This is the html version of the file https://www.jiscmail.ac.uk/cgi-bin/webadmin?A3=ind1307&L=BISA-IPEG&E=base64&P=632139&B=--_003_1D089CBA0793A545B7FF1CEC90ECB74B027EB69CEE3EHERMES8dsle_&T=application%2Fvnd.openxmlformats-officedocument.wordprocessingml.document;%20name=%22Martin%20Watts_paper.docx%22&N=Martin%20Watts_paper.docx&attachment=q automatically generates html versions of documents as we crawl the web.

Why hasn't post-Keynesian economics embraced the principles of Modern Monetary Theory?

James Juniper, Timothy Sharpe1 and Martin Watts

Newcastle Business School and, Centre of Full Employment and Equity, University of Newcastle, Australia



Abstract

Post-Keynesian economists have responded to the Global Financial Crisis by addressing the relationship between post-Keynesian and mainstream economics, particularly in the context of the austerity debate and hence the conduct of fiscal policy. Despite a post-Keynesian vision for broadened pluralism, there has been limited formal engagement with principles of Modern Monetary Theory (MMT) in their analysis of post-GFC macroeconomic policy. In this paper we argue that the incorporation of MMT principles enhances the post-Keynesian framework, principally with respect to the conduct of fiscal and monetary policy in sovereign and non-sovereign economies which has assumed increased importance since the GFC. Specifically, we (1) outline the common theoretical elements which unite post-Keynesian and MMT advocates; (2) address the post-Keynesian critiques arising from the MMT interpretation of the nature and value of money, and the consolidation of the Treasury and Central Bank within MMT analysis; and, (3) examine the post-Keynesian and MMT perspectives on the role of fiscal policy vis-à-vis macroeconomic stability and the achievement of sustained full employment.

Keywords: Modern monetary theory; post-Keynesian economics; Global Financial Crisis

JEL Classification: E12, E42, E63



Introduction

Mainstream economics has faced intense scrutiny since the advent of the Global Financial Crisis (GFC) particularly in the light of the weak recovery, but the response of policymakers suggests that the hegemony of mainstream economics remains largely intact. Post-Keynesian economists have responded with a flood of journal articles and special issues (e.g. Cambridge Journal of Economics, vol. 36(1) 2012; International Journal of Political Economy, vol. 41(2) 2012; Review of Keynesian Economics, vol. 1(1) 2012) addressing the relationship between (post-) Keynesian and mainstream economics, particularly in the context of the austerity debate and the associated role and conduct of fiscal policy.



The consolidation of post-Keynesian theory is also addressed in a recent symposium (Review of Political Economy, vol. 24(2) 2012). Here, Lee (2012:348) calls for ‘strengthening the foundations of the future of heterodox economics.’ King (2012:305) opines that ‘Post-Keynesians should remain open to ideas from other heterodox traditions…’ (see also Dunn 2000; Stockhammer and Ramskogler 2009). Furthermore, there is the need to become more engaged with policymakers (Vernengo 2010).





The vision for a broadened pluralism does not appear to extend to the integration of Modern Monetary Theory (MMT) or neo-chartalist principles into the post-Keynesian discourse. A lone voice in the above journals, Lavoie (2012:332), argues:

‘[T]he so-called modern monetary theory is a result of an in-depth study by some neo-chartalist Post-Keynesian authors of how the payment system operates. While one may not agree with all the implications that are drawn by neo-chartalists [see Lavoie 2013], their detailed institutional analysis reinforces Post-Keynesian monetary theory and our comprehension of policy failures.’2

While MMT appears to have gained additional adherents, consisting of both academics and lay people, and has engaged with leading US orthodox economists via blogs since the advent of the GFC, there has been limited formal engagement with MMT principles by post-Keynesians in their analysis of post-GFC macroeconomic policy.



This is not to deny the series of critical papers over the last decade or so by post-Keynesians which explore the MMT interpretation and analysis of the conduct of fiscal and monetary policy.3 In particular, the critiques of MMT’s monetary views (see Rossi 1999; Parguez and Seccareccia 2000; Merhling 2000; Gnos and Rochon 2002; Van Lear 2002-03; Rochon and Vernengo 2003; Febrero 2009; Fiebiger 2012; Lavoie 2013), and the operation of an Employer of Last Resort (ELR) scheme to achieve full employment (see Lopez-Gallardo 2000; Aspromourgos 2000; Kadmos and O’Hara 2000; King 2001; Seccareccia 2004; Sawyer 2003, 2005). In addition, Palley (2013) offers a particularly hostile and ill-founded critique of the general MMT discourse (see also Nesida 2013).4



In this paper we argue that the incorporation of MMT principles enhances the post-Keynesian framework, principally with respect to understanding the distinction between sovereign and non-sovereign economies and the role of the payments system. These have major consequences for the conduct of macroeconomic policy which has assumed increased importance since the advent of the crisis.



Section 2 outlines the common theoretical elements which unite post-Keynesian and MMT advocates, and canvasses some points of difference. Section 3 addresses the post-Keynesian critiques arising from the MMT interpretation of the nature and value of money, and the consolidation of the Treasury and Central Bank within MMT analysis. Section 4 examines the post-Keynesian and MMT perspectives on the role of fiscal policy vis-à-vis macroeconomic stability and the achievement of sustained full employment. Concluding remarks complete the paper.



Broad consensus and specific departures: Post-Keynesianism and MMT

Common theoretical elements uniting post-Keynesian and MMT advocates are briefly canvassed, namely, the notion of uncertainty, the point-of-effective-demand, endogeneity of the money supply, the absence of self-correcting mechanisms, and the notion of debt-deflation. Post-Keynesian and MMT advocates also reject marginal productivity theory of income distribution, and traditional notions of crowding-out and Ricardian equivalence.5



Both MMT and post-Keynesian economists accept the distinction between uncertainty and risk. Uncertainty can be loosely defined as the incompleteness of knowledge about the characteristics of the joint distribution that is deemed responsible for perturbing the economic processes. Most mainstream theorists, however, view that uncertainty can be gradually transformed into risk either through a collective or individual process of learning about the economic world, or via some kind of market selection which weeds out those who can make sensible commercial decisions from those who cannot. For post-Keynesians, uncertainty has an ontological basis that cannot be overcome either by learning or selection. Along these lines, post-Keynesians recognize the time-varying influence of ‘uncertainty aversion’ over key macroeconomic parameters, including the marginal propensity to consume, the marginal efficiency of capital, and the state of preference for liquid over illiquid assets.



Similarly, both post-Keynesians and advocates of MMT acknowledge the crucial importance of the point-of-effective-demand in influencing the level of involuntary unemployment and rates of capacity utilization. This was originally set out in Keynes’s Z and D analysis in The General Theory. The point of intersection between the Z and D curves determines the level of effective demand. It represents the point where there is a coincidence of the expected and actual remuneration flowing to firms. As such, it represents an equilibrium in the sense that expectations are fulfilled and firms have no incentive to vary the level of employment.



Endogeneity of the money supply is also shared among post-Keynesian and MMT economists. In a modern credit-based economy, the money supply expands or contracts automatically to meet the demand for (nominal or real) money balances, unless there is credit rationing across the economy.



The idea that there are negligible or non-existent self-correcting mechanisms (Pigou or Patinkin effects) that would be stimulated by a decline in the general price level taking the economy back to a state of full employment, is a view that is also shared by both schools of thought.6 One countervailing influence over mechanisms of this kind, which are predicated on the notion that a fall in prices would increase real levels of wealth in general, or money balances, in particular, is the Fisherian notion that most contracts in financial markets are denominated in nominal rather than in real terms. Accordingly, if prices decline by more than was expected (or rise by less than was expected) this would effectively shift income from higher spending borrowers to lower spending lenders. Beyond a certain point, this distribution of obligations could result in higher levels of bankruptcy and default on the part of borrowers, especially if it occurs within the context of a general slow-down in economic activity. The process of debt-deflation has been promoted by Hyman Minsky, who generalises it to cover situations in which economic growth and stability are endogenously undermined by increases in financial fragility due to a loss of diversification, a deferment of (present value) break-even times, and an increasing reliance, on the part of corporations and/or households, on external rather than internal sources of finance.



Post-Keynesians and MMT advocates acknowledge that the capital debates instigated by Joan Robinson and Piero Sraffa have undermined the foundational role played by marginal productivity theory in the explanation of income distribution, optimal growth, and the neutrality and super-neutrality of money.



Joan Robinson’s original argument that Ricardo’s pursuit of a standard commodity (an artificial construction whose value would be invariant to shifts in the distribution of income between capital and labour) is a ‘will-o-the-wisp’, has been built on by MMT proponents who emphasise that the absence of a unique and invariant numéraire justifies the government’s role in the setting of nominal anchors for both real rates of return and the general level of prices (respectively, through the determination of the overnight cash rate and the minimum wage).



Finally, post-Keynesians and MMT advocates share in the view that government debt comprises real wealth to the non-government sector. While similar views have been promoted by certain New Growth Theorists, for whom externalities deriving from public infrastructure are seen to have boosted private sector productivity, MMT advocates take this notion further in arguing that a wider range of social benefits can be derived from employment based on ELR principles.



MMT proponents depart from some of their post-Keynesian colleagues in: (1) advocating the consolidation of Treasury and Central Bank functions to simplify analysis of the payments system; (2) introducing a distinction between vertical transactions (between government and non-government sectors) and horizontal transactions (between banks, households and firms); (3) arguing that unemployment arises because the government is failing to create enough net financial assets (through deficit spending) to meet the non-government sector’s desire to net save; (4) suggesting that concern about the rising levels of national currency denominated debt are misplaced for economies which enjoy full fiscal-monetary sovereignty; and finally, (5) arguing that traditional Keynesian policies of public investment and training will fail to deliver sustained full employment and macroeconomic stability due to the absence of an appropriate counter-inflation mechanism and the well-known lags associated with the conduct of pump-priming.

Monetary critiques of MMT

Notwithstanding the broad theoretical consensus, many post-Keynesians have reservations about MMT’s monetary views and policy prescriptions. Lavoie (2013:5) suggests that this uneasiness ‘may, in part, be attributed to their [post-Keynesians] unwillingness to entertain the mechanics of the clearing and settlement system as well as the horizontalist position.’7



However the mechanics of the payment and settlement system are well documented by Central Banks and have been further articulated by post-Keynesian academics (Mosler 1994; Fullwiler 2003; Wray 2006; Lavoie 2010).8 In addition, Lavoie (2013:5) notes that the ‘more transparent procedures put in place by central banks over the last two decades have vindicated the horizontalist position,…’



For MMT advocates, monetary circuit theory presents a familiar account of the monetary system (see Parguez and Seccareccia 2000; Bougrine and Seccareccia 2002; see also Graziani 1990, 1994, 2003). In fact, circuitists share an affinity with MMT which extends beyond the common theoretical ground afforded by the broad post-Keynesian framework. These additional similarities are canvassed by Parguez and Seccareccia (2000:110-111); (1) ‘taxes cannot be raised unless there is already a pre-existing money in circulation’9; (2) the government budget deficit is an ex post notion, which is ‘by its very nature already financed’ (see also Parguez 2002); (3) commercial banks will only meet creditworthy demand for loans; (4) government deficits increase commercial bank reserves. They quote Mosler (1997-98) who suggests that excess reserves would need to be removed to prevent the interbank funds rate from falling below the specified target (see also Bougrine and Seccareccia 2002)10; Finally Parguez and Seccareccia (2000:111) note that (5) circuitists acknowledge the constraints implied by the Eurozone in that ‘state expenditures would be financed via the holding of government securities by commercial banks’ (see also Bougrine and Seccareccia 2002).



Nevertheless, even post-Keynesians somewhat sympathetic to these arguments, such as Rochon and Vernengo (2003:65), maintain that ‘despite the fact that modern money is in fact chartal money, the underlying idea that states rule the roost, and can provide full employment and price stability at will maybe rather naïve.’ So MMT authors are accused of taking their policy prescriptions too far (Febrero 2009) despite the fact that ‘neo-chartalists do not claim that their ideas are valid everywhere at all times,…’ (Lavoie, 2013:4).



Here, we address the post-Keynesian contention arising from the MMT interpretation of the nature and value of money (see Rossi 1999; Parguez and Seccareccia 2000; Merhling 2000; Gnos and Rochon 2002; Rochon and Vernengo 2003; Febrero 2009) (Sections 3.1, 3.2);11 and the consolidation of the Treasury and Central Bank, collectively the ‘state’, within MMT analysis (see Gnos and Rochon 2002; Van Lear 2002-03; Fiebiger 2012; Lavoie 2013) (Section 3.3).



3.1 Nature of modern money

Contention regarding the nature of money arises over the MMT reference to state money preceding bank money, the use of the term leverage and reference to a hierarchy of money.



For example, Parguez and Seccareccia (2000:120) appear to paraphrase Bell (1998) suggesting that ‘bank money is hierarchically inferior or subordinate to state money’ and Wray (1998) that ‘[b]anks’ credit activity is a leverage on the existing stock of state money.’ Lavoie (2013:8) provides direct citations.



Fullwiler (2010) suggests that Febrero (2009:533) ‘misinterprets chartalist use of the term “leverage” and [the] suggestion that “state money precedes private money” to mean something like the money multiplier.’ Likewise, Rochon and Vernengo (2003:61) conclude that state money is exogenous according to MMT:

‘The integration of horizontalism and verticalism under the chartalist banner looks surprisingly familiar and not altogether dissimilar from the standard money multiplier model of more conventional verticalist writers. For chartalists, state money is exogenous, and credit money is a multiple of the former.’

MMT advocates emphatically reject the standard money multiplier model.12 The confusion here largely stems from differences in terminology. While the term ‘state’ often refers to Government/Treasury (e.g. Parguez and Seccareccia 2000), MMT consolidates the Government/Treasury and Central Bank, termed collectively the ‘state’ (see Section 3.3).



Now acknowledging the consolidation, Parguez and Seccareccia’s (2000) view and the MMT view on the nature of money are not dissimilar. That is, ‘[c]redit money could not exist without the state’ and ‘all credit-driven money is by its very nature fiat money, irrespective of whether it takes the form of a commercial bank or central bank liability’ (Parguez and Seccareccia 2000:107).



Confusion over the term leverage often arises by conflating MMT notions of vertical and horizontal transactions with verticalism and horizontalism along the lines of Moore (1988).13 Wray (2003:91) is clear:

‘When one uses a bank liability to pay “the State”, it is really the bank that provides the payment services, delivering the State’s fiat money which results in a debit of the bank’s reserves. When the State spends, it provides a check which once deposited in a bank leads to a credit to the bank’s reserves [vertical transaction]…Note that payments using bank money within the private sector merely cause reserves to shift pockets from one bank to another [horizontal transaction]…’

Two points are apposite: First, this lays to rest Gnos and Rochon’s (2002:48) argument that ‘contrary to what chartalists claim, the public in no way has to worry about obtaining state money in order to pay taxes. They just have to pay with bank money and the central bank will then do its job.’ Second, while MMT advocates maintain that all money is debt (a liability), one should not conflate a state liability with a private liability. MMT reference to vertical and horizontal transactions informs the so called hierarchy of money. In a response to critiques by Rossi (1999) and Merhling (2000), Wray (2003:87) argues:

‘When a private party issues a liability there is a clear “hierarchy of monies”, and their [Rossi 1999 and Merhling 2000] analysis correctly predicts that one must retire one’s liability by delivering another liability – usually, one issued by an agent higher in the hierarchy. Liabilities of firms are mostly extinguished by delivering liabilities of banks; and banks extinguish their liabilities by delivering liabilities of the central bank.’

MMT maintains that state liabilities are positioned at the top of the hierarchy, since:

‘All other economic agents in the sovereign nation must use income or issue debt or rely on charitable giving (including that of the State) or engage in petty production to obtain resources. No other economic agent can issue liabilities that represent final means of payment for itself’ (Wray 2003:98; Tcherneva 2006).

Finally, it is important to note that ‘the horizontal dimension [within MMT analysis] is equivalent (totally consistent) with the (properly accounted for) circuit theory and endogenous money models’ (Mitchell 2009a). MMT however emphasises the importance of the state to capture the role of vertical transactions.14 Similarly Bougrine and Seccareccia (2002:66) argue, ‘given the importance of the state sector, [the] circuitist framework can and, indeed, must be extended to the public sector.’



3.2 Value of modern money

Post-Keynesians reject the conventional belief that money can be defined by its functions as a unit of account or store of value, and derives its value from a scarcity principle. Knapp’s ‘state money’ and Goodhart’s ‘cartalist’ view opposes the standard approach ‘where money spontaneously emerges as a medium of exchange from the attempts of enterprising individuals to minimize the transaction costs of barter’ (Tcherneva 2006:69). Furthermore, ‘the value of a currency is not linked to the value of the material from which it is produced. Nor is its value determined by reserves of precious metals or foreign currencies into which it might be converted’ (Wray 2003:89). Mehrling (2000:404) notes that ‘practical chartalism is fairly universally accepted economic doctrine these days.’



Circuitists and others however are critical of the MMT perspective on the value of money. Parguez and Seccareccia (2000:118) argue that ‘[b]y varying the public’s tax liability, it is assumed [by MMT advocates] that the state can even determine the value of money.’ Febrero (2009:523) interprets the MMT view along the lines that ‘money has value because it is what the state accepts for tax discharge’ and ‘the state has the ability to determine the value of money’.15 Mehrling (2000:402) concludes; ‘the [MMT] argument that the power to tax is the source of money’s value does not seem very compelling’ (see also Palley 2013:2-3).



For circuitists, ‘[t]he value of this bank liability (or money)….stems, rather, from the certainty that accepting bank debt as payment is to acquire a right on the existing as well as future output that will be created by the agents who have been granted bank credit’ (Parguez and Seccareccia 2000:101). Thus ‘[i]f banks were to issue liabilities to finance loans that could never support the generation of future real wealth, these debts would be deprived of value and no one would accept them’ (Parguez and Seccareccia 2000:107). In essence ‘[m]oney exists and has a value only as long as it is spent by non-bank agents for the purpose of creating future wealth’ (Parguez and Seccareccia 2000:105).



Critical of the MMT view, Parguez and Seccareccia (2000:119-120) conclude that ‘[t]he state [government] can endorse central and/or private bank liabilities, but it cannot impose the value of money.’ For circuitists, government endorsement is a fundamental prerequisite for the existence of money. This is derived ‘largely though the legal system’ (Parguez and Seccareccia 2000:119).



Wray (2003:89) follows Knapp insisting that ‘the State is liable only to accept its fiat money in payments made to itself.’ Such payments in modern states consist of taxes, fees, fines, and interest, but taxes are the most significant. Wray (2003) is critical of acceptance by social convention since it relies on an infinite regress, from which it is not clear how the convention was established. Acceptance based on legal tender laws along the lines of Schumpeter (1954) are also dismissed (see Tcherneva 2006; also Knapp 1924; Davidson 2002).



For modern sovereign economies with a flexible exchange rate ‘it is the acceptance of the paper money in payment of taxes and the restriction of the issue in relation to the total tax liability that gives value [purchasing power] to the paper money’ (Wray 1998:23). ‘[I]f government money in circulation far exceeds the total tax liability, the value of the currency will fall. So it is not only the requirement to pay taxes, but also the difficulty of obtaining that which is necessary for payment of taxes, that give money its value’ [emphasis in original] (Tcherneva 2006:80; see also Innes 1914; Mosler and Forstater 1999).



Thus Mehrling’s (2000:402) understanding of the MMT position and Febrero’s (2009:523) first assertion are incomplete. This may arise from a simple misinterpretation. For example, arguing that ‘[money’s] value stems from the powers of the money-issuing authority’ [emphasis in original] (Tcherneva 2006:75) is not the same as arguing ‘the power to tax is the source of money’s value’ (Mehrling 2000:402). These are semantics but still worth noting.



Notwithstanding this, Mehrling (2000:403) argues ‘[t]he fact that the state is the issuer of the ultimate domestic money does not mean that it has the ability to set the price level or the rate of interest as an exogenous policy datum.’ First, again acknowledging the consolidation of Treasury and Central Bank, the state can and does set the rate of interest (e.g. the interbank cash rate) as an exogenous policy datum. Furthermore, a sovereign economy has an inherent ability to set the interest rates on all national currency denominated government debt via a commitment to purchase unlimited quantities at the desired price (Fullwiler and Wray 2010; Mitchell 2010; Watts 2012). Second, ‘the ability to set the price level’ should not be interpreted as setting the general price level. Rather it pertains to setting the terms of exchange that the state will offer to those seeking its currency (Mosler and Forstater 1999).

‘[T]he state as a monopoly supplier of HPM has the power to exogenously set the price at which it will provide HPM, i.e. the price at which it buys assets, goods and services from the private sector. While it is hardly desirable for the state to set the prices of all goods and services it purchases, it none the less has this prerogative’ [emphasis added] (Tcherneva 2006:81).

On determining the value of money Parguez and Seccareccia (2000:120) note that ‘neo-chartalists seem to identify a positive relation between the value of money and the amount of tax liability in an economy…’ The authors argue that ‘consequential to the value of money is primarily the ability of state [government] expenditure to increase the real wealth of society either directly, through the production of public goods, or indirectly, through their capacity to foster private investment expenditures.’



MMT authors would agree that the government can influence the value of money via its expenditure decisions, but its taxing decisions can equally influence this value. Following Lerner (1943, 1947) taxes reduce private sector money hoards (see also Mitchell 2009a). ‘[A] government can vary tax rates in order to release sufficient real resources so that its programs can be implemented’ (Watts 2010:13). ‘Taxation, in a sense, is a vehicle for moving resources from the private to the public domain’ (Tcherneva 2006:77).



Thus government taxes and spending decisions can determine/influence both directly and indirectly the value of money by affecting the non-government sector’s capacity to generate future real wealth. In this sense, the circuitist (presented by Parguez and Seccareccia 2000) and MMT views on the value of money are not dissimilar.



Consolidation of Central Bank and Treasury

The MMT characterisation of the nexus between fiscal policy and monetary conditions has been challenged by some post-Keynesians. By consolidating the Treasury and Central Bank, MMT advocates are alleged to misrepresent the capacity of sovereign governments to conduct fiscal policy in economies which have voluntarily adopted particular institutional arrangements, sometimes in the form of legislation. For example, ‘[t]o argue that it is not important to distinguish between the Fed's and the treasury's balance sheets certainly is incorrect’ (Gnos and Rochon 2002:48). Van Lear (2002-03:254) is also clear; ‘[o]nly when the [US] Federal Reserve and banks choose to buy government bonds will the state have new money to spend’ [emphasis in original].



On the other hand, Parguez and Seccareccia (2000:106) argue that the Central Bank as ‘the ultimate purveyor of liquidity…empowers commercial banks to lend their own debt to credit worthy borrowers without constraint. At the same time, the [government] is now entitled to finance its desired expenditures by credits granted by the central bank.’ The very essence of the consolidation issue is how these credits are obtained in the first instance.

MMT proponents acknowledge that some sovereign economies have adopted measures which limit or prevent the Treasury from obtaining these credits by selling debt directly to the Central Bank on the primary market (e.g. USA, Japan; see Bell 2000; Bell and Wray 2002-03). However, for other sovereign economies (e.g. Australia, New Zealand, Canada and the UK) there are no legal restrictions on the Central Bank participating in the primary market for government debt (Jácome et al. 2012).16 The Reserve Bank of Australia (RBA) does operate in the primary market for government securities to ensure it has sufficient holdings to conduct Open Market Operations, but while its purchases are relatively small, there is no specified limit. The Bank of Canada also can purchase some debt on the primary market, as noted by Lavoie (2013).17



Post-Keynesian economists and advocates of MMT would acknowledge that no single model can capture the different institutional arrangements prevailing in these economies. But, the relevant question to ask is whether the MMT depiction of the operation of fiscal policy misrepresents the intrinsic features of a modern monetary system within a sovereign economy. That is, with ‘government as a currency issuer or monopoly producer of the currency, with the exclusive power to increase the non-government sector’s holdings of net financial assets’ and the non-government sector as a currency user (Kervick 2012).



Fiebeger (2012) argues that the level of Treasury deposits with the US Federal Reserve limits the capacity of the Treasury to net spend unless (additional) borrowing is undertaken. While the Federal Reserve has the capacity to create credit, it is explicitly precluded from operating in the primary market for Treasury bonds. The need to obtain finance from issuing bonds to the non-government sector is alleged to rebut the MMT claim that bond sales are purely an interest rate maintenance mechanism.



Fiebiger (2012:7) mounts a curious argument by claiming that high-powered money (HPM) does not increase when (consolidated) US government expenditures exceed receipts. He rightly argues that arbitrary definitions (of money) should not underpin the construction of theory. He then criticises Bell (2000:615), who points out that the Treasury emits ‘money’ when it spends, because her claim is premised on the observation that the Treasury writes cheques on its account held at the Federal Reserve ‘that does not comprise part of the money supply or high-powered money’. Fiebiger (2012:3) claims that in these circumstances only the composition of the Federal Reserve’s liabilities has changed, so that HPM, which he appears to redefine to incorporate all Federal Reserve liabilities, would be unchanged. The key point is that there has been an increase in the net financial assets of the non-government sector (see Fullwiler et al. 2012), which clearly is meaningful from a theoretical perspective. Fiebeger (2012:2) incorrectly concludes that MMT does not offer an alternative to fiscal austerity measures.

Lavoie (2013) offers the most detailed critique of the consolidated Treasury and Central Bank within MMT.18 Like Fiebiger (2012), he highlights the prevailing institutional arrangements in the US to justify the analysis of the Treasury and the Federal Reserve as separate entities, countering the MMT view.



Lavoie (2013:10-17) conducts a balance sheet analysis in which the Treasury must sell $100 worth of Treasury Bills to Commercial Banks in order to engage in its chosen level of net spending (see Table 1, Stage 1). In Stage 2, the additional Government deposits with the Commercial Banks are transferred to the Central Bank. The Commercial Banks now suffer from a shortage of reserves which can be addressed by the Central Bank purchasing the $100 of Treasury Bonds from the Commercial Banks on the secondary market (Stage 3), as argued by Wray (2011a). The balance sheet outcomes in Stages 3, 4 and 5 correspond to those based on the neo-chartalist (MMT) perspective, namely that within the consolidated Treasury and Central Bank, Treasury can sell Treasury Bills to the Central Bank on the primary market (Lavoie 2013:11, Table 1). This increases Treasury deposits at the Central Bank, thereby enabling their chosen level of spending. Households then choose to hold 10% of their additional net assets as notes and coins, and Commercial Banks choose (or are required) to hold the equivalent of 10% of the additional deposits as reserves at the Central Bank.19



Table 1. The modified neo-chartalist view of government deficit-spending

Stage Central Bank Commercial Banks Asset Liability Asset Liability 1 TBs + 100 G deposits +100 2 G deposits +100 Banks’ deposits - 100 TBs + 100 Reserves – 100 G deposits 0 3 TBs + 100 G deposits +100 TBs 0 Reserves 0 G deposits 0 4 TBs + 100 Banks’ deposits + 100 Reserves + 100 Household deposits +100 5 TBs + 19 Banks’ deposits + 9 Banknotes +10 Reserves +9 TBs + 81 Household deposits +90

Source: Adapted from Lavoie (2013:15, Table 3). Column 1 has been added for clarity.

Note: Positive or negative signs indicate changes in the corresponding assets or liabilities.20



Lavoie (2013:15) emphasises that the objective of the above exercise is to demonstrate that for the USA at least, the consolidation of the Treasury and Central Bank would hide the institutional reality that the US government is required to borrow from the non-government sector when it deficit spends. But despite the initial need to sell Treasury Bills, the balance sheet outcomes are the same because the Central Bank subsequently purchases Treasury Bills from the Commercial Banks on the secondary market.

Lavoie (2013:16) then notes that the Bank of Canada has been an active participant in nominal bond and Treasury Bill auctions.21 Further, notwithstanding the different institutional arrangements prevailing in the USA and Canada, their Central Banks intervene in secondary markets and hence can even set long term rates on government securities, by announcing a desired interest rate and being prepared to purchase all securities at a price consistent with this rate (Fullwiler and Wray 2010:9, cited in Lavoie 2013:16). Lavoie (2013:17) then chastises MMT advocates for ‘presenting counter-intuitive stories, based on abstract consolidation, and an abstract sequential logic, deprived of operational and legal realism.’



While there is no legislation forbidding Central Bank purchases of debt on the primary market, debt management arrangements have changed in both the UK and Australia in the last 30 years. Prior to 1982, the tap system for issuing government debt had operated in Australia (Mitchell 2009b). Under this arrangement, the government would set the interest rate and maturity of the debt which was for sale, so that the quantity sold was demand determined. If the quantity sold was less than that desired by the authorities, extra funds were secured from the RBA (Mitchell 2009b). The use of the tap system with the RBA as the residual buyer in the primary market has been construed as a means of circumventing/undermining the market mechanism and was criticised because it obscured the extent of Treasury profligacy with bond purchases no longer rising $-for-$ with the public sector deficit. Also the Treasury had access to cheap funds from the Central Bank, which was considered to have inflationary consequences (Mitchell 2009b). The replacement of the tap system with the auction system (post-1982) meant that the government debt issuing agency could now specify the quantity and maturity structure of debt for sale but not the yields. Prior to 1998, when the Australian Office of Financial Management (AOFM) was established, the RBA had responsibility for managing Australian government debt.



In 1998, the UK also chose to ‘fully fund its financing requirement’ (HM Treasury 2011) through the establishment of the Debt Management Office (DMO) which sells debt in line with a pre-announced schedule, which can be revised. HM Treasury (2012:8) provides the following rationale:

‘[T]he Government believes that the principles of transparency and predictability are best met by full funding of its financing requirement;22 and to avoid the perception that financial transactions of the public sector could affect monetary conditions, consistent with the institutional separation between monetary policy and debt management policy’ [emphasis added].23,24

Jácome et al. (2012:4-5) provide a different rationale for governments not sourcing funds from their Central Banks, based on the desired autonomy of the latter: ‘With governments relying extensively on central bank money to finance public expenditure, central banks’ political and operational autonomy is inevitably undermined for the fulfilment of their policy objective of preserving price stability.’ Further, ‘[a]s a first best, central banks should not finance government expenditure. The central bank may be allowed to purchase government securities in the secondary market for monetary policy purposes.’25



Lavoie (2013:14) notes the more nuanced position adopted by Kelton (2010), in which she argues that the US Treasury coordinates spending, taxing and bond sales to reduce the fluctuations in the private banking system, which would otherwise force the Fed to engage in monetary management on a greater scale to achieve the target rate. While this observation adds complexity to the central MMT argument that bond sales are undertaken ex post to drain excess reserves, this author held the same position in 2000 (Bell 2000). This perspective provides some insight concerning the italicised HM Treasury (2012) quote above, but, while debt management does impose a degree of institutional separation between monetary policy and debt management policy, by eliminating more extreme fluctuations in reserves, it is not evident why it is necessary to avoid the ‘perception that financial transactions of the public sector could affect monetary conditions’ unless it is considered appropriate to mislead the public as to the fiscal capacity of a sovereign government.



The irony is that there is no corridor in either the USA or the UK, so the target (official) rate and the rate paid on reserves are equal. Thus the interbank rate does not deviate from its target rate and hence there is no imperative to mop up excess reserves via bond sales (Keister and McAndrews 2009).



Notwithstanding the prevailing institutional arrangements, a Treasury within a sovereign economy is not budget constrained, unless the Central Bank can veto its proposed spending or there is a political constraint such as a debt limit. The first proviso would imply that the incumbent political party had ceded all responsibility for the conduct of macroeconomic policy to the independent Central Bank. Certainly, the inability of the Central Bank to operate in the primary market does not financially constrain a Treasury which sells government securities denominated in its own currency.

‘[T]he only limit on sovereign government expenditure lies in the productive capacity of the economy in the context of planned non-government spending which includes spending by bondholders out of post-tax interest income. In practice, the likelihood of bondholder spending imposing major constraints on sovereign government net spending is remote, given first that current and prospective target (Cash) rates are the main determinants of longer term bond rates…’ (Watts and Sharpe 2013).

But, in fact the Central Bank has the capacity to control the long term interest rate, as acknowledged by Lavoie (2013). Further, ‘in the pursuit of its own political objectives a sovereign government can vary tax rates in order to release sufficient real resources so that its programs can be implemented’ (Watts and Sharpe 2013).



Thus, notwithstanding the legal and institutional constraints that some modern monetary economies have embraced, the capacity of a Treasury in a sovereign economy to pursue expansionary fiscal policy is subject to minimal real constraints and no financial constraints, unless we assume that the Treasury and the Central Bank have inconsistent macroeconomic policy objectives and the Treasury is subservient to the Central Bank.

Clearly the assumption of a consolidated Treasury and Central Bank cuts through a lot of complexity within the MMT discourse to reveal the intrinsic features of a modern monetary economy. Pilkington (2011) argues that the motivation of MMT advocates who assume this consolidation is ideological in that they are highlighting the distinction between the prevailing institutional arrangements in economies such as the USA and UK, which reflect their earlier commitment to the gold standard and are ‘fairly inconsequential’ anyway, and the arrangements which should prevail. He draws a somewhat unfortunate parallel with neo-liberalism which provided a clear prism within which to view the world and a toolkit to achieve the objective of self-equilibrating markets. Its strength has been in its prescriptive capacity which is designed to achieve this neo-liberal vision.



On the other hand, Pilkington (2011) argues that MMT has more modest objectives, namely the reform of the ‘monetary system so that a functional finance approach can be taken to policymaking’. MMT advocates ‘raise fundamental questions about the role of government in advanced capitalist economies’. By reframing the terms of the debate, MMT advocates have been successful in attracting many non-academic supporters.



While MMT advocates ‘currently have no say in obscure institutional practices between certain Treasuries and their Central Banks’, failing to pose these fundamental questions is a major error; ‘the equivalent of Friedman fleeing from his prescriptions for controlling the money supply because central bankers were then not adopting this approach’ (Pilkington 2011). We certainly acknowledge the distinction between MMT as rhetoric and MMT as scholarly practice in which, for example, the distinction can be clearly made between a government with full fiscal-monetary sovereignty which chooses to engage in debt management practices, ostensibly due to the need for accountability, transparency and to reduce the scale of monetary management, and a Eurozone economy which fearing insolvency, carefully monitors its net fiscal outlays.



Fiscal policy and full employment

We now examine the post-Keynesian and MMT perspectives on the role of fiscal policy in the pursuit of macroeconomic stability and the achievement of full employment. According to Palley (2013:2), ‘the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics....’ In fact, ‘MMT is an inferior rendition of the analysis of money-financed fiscal policy contained in the stock-flow consistent ISLM analysis of Blinder and Solow (1973) and Tobin and Buiter (1976)’ (Palley 2013:14).26



First, it seems curious to look for an enlightened understanding of MMT principles in the research of Keynesians undertaken more than 30 years ago which pre-dates the dominance of neo-liberal thinking. A better guide is whether surviving members of this illustrious group still demonstrate an understanding of the finer points of MMT. Perusal of the following references is recommended to demonstrate that, whatever views they held in the 1970s, they do not hold them now (see Buiter 2010; Solow 2011; Blinder 2012).



Second, Mitchell (2013) questions whether academics, politicians, Central Bankers, private executives, lobbyists, media commentators, etc accept or understand the basic MMT claims, adding; ‘[w]here in the vast body of macroeconomic literature – mainstream or otherwise – do we see regular acknowledgement that there is no financial constraint, for example?’



Third, analysis of recent post-Keynesian literature in the context of the GFC suggests the principles of MMT are not well understood. Rather we argue, (1) in their post-GFC commentary on the conduct of macroeconomic policy, most post-Keynesians fail to distinguish between sovereign economies with their own currencies, operating with flexible exchange rates, and others, particularly Eurozone economies, which do not enjoy the macroeconomic policy freedom afforded by full fiscal-monetary sovereignty; and, (2) notwithstanding a general hostility to austerity measures which are currently being practiced in both sovereign and non-sovereign economies, post-Keynesians are typically critical of the ELR and rely on an unspecified degree of pump-priming to achieve higher levels of economic activity. They do not make a commitment to sustained full employment, as defined by William Beveridge (1944).27



4.1 Post-Keynesians on the role of fiscal policy post-GFC

Space constraints preclude a comprehensive treatment of post-GFC fiscal policy prescriptions outlined by post-Keynesians. Post-Keynesian analysis can be found in the special issues, including Cambridge Journal of Economics (vol. 36(1) 2012), International Journal of Political Economy (vol. 41(2) 2012) and Review of Keynesian Economics (vol. 1(1) 2012).



In an editorial outlining the articles included in the Cambridge Journal of Economics (2012) special issue, King et al. (2012:2) argue that ‘[r]egardless of the fact that the high level of sovereign debt was, to a large extent, attributable to bank bailouts and their economic consequences; the financial markets soon resumed speculation against nation states, creating a growing “sovereign debt crisis”.’ Also, ‘risk premia on the sovereign debt of weaker countries’ have contributed to rising fiscal deficits (King et al. 2012:9). ‘Weaker’ is not defined, so it could refer to a country with a large debt to GDP ratio, such as Japan, which continues to experience 10 year bond rates of under 2 percent.28



Taylor et al. (2012:189) note that in 2010, US economic debate was obsessed with the impact of fiscal policy on economic performance.29 Far from making a distinction between sovereign and non-sovereign economies, the authors rely on a quote from the German finance minister, Wolfgang Schäuble, who justifies fiscal austerity measures because of the adverse reaction of the financial markets to excessive budget deficits. Yet, ‘with historically low interest rates in mid 2011, no vigilantes could be seen on the horizon of the US economy’ (Taylor et al. 2012:190). In their empirical work, a countercyclical response of the primary deficit to growth is found in the US, along with higher deficits stimulating faster growth, particularly during recessions. A strong response of interest rates to changes in the primary deficit was absent.

Given the political aversion to increasing primary deficits, Taylor et al. (2012:204) advocate the exploitation of the balanced budget multiplier. The authors bemoan the fact that ‘mainstream economic thought in the USA appeared to be too ideological to recognise straightforward answers from economic history.’ But there is no attempt to link the empirical results to established MMT theory, underpinned by how macroeconomic policy is actually conducted in the USA.



In a discussion of the fallacies of current austerity measures, Boyer (2012) does not make a clear distinction between sovereign and non-sovereign economies. Indeed he argues that ‘[t]his does not mean that many countries do not need to consolidate their public finances; however, such a strategy has to be planned over a sufficiently long time horizon’ (Boyer 2012:307). Similarly, King et al. (2012:6) maintain that:

‘Efforts to reduce the deficit should therefore be postponed until the recovery is fully underway because it is only then that such efforts can succeed. This is as the consequence of multiplier effects of additional government spending when the economy is operating significantly below capacity. During a period of economic expansion, employment and income grow together, contributing to increasing tax receipts relative to public expenditure and reducing national debt as a proportion of GDP.’

From the above articles, it appears that (1) financial markets have been able to speculate against any nation state; and (2) long-term debt/deficit reduction is an appropriate policy objective.30 Ireland, Greece, Portugal and Spain, all recipients of IMF/ECB/EC supported (bailout) loans, have experienced a significant decline in their 10 year government bond rates following an announcement of Outright Monetary Transactions by the ECB in September 2012. This is testament to the capacity of a sovereign Central Bank to manipulate the yields on long term government debt, notwithstanding the sentiment of international investors (Mitchell, 2012).



Davidson (2010) acknowledges the political economy constraints on further fiscal stimulus in the US, but emphasises the importance of counter-cyclical fiscal policy.

‘Our politicians and public must be educated to understand that when total demand for domestically produced goods is low so that recession and depression threaten, then government must deficit spend as much as necessary to encourage domestic entrepreneurs to hire all […] workers who are willing and able to work’ (Davidson 2010:667).

The sovereign economy status of the USA is not acknowledged in Davidson’s (2010) analysis of government debt. Further, it appears that the onus for full employment lies with entrepreneurs rather than governments.



Arestis (2012:105) is quite vague, concluding that ‘fiscal policy does have a strong macroeconomic role to play in the conduct of economic policy.’ Also, ‘coordination of fiscal and monetary/financial stability policies in a discretionary manner is the best way forward in terms of macroeconomic stabilisation where objective of income distribution should become one of the main objectives of such coordination.’



Sawyer (2012) is critical of the fiscal austerity measures conducted in the UK since the GFC (see also Fontana and Sawyer 2012). He questions the claim that potential output has not only declined, but cannot be restored by high levels of demand through stimulus measures. The UK government appears to have embraced the OECD argument that, in response to a major demand shock, ongoing stimulus measures are inappropriate due to the reduced level of potential output.31



Sawyer (2012) agrees with the principles of functional finance and that the UK government can always service its debt. ‘This was a feature that clearly distinguished the situation of the UK government from that of the Greek government (and indeed other members of the eurozone), where the latter does not issue its own currency’ (Sawyer 2012:208-209; see also Sawyer 2010). Sawyer (2012:220) then questions whether private sector conditions could be established such that budget deficits would not be required to achieve high levels of economic activity.



This is a curious question to pose for two reasons. First, functional finance principles would argue against the relevance of the budgetary outcome, so the desire to enact policies to achieve a balanced budget or a surplus would suggest a more orthodox view about the consequences of sustained deficits. Second, in the absence of positive net exports (see Sawyer 2012:218, Table 4), which Sawyer (2012) notes is not a universal policy anyway, a balanced budget necessitates a positive level of investment minus saving which signifies overall dissaving by the private sector which is unsustainable.32



Seccareccia (2012) documents the long-term fiscal austerity measures enacted in Canada prior to the GFC. He argues that a country, such as Canada, ‘which has a central bank and can issue its own sovereign currency (unlike the eurozone or dollarized regimes), can never face a hard liquidity constraint, but only a soft political one’ (Seccareccia 2012:70). The sequence of budget surpluses between 1995 and 2008 did not increase the spending capacity of the Canadian government during the GFC. Rather these austerity measures weakened Canada’s capacity for sustained growth which requires ‘long-term investment in physical and social infrastructure, a strong safety net with strong built-in stabilisers and a household sector that is not excessively leveraged’ (Seccareccia 2012:78). A superior fiscal strategy is not interrogated in the paper.



4.2 Aggregate demand and full employment

(Post-)Keynesians generally advocate an unspecified amount of aggregate demand stimulus (pump-priming) to achieve full employment, though distributional constraints are often acknowledged.



For example, Arestis and Sawyer (2010, 2012) propose a ‘new economics’. The theoretical framework is underpinned by four broad propositions: ‘(i) aggregate demand is important for the level of economic activity; (ii) distributional effects matter; (iii) money is endogenous and credit driven; and (iv) appropriate government deficits do not present financial risks’ (Arestis and Sawyer 2012:148). Arestis and Sawyer (2012:151) argue that:

‘Fiscal policy should be used both in the short term and in the long term to address demand issues…The main objective of macroeconomic policy is the achievement of full employment of the available labour force. Achieving such an objective would require, inter alia, the maintenance of a high level of aggregate demand consistent with full employment of labour. In addition, the provision of sufficient productive capacity to enable the achievement of full employment is to be interpreted in terms of quantity, quality and geographical distribution. In this sense, industrial and regional policies are required to enhance supply. Public expenditure, particularly investment, can also be structured to ease supply constraints; changes in relevant taxes could also help.’

Elsewhere, Sawyer (2010:14) draws on Kalecki (1944) to promote aggregate demand to achieve full employment via ‘the use of budget deficits’, simulating investment and income redistribution. The stimulation of net exports is also added but Sawyer (2010) acknowledges it is not a universal policy option. No clear guidance is provided as to how these admirable goals are to be achieved, given the acknowledged difficulties of aligning stimulus measures to the achievement of full employment (see also Ramsay 2002-03).33



Palley (2013:23) draws an ill-informed relationship between MMT advocates and neo-Keynesians since ‘[b]oth believe that expansionary fiscal policy can shift the economy to full employment and maintain it there, regardless of factors such as the distribution of income.’ Palley (2013:27) lucidly explains how the operation of discretionary fiscal policy is blighted by the presence of the well-known inside and outside lags (Friedman 1948). Unbeknown to Palley, MMT questions the efficacy of traditional stimulus measures to generate and maintain full employment, and this is precisely the reason many MMT advocates recommend an ELR.



Keynes’ approach to full employment is often misinterpreted. Tcherneva (2012) suggests this stems from confusion between aggregate and effective demand. The argument for aggregate demand polices to promote full employment is often framed in terms of closing the output gap, along the lines of Okun. For Keynes, however, the issue was deficient demand for labour, not output. That is, ‘any output gap that had to be plugged was measured in terms of the number of unemployed men and women who needed work’ (Keynes 1980, quoted in Tcherneva 2012:73).



While Keynes argued that private sector demand would be incapable of achieving and maintaining full employment, there is a tendency for post-Keynesian economists to advocate increased government expenditure to fill the gap.



Government can attempt to influence effective demand via policies which seek to: (1) redistribute income towards individuals with higher marginal propensities to consume; (2) reduce the interest rate; and/or, (3) increase the expected profitability of investment via increased government spending (see Tcherneva 2012:62).

However such policies are unlikely to guarantee sustained full employment. The effectiveness of (1) and (2) are limited since the marginal propensity to consume cannot be directly controlled by government, and the expansionary effects from reducing interest rates relies on interest sensitive private expenditures and also business/consumer expectations. During a recession these channels are weakened further. Kregel (2008) likens (3) to government filling the cash boxes of private entrepreneurs. Tcherneva (2012:62) adds:

‘The trouble with filling investors’ cash boxes as a policy for full employment rests with the state of expectations, which may or may not improve fast enough with the provision of liquid financial assets. And once they improve, they may not improve sufficiently to induce entrepreneurs to offer employment to all who want it.’34

An aggregate demand approach to full employment (pump-priming) suffers at least three shortcomings (see Tcherneva 2012:69). First, it generates inflationary pressures potentially before full employment is reached (e.g. particular industries may already be operating near full capacity). There is no counter-inflation mechanism to address the emergence of inflation, since the government is committed to high levels of employment at market wages. Second, it produces more inequitable income distribution. Drawing on Minsky (1973), Tcherneva (2011:7) argues:

‘The problem with aggregate demand policies is that they not only ignore how the initial income distribution is generated but also tend to favour rentier incomes and profits, as well as high wage workers, thereby bankrolling the very processes that generate income inequality between factor incomes, within labor income, and within capital income.’35

Third, it does not deal with structural unemployment since it largely relies on a flawed ‘trickle-down’ mechanism:

‘Pumping more aggregate demand in the economy improves the employment and income conditions of those workers who will then increase their own demand for products and services that will trickle down to the less-skilled and low-wage workers and, eventually, to the least skilled individuals at the bottom of the income distribution’ (Tcherneva 2011:5).

Acknowledging the shortfalls of aggregate demand management to generate and maintain full employment, ‘Keynes specifically endorsed labor-demand targeting policies in the form of direct job creation for the unemployed that would be implemented irrespective of the phase of the business cycle’ (Tcherneva 2012:58). Keynes often referred to ‘on-the-spot’ employment which would be available to all individuals ready, willing, and able to work (Tcherneva 2012:58). The ELR presents a contemporary approach to sustained full employment consistent with Keynes’ original policy recommendation.



Employer of Last Resort and full employment

4.3.1 Introduction and features

While post-Keynesian commentary on recent austerity measures has been hostile, in most cases, there has been a lack of clarity regarding the extent to which stimulus measures should be adopted. Further, there appears to be no formal commitment to full employment as defined by Beveridge (1944).

While agreement with MMT principles does not imply that the merits of the ELR are also accepted, many MMT advocates, including Mitchell (1998), Wray (1998), Forstater (1998) and Mosler (1997-98) would argue that, by exploiting the macroeconomic policy freedoms of a sovereign economy, the Employer of Last Resort (ELR) or Job Guarantee offers the best option for full employment and price stability.36 The ideal labour market outcome would entail, say, 2% unemployment with no hidden unemployment and no visible underemployment. All employees would be paid market wages and undertake work for which they are trained, so there would be no invisible underemployment either. However this scenario is typically unattainable (see below).



Drawing on Mitchell (1998) and Wray (1998), we now briefly summarise the properties of an ELR to counter the misrepresentation of the scheme in the literature (see, in particular, Palley 2013). The ELR offers a job at a fixed money wage (including a benefit package) to any individual ready, willing and able to work, which creates infinitely elastic labour demand at the ELR wage. All ELR employees can engage in a maximum number of hours of work per week (say 35) or less if preferred.



The buffer stock of ELR jobs expands (declines) when private sector activity declines (expands). A smooth transfer of labour between sectors occurs, because ELR workers are paid the minimum wage to avoid upsetting the private sector wage structure.37 Moreover, ELR workers are job ready which reduces hiring and on-the-job training costs, lessens skill atrophy and therefore the hysteretic inertia embodied in the long-term unemployed, allowing for a smoother transition between the ELR sector and private (or public) sector. Thus the ELR fulfils an important function of minimising the personal/social costs, resulting from unemployment or reduced work hours, which are normally associated with the flux of private sector activity. Further, the introduction of an ELR does not preclude increased public sector employment at market wages.



The minimum wage is the numéraire of the ELR system, so its changes over time cannot be driven by market forces. Private sector employers paying wages equal to the ELR wage may face increased competition for workers which may promote job restructuring and higher productivity. Drawing on a suggestion by Ian McDonald, Watts (2010) recommends that in Australia, the minimum wage be adjusted annually at a constant rate of 4% in line with the (average) targeted inflation rate (2.5%) plus economy wide productivity growth (1.5%).38 The ELR would also be associated with an increase in the social wage through improved public provision of education, health, child care, and access to legal aid. All families would be able to access the normal raft of benefits, such as income supplements, disability benefits and single parent allowances, which reflect family structure and circumstances.39



The ELR wage provides an in-built inflation control mechanism so that full employment can be sustained. If inflation exceeds the government’s announced target, tighter macroeconomic policy would lead to workers transferring from the inflating private sector to the fixed price ELR sector with a loss of wage income. ELR workers are a credible threat to current private sector employees because they represent a fixed-price stock of labour from which employers can recruit, which contrasts the short- and long-term unemployed under current policy. Thus employers are more likely to resist inflationary wage demands from the existing workforce.



The Buffer Employment Ratio (BER), defined as the ratio of ELR employment to total employment, will condition the overall rate of wage demands, with a rising BER slowing the inflationary spiral. Unemployment is not used to discipline the distributional struggle in a manner characteristic of NAIRU models. Rather contractionary macroeconomic policy moderates the inflationary process via compositional changes in employment which imposes a sanction, in the form of income loss, on workers displaced from market wage employment.



The BER at which there is stable inflation is defined as the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It represents the steady state, full employment ELR share of total employment. While the NAIBER is path dependent, its microeconomic foundations differ from those of the conventional NAIRU. Speculation as to the relative magnitudes of the NAIBER and NAIRU should be considered irrelevant, because full employment should not be sacrificed to achieve an unemployment rate that may or may not be lower than the steady-state BER ratio.40



The implementation of the ELR is not a form of pump-priming, but rather creates loose full employment so that demand pressures are less than if the unemployed are employed at market wages in the private (or public) sector (Mitchell and Wray 2005, cf. Sawyer 2003). The presence of unemployment is signalled by workers seeking ELR jobs, so there is a perfect calibration of job creation to the level of unemployment, so that many of the problems with pump-priming are avoided. Given the uneven spatial distribution of unemployment and underemployment, these include unknown multipliers associated with the spatial distribution of additional employment and the corresponding impact on labour force participation rates.



The operational focus of the ELR would be Local Government. Here, urgent social needs would be identified and addressed by meaningful, value-adding employment. Employment services would be eliminated and the agency reconfigured to coordinate ELR employment creation. In addition, ongoing occupational planning would attempt to align future skill development, via tertiary education and on-the-job training, with future employment needs.



The provision of ELR employment opportunities would exploit the absence of a government budget constraint within sovereign economies. Hence, the ELR requires a flexible exchange rate system to ensure complete policy freedom. The introduction of an ELR may be associated with a once-off increase in import spending because ELR workers would have higher disposable incomes than when unemployed (Lopez-Gallardo 2000). While this effect would be mitigated by phasing in the ELR, exchange rate depreciation is possible so imports become more expensive, but such an outcome is a small price to pay for full employment. A depreciation would raise the contribution of net exports to GDP and employment, if the Marshall-Lerner condition were satisfied. But exports represent (real) costs and imports provide (real) benefits (cf. orthodoxy). Further, it is likely that a fully employed economy with price stability would be attractive for long-term equity investors, thereby causing the currency to appreciate.



4.3.2 Post-Keynesian critique

There are a number of post-Keynesian critiques of the ELR scheme, including Lopez-Gallardo (2000), Aspromourgos (2000), Kadmos and O’Hara (2000), King (2001), Ramsey (2002-03), Sawyer (2003, 2005), and Seccareccia (2004) and Palley (2013). While space constraints prevent a comprehensive review of these, here we consider (1) the logistics of implementing the ELR, types of jobs offered and remuneration, and (2) the macroeconomic consequences.



Provision of sufficient jobs, both public and private, at market wages underpinned by a robust minimum wage is clearly desirable. However if the buffer stock of ELR jobs is too small then an expansion of private sector employment (e.g. during buoyant economic conditions) would create demand-pull inflation. Contractionary macroeconomic policy to stem the inflation would cause economic dislocation as some market wage earners are displaced to minimum wage buffer stock employment. Thus it is vital that the nationwide institutional structure of the ELR enables workers to be redeployed in the event of a major private sector contraction (or expansion) in a particular location.



Seccareccia (2004) is critical of the ELR scheme, but fails to incorporate its defining features in his model. He develops a one sector Kaleckian model with a simple Leontief production function in which labour demand is a positive non-linear function of the real wage. He shows that with an ultimately backward-bending labour supply schedule, there is the logical possibility of two supply/demand intersections (equilibria), one associated with high wages and one with low wages. Seccareccia (2004) introduces an ELR by superimposing a low real wage. He then claims that the ELR will predispose the economic system to generate low wages which have poor distributional consequences.



First, the rudimentary macroeconomic model developed by Seccareccia (2004) is not characterised by deficient aggregate demand, but rather a non-unique equilibrium wage, so the motivation for the introduction of an ELR is problematic. Second, an ELR has been incorporated into the one sector model, even though the level of ELR employment and output is determined by the level of unemployment, rather than real wages and discretionary expenditure. Also the key feature of the ELR is that labour mobility to the private sector is facilitated, thus a two sector framework is appropriate.



Sawyer (2003:893) raises the spectre of public sector wages being undercut, via jobs being transferred to the ELR sector. Under a more enlightened administration of the public sector in which cost cutting and cost shifting were not viewed as a badge of honour by senior management and politicians, ELR and standard public sector jobs would be sharply distinguished. Sawyer (2005:259) appears to think that a public sector expansion and the establishment of an ELR are mutually incompatible (see also Kadmos and O’Hara 2000:16).



Sawyer (2003, 2005) expresses concern about the impact of private sector flux on say the provision of assistance to the elderly, which needs to be ongoing. There are many services which, subject to political choice, should be provided by the public sector on an ongoing basis and/or require a critical mass of workers. This justifies the provision of these services at market rates of pay. With a commitment to full employment, however, non-government sector employment at market wages may exhibit less fluctuation which means the buffer stock can be relatively small.



ELR advocates do not argue that delays in the provision of ELR employment would never occur (Sawyer 2003), nor is it claimed that invisible underemployment would be addressed through the adoption of an ELR scheme (cf. Sawyer 2003). First, employees displaced from market wage jobs typically have a notice period to serve. Second, more skilled workers who are displaced from employment may choose to engage in wait-unemployment, supported by redundancy payments, rather than taking up a low skilled (ELR) job (cf. Sawyer 2003:884). Finally, no realistic job creation scheme can be established which matches jobs to the specific skills possessed by members of the labour force.



Cook et al. (2008) surveyed Economic Development Officers from local councils to document jobs that could be available under an Australian ELR. A wide range of jobs were identified, many with low skill requirements (see Table 2 in Appendix 1, reproduced from Cook et al. 2008). Thus Sawyer’s (2003:884) concern about the content of ELR jobs, and specifically the availability of sufficient low skilled jobs, is misplaced. Rather than providing jobs to absorb the unemployed, ‘social priorities decide the nature of the government’s spending programme’ (Kalecki 1944:368, quoted in Sawyer 2003).



The design of ELR jobs are often criticised on two grounds; (1) in the absence of unemployment benefits, the unemployed are forced to take an ELR job even if this position does not accord with their preferences; and, (2) the ELR wage is not ‘market’ determined due to its function as a numéraire.41 Nesiba (2013:55) reports that ‘many on the left would find this [1] repugnant’ (see also Ramsay 2002-03:283).



The so-called ‘left’ has not come up with a coherent strategy by which to generate an adequate supply of jobs to match the desires of the working age population in an environment of stable inflation. This argument is resonant of the view that there should be no invisible underemployment. In practice, all workers have to make choices about post-school education and employment which entail tradeoffs. The distinctive feature of an ELR is that all workers enjoy employment security which is a reasonable quid pro quo for some workers undertaking less desirable ELR jobs for some of the time, as opposed to being unemployed. MMT advocates are accused of political naivety with its full employment policy. Yet it is drawing a long bow to argue that, in the presence of sufficient jobs, political opinion would support the unemployed via unemployment benefits, in the absence of compliance requirements.42



Finally the ‘left’ has every right to complain about the imposition of compliance regimes such as Work for the Dole (WfD) in an environment of insufficient jobs, particularly when WfD is not ongoing and does not offer the usual employment benefits. These complaints ring a bit hollow, if sufficient ongoing jobs are available, with normal employment rights, except the capacity to wage bargain. It is noteworthy that King (2001) considers three alternative forms of employment and income support, but considers all of them impractical and settles on the ELR as the ‘last resort’ (see also Nesiba 2013).



We now consider the macroeconomic consequences of the ELR which have attracted comment from post-Keynesians, including Aspromourgos (2000), Sawyer (2003, 2005) and Palley (2013).



Sawyer (2003:904) argues that, in addition to sufficient aggregate demand, ‘there are other barriers to high employment, notably lack of productive capacity, inflation barriers, and balance of trade constraints (see also Aspromourgos 2000:155), as well as political and intellectual constraints.’



The reference to aggregate demand should be qualified by again noting that the ELR is not a pump-priming exercise (Mitchell and Wray 2005; Tcherneva 2012). The question of deficient productive capacity is an empirical one. The other barriers outlined by Sawyer (2003) need to be more clearly articulated. King (2001, quoted in Nesiba 2013:5) is critical of Kadmos and O’Hara (2000:7) for claiming that the ELR constitutes a powerful ‘built-in stabiliser’. This again reveals an aggregate demand fetish on the part of some ELR critics, rather than noting that direct employment is its focus.



By reference to the ex post ‘budget constraint’, Aspromourgos (2000:149-151) provides a reasonably accurate account of the processes involved in expansionary fiscal policy, notwithstanding his use of misleading terminology including printing money and financing. He then poses the question of private agents declining to take up the additional net financial assets (government securities and high-powered money), in sufficient quantities, which he claims implies a financing limit to the level of government expenditure consistent with an ELR policy. But ‘[t]he private sector can only dispense with unwanted cash balances in the absence of government paper by increasing their consumption levels’ (Mitchell and Mosler 2001:18).



If there were no financial constraints on government expenditure, Aspromourgos (2000) suggests expanding employment at market wages. He concludes that the only reason for not doing so, aside from the anti-inflationary role of the ELR, is that there are insufficient useful activities which could be expanded (cf. Table 2). Aspromourgos (2000:151-152) also argues that the existence of a maximum sustainable deficit would necessitate reliance on a balanced budget multiplier to generate sufficient employment. This is alleged to strengthen concerns of political sustainability due to the increased ‘size’ of the public sector. Further, Aspromourgos (2000:152) makes reference to the ‘excess liquidity flow through the economic system’, which was addressed by Constâncio (2011:5, see footnote 13).



Any differences between Sawyer (2003) and Mitchell and Wray (2005) concerning the conduct of expansionary fiscal policy seem to be largely resolved in Sawyer (2005), although again reference to terms such as financing (deficits) and printing money by Sawyer may cause concern due to their orthodox connotations.



Palley (2013) also uses unhelpful language, including money financed budget deficits, (keywords for his paper) in describing expansionary fiscal policy, but also appears to think that the Treasury makes an ex ante choice regarding the composition of money and bonds to finance a fiscal expansion. For example, Palley (2013:17) argues that:

‘The significance of the Phillips curve is that inflation is not an “off-on” phenomenon. Instead, it will be positive a considerable way away from policymakers’ employment target and it is likely to increase as employment approaches the target. Policy needs to take account of this. That may mean changing the composition of deficit financing and shifting away from money finance to bond finance.’

He appears not to understand the payments system and the need for monetary management by the Central Bank. Following a fiscal expansion, the ex post mix of additional high-powered money and government securities held by the non-government sector is the outcome of Commercial Bank preferences for reserves, and the institutional arrangements associated with the interbank market.43 Further, Palley (2013:27) appears to assume that an ELR is based on pump-priming:

‘MMT discards the interest rate as an instrument of policy and instead relies on fine tuning of government spending to maintain full employment and taxes to maintain budget balance. The assumption is that spending and taxes can be adjusted rapidly and their effects kick-in quickly.’ 44

Mitchell and Wray (2005) emphasise that the ELR is not an aggregate demand policy. Indeed with its job creation focus, no finetuning of government expenditure is required. If monetary policy is not employed to control inflation, given the low interest rate policy, the Treasury can raise taxes or cut expenditure so that some market wage workers are redeployed to the ELR sector.



Conclusion

The conduct of macroeconomic policy post-GFC has been severely misguided. While the disastrous economic outcomes in many advanced economies present a unique challenge to orthodox policy prescription, most post-Keynesian economists merely reject fiscal austerity and advocate the adoption of further stimulus measures. Thus, it would seem that most post-Keynesians have not embraced the principles of Modern Monetary Theory.



The unwillingness to engage with MMT largely reflects; (1) misunderstandings and misrepresentations of MMT views and policy prescriptions (see also Fullwiler et al. 2012); and (2) an unwillingness to embrace the mechanics of the payment system (see also Lavoie 2013). The latter is essential to understand the constraints on the conduct of fiscal and monetary policy among sovereign and non-sovereign economies. Thus the formal incorporation of MMT principles would enhance the post-Keynesian framework.



Circuitists often make the distinction between sovereign and non-sovereign economies, and acknowledge that the former do not face an ex ante budget constraint (Bougrine and Seccareccia 2002; Parguez 2002). Hence circuitist analysis of post-GFC fiscal policy is very much aligned with the MMT view (see Bougrine 2012; Seccareccia 2012).45



There is also hostility to the imposition of an ELR by post-Keynesians, which appears to be based on an antipathy to minimum wage employment and the implied coercion of accepting an ELR job in the absence of unemployment benefits. Yet post-Keynesians who reject the ELR have not devised an alternative economic strategy to achieve sustained full employment and price stability.





Appendix 1

Table 2. Potential jobs for an Australian ELR

Subcategory Examples of areas of need Potential jobs for low/unskilled workers Community Welfare Services Housing and accommodation Expansion of public housing Residential aged care facilities Refuge facilities for various groups Builder’s labour Personal care assistant Refuge support worker Services for children Provision of teachers aides Assistance to childcare services Before and after school care Teachers aides Child care worker Community support Elderly social isolation Hospital/nursing home visitation Administrative support to community groups Personal care assistant Community development assistant General clerk Independent living Provision of domestic assistance Garden maintenance services Meal delivery services Personal care assistant Gardener Food preparation Transport Amenity Transport infrastructure Bituminise roads Up-scale light rails services Manage road-side vegetation Footpath / cycleway expansion Upgrade bus stop/shelter facilities Paving/surfacing labourers Gardeners Builder’s labourers Transport services Dial-a-ride community transport Increase inter-city service frequency Flexible community transport Drivers General clerks Personal care assistant Public Health and Safety Community infrastructure Graffiti removal/ street mural Septic tank inspection Clearing of derelict land Cleaner Caretaker Inspectors Community safety Support of alcohol free zones Community patrols Community development assistant Youth development assistant Community cohesion Youth café/youth drop-in centre Support civic engagement: street festivals, block BBQs community newsletter/ community radio station Community development assistant Youth development assistant Event assistant/promotion Kitchen hand Community health

Community fruit/vegetable garden Community group exercise Assistance to sporting groups public health promotions Gardener Sport development assistant Administration Health promotion assistant Disaster prevention Hazard reduction Bushfire prevention Fire worker Environmental remediation worker

Source: Cook et al. (2008, Tables 8.9, 8.10 and 8.13).

References

Arestis, P. (2012). Fiscal policy: A strong macroeconomic role, Review of Keynesian Economics, Inaugural issue, 93-108.

Arestis, P., and M. Sawyer. (2010). 21st Keynesian economic policy, in P. Arestis and M. Sawyer (eds.), 21st Century Keynesian Economics, annual edition of International Papers in Political Economy, Houndmills, Basingstoke: Palgrave, Macmillan.

Arestis, P., and M. Sawyer. (2012). The ‘new economics’ and policies for financial stability, International Review of Applied Economics, 26(2):147-160.

Aspromourgos, T. (2000). Is an employer-of-last-resort policy sustainable? A review article, Review of Political Economy, 12(2):141-155.

Bell, S. (1998). The hierarchy of money, The Levy Economics Institute, working paper, 231.

Bell, S. (2000). Do taxes and bonds finance government spending? Journal of Economic Issues, 34, 603-620.

Bell, S., and L.R. Wray. (2002-03). Fiscal effects on reserves and the independence of the Fed, Journal of Post Keynesian Economics, 25(2):263-272.

Beveridge, W. (1944). Full Employment in a Free Society, London: Allen & Unwin.

Blinder, A. (2012). The long and short of fiscal policy, Wall Street Journal, 21 May.

Blinder, A.S., and R.M. Solow. (1973). Does fiscal policy matter? Journal of Public Economics, 2, 319-337.

BOE (2013). Sterling monetary framework operations, Bank of England, available: http://www.bankofengland.co.uk/markets/Pages/money/default.aspx.

Bougrine, H. (2012). Fiscal austerity, the Great Recession and the rise of new dictatorships, Review of Keynesian Economics, Inaugural issue, 109-125.

Bougrine, H., and M. Seccareccia. (2002). Money, taxes, public spending, and the state within a circuitist perspective, International Journal of Political Economy, 32(3):58-79.

Boyer, R. (2012). The four fallacies of contemporary austerity policies, Cambridge Journal of Economics, 36(1):283-312.

Buiter, W.H. (2008). Can central banks go broke? Centre for Economic Policy Research, Policy Insight, 24.

Buiter, W.H. (2010). Global economics view – Sovereign debt problems in advanced industrial countries, Citi Group briefing, 26 April.

Constancio, V. (2011). Challenges to monetary policy in 2012, speech at the 26th International Conference on Interest Rates, Frankfurt am Main, 8 December.

Davidson, P. (1994). Post-Keynesian Macroeconomic Theory: A Foundation for Successful Economic Policies for the Twenty-first Century, Aldershot: Edward Elgar.

Davidson, P. (2002). Financial Markets, Money and the Real World, Cheltenham and Northampton: Edward Elgar.

Davidson, P. (2010). Making dollars and sense of the U.S. government debt, Journal of Post Keynesian Economics, 32(4):663-667.

Dunn, S.P. (2000). Wither post Keynesianism? Journal of Post Keynesian Economics, 22, 343–364.

Febrero, E. (2009). Three difficulties with neo-chartalism, Journal of Post Keynesian Economics, 31(3):523-541.

Fiebiger, B. (2012). Modern money theory and the real-world accounting of 1-1<0: The U.S. Treasury does not spend as per a bank, Political Economy Research Institute, working paper, 279.

Fontana, G., and M. Sawyer. (2012). Setting the wrong guidelines for fiscal policy: The post-2007 UK experience, International Journal of Political Economy, 41(2):27-41.

Forstater, M. (1998). Flexible full employment: Structural implications of discretionary public sector employment, Journal of Economic Issues, 32(2):57-563.

Forstater, M. (2005). Taxation and primitive accumulation: the case of colonial Africa, Research in Political Economy, 22, 51–64.

Forstater, M. (2006). Tax-driven money: Additional evidence from the history of thought, economic history, and economic policy, in M. Setterfield (ed.), Complexity, Endogenous Money, and Exogenous Interest Rates, Cheltenham and Northampton: Edward Elgar.

Friedman, M. (1948). A monetary and fiscal framework for economic stability, American Economic Review, 38(2):245–264.

Fullwiler, S.T. (2003). Timeliness and the Fed’s daily tactics, Journal of Economic Issues, 37(4):851–880.

Fullwiler, S.T. (2010). Re-viewing Chartalism/neo-Chartalism, Comment, Reviving Economics, 8 July, available: http://econrevival.blogspot.com/2010/07/re-reviewing-chartalsim-neo-chartalism.html.

Fullwiler, S.T., and L.R. Wray. (2010). Quantitative easing and proposals for reform of monetary procedures, The Levy Economics Institute, working paper, 645.

Fullwiler, S.T., Kelton, S., and L.R. Wray. (2012). Modern money theory: A response to the critics, Political Economy Research Institute, working paper, 279.

Gnos, C., and L-P. Rochon. (2002). Money creation and the state: A critical assessment of chartalism, International Journal of Political Economy, 32(3):41-57.

Godley, W., and M. Lavoie. (2007). Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth, Macmillan Palgrave.

Graziani, A. (1990). The theory of the monetary circuit, Economies et Sociétés, 24(6):7-36.

Graziani, A. (1994). Monetary circuits, in P. Arestis and M. Sawyer (eds.), The Elgar Companion to Radical Political Economy, Aldershot: Edward Elgar.

Graziani, A. (2003). The Monetary Theory of Production, Cambridge: Cambridge University Press.

Hammond, J. (2011). Fiscal sustainability ‘denial’ cannot continue forever, says Willem Buiter, mimeo, 64th CFA Institute annual conference, available: http://seekingalpha.com/article/269349-fiscal-sustainability-denial-cannot-continue-forever.

HM Treasury (2011). Debt and reserves management report 2011-12, HM Treasury, March.

HM Treasury (2012). Debt and reserves management report 2012-13, HM Treasury, March.

Innes, A.M. (1914). The credit theory of money? Banking Law Journal, 31, 151–168.

Jácome L.I., Matamoros-Indorf, M., Sharma, M., and S. Townsend. (2012). Central bank credit to the government: What can we learn from international practices? International Monetary Fund, working paper, 16.

Juniper, J., and W.F. Mitchell. (2008). There is no financial crisis so deep that cannot be dealt with by public spending, Centre of Full Employment and Equity, working paper, 10.

Kadmos, G.A., and P.A. O’Hara. (2000). The taxes-drive money and employer of last resort approach to government policy, Journal of Economic and Social Policy, 5(1):1-23.

Kalecki, M. (1944). Three ways to full employment, in Oxford University Institute of Statistics, The Economics of Full Employment, Oxford: Blackwell.

Keister, T., and J. McAndrews. (2009). Why are banks holding so many excess reserves? Federal Reserve Bank of New York, Staff Report, 380.

Kelton, S. (2010). Yes, deficit spending adds to private sector assets even with bond sales, New Economic Perspectives, 17 November, available: http://neweconomicperspectives.org/2010/11/yes-deficit-spending-adds-to-private.html.

Kervick, D. (2012). The public money monopoly (Pt. I), New Economic Perspectives, 13 March, available: http://neweconomicperspectives.org/2012/03/13.

Keynes, J.M. (1980). Activities 1940–46, in D. Moggridge (ed.), Shaping the Post-War World: Employment and Commodities, Volume XXVII of Collected Works, London: Macmillan.

King, J.E. (2001). The last resort? Some critical reflections on ELR, Journal of Economic and Social Policy, 5(2):72-76.

King, J.E. (2012). Post-Keynesians and others, Review of Political Economy, 24(2):305-319.

King, L., Kitson, M., Konzelmann, S., and F. Wilkinson. (2012). Making the same mistake again—or is this time different? Cambridge Journal of Economics, 36(1):1–15.

Knapp, G.F. (1973[1924]). The State Theory of Money, Clifton: Augustus M. Kelley.

Kregel, J.A. (2008). The continuing policy relevance of Keynes’s General Theory, in M. Forstater and L.R. Wray (eds.), Keynes for the 21st Century: The Continuing Relevance of The General Theory, London: Macmillan.

Lavoie, M. (2010). Changes in central bank procedures during the subprime crisis and their repercussions on monetary theory, International Journal of Political Economy 39(3):3-23.

Lavoie, M. (2011). The monetary and fiscal nexus of neo-chartalism: A friendly critical look, mimeo, Department of Economics, University of Ottawa, Canada.

Lavoie, M. (2012). Perspectives for post-Keynesian economics, Review of Political Economy, 24(2):321-335.

Lavoie, M. (2013). The monetary and fiscal nexus of neo-chartalism: A friendly critique, Journal of Economic Issues, 47(1):1-31.

Lee, F.S. (2012). Heterodox economics and its critics, Review of Political Economy, 24(2):337-351.

Lerner, A.P. (1943). Functional finance and the federal debt, Social Research, 10(1):38-51.

Lerner, A.P. (1947). Money as a creature of the state, The American Economic Review, 37, 312–317.

Lopez-Gallardo, J. (2000). Budget deficits and full employment, Journal of Post Keynesian Economics, 22(4):549-564.

Mehrling, P. (2000). Modern money: Fiat or credit? Journal of Post Keynesian Economics, 22(3):397-406.

Minsky, H.P. (1973). The Strategy of Economic Policy and Income Distribution, The Annals of the American Academy of Political and Social Science, 409, 92–101.

Minsky, H.P. (1975). John Maynard Keynes, New York: Columbia University Press.

Minsky, H.P. (1985). The financial instability hypothesis: A restatement, in P. Arestis and T. Skouras (eds.), Post Keynesian Economic Theory: A Challenge to Neo-Classical Economics, Sussex: Wheatsheaf Books.

Minsky, H.P. (1986). Stabilizing and Unstable Economy, New Haven: Yale University Press.

Mitchell, W.F. (1998). The buffer stock employment model and the NAIRU: The path to full employment, Journal of Economic Issues, 32(2):547-555.

Mitchell, W.F. (2009a). In the spirit of debate…my reply, Billy Blog, 28 September, available: http://bilbo.economicoutlook.net/blog/?p=5199.

Mitchell, W.F. (2009b). Will we really pay higher interest rates? Billy Blog, 8 April, available: http://bilbo.economicoutlook.net/blog/?p=1266.

Mitchell, W.F. (2010). Who is in charge? Billy Blog, 8 February, available: http://bilbo.economicoutlook.net/blog/?p=7838 .

Mitchell, W.F. (2012). The ECB plan will fail because it fails to address the problem, Billy Blog, 11 September, available: http://bilbo.economicoutlook.net/blog/?p=20935

Mitchell, W.F. (2013). I wonder what the hell I have been writing all these years, Billy Blog, 12 February, available: http://bilbo.economicoutlook.net/blog/?p=22701 .

Mitchell, W.F. and W. Mosler. (2001). Fiscal policy and the Job Guarantee, Centre for Economic Policy Research, Australian National University, DP441, December.

Mitchell, W.F. and M.J. Watts. (2003). In defence of the Job Guarantee, Centre of Full Employment and Equity, working paper, 12, December.

Mitchell, W.F. and L.R. Wray. (2005). In defence of the employer of last resort, Journal of Economic Issues, 39(1):235-245.

Moore, B. (1988). Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge: Cambridge University Press.

Mosler, W. (1994). Soft Currency Economics, West Palm Beach, available: http://moslereconomics.com/mandatory-readings/soft-currency-economics/.

Mosler, W. (1997-98). Full employment and price stability, Journal of Post Keynesian Economics, 20(2):167-182.

Mosler, W., and M. Forstater. (1999). General framework for the analysis of currencies and commodities, in P. Davidson and J. Kregel (eds.), Full Employment and Price Stability in a Global Economy, Cheltenham and Northampton: Edward Elgar.

Nesiba, R.F. (2013). Do Institutionalists and post-Keynesians share a common approach to Modern Monetary Theory (MMT), European Journal of Economics and Economic Policies: Intervention, forthcoming.

OECD (2009). Beyond the crisis: Medium term challenges relating to potential output, unemployment and fiscal positions, Chapter 4, OECD Economic Outlook, 85, Paris: OECD Publications.

Palley, T. (1995). Post-Keynesian Macroeconomics, Aldershot: Edward Elgar.

Palley, T. (2012a). More on the spurious victory claims of MMT, Economics for Democratic and Open Societies, 25 July, available: http://www.thomaspalley.com/?p=290.

Palley, T. (2012b). MMT/ELR: A mix of old and unsubstantiated new ideas, Economics for Democratic and Open Societies, 27 July, available: http://www.thomaspalley.com/?p=298.

Palley, T.I. (2013). Money, fiscal policy, and interest rates: A critique of modern monetary theory, mimeo, Independent Economist, Washington, D.C.

Parguez, A. (2002). A monetary theory of public finance, International Journal of Political Economy, 32(3):80-97.

Parguez, A., and M. Seccareccia. (2000). The credit theory of money: The monetary circuit approach, in J. Smithin (ed.), What is Money? London: Routledge.

Pilkington, P. (2011). A scribbler’s response to Marc Lavoie on MMT, New Economic Perspectives, 14 December, available: http://neweconomicperspectives.org/2011/12/scribblers-response-to-marc-lavoie-on.html .

Ramsay, T. (2002-03). The jobs guarantee: A post Keynesian analysis, Journal of Post Keynesian Economics, 25(2):273-291.

Potter, W. (1995). An overview of the money and bond markets in New Zealand Part 1: The Crown debt market, Reserve Bank Bulletin, 58(3):177-192.

RBA (2013). Domestic market operations, Reserve Bank of Australia, available: http://www.rba.gov.au/mkt-operations/dom-mkt-oper.html.

Reinhart, C.M., and K.S. Rogoff. (2010). Growth in a time of debt, working paper presented at the American Economic Association meeting, January.

Rochon, L-P., and M. Vernengo. (2003). State money and the real world: Or chartalism and its discontents, Journal of Post Keynesian Economics, 26(1):57-68.

Rossi, S. (1999). Review of ‘Understanding Modern Money’, Kyklos, 52(3):483-485.

Sargent, T.J. (1986). Macroeconomic Theory, 2nd edition, New York: Academic Press.

Sawyer, M. (2003). Employer of last resort: Could it deliver full employment and price stability? Journal of Economic Issues, 37(4):881-909.

Sawyer, M. (2005). Employer of last resort: A response to my critics, Journal of Economic Issues, 39(1):256-264.

Sawyer, M. (2010). Progressive approaches to budget deficits, mimeo, University of Leeds, October.

Sawyer, M. (2012). The tragedy of UK fiscal policy in the aftermath of the financial crisis, Cambridge Journal of Economics, 36, 205-221.

Schumpeter, J.A. (1954). History of Economic Analysis, Oxford: Oxford University Press.

Seccareccia, M. (2004). What type of full employment? A critical evaluation of government as the employer of last resort policy proposal, Investigacion Economica, 63(247):15-43.

Seccareccia, M. (2012). Understanding fiscal policy and the new fiscalism: A Canadian perspective on why budget surpluses are a public vice, International Journal of Political Economy, 41(2):61-81.

Sharpe, T.P. (2013). A modern money perspective on financial crowding-out. Review of Political Economy, forthcoming.

Sharpe, T.P., and M.J. Watts. (2012). Policy advice in crisis: How Inter-Governmental Organisations have responded to the GFC, Journal of Australian Political Economy, 69(winter), 103-133.

Solow, R.M. (2011). New policy ideas for a new world: Interview with Robert Solow, IMFdirect - IMF Global Economic Forum, available: http://blog-imfdirect.imf.org/2011/04/02/new-policy-ideas-from-robert-solow/.

Stockhammer, E., and P. Ramskogler. (2009). Post-Keynesian economics – how to move forward, European Journal of Economics and Economic Policies: Intervention, 6, 227–246.

Taylor, L., Proano, C., de Carvalho, L., and N. Barosa. (2012). Fiscal deficits, economic growth and government debt in the USA, Cambridge Journal of Economics, 36(1):189-204.

Tcherneva, P.R. (2006). Chartalism and the tax-driven approach, in P. Arestis and M. Sawyer (eds.), A Handbook of Alternative Monetary Economics, Cheltenham: Edward Elgar.

Tcherneva, P.R. (2011). Fiscal policy: Why aggregate demand management fails and what to do about it, The Levy Economics Institute, working paper, 650.

Tcherneva, P.R. (2012). Permanent on-the-spot job creation—the missing Keynes plan for full employment and economic transformation, Review of Social Economy, 70(1):57-80.

Tobin, J., and W.H. Buiter. (1976). Long run effects of fiscal and monetary policy on aggregate demand, in J.L. Stein (ed.), Monetarism, Amsterdam: North Holland.

Van Lear, W. (2002-03). Implications arising from the theory on the Treasury’s bank reserves effects, Journal of Post Keynesian Economics, 25(2):251-262.

Vercelli, A. (1991). Methodological Foundations of Macroeconomics: Keynes and Lucas, Cambridge: Cambridge University Press.

Vernengo, M. (2010). Conversation or monologue? On advising heterodox economists, Journal of Post Keynesian Economics, 32, 389–396.

Walsh, V., and H. Gram. (1980). Classical and Neoclassical Theories of General Equilibrium: Historical Origins and Mathematical Structure, New York: Oxford University Press.

Watts, M.J. (2010). The role of the OECD in the design of macroeconomic and labour market policy: Reflections of a heterodox economist, Centre of Full Employment and Equity, working paper, 2.

Watts, M.J. (2012). Debt management in the U.K. and Australia: Breaking the nexus between fiscal and monetary policy? mimeo, Centre of Full Employment and Equity, April.

Watts, M.J., and T.P. Sharpe. (2013). Institutional arrangements and the ‘immutable’ laws of debt dynamics, Journal of Post Keynesian Economics, forthcoming.

Wray, L.R. (1998). Understanding Modern Money, Cheltenham: Edward Elgar.

Wray, L.R. (2001). Understanding modern money: Clarifications and extensions, Centre of Full Employment and Equity, conference proceedings, available: http://e1.newcastle.edu.au/coffee/pubs/workshops/12_2001/wray.pdf.

Wray, L.R. (2003). Seigniorage or sovereignty? in L-P. Rochon and S. Rossi (eds.), Modern Theories of Money: The Nature and Role of Money in Capitalist Economies, Cheltenham: Edward Elgar.

Wray, L.R. (2006). When are interest rates endogenous? in M. Setterfield (ed.), Complexity, Endogenous Money and Macroeconomic Theory, Cheltenham: Edward Elgar.

Wray, L.R. (2007). Endogenous money: structuralist and horizontalists, The Levy Economics Institute, working paper, 512

Wray, L.R. (2011a). A modest proposal for ending debt limit gridlock, Credit Writedowns, 27 March, available: http://www.creditwritedowns.com/2011/03/a-modest-proposal-for-ending-debt-limit-gridlock.

Wray, L.R. (2011b). Minsky Crisis, The Levy Economics Institute, working paper, 659.