In neo-liberalism, it’s always the individual’s fault

There’s a post up at Telepolis in which the author contrasts neo-classical, Austrian and MMT-approaches to solving the current crisis.

His diagnosis is that the problem is private over-indebtedness, which “paralyzes” individuals and banks and which needs to addressed “as quickly as possible” because supposedly the crisis stops the state from addressing real issues such as anthropogenic climate change, and resource overexploitation.

This is a somewhat problematic position to begin with if one attempts to discuss MMT because private debt does not constrain state spending. It does slow down economic activity which will, however, slow down CO2 emissions and resource overexploitation somewhat for the time being.

Furthermore, the conclusions he draws from the MMT framework are a bit strange: in his view, Central Banks take over private debt from private banks, and then just forgive it. He identifies that this has a chance to be inflationary (although his assumption is that the inflationary impulses would come from banks, I guess via lending, which is a strange position to take given that last years’ QE operations have not lead to further lending and accompanying inflation).
He also wonders whether a new debt bubble would simply develop and finishes by stating that since the MMT solution knew only winners (banks get their money back, debtors get rid of some debt), it has to be too good to be true.

Now, while his is a MMT solution, it is a rather naive and risky one. Without addressing wages, unemployment and all the other things Bill Mitchell writes so consistently about, his solution would suddenly leave wage earners with more capability to consume, without a means of paying off the rest of their debt, and the economy at the same level of utilization as before the day some debt disappeared. So inflationary impulses might develop, driven by those whose debt has been lessened, and a new debt bubble would probably develop since people’s situation w.r.t. earning enough to consume and save wouldn’t have changed.

I pointed all of this out in a comment and got a reply that has internalized neo-liberal thinking so deeply that it hurts. I’ve replied in turn and cross-post a translation of my reply here (this also includes a translated excerpt of the reply to my initial comment):

I am not sure whether private debt is mainly a consequence of inadequate wages (this might be the case for many), or rather a consequence of the belief in never-ending growth and a secure job. In looking at the US bubble until 2007 this is unfortunately hard to tell apart, both factors came into play.

When the savings rate in the US drops with the onset of the neo-liberal era (and especially with its gaining momentum under Reagan):

and private debt (which admittedly also grew before) shows a steeper increase in the same time frame (although one has to remember that this is the US, with much less public support for the non-rich):

one can of course assume that suddenly the attitude of wage earners changed and they were willing to go deeper into debt although, not despite, no indication for increased job security could be observed:

or one has a look at the development of income distribution:

and concludes that the entire complex maybe has something to do with the fact that wages grow slower than productivity and slower than inflation and therefore unchanged consumption patterns need changed financing options (i.e. going into debt).

The claim that the higher private debt is due to irresponsible individuals is as insidious as the claim that work ethic in Europe and the US both during the Great Depression and since the mid-70s just collapsed and that this explains high unemployment rates.

In my comment, I did not propose that the current loan practices should be kept unchanged. But, in which form loan practices are reined in has nothing to do with the question of whether MMT offers a solution for private deleveraging or not. Well-regulated loan practice in the current neo-liberal system would do nothing for private deleveraging or increased domestic demand because where should consumers take the financial means from if wages don’t rise?

This entry was posted in austerity, belief systems, debt, deficit spending, economic policy, macroeconomics, MMT, neo-liberalism, private debt, wealth distribution. Bookmark the permalink.

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