubble collapses, the real economic situation emerges. The collapse eviscerates growth, but the expansion of the bubble means allocates credit inefficiently, which harms growth. Austerity gratuitously increases the lost growth. The key to preventing this lost growth is an effective rule of law preventing the epidemics of control fraud and predation.
The New Democrats and Blair are terrible on each of these essential prerequisites of real economic growth. Bill Clinton was exceptionally lucky in the timing of his presidency. His supposed economic success was the product of the immense dot.com bubble and the even larger housing bubble. The housing bubble expanded throughout his eight years in office. President Bush continued Clinton and Gore’s assault on the rule of law by making even deeper cuts in federal banking regulators and ‘preempting’ state attorney generals’ efforts to stop the three epidemics of control fraud (plus predation) that drove the GFC. Clinton and Bush made the same promise – ‘deregulation’ would spur a sharp increase in growth. It did the opposite. An effective rule of law – and regulation is an essential aspect of that rule of law – is essential to produce real growth. When you strip away the bubbles, you strip away the Clinton and Bush growth and see the reality.
Blair, Brexit, and Friedman Show the Need for MMT Insights
Part One: The MMT Critique of Orthodox Microfoundations
Orthodox ‘modern macro’ is based on ‘microfoundations’ that implicitly assume that firms profit-maximize, that there are no negative externalities, that there is no market power, and that there is no control fraud or predation. In sum, they assume out of existence reality and particularly the parts of reality that produce the “endemic” global financial crises that Friedman admits his favored model produce.
Friedman, of course, loved both Blair and Brown. In the same April 22, 2005 column, Friedman described Brown as Blair’s “deft finance minister.” (Perhaps he meant to write ‘daft.’) In 2005, the UK was racing toward the GFC. It nosed Wall Street at the wire to ‘win’ the regulatory ‘race to the bottom’ that produced the epidemics of control fraud and predation in the U.S. and the UK that hyper-inflated bubbles and drove the GFC. The UK economy was sick in 2005. It was systematically misallocating capital. It was driven not by real industrial productivity gains, but by accounting scams in the City of London. The ethics of the City of London had fallen to sewer levels. Its biggest banks had been specializing in predating on their customers for two decades. Its most prestigious bankers were driving the two largest price-rigging cartels (Libor and Forex) in world history. Even the sleaziest U.S. bankers at the ‘vampire squid’ (Goldman Sachs) based their worst, most rapacious predators in the City of London. On any real economic basis, many of the UK’s largest banks were insolvent because of their terrible asset quality.
The UK was only two years before the first large bank crisis of the GFC – the run on Northern Rock. Only a government bailout saved the bank from immediate failure. Friedman, the triple Pulitzer Prize winner supposedly the world’s expert on ‘globalization’ was oblivious to reality. He believed the financial CEOs who wine and dine him and receive his unctuous praise.
Friedman’s 2005 column called the UK economy “strong” and “vibrant.” He attributed this to Blair and Brown embracing Friedman’s mantra – we all need to “to firmly embrace the free market and globalization.” The Brits think we are incapable of irony, and perhaps they are right about Friedman. To state the obvious, the City of London’s leaders despises ‘free markets.’ They love control fraud and predation and price-rigging cartels. Their business model is control fraud and predation plus price-rigging cartels. They love tax evasion, money laundering, and sanction busting. Those are sanctions against terrorism, which Friedman purports to love. They run criminal enterprises. They assist other criminal enterprises and wealthy criminals evade the tax laws. These financial control fraud and predation drove the fiction of the “vibrant” UK economy, which was actually a predatory and wealth-destroying economy. When the City of London reports enormous profits, we know that they are making the world poorer and sleazier.
The City of London’s leaders, like Wall Street’s leaders, are the most powerful generators of the ‘Gresham’s’ dynamic. George Akerlof explained and named the dynamic in his famous 1970 article on markets for ‘lemons.’
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.
Control fraud and predation mean that markets are neither ‘free’ nor efficient. Control fraud and predation cause market forces to become perverse. When cheaters prosper, markets harm consumers and honest business people. Finance is particularly important in this regard, for it ‘disciplines’ CEOs to maximize reported returns. Control fraud and predation are the easiest and surest ways to maximize reported returns. This means that finance tends to send enormous amounts of capital to the worst actors and deny it to the best, intensifying the Gresham’s dynamic in the real economy. (Financial executives also rake off enormous profits for themselves, further reducing efficiency and growth.) Globalization means that the harmful effects of the Gresham’s dynamic can now dominate industries globally. Again, finance is the whip hand of globalization’s most perverse incentives.
There is no such thing as natural “free markets.” A vibrant rule of law that effectively constrains control fraud and predation is essential to well-functioning markets. The ‘race to the bottom’ of regulation that the City of London (barely) ‘won’ over Wall Street eviscerated effective financial regulation in the two financial epicenters of globalization. This supercharged the Gresham’s dynamic, which produces endemic control fraud and predation. Blair and Brown were the two UK leaders most culpable for destroying any effective rule of law in finance. Effective financial regulation is essential to creating an effective rule of law, and an effective rule of law is essential to block the Gresham’s dynamic. When we regulate finance effectively we make possible, not harm, “free markets.” Markets without effective financial regulation are neither free nor efficient.
Blair and Brown did not hide from Friedman their zest for destroying regulation, particularly financial regulation, and ‘winning’ the race to the bottom against Wall Street. I have written two articles about this point. Blair delivered his most famous speech attacking regulation only one month after Friedman’s April 22, 2005 column praising Blair.
Blair most famously made public his war on regulation and his embrace of “winning” the regulatory race to the bottom in his May 26, 2005 speech on “Risk and the State.”
Blair explicitly cited regulatory restraints on financial control fraud that the U.S. adopted after the Enron-era control fraud epidemic as the exemplar of the rules he was most dedicated to never adopting. Blair admitted that because of his ‘light touch’ regulatory policies “the UK is very lightly regulated by international standards.” That was not sufficient for Blair. To ‘win’ the race to the bottom against Wall Street, Blair was dedicated to making the UK the weakest major financial regulator.
Blair bragged in his speech that he had ordered “light touch” regulation be the standard.
The new inspectorates will be actively charged with ensuring those doing well get a light touch approach….
At a time when UK financial regulation, in reality, was effectively non-existent, and UK financial control fraud and predation were epidemic, Blair claimed with all his faux sincerity that the City of London fraudsters and predators were the honest victims of rapacious regulators.
But something is seriously awry when … the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone….”
The UK satirical magazine Private Eye aptly labeled the FSA the “Fundamentally Supine Authority.” There was no major UK bank whose officers had “never defrauded anyone.” The FSA did not even slightly inconvenience, much less “hugely inhibit” any UK bank. The UK Parliamentary inquiry commission reported on a related and analogous disaster caused by “light touch” approaches.
The corporate governance of large banks was characterised by the creation of Potemkin villages to give the appearance of effective control and oversight, without the reality.
Friedman, the master of unintentional self-parody, celebrated how Blair had increased spending on “law and order.” Yes, at the same time that Blair and Brown eviscerated ‘law and order’ for elite white-collar criminals, they increased spending on ‘law and order’ for blue-collar criminals. Friedman cheered that combination.
Friedman, as late as 2017, was writing that the U.S. had a critical “need” to “enact sensible deregulation.” He had seen U.S. deregulation produce the fraud epidemics that drove the savings and loan debacle, the Enron-era frauds, and the GFC, UK deregulation produce the epidemics of control fraud and predation that caused the GFC, Icelandic deregulation produce the fraud epidemics that drove its financial crisis, and Irish deregulation produce the fraud epidemics that drove its financial catastrophe. This is another example of Friedman’s central madness – the belief that heads of state should allow horrific “trends” to continue and merely ameliorate the worst aspects of those trends. Friedman, however, wants to exacerbate the disastrous trend by increasing deregulation even though existing regulation is woefully weak.
Part 2: The MMT Macroeconomic Critique of Blair, Brown, Obama, and Friedman
The GFC and austerity devastated UK and U.S. growth. Austerity drove the “Leave” vote in favor of Brexit. Friedman and his heroes Blair, the Clintons, and Obama, betrayed the working class that was once the core of the Labour Party and the Democratic Party by adopting austerity in response to the GFC. Obama, who told the congressional New Democrats caucus that he was a New Democrat, initially supported stimulus, but he quickly abandoned it. That stimulus program was too small, but relative to the EU and the UK, it still set the U.S. on a path of a far quicker recovery from the GFC. By early 2010, Obama was working with Republicans to slash the safety net and increase the severity of austerity (the Grand Betrayal that he called the Grand Bargain). Fortunately, Tea Party Republicans were pretending to worry about deficits and they killed the Grand Betrayal because it did not do enough to rend the safety net. These policies were all ‘mad.’
Due to Blair and Gordon Brown, his chosen successor, the Labour Party was an enthusiastic promoter of severe austerity even before the GFC began. Friedman, of course, proclaimed this a stellar virtue.
[Blair] has made liberalism about … embracing fiscal discipline.
By “liberalism,” Friedman means the American usage. The three critical questions are: what does he mean by “fiscal discipline,” why does he think it is great, and why does he think American liberals should “embrace” it? Friedman does not even try to answer any of these questions. To him, it is self-evident that “fiscal discipline” is a virtue next to godliness. MMT, however, demonstrates that the budgetary balance of nations with sovereign currencies are not matters of ethics. The contents of the budget have great moral content. Spending massive amounts of money to invade Iraq is a grotesquely immoral budgetary policy. Failing to spend money to fix acute societal problems is inefficient and immoral. Failing to provide adequate stimulus in response to a GFC is self-destructive and immoral. Adopting austerity in response to a GFC is beyond stupid, self-destructive, and immoral.
Friedman was particularly impressed that Blair’s surpluses “helped the government pay down its national debt.” Orthodox economists tend to believe that running a surplus during an economic upturn is obviously desirable. MMT teaches that this is frequently not the case. Budget surpluses are leading predictors of serious U.S. recessions and depressions. There is nothing inherently virtuous about running a budget surplus even during a period of robust economic growth. A budget surplus may be a desirable as a means of reducing inflationary pressures when there is a shortage of real resources.
MMT explains why nations like the U.S. and UK with sovereign currencies cannot run out of their own money. Such nations are not remotely equivalent to ‘households’ when it comes to budgets and deficits. Blair, Brown, Obama, and Friedman illustrate the ignorance of money and the terrible harm that ignorance can cause. There is dumb, and then there is Brown’s appointee,
Liam Byrne, chief secretary to the Treasury under Gordon Brown, left a note for his successor that proved to be a gift for the Conservatives
The note said: “I’m afraid there is no money.”
The Tories, of course, made copies of the note and waved them at campaign rallies. The UK has a sovereign currency. It had an unlimited amount of its own ‘money.’ Real resources, not a sovereign currency, can suffer real shortages and those shortages can be important, e.g., by driving harmful levels of inflation. In a Great Recession, it is vital that a government with a sovereign currency adopt fiscal stimulus. Real resources are rarely so scarce in a Great Recession that there is any risk of fiscal stimulus causing harmful inflation. Stimulus is a win-win-win-win in those circumstances. It reduces unemployment, increases growth, reduces the ultimate deficit, and reduces the risk of a deflation trap.
New Democrats, New Labour, and Friedman, however, all favor austerity and think national budget deficits are immoral. Here are key excerpts from Byrne’s efforts to explain why he wrote the note. As one would expect from someone that would write such a note, his explanation is incoherent, delusional, and intended to excuse his failures.
The final years of Gordon Brown’s government were tough.
His leadership of Britain and the G20 at the London summit stopped the collapse of Lehman Brothers triggering a global depression – an incredible achievement we should never have stopped shouting about. But the recession slashed Treasury tax receipts by over £40bn, forcing us to borrow to keep public services on the go and get Britain back on its feet. And because the deficit was big, the responsible thing to do was draw up a long-term plan to cut spending.
In government, it was my job to craft a plan. As chief secretary, I spent bruising months negotiating £32bn of annual savings to help halve the deficit in just four years and set out in huge detail in our 2010 budget. Of course, the Conservatives attacked us – though it was the timetable they eventually delivered.
Those negotiations were tough and bruising. And so in my final hours of office, I was writing thank-you notes to my incredible team of civil servants. And then I thought I’d write one letter more to my successor. Into my head came the phrase I’d used to negotiate all those massive savings with my colleagues: “I’m afraid there is no money.”
Nearly every phrase of his excuse is false. Brown did not prevent a global depression – he was an important cause of the GFC. Lehman’s failure did not cause the UK crisis; UK bankers and anti-regulators caused it. A government with a sovereign currency does not have to ‘borrow.’ It, routinely, creates money through computer keystrokes. No, it does not follow that because a deficit is ‘large’ the ‘responsible thing’ is to plan to ‘reduce spending.’ The responsible thing is to increase spending, which can greatly speed the recovery and support future productive spending.
It is insane, in response to a Great Recession, to cut spending to “halve the deficit in just four years.” Byrne is describing a plan for brutal, self-destructive austerity. Labour’s austerity was sure to turn much of the UK into an economic anti-opportunity zone, sowing the seeds of Brexit. The fact that Byrne used the same economically illiterate phrase repeatedly with the UK Labour cabinet without a single minister telling him he was illiterate tells us how pervasive the rot was among New Labour’s leadership. I have written previously on this same rot infesting New Democrats.
In fairness, Byrne’s note was strikingly similar to one of the all-time stupid statements of another official – President Obama. In a C-SPAN interview that caused conservatives to chortle, Obama channeled his inner-Byrne.
SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits….”
MMT is not simply an Ivory Tower theory. Finance professionals use it because it produces superior predictive results. If politicians like Blair, Brown, and Obama had studied MMT, they would have avoided many of their worst economic blunders that brought us Brexit and Trump.