MMT Primer – Blog #50 Responses

Conclusion – Minsky and the Job Guarantee

by L Randall Wray (June 8 2012)

As I said I am not going to provide responses to comments on the final blogs of the primer. In any case, the commentary has degenerated into a chat room utilized largely by aging retirees who do not understand that we’ve got at least 25 million people in the US who want full-time jobs but cannot obtain them. The Job Guarantee (JG) is a program designed to offer jobs to those who want to work. If our aged retirees are correct, we’ll offer the JG at and no one will show up to claim the job. I cannot see what all the fuss is about.

The bigger problem is that most of this discussion fails to deal with the dynamics of our actual real-world economy. In my view, Hyman Minsky understood these dynamics better than any economist of the second half of the twentieth century. He is best known for his work on financial instability, of course. But he wrote almost as much – at least in his early years – on unemployment and poverty. He formulated the ELR / JG proposal that I have described in recent weeks.

I thought it might, therefore, be useful to provide a link to a paper I wrote that summarizes many of his papers on the ELR proposal and to paste here the outline I use in class for a lecture on Minsky’s writings. Take a look at the outline, then go to my paper, then use the reference section of my paper to locate Minsky’s actual writings on the topic. This is only for those who are serious about trying to understand the argument that we need jobs to solve the “disease” of poverty, and that welfare will not be sufficient because of the perverse dynamics created. My paper is titled “Minsky’s Approach to Employment Policy and Poverty, Employer of Last Resort, and the War on Poverty”, Levy Working Paper September 2007.

Next up: A blog on inflation and efficiency.


by L Randall Wray

1. GENERAL APPROACH: Analytical Institutionalism
a. Structure of economy affects performance: emp, growth, inflation
b. Institutions of real world affect how policies impact economy
c. Policy change must act through individuals (must change their behavior) and through institutions (which constrain or empower)
d. In a dynamic and complex economy, growth and policy have differential impacts across sectors: leading sectors, merely expanding sectors, and lagging sectors; diverse growth across sectors means prices rise before full emp. – even in sectors with excess capacity
e. This alters the “trade-off”, such as Phillips Curve; Prices rise w/o necessarily reducing Unemp; and Emp can rise w/o inducing inflation
f. Financial factors matter, affect market processes and the efficacy of policy; Need to include how the mix of govt debt and private debt implied by policy mix affects private behavior
g. Higher growth, alone, is not an appropriate goal; need to consider how it affects allocation and distribution;
h. Policy cannot really be general: it has differential allocational and distributional impacts

a. Cannot rely on human capital investment – takes too long; gestational period = 18 yrs or longer
b. Cannot rely on growth
i. Growth doesn’t necessarily reduce poverty; wage dispersion actually increased 1948-66 (hrly wage dispersion fell in 1960s but offset by overtime pay in high W jobs and lay-offs in low W jobs); geographic and sectoral lagging
ii. Growth actually tends to favor the leading sectors rewards the better-off; not much trickles down
iii. Growth is not necessarily sustainable; creates instability: high growth raises expectations, encourages high investment, shifts distribution toward profits, fuels explosive growth policy to restrain growth, generates bust
iv. Policy to promote growth usually relies on investment; 4 flaws: financial fragility; inflationary; increases capital’s share; increases inequality of wage. Favors heavily monopolized, unionized sectors; increases private debts and thus interest payments and rentier income; can fuel stock mkt boom; promotes consumption of luxuries and emulative consumption
c. Can we use redistribution?
i. Radical Income Equalization: Redistribute gains from growth toward poor to move large proportion of population close to today’s median income, by taking from rich; arithmetically possible, but requires rate of growth of incomes above the mean would fall by 90%; and the cost of redistribution would grow over time
ii. Negative Income Tax, or Social Dividend (BIG): Has 3 effects: incentive effect on labor supply (likely discourage women and others); inflationary impact through wealth effect (it is like a free insurance policy; even if budget is balanced, the benefits exceed the taxes); and inflationary impact thru reduction of uncertainty (lower liquidity preference, raises AggD). NIT cannot improve situation of poor because the excess AggD is inflated away.
iii. Baumol’s Disease: constrains “share the wealth” feasibility; as productivity growth reduces inputs in leading sectors, relatively more are in lagging sectors; but competition tends to equalize W. If economy achieves balanced growth (ratio of the outputs of the 2 sectors remains constant) then rate of growth of economy falls toward zero (ever larger portion of resources are in low productivity sector).
iv. Anti-poverty program must be consistent with underlying behavioral rules of a capitalist economy. Taxpayers don’t benefit much from welfare.

a. Conservative rebuttal: attempt to end poverty by changing people
b. Cannot end poverty, can only give existing poor a better chance
c. Accepts Unemp=5% as interim goal on way to 4%; too slack. Okun’s Law: every 1% point reduction increase GDP by 3% points; means lowering Unemp to 2.5% would create 3-5 times the GDP required to raise all above poverty line
d. Must transfer from those who work to those who don’t; policy cannot rely on altruism; benefits to worker/taxpayer is small
e. It is an admission that we cannot make the productive process work to provide factor payments to lift people out of poverty
f. It puts the cart before the horse: if the poor change their character, then they won’t be poor
g. Creates dependent class, not conducive to social cohesion or democracy

a. Keynes: 2 outstanding faults = arbitrary and inequitable distribution of income; and unemployment. Better econ performance since WWII has not resolved these.
b. Can be resolved only thru euthanasia of rentier + modest bias of taxes and transfers in favor of poor + tight full employment
c. Tight full emp = over broad range of occupations and industries, employers would like to employ more workers than they do
d. Jobs, not welfare. Tight full emp helps poor in 3 ways: some move from Unemp to Emp; eliminates involuntary unemp; increases relative wages for the poor; Works to reduce poverty by increasing # of workers per family and by increasing growth of low-end wages relative to high wage jobs
e. Need for low-W jobs to have faster W growth than high-W jobs; this means at low end, W growth > productivity growth; at high end, productivity growth >W growth. Pwill grow in low-W sectors; to prevent inflation overall requires some kind of constraint on P,W in high W sectors. Can be justified: previously low W workers “subsidized” high W workers thru unemp.
f. Even the poorly designed War on Poverty did reduce poverty. It was designed to resolve insufficient Effective Demand, biased toward War, gave tax relief to rich, relied on trickle down. Still, by raising AggD it did tighten labor mkts, reducing poverty.
g. Problem: the WOP/pump priming led to inflation and instability. Tended to favor oligopolistic industries; unionized workers; public sector workers in labor-intensive (Baumol disease) sectors
h. Tight full employment was ultimately constrained by B-W – inconsistent with fixed exchange rate; cross of gold borne by the poor
i. High Govt spending and welfare sets floor to AggD, encourages investment, profits, capital share, etc, so is destabilizing
j. Promotes stop/go policy, that tends to increase W in leading sectors
k. Only a jobs program can resolve the problem; directed demand, not general demand/pump priming

a. Need “bubble up” policy not trickle down; targeted spending
b. Take workers as they are and provide jobs that fit
c. Provide jobs where workers live; slow down urban migration
d. ELR wage becomes effective minimum wage; raises the floor; should increase over time faster than high wages to reduce spread; may need to constrain high wage growth
e. Include part-time work; child maintenance; discounted youth wage
f. Would work on projects with readily visible public benefits
g. Probably need a permanent cadre to provide critical services
h. Would partially euthanize rentier; expansion of these jobs doesn’t require private debt; won’t require speculative finance; doesn’t foster speculative boom
i. Should set tax to balance budget when ELR employment = 4.5% automatic stabilizing budget
j. Would use progressive tax, and distribute benefits of publicly produced goods and services progressively; taxpayers would get something for their taxes, but program would redistribute. Taxpayers would benefit from parks, safety, clean streets, education, etc.
k. Will provide jobs and public goods and services where most needed; urban ghettos, quell unrest
l. A return to pre-WWII New Deal, which emphasized public employment; reduces investment, reduces capital’s share, reduces financial instability, favors consumption and pubic investment
m. Won’t be inflationary; maintaining full emp does not have same inflation impact as moving to full emp. Raising AggD to move to full emp will be inflationary. But it hasn’t been shown that holding Unemp low is inflationary. Esp if full emp maintained thru price floor
n. Need to drop gold standard; within a short time, the US dollar standard will arise based on ability of $ to buy US goods and services
o. Make labor more homogenous thru education and training; but do not make this a reqmt for getting a job
p. Jobs for all, available at min wage; govt agencies can bid for workers
q. Will need some programs for those who lose high W jobs and fall into the ELR program
r. Will still need welfare; children’s allowance; medical care for all
s. But will solve most poverty problem; of the poor 30% work part-time, 40% don’t work at all.
t. Not utopian; will not solve econ problems for all time. Will need adjustment, evolution.
u. An alternative to the dole. Unemp compensation just institutionalizes unemp. Jobs affirm the dignity of labor
v. Other policies: reduce bigness; restrain construction wage; need W&P controls for things govt buys (utilities, defense, health)
w. Must change the system, not the people

Wray: MMT Primer – Blog #50

MMT Without the JG? Conclusion

by L Randall Wray (May 28 2012)

Sorry for the interruption of the blog. Originally I had planned 52 blogs, one-year’s worth, although along the way I added a few so that we would have run about thirteen months. Here’s why: the blogs came from a book manuscript, the Modern Money Primer. The idea was that you would not only be a test audience but that your questions and comments would allow me to revise the manuscript as we went along. And that worked. I think the manuscript was much improved because of this blog. You helped write the book.

At the beginning of May, there remained three topics for the blogs: to finish up on the Job Guarantee (JG), a section on inflation, and a concluding section on the nature of money. Unfortunately, due to family commitments, I cannot do all of the remaining blogs. I will do one blog on each of these topics. Today’s blog will complete the series on the JG. And I’ll do two more blogs (one on inflation and one on the nature of money) to complete the promised 52. These will probably not be posted each week – I expect it will take me longer than a week to produce each. But they should be finished in June.

To make a long story short: the book will be released soon. (See When I get the publicity materials, I’ll post them on New Economic Perspectives (NEP). If you liked the blog, you’ll love the book (if you hated the blog, you’ll hate the book!). The book contains a fair amount of material that is not in the previous blogs, plus the material that I won’t be able to cover in the next few weeks. Further, the organization was revamped and I think improved. Finally, as you’ve probably noticed, when NEP switched blog platforms, the formatting of all the old blogs got messed up. Mitch is trying to fix that but it is too much work for him to manually reformat everything. So for newbies, the book will be much easier to read than it would be to try to read the old blogs.

Finally, let me make one more comment. As you know, I had been accumulating your comments and questions, with a response on Wednesdays. I won’t be able to do that for these final blogs. Further, as you know, I did not want this Primer to become a debate with critics. And I certainly did not want it to become a chat room with more than a hundred comments weekly, most of which are promoting personal websites and idiosyncratic positions on a range of off-topic matters. I’m not opposed to debates or chat rooms. But that was never the purpose of the Primer. Besides, since the manuscript is in production with the publisher, I cannot do any rewriting now – so the main purpose of soliciting your comments no longer applies.

Let us move on to a conclusion of our discussion of the JG. The contentious issue is this: can one adopt MMT while rejecting the JG?

I had made the analogy between disease and unemployment: would any reasonable person who understands the cause of a disease oppose a cure? If you knew that a vaccination can prevent smallpox, would you oppose providing vaccinations (at least to those who want them – I do not want to get into a debate about forcing vaccinations as we have never advocated forcing jobs on those who do not want to work)?

Now I do realize this is not quite a fair comparison because it is possible that there are many cures for the disease of unemployment. MMTers advocate the JG cure. I am open to alternative cures. I just do not hear any coming from the critics.

Some try bait-and-switch: Let’s give them Basic Income Guarantee (BIG) instead of jobs. That does not cure the disease of unemployment. It is like providing antibiotics instead of vaccinations to fight Polio. They then try to justify this on the argument that if we give people BIG, they can still choose to work if they want to. No, they cannot. There must be jobs. Certainly, it is true that giving everyone antibiotics does not prevent them from seeking vaccinations. But the vaccinations need to be available. I’m not going to argue more about this – the argument is just too silly. Yes, we can give people BIG but that does not give them jobs. If someone is involuntarily unemployed, she wants a job. BIG will not cure the unemployment disease.

Can we have BIG and JG? Sure. But it is the JG that cures the disease of involuntary unemployment. (Some claim BIG cures the disease of poverty; I doubt that, but it is a different disease.)

Some argue for demand stimulus alone. The theory is that if government spends enough on “general” demand, jobs will trickle down in sufficient numbers that everyone (?) who wants one will get one. When pushed, they will admit that they really do not mean “everyone”. They mean the rate of involuntary unemployment will be reduced “sufficiently”. Sufficiently for whom? Well, for those who get the jobs.

See the Vonnegut quote below. Those who do not get the jobs are not deserving. Better luck next year. Go improve yourself so that you can get a job and some other unlucky shmuck goes jobless. There are always winners and losers – and you happen to be a loser. In your next life, choose better parents. You all know the drill. And, yes, that means people of color will have three times the unemployment rate of the luckier whites (and in most countries, females will have higher rates of joblessness) but that is just the luck of the draw when it comes to job creation through demand stimulus.

Again, this is a bait and switch argument. Aggregate demand stimulus will likely create more jobs. For everyone? No.

Further, it begs the question of what to spend on. Except for random helicopter drops (or tax cuts) all spending (and tax cuts) is targeted. The only question is to whom. It is really strange that many opponents of the JG dislike the targeted nature of the program, yet, they like the targeted nature of Congressionally-approved spending that will go to the usual suspects: big oligopolies that tend to have higher-skilled and paid workers and strong pricing power, as well as the much-maligned pork-barrel roads to nowhere. And, finally, it evades the inflation issue. If jobs do indeed trickle down, it is at least in part because the targeted “general” pump-priming pushes up wages and prices in those favored sectors sufficiently that employers look to workers who are less desirable.

Can we have demand-stimulus plus a JG? Sure. But it is the JG that cures the disease.

Others protest that the JG creates low-paying jobs that won’t utilize all the skills of the workforce. Hence it does not really resolve all the problems of unemployment and so instead we need a combination of demand stimulus, skills matching services, and retraining. Again, another bait and switch argument.

While demand stimulus plus active labor market policies are desirable, they do not ensure that a sufficient supply of worker-ready jobs is created. As discussed in previous blogs, the JG “takes workers as they are, where they are”. Training programs train workers on the hope that jobs will exist and that employers will hire them. It is a faith-based policy.

JG creates jobs for those who want them, then trains workers on the job. If the better, higher-paying jobs do come along, they can move out of the JG. Meanwhile, they’ve got the job and are allowed to contribute to social production.

Some still persist in arguing that the JG is “just” workfare – that it forces people to work. No. It provides a job for those who want one. It hires the involuntarily unemployed. Involuntary describes a situation that one does not want; unemployed means without a job. Involuntarily unemployed people want jobs. The JG offers jobs. No one is required to take one.

JG can be added to any safety nets society wants – whether non-means-tested programs like BIG, or means-tested programs like welfare. That is why I said the JG is a policy “add-on”.

Recall that I began the discussion of the JG with an exposition of Lerner’s functional finance approach to policy and with a discussion of human rights. The first of these builds on the “state money” view that government can afford to buy anything for sale in its own currency. It then derives a policy – that is what government SHOULD DO: spend more if there is unemployment.

The second comes at the topic of unemployment from the human rights angle: the right to a job is one of the internationally recognized human rights. Again, this is about what government SHOULD do: ensure that anyone who wants to work has access to a job. While consistent with Lerner’s proposal it goes further. For Lerner unemployment is an economic waste – since government can “afford” full employment, it should ensure it. From the perspective of human rights, unemployment is evidence of a violation of human rights.

Clearly, this is a violation of a human right by government as no one should expect for-profit firms to ensure this right. Only government can “afford” to ensure this right. Further, it is the position of MMT that imposition of taxes creates a demand for money – from inception, one with a tax liability but without the means to pay it is in some sense “unemployed”, searching for a way to earn the money needed to pay the tax.

Carried to the logical extreme, we can say that unemployment is created by the monetary system (as Paul Davidson always points out, there is no unemployment in a nunnery – economic systems that are not based on money do not have unemployment), a system that from inception was created by government to move resources to the public sector. Thus unemployment is not just a problem to be resolved by government, it is a problem that is created by government. And sovereign government has the key: provide the jobs. Warren Mosler always says the unemployed are already in the public sector – we have to support them and deal with them in some manner – so we might as well let them work for the public sector.

Now, I admit that some other advocates of MMT do not accept the human rights angle. But I do. Still, as I argued before, human rights are aspirational and even rich, developed, and nominally democratic nations persistently violate most of the accepted human rights. In my view, that does not diminish the value of the argument.

In the comments section from Blog 48, someone provided the following statements by MMT advocates:

Bill Mitchell: “The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.”

Pavlina Tcherneva: “The JG is not just an afterthought to MMT but a crucial component that has so far offered the most coherent counter-cyclical economic stabilizing mechanism”.

Neil Wilson: “Discussing MMT without the Job Guarantee is to discuss some other economic theory, and one without any stability anchor to nominal prices”.

The commentator then wrote: “It does appear that Wray is parting ways with his colleagues here. Can someone clarify this contradiction?”

While I find that statement puzzling, let me try to clarify.

MMT has three levels or aspects: description, theory, and policy.

As a description, there are actually two levels. First, we describe a “pure” or “hypothetical” case that applies to any currency issuer. We begin with the imposition of the tax denominated in the state’s unit of account; the state then spends the currency into existence, moving resources to the public sector; people then can pay their tax. To that, we can add private sector “money creation” as a leveraging activity. We discuss interest rate setting and the purpose of government bond sales. We note that no one can pay taxes until government spends currency into existence. And so on. I won’t repeat all the analysis presented in previous blogs.

Then we describe actual practice. This must be case-specific. This is where we bring in a Treasury and a Central Bank since most governments divide responsibilities between the two. We also need to discuss self-imposed constraints (Treasury writes checks on its account at the Central Bank, which is not permitted to buy Treasury bonds. And so on). In other words, we discuss “how government REALLY spends”, going into all the operational details. This does not change any of the general conclusions from level 1 analysis, but it does respond to the critics.

Next, we move to theory. In truth, there is no description without theory. I realize that many people, including economists, think that you can describe the “real world” without theory or value judgments. Uncle Milty Friedman was famous for pushing such a view – “normative” versus “positive” economics. This was at best a naive view – or, more likely, a purposeful deception designed to hide his agenda. It cannot be done. You cannot observe “reality”. To make sense of your observations you must have a theory. You cannot use a word like “money” without having a theory of money. The theory held by most people is, according to MMT, completely inappropriate for the type of economy in which we live. Indeed, this whole Primer really boils down to an argument about the “nature of money”.

That is the topic of the final chapter of the soon-to-be-published book. However, if you look back to MMP #30 you will see how I defined MMT as an integration of several approaches to monetary theory, including Chartalism, Endogenous Money, Monetary Theory of Production, Functional Finance, Sectoral Balances Approach, and Circuit Theory. Personally, I’d also add Minsky’s Financial Instability theory and probably a few other bells and whistles.

Now does every MMTer have to integrate every one of these approaches into her own MMT approach? No, that would be too much to ask. Do I like my own approach better than the approaches taken by others? Yes. Of course, I need to convince others that mine is best. At least until I change my mind.

The third aspect is the policy implications. So far today I’ve been focusing purely on JG as a solution to the unemployment disease. But that is only part of the story. From the beginning, we have argued that the JG is needed to “anchor” prices. The JG is a buffer-stock program and like all buffer stocks it can be used to stabilize prices. Further, it helps to resolve that Minsky problem – instability – by helping to stabilize (actually, reducing instability, but stability is destabilizing!) wages, consumption, employment, and aggregate demand.

Inflation is the topic for next time. But very briefly (and really this is just a reprise of the explanation of the buffer-stock made in a previous blog), you can use the JG pool as a better wage- and price-stabilizing buffer-stock than the “reserve army of the unemployed” can be.

Look at it this way. The great fear of our goldbugs and others who warn about the danger of “fiat money” is that it has no commodity anchor to keep it valuable. Since it is “fiat”, government can print up unlimited amounts, give it away free, and drive its value to zero. Zimbabwe here we come! Tie it to gold and you cannot get inflation – so the story goes.

The goldbugs are not completely crazy. Money does need backing – and an infinite regress, arguing that we accept money and believe in its value because we think others think it is valuable, is not acceptable.

In the MMT view, taxes create a demand for the currency, but currency’s value is determined by what you’ve got to do to get it.

There is a long tradition in economics that adopts a “labor theory of value” approach. As both Marx and Keynes argued, the value of commodities (here I’m using the term broadly to include all things produced for sale for money – not just the “resource” commodities like oil and pork bellies) can be taken to be determined by labor. More specifically, we use labor hours as one of our units of measurement to assess the value of all things produced by (admittedly heterogeneous – thus we need to make quality adjustments) labor. The other measuring unit is money – the state’s unit of account.

Now, I do not want to get into a debate about labor value theory. My point is much simpler and highly intuitive: if I must work an hour to get something valued at one unit of the money of account. it will be more valuable than if I received two money units per hour of work. If money grew on trees (our moms always claimed it does not!) then it would be worth the effort of going out to pick it. Not much, in other words. Clearly, modern money takes very little effort to produce (keystrokes create government IOUs), so the goldbug fear is that its value will fall to nearly zero as we increase the number of keystrokes.

But what if government will only issue $1 in return for one hour of hard labor? Will the number of dollars issued make much difference in its valuation?

At UMKC we’ve been running exactly such an experiment, imposing a “Buckaroo” tax on our students for the last dozen years, and paying them one Buckaroo for each hour of work at local community service providers. They pay the tax using the Buckaroos they earn. We’ve run budget deficits every year since the program began, fulfilling the net saving desire of students. Our students are fully employed – they choose how much to work and we ensure there is always a job available. The MMT principles have been verified by the program.

Oh, what about inflation? Zero, Zip, Nada. The wage is still exactly one Buckaroo = One Student Hour of Labor.

We let the exchange rate float to give us complete policy independence. Have all of those budget deficits reduced the Buckaroo exchange value against the Dollar? No – the Buckaroo has appreciated more than the Swiss Franc! According to Warren Mosler, the Buckaroo has been the best investment in the world over the past dozen years (although I have not fact-checked that).

Oh, alright it is a simple little real-world experiment, so the results might not scale up to real-world currencies, but it does shed some light on the value of a buffer-stock to give value to a currency. Tie your currency to labor, and stabilize wages in that currency. That will provide full employment with a greater degree of price stability.

So that is the additional argument for tying the JG to MMT: price stability.

I’ll have more to say about inflation next time. But this is why MMTers believe that the JG is a necessary component of MMT: if you care about inflation, you want a price anchor. So far as I know, no one has come up with a better price anchor than a relatively stable wage unit. The JG provides that.

Let us quickly return to the argument that unemployment serves a useful public purpose, hence, we do not want the JG because it adversely affects incentives. We need the suffering to motivate the lazy.

There is a popular view that adversity is good. As Joe Firestone put it in a comment, many attribute their success to the beatings their fathers gave them: “spare the rod, spoil the child”. The threat of unemployment and deprivation is believed to be an essential motivator.

In truth, modern psychology knows this is false – the best way to produce caring and productive people who will make socially beneficial contributions to society is to provide a caring, nurturing, and secure upbringing. The best way to promote quality work is to create a caring and secure work environment. As I’ll discuss next time, this is all the more important as we transition to the “service economy”.

If you want to produce psychopaths, beat the crap out of them when they are young, convince them that the world is dog-eat-dog, make them fight for every scrap of food, and eliminate all protection in the workplace. Make life as precarious as possible, with workers fearing they could be replaced by the unemployed – losing their jobs and joining the ranks of the starving masses. Richly reward the strong and punish the weak. (I think I just described an entire sector of the modern economy, where the psychopaths rise to the top – see below.) That is the idea behind the Non-Accelerating Inflation Rate of Unemployment (NAIRU), which is so dear to the hearts of most economists.

Here’s the problem. Our society does produce a lot of psychopaths, and their behavior can lead to individual success at least on some measures. The rest of us – the 99% or so – have got to protect ourselves from them. However, their relative success makes that difficult not only because they can obtain positions of great power and influence, but also because we emulate them. In Chapter 24 of the General Theory (1936), Keynes remarked that it is better to allow such psychopaths to inflict cruelty over their balance sheets than on their fellow humans. In other words, let them make money, but don’t let them run the show. As we all remember, he advocated policy measures to ensure full employment, to reduce inequality, and to “euthanize” the rentier class:


dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative.


Of course, our one percent psychopaths will oppose these policies since the psychopaths thrive in the current, unequal, environment.

An editorial in the New York Times put it this way:


A recent study found that ten percent of people who work on Wall Street are “clinical psychopaths”, exhibiting a lack of interest in and empathy for others and an “unparalleled capacity for lying, fabrication, and manipulation”. (The proportion at large is one percent.) Another study concluded that the rich are more likely to lie, cheat, and break the law …. Accounting fraud, tax evasion, toxic dumping, product safety violations, bid rigging, overbilling, perjury. The Walmart bribery scandal, the News Corp hacking scandal – just open up the business section on an average day. Shafting your workers, hurting your customers, destroying the land. Leaving the public to pick up the tab. These aren’t anomalies; this is how the system works: you get away with what you can and try to weasel out when you get caught.

… while “job creators” may be a new term, the adulation it expresses – and the contempt that it so clearly signals – are not. “Poor Americans are urged to hate themselves”, Kurt Vonnegut wrote in Slaughterhouse-Five (1969). And so, “they mock themselves and glorify their betters”. Our most destructive lie, he added, “is that it is very easy for any American to make money”. The lie goes on. The poor are lazy, stupid, and evil. The rich are brilliant, courageous and good. They shower their beneficence upon the rest of us.


Psychopaths on Wall Street are not the ten percent anomaly, they are the Gordon Gekko role models. They are the ten percent top dogs of the one percent1% that run the show.

And so it is not surprising that there are individuals who accept MMT as a description yet who adopt the policy recommendation of our successful psychopaths: use unemployment and the threat of poverty as motivation to “pull one up by one’s own bootstraps”. Yet that policy simply perpetuates the production of psychopaths and anti-social behavior more generally. As Keynes put it, such policy stacks the game with more zeroes – increasing insecurity and actually making it harder to achieve success with just normal luck. All pain, no gain.

A psychopath could discover the cause of Polio and yet oppose a policy of vaccination. Indeed, lack of compassion is part of the definition of psychopathology. Surely a psychopathic economist can accept MMT’s explanation of the cause of unemployment and yet reject policy to cure the disease.

So, can you separate the modern theory of the disease cause of Polio from the cure? Yes.

Can you separate the MMT explanation of the cause of unemployment from the policy to cure it? Yes.

Should you? Of course not.

What Are Taxes For?

The MMT Approach

by L Randall Wray (May 15 2014)

This is part of a series, following on from that asked: “Do We Need Taxes?”.

Previously we have argued that “taxes drive money” in the sense that imposition of a tax that is payable in the national government’s own currency will create demand for that currency. A sovereign government does not really need revenue in its own currency in order to spend.

This sounds shocking because we are so accustomed to thinking that “taxes pay for government spending”. This is true for local governments, provinces, and states that do not issue the currency. It is also not too far from the truth for nations that adopt a foreign currency or peg their own to gold or foreign currencies. When a nation pegs, it really does need the gold or foreign currency to which it promises to convert its currency on demand. Taxing removes its currency from circulation making it harder for anyone to present it for redemption in gold or foreign currency. Hence, a prudent practice would be to constrain spending to tax revenue.

But in the case of a government that issues its own sovereign currency without a promise to convert at a fixed value to gold or foreign currency (that is, the government “floats” its currency), we need to think about the role of taxes in an entirely different way. Taxes are not needed to “pay for” government spending. Further, the logic is reversed: government must spend (or lend) the currency into the economy before taxpayers can pay taxes in the form of the currency. Spend first, tax later is the logical sequence.

Some who hear this for the first time jump to the question: “Well, why not just eliminate taxes altogether?” There are several reasons. First – as we said last time – it is the tax that “drives” the currency. If we eliminated the tax, people probably would not immediately abandon use of the currency, but the main driver for its use would be gone.

Further, the second reason to have taxes is to reduce aggregate demand. If we look at the United States today, the federal government spending is somewhat over twenty percent of GDP, while tax revenue is somewhat less – say seventeen percent. The net injection coming from the federal government is thus about three percent of GDP. If we eliminated taxes (and held all else constant) the net injection might rise toward twenty percent of GDP. That is a huge increase in aggregate demand and could cause inflation.

Ideally, it is best if tax revenue moves countercyclically – increasing in expansion and falling in recession. That helps to make the government’s net contribution to the economy countercyclical, which helps to stabilize aggregate demand.

So, we covered those points last time, in part due to a silly twit by Doug Henwood, who likened this to “astrology”. Not one to be bothered with embarrassment he responded to the last blog with this exchange:

Well, no. Taxes on the rich might take “resources” from people who have too much – if he means that their demand deposit account is debited. But taxation does not “give them (the resources) to people who have too little”. Rather government spending directed to those who “have too little” is what gives the poor access to resources (they can use their demand deposit credits to buy food, clothing, shelter, and so on).

These are functionally two entirely separate activities. Government can spend to help the poor without taxing the rich or anyone else. And anyone who can understand balance sheets knows that there is no longer any balance sheet operation in which government “spends” its tax revenues.

Henwood seems to imagine that the rich roll their wheelbarrows full of coins up to the Treasury Department’s steps, where armored trucks load the cash up and take it out to make payments to the poor.

It doesn’t work that way. Tax payments debit the accounts of taxpayers. If you’ve ever gone to a ballgame you know that when the scorekeeper awards a run to Boston, he does not take it away from New York. Rather, he keystrokes runs to Boston. If after reviewing the video, the umpire has made an error, he “debits the account” of Boston. Where does the run taken away go?

That’s a question for the physicist, not the economist. Where do the tax payments go? Nowhere – a bank account is debited. I think it has something to do with electrical charges changing from negative to positive, although some commentators told me it is all photons now. All I know is that taxes do not and cannot “pay for” spending.

All of this was recognized by Beardsley Ruml, a New Dealer who chaired the Federal Reserve Bank in the 1940s; he was also the “father” of income tax withholding and wrote two important papers on the role of taxes (“Taxes for Revenue are Obsolete” in 1946, and “Tax Policies for Prosperity” in 1964). Let’s first examine his cogent argument that sovereign government does not need taxes for revenue, and turn to his views on the role of taxes.

In his 1964 article, he emphasizes that:



We must recognize that the objective of national fiscal policy is above all to maintain a sound currency and efficient financial institutions; but consistent with the basic purpose, fiscal policy should and can contribute a great deal toward obtaining a high level of productive employment and prosperity.
(1964, pages 266~267)

This view is similar to that propounded in by MMT.

He goes on to say that the US government gained the ability to pursue these goals after World War Two due to two developments. The first was the creation of “a modern central bank” and the second was the sovereign issue of a currency that “is not convertible into gold or into some other commodity”. With those two conditions, “it follows that our federal government has final freedom from the money market in meeting its financial requirement …National states no longer need taxes to get the wherewithal to meet their expenses” (ibid, pages 267~268)

Why, then, does the national government need taxes? He counts four reasons:

(1) as an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

(2) to express public policy in the distribution of wealth and of income as in the case of the progressive income and estate taxes;

(3) to express public policy in subsidizing or in penalizing various industries and economic groups; and

(4) to isolate and assess directly the costs of certain national benefits, such as highways and social security. (ibid, page 268)

The first of these is related to the inflation issue we discussed above.

The second purpose is to use taxes to change the distribution of income and wealth. For example, a progressive tax system would reduce income and wealth at the top, while imposing minimal taxes on the poor.

The third purpose is to discourage bad behavior: pollution of air and water, use of tobacco and alcohol, or to make imports more expensive through tariffs (essentially a tax to raise import costs and thereby encourage the purchase of domestic output). These are often called “sin” taxes – whose purpose is to raise the cost of the “sins” of smoking, gambling, purchasing luxury goods, and so on.

The fourth is to allocate the costs of specific public programs to the beneficiaries. For example, it is common to tax gasoline so that those who use the nation’s highways will pay for their use (tolls on throughways are another way to do this).

Note that while many would see these taxes as a means to “pay for” government spending, Rumsl vehemently denies that view in the title to his other piece, “Taxes for Revenue are Obsolete”. Government does not need the gasoline tax to “pay for” highways. That tax is designed to make those who will use highways think twice about their support for building them. Government does not need the revenue from a cigarette tax but rather wants to raise the cost to those who will commit the “sin” of smoking.

Many would say that it is only fair that those who smoke will “pay for” the costs their smoking imposes on society (in terms of hospitalizations for lung cancer, for example). From Ruml’s perspective, this is not far from the truth – the hope is that the high cost of tobacco will convince more people never to smoke, which thereby reduces the cost to society.

However, the point is not the revenue to be generated – government can always “find the money” to pay for hospital construction. Rather, it is to reduce the “waste” of real resources that must be devoted to caring for those who smoke. The ideal cigarette tax would be one that eliminated smoking – not one that maximized revenue to government. He said “The public purpose which is served [by the tax] should never be obscured in a tax program under the mask of raising revenue”. (1964, page 268)

We can then use this notion of the public purpose to evaluate which taxes make sense. I won’t go through that today, but let me say that Ruml used the corporate income tax as an example of a particularly bad tax. He’s right. My professor Hyman Minsky always argued for abolishing that tax – and I wouldn’t be surprised if he got the idea from Ruml.

Of course, which tax do “liberals” love? Corporate income tax. They all want to increase it to “pay for” all the goodies they want to shower on the poor. In other words, they compound their confusion – not only do they insist on being wrong about the purpose of taxes, but they also embrace one of the worst ones! Maybe a good topic for another blog?

Ruml concluded both of his articles by arguing that once we understand what taxes are for, then we can go about ensuring that the overall tax revenue is at the right level.

Briefly the idea behind our tax policy should be this: that our taxes should be high enough to protect the stability of our currency and no higher … Now it follows from this principle that our tax rates can and should be lowered to the point where the federal budget will be balanced at what we would consider a satisfactory level of high employment. (1964, page 269)

This principle is also one adopted in MMT, but with one caveat. Ruml was addressing the situation in which the external sector balance could be ignored (which was not unreasonable in the early postwar period). In today’s world, in which some countries have very high current account surpluses and others have high current account deficits, the principle must be modified.

We would restate it as follows: tax rates should be set so that the government’s budgetary outcome (whether in deficit, balanced, or in surplus) is consistent with full employment. A country like the US (with a current account deficit at full employment) will probably have a budget deficit at full employment (equal to the sum of the current account deficit and the domestic private sector surplus). A country like Japan (with a current-account surplus at full employment) will have a relatively smaller budget deficit at full employment (equal to the domestic private sector surplus less the current account surplus).

I’ll continue this thread.

China’s Long March to Total Food Security

by Jim W Dean

New Eastern Outlook (October 26 2019)

Earlier this year, China announced adding five million more hectares to its 42 million already connected farmland and shooting for sixty million hectares by 2022. This is part of China expanding, modernizing and restructuring its agriculture industry from top to bottom for maximum production and efficiency.

With my growing up in a small New England town, the term hectare was a blank for me in terms of size. But I soon figured out that the total area they had targeted for bringing into production was larger than Spain. With 1.4 billion people to feed, I was not surprised to see China wanting to maximize domestic production to reduce dependency on foreign imports.

Why? Well, that is because of the wonderful duo of unipolarism and quickdraw sanctions by you know who. The ongoing trade wars with the US, involving all kinds of products, has many countries looking to maximize domestic production of anything and everything they possibly can. The term food security is here to stay.

China has always had limited arable land, much of which I suspected had been over-farmed. It consisted of only ten percent of the total land area, as compared to twenty percent in the continental United States, and most of it was in the eastern third of the country. Large areas of the country were not suitable, due to lack of rain and the short growing season like in the North, versus South China where three rice crops can be cultivated in a season.

China’s winter wheat, 94% of the total crop, comes from the drier North China Plain, where the land is fertile but subject to floods and drought. Efficient water conservation has contributed to increased yields. The northeastern plains produce spring wheat, corn, and even rice. But much of China’s vast northwest and southwest regions are not suited for cultivation.

There were many hurdles to the ambitious cultivation expansion, as both drought and flood-resistant farmland were needed. A holistic approach was used, combing new crop varieties and higher mechanization levels.

Because the February announcement had used the term “connected farmland”, that was a strong hint that large areas were being targeted, so my assumption was that these must be major irrigation projects, which was partially correct. It took further research to discover that rain-making technology was going to be the magic key to it all.

If the Chinese are good at anything, it is in doing large integrated projects. With its huge population and educational system, they have a deep science and technical bench to draw on for the needed talent.

The Russians are in a similar situation with a top-drawer education system and their world-class technical contenders, even with a smaller population. What they have been able to produce in their defense modernization on a smaller budget has been amazing, but then they don’t have a huge navy and 750+ foreign base structures to support. Moscow’s response to the EU sanctions was to cut back on farm imports by boosting domestic food production and then increasing non-dollar trade with China to be less dependent on the West for basic import needs

Over forty percent of its arable lands have been overused, with two-thirds of that consisting of medium to low yield fields, and half of those lack irrigation. You cannot move land to water, so you have to move water to land, and China chose weather modification, starting with the Tibetan Plateau project in 2013.

Tens of thousands of fuel-burning chambers were set up in the Tibetan mountains, and that boosted rainfall by roughly ten-billion cubic meters annually. The current plan, called Sky River, developed in 2016 at Tsinghua University, attempts to bring rain to an area three times larger than Spain.

According to South China Morning Post in March of 2018:



The chambers burn solid fuel to produce silver iodide, a cloud-seeding agent with a crystalline structure much like ice. The chambers stand on steep mountain ridges facing the moist monsoon from south Asia. As wind hits the mountain, it produces an upward draft and sweeps the particles into the clouds to induce rain and snow.


China plans to increase the ten billion cubic meters of rainfall in the north to 45 billion annually, about seven percent of the entire water used by the country. Nowhere in the West have any development projects this size been attempted, and if they were, the cost would have been much higher.

Weather modification has been going on in the US for decades, after being perfected in the Vietnam war. Sadly, wars have often been used for testing such things on live subjects that are not one’s citizens. The concerns for its misuse here led to the US signing the UN Environmental Modification Treaty, prohibiting military or any other hostile use (New York, December 10 1976).

China’s huge achievements were based on years of events, starting with the Great Leap Forward, from 1958 to 1960. Agricultural development evolved through the early and painful land reforms, mutual aid teams, cooperatives, and on to collectivization.

Then came the larger people’s communes, 5400 households with between 20,000 to 30,000 members. The peasants suffered under continued pressure to produce more. Production statistics were inflated to keep communist bosses happy, which led to shortages and even declines in production.

Millions of Chinese were starving in the countryside due to government requisitions to feed the large city populations that were considered a more dangerous revolutionary threat. By 1962, China admitted defeat and was importing grain, despite being a net exporter in the 1950s.

China’s leadership recognized the need to strengthen the agricultural sector via incentives for individual and collective production, expanded private plots and markets. Chemical fertilizer production and imports increased, along with high yielding seed varieties and investments in irrigation.

Farmers were treated more fairly, under an incentive plan where they could keep or sell any excess production, and were given flexibility to put profits into expansion of small business services in rural areas. Gross agricultural output nearly doubled from 1978 to 1985, with per capita peasant income tripling.

Economic cooperatives expanded into manufacturing, mining, transportation, construction, and services. China was on the road for its people developing their full potential. Who in China could have ever envisioned in its early days what China has now become? And the same can be said for the old Soviets.

It was not an easy journey for either constituency, with much suffering and even tragedy, as life is not fair to all. Both Russia and China find themselves in trade battles with a bankrupt US, with its systemic imbalance of trade, looking to gobble up whoever it can to stay afloat.

While both countries want to be open trade partners with the world, they also see they must be as self-reliant for as much of their needs as possible. While they have watched deficit funding and national debt balloon in the West, both have protected themselves from a crash in the West via large foreign reserve accounts and by increasing gold reserves.

Back in the US, Fort Knox gold has not been audited since anyone can remember, and families worry about what may be coming for their children and grandchildren, besides college debt they can never repay and white-collar jobs at blue-collar wages, or even lower.

I fear food is going to be the next nuclear weapon in the next big war, or I should say, the denial of food. There is already history for it. During the Cold War, we were fortunate to not have the nukes used, but everything else was, including weaponizing food.

Wheat rust was used against both the Soviet and Chinese wheat crops. Scientists were routinely working on food diseases and pandemics to inflict on an enemy population.

New Eastern Outlook’s Henry Kamens has written for years on how the US has worked in the “stan” countries in their biological labs to do testing against the law in the West. In Georgia, lab workers got sick and some died from biological weapons work that was supervised by US contractors. Henry reported this at great risk.

Genetic editing is now all the rage, and you can bet more government money is being spent on using gene technology to kill people than on saving lives. The Deep State crowd is into saving the world ecosystem by depopulating it significantly in the next big war.

China knows the US has been doing food war research, part of which entails having seed strains that are resistant to what would be used against an “enemy” crop that got out of hand and traveled back to its maker. A crop destroyer cannot be deployed without having a new seed strain that is protected.

One of China’s big Intel goals in the US is trying to stay on top of US research in this regard. One of the oddest anomalies of the New Cold War is Michigan State in East Lansing, Michigan, where twelve percent12% of the population are Chinese students, many are studying in its highly rated agricultural school.

So yes, China is planning ahead and putting significant resources into defending on fronts where it has already been attacked in the past. The recurrent swine flu problems should have people thinking more about who is really behind it.


Jim W Dean, managing editor for Veterans Today, producer/host of Heritage TV Atlanta, especially for the online magazine New Eastern Outlook.

The Uighurs, China, and …

… the Lucrative Hypocrisy of LeBron James and the NBA

by James Durso, op-ed

The Hill (October 24 2019)

Last week the National Basketball Association was brought to heel by China over a tweet by Daryl Morey, the general manager of the Houston Rockets, supporting democracy protestors in Hong Kong. Chinese retribution was quick as all eleven of the NBA’s official Chinese partners suspended ties, and appearances and endorsement deals were canceled – just as the Los Angeles Lakers and Brooklyn Nets arrived in Shanghai for two exhibition games.

Americans were feted to the sight of Houston’s James Harden and LeBron James of Los Angeles reciting their lines like kidnapping victims in a ransom video.

Harden’s “We apologize. You know, we love China” was forgettable enough, and Golden State Warriors coach Steve Kerr helpfully informed us “The world is a complex place and there’s more gray than black-and-white” when asked about the NBA kowtowing to the Chinese government. But @KingJames wrote his epitaph with, “So just be careful what we tweet and what we say, and what we do. Even though yes, we do have freedom of speech, it can be a lot of negative that comes with it” – which is probably what the Chinese government tells the Chinese people.

If LeBron James were some Vice President of GM, no one would care what he said or did, but he’s a woke celebrity and an activist for labor rights and social justice who forgot when you attack others for their failings, real or imagined, you raise the bar for yourself.

The Hong Kong protestors – the real activists – registered their disappointment, some by burning #23 jerseys and commenting “LeBron James stands for money. Period.”

Wesley Snipes said, “Always bet on black” but the NBA proves the most powerful color is green.


How Much Green?

According to NBC News, last year 800 million Chinese watched an NBA game, “the league is estimated to be worth about $5 billion in China … and the NBA just signed a new partnership agreement with an internet company in the country for $1.5 billion”. China is ten percent of the league’s revenue – and that could climb to twenty percent by 2030.

Mr James gets by on $35 million from the LA Lakers, and $32 million from Nike (part of an alleged $1 billion lifetime deal), but the post-NBA money will come from his SpringHill Entertainment which is collaborating with Warner Brothers on Space Jam 2 (July 16 2021) that James will produce and star in. The movie will make a lot of money in China – if Beijing’s censors allow it in – which is probably what occupied his mind on that long flight back from China.

And Nike’s shoe sales in China doubled in the last five years, and the company has 110 factories and over 145,000 workers in China. After all, those $110 #23 jerseys don’t stitch themselves.

In fact, who does stitch them?

Nike doesn’t say. But according to the Citizen Power Institute (CPI), much of China’s apparel production is done by up to one million of China’s Uighurs and other Muslim ethnic groups detained in so-called re-education camps or vocational training centers, intended to cleanse them of their ethnic and religious identity and make them loyal to the Communist Party of China.

The camps and centers are in the Xinjiang Uyghur Autonomous Region, which produces 84 percent of China’s cotton crop (Nike says the #23 jerseys are 100 percent recycled polyester), and most are run by the Xinjiang Production and Construction Corps (XPCC), a paramilitary organization that reports directly to the Communist Party of China and is tasked to help maintain political stability in Xinjiang. One of the ways it is doing so is by detention of large numbers of Uighurs in “re-education camps” which complements the Chinese government’s goal of vertical integration of the garment manufacturing sector.

The XPCC operates through a network of joint-ventures and front companies that produce the finished goods. One of the XPCC’s joint-venture partners is Hong Kong-based Esquel Group, which produces clothing for Nike.

XPCC hasn’t just assembled an efficient garment production operation. According to CPI, XPCC’s “inmates serve as a key labor force in every link of China’s cotton value chain, from cotton field reclamation to planting, harvesting, processing, and garment production”.

If the NBA would crack a history book, it might learn that “cotton field reclamation to planting, harvesting” was the cause of the “War Between the States”.

Do the NBA and its players understand this? You bet.

Just understand all that “Injustice Anywhere is a Threat to Justice Everywhere” for what it is – marketing – and that the league confines its posturing and tweeting only where there are no financial consequences.

And there probably won’t be any financial penalties for the NBA, Nike, or LeBron and the other players, according to marketing experts who say “this will pass”.

But one thing it has done is take the sharp edges off the ability of the league and the players to gratuitously comment on political and social issues du jour, knowing the rejoinder may be “why aren’t you speaking out about Uighur slaves in cotton fields?”

LeBron James always wanted to be “More Than an Athlete” but is this what he had in mind?

Copyright (c) 2009~2019 Media, LTD

China’s Hidden Economic Time Bomb

by F William Engdahl

New Eastern Outlook (October 22 2019)

The China government statistical agency just released economic data showing the poorest GDP growth in almost thirty years for China. The problem goes far deeper than recent effects of the US-China trade war or the impact of calamities such as African Swine Fever that have decimated the nation’s pig herds. The underlying far more serious problem is an emerging disaster that few are willing to discuss openly.

Since about 2017 China’s population has begun to feel the real impact of the ill-conceived One Child Policy imposed by the Communist Party in 1979, some forty years ago. This slow-growing problem, once seen as a benefit, is undermining the entire basis of the China Economic Miracle. The question is whether Beijing can make the transition to an aging population without major social and economic dislocation.

On October 18 the China State Statistics bureau released Third Quarter GDP which came in at 6.0% compared with 6.2% the previous quarter. While there is great skepticism as to how honest the reporting is, the fact the government must announce a slowing growth at all suggests the situation, in reality, could be far worse.

The true data on China’s economy remain opaque. In December 2018 the Shanghai University of Finance and Economics published its annual transparency survey on the 31 provincial-level regions. The average score was just above 53%. The study concluded, “[Unfortunately,] the general level of transparency in China’s local governments remains poor”.

A more direct indicator of the health of the economy comes from actual trade data. Bloomberg reports that auto sales in China have fallen for the fifteenth month out of sixteen months in September. It’s the “worst slump in a generation”, according to Bloomberg. As well, sales of new homes and apartments in Beijing, Shanghai, and other major cities fell dramatically to lows of 2014.

The deeper issue is not the transparency of official economic data. The deeper issue is whether the China Miracle, the remarkable rise from a Third World level backwardness in less than three decades, is entering a structural crisis that will impact not only China’s economy. The recent data on new car sales and new home buying could be an ominous indicator that the China boom years are coming into a drastic slowing with huge consequences not only for China but also for the world.


Golden Era Peaks


Like no other economy in modern history, China’s remarkable economic rise has been facilitated by an extraordinary short-term demographic blessing. That blessing has begun to turn into a curse.

In the 1980s as China officially opened its economy to Western factories and investment, China had what seemed to be an endless pool of low-wage labor power from the countryside to build its roads, new cities and assemble its goods in factories of the likes of Nike or VW or Apple to be shipped to the world. In 1987, the early days of China’s economic miracle, 64 percent of the population were of working age, and only four percent were aged above 65. That meant a huge surplus of workers to feed China’s low-cost manufacturing boom. This drove the average ten to eleven percent annual GDP growth seen between 1987 and 2007.

So long as globalization with the rules of the newly-created World Trade Organization encouraged the outsourcing of manufacture to China with its huge workforce and ultra-low wages, China was booming like no other.

In 1979, alarmed at a population that had been increasing from 1950 to 1978, at a twenty percent annual natural population growth rate, the Communist Party imposed a draconian One Child Policy. Deng Xiaoping as part of the Four Modernizations set a goal to keep the population at 1.2 billion by 2000 as part of the formula for quadrupling China’s GDP within the same period.

The longer-term economic consequences of that policy were not to emerge until some three decades, roughly a generation later, around the time, significantly, of the 2008~2009 world economic crisis. A case can be made that the rising wages in China’s manufacturing sector, occasioned by the first shortages of manpower beginning around 2007~2010, were more a factor for the severity of the world financial crisis at that time than was merely the US real estate market.

China’s turn to what Deng Xiaoping called “Socialism with Chinese Characteristics” after 1979 was, in fact, a state-controlled turn to western companies and investment to take advantage of China’s seemingly unlimited low-cost labor. That labor mostly came from those born prior to 1979, before the One-Child Policy. A worker in his mid-twenties in 1980 was in his fifties by the time of the 2008~2009 crisis in the West. Demographic change is a slow process and could be overlooked in the boom years before 2008. Now, in the past decade, manufacturing wages across China are rising and the population born under the One Child era is notably fewer, adding to recent rising wage pressures.

As China’s manufacturing has moved up the value-added chain as part of its development strategy of Made in China, wages have risen significantly. The Economist Intelligence Unit estimates that from 2013 to 2020 average manufacturing labor costs have risen on average twelve percent a year. Today average factory wage costs in China are some three times that of India and far higher than in Indonesia or Vietnam.

At the same time as higher-skilled labor is needed for China’s fast-developing manufacturing base, especially under the mandates of the Made in China2025 transformation to a world high-tech economy, the size of the overall workforce once considered nearly limitless, has begun to decline. China’s labor force peaked in 2015 and has begun shrinking, albeit slowly at first. That decline now is pre-programmed to accelerate as the pre-1979 workforce reaches retirement age and is not replaced in equal numbers after 1979 due to the drastic decline in births. According to Deutsche Bank estimates, the workforce will shrink from 911 million in 2015, to 849 million in 2020, and to 782 million in 2030. Barring a dramatic change in birth rates, beginning about 2025 China’s overall population will begin a slow but accelerating decline as well.

In 2017 China had a fertility rate well below population replacement levels of 2.1 needed to sustain population size. Slowly realizing the long-term implications, in 2013 the Communist Party moved to slightly lift the limit to two children for some families, and by 2016 to two children for all. Even if the result had been as hoped, it would take at least a generation to change the dynamics. However, the policy has yet to produce any major increase in birth rates for a complex of reasons.


Aging Shift


Not only is China’s labor force declining and wages rising, but China’s overall population is also aging faster than any comparable country, owing to the combination of rapid economic growth and the limits on children over the past four decades. With improving living standards in rural areas the longevity of the population has improved significantly. Life expectancy in China increased from 43 years in 1960 to 75 years in 2013.

China is aging faster than almost any other country because the number of new births has been blocked while those born are living far longer. By 2016 China had the lowest fertility rate in the world – 1.05 according to China’s 2016 State Statistical Bureau data. Social changes encourage young women to postpone marriage and pursue careers, while rural practice encourages male over female births, all of which drive fertility rates lower.

China’s elderly population (over sixty), fourteen percent in 2016, will grow to 24 percent of the population by 2030 and will reach 39 percent of the population by 2050. At that time, China’s dependency ratio – the number of people below fifteen and above 65 divided by the total working population – is projected to increase to seventy percent, up from 37 percent in 2015. This means a dramatically smaller working-age population with the responsibility of providing for both the young and old. In other words, a shrinking relative number of working-age taxpayers is facing the growing number of elderly retirees. To avert social unrest the government must somehow undertake huge costs to provide for the elderly.

Traditionally, younger Chinese have taken care of their elderly parents but now, with significantly fewer working children to care for the older retirees, the government will be forced to secure some improved form of social benefits, health care, and income support at a time trade surpluses are declining and state debt soaring. At the same time, young families are under pressure to increase family size which increases family costs as well. An estimated 23 percent of the elderly in China today cannot take care of themselves, while in 2010 only 43 percent of elderly males and thirteen percent of elderly females received any financial pension. While Japan became rich before its population aged, China will not. Aging of China is a social ticking time bomb.

While all this might sound similar to problems faced by many countries such as Italy or Germany, given the scale of China’s role in the world economy and the dramatic shift in just a few years from what was called a “demographic dividend” – acceleration of economic growth following a decline in birth and death rates – to what might be now called a “demographic disaster”, China is unique.

It becomes clear that the urgency with which Xi Jinping and the Party leadership is promoting its Belt, Road Initiative, as well as Made in China 2025, as an attempt to achieve a near-impossible economic feat. Yet the demographic shift is here, while the hoped-for dividends from the BRI and Made in China2025 look far remote at this point. The sharp declines in recent months in domestic consumption for cars and housing could, in fact, be far more alarming than a mere cyclical downturn. It could well be the first signs of the negative global economics of the huge China demographic shift now unfolding.


F William Engdahl is a strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine New Eastern Outlook.

US Fears Mass Boycott …

… as Chinese Turn to Homegrown Brands

A wave of nationalism sweeping the mainland could be bad news for Western brands.

by Shelly Banjo and Thuy Ong (October 24 2019)

Photographer: Andrew Paterson/Alamy

When a Chinese automaker set out to find a celebrity endorser for its new electric cars earlier this year, the talent agency it tapped suggested Captain America actor Chris Evans. Signing up one of the stars of Avengers: Endgame (2019), the highest-grossing film of all time, would be perfect for a splashy global ad campaign, the agency figured.

The proposal got a hard pass.

“They looked at that and said, ‘We’ve got lots of Chinese investors. It’s too risky for us to invest in Captain America during this trade war,'” says Michael MacRitchie, founder of Sydney-based MGI Entertainment. The carmaker plans to go with a Chinese celebrity, he says, declining to name the company because deliberations are private.

Even before Chinese retailers stripped NBA merchandise from their shelves in retaliation for a league executive’s public support of pro-democracy protesters in Hong Kong, a yearlong trade war has stoked a surge in Chinese nationalism and anti-American sentiment that’s increasingly bleeding into marketing decisions and consumer buying habits. Companies such as Apple Inc have seen market share in the country dwindle. And American brands including Coach and Calvin Klein have rushed to issue public apologies after some of their products ran afoul of Beijing’s political sensitivities. Even if a trade truce is reached, marketing executives
say that lasting brand damage has been done.

A worker removes a promotional NBA banner from a building in Shanghai on October 9. Photographer: Hector Retamal/AFP/Getty Images

Patriotism has long been employed as a marketing pitch around the world, including in the US, where companies such as Walmart, American Apparel, and New Balance used “Made in America” labels as symbols of quality. And China famously froze out American tech and financial companies for years to nurture homegrown brands. Yet Western fashion, car, beauty, food, and other consumer brands were mostly exempted from restrictions on selling on the mainland and were seen by many of China’s elite as status symbols.

That’s changing for consumers such as Ziyu Sun, a 23-year-old engineer in China’s eastern city of Qingdao. He says patriotism was a big reason behind his buying a Huawei phone, adding that he’s read many online articles on Alibaba’s Taobao marketplace and Twitter-like Weibo promoting support for domestic brands. “But the quality of Huawei phones is also very good”, he says. Same goes for Yongming Su, a high school teacher in Beijing who points to his Chinese-made Vivo phone as an example that, all things being equal, he would “support and buy domestic brands over foreign ones”.

Such thinking could pose a major challenge for American businesses in 2020. The US sold almost $120 billion in goods to China in 2018, making it the country’s third-largest export market after Canada and Mexico, according to the US-China Business Council. Many American brands such as Nike, Apple, and General Motors have staked their growth prospects on the promise of attracting shoppers in the world’s most populous country. GM, America’s oldest automaker, sells more cars in China now than in the US “Consumer sentiment is something we’re obviously keeping a close eye on”, says GM China President Matt Tsien.

Some American companies now worry that a preference for buying Chinese could morph into an all-out boycott of US goods, as happened when Beijing banned consumers from buying South Korea’s goods in retaliation for its government saying in 2016 it would let the US build a missile defense system in the country. The results of that action: Korean companies lost an estimated $15.6 billion in revenue, hitting giants such as supermarket operator Lotte Shopping Co and Hyundai Motor Co particularly hard, according to the Hyundai Research Institute.

Huawei smartphones on display at CES Asia in Shanghai on June 11. Photographer: Qilai Shen/Bloomberg

Many Chinese brands, particularly makers of electronics such as Huawei Technologies Co and Xiaomi Corp, now perform at the same level as their Western counterparts. The quality gains and increased advertising budgets have led shoppers to recognize them as household names. But amplified national pride is also playing a role in their growth. “Local heroes are fueling Chinese consumers’ growing confidence”, according to a recent report on China’s most popular brands by consulting firm Prophet.

In 2019, Chinese companies such as Huawei and drone maker SZ DJI Technology Co edged out once-untouchable American companies like Apple and Nike from the list of China’s ten most favorite brands, according to Prophet’s annual survey of 13,500 consumers. Local names made up half of the top fifty brands in 2019, compared with just eighteen three years earlier, with Alipay, Alibaba Group Holding Ltd’s payment service, and Huawei taking the top two spots.

The money has followed the brand awareness. Huawei is now the largest smartphone seller in China, commanding 37% of the market, according to consulting firm IDC. Apple has about seven percent, down from eleven percent in 2012, when Huawei was only the fifth-largest smartphone seller in China.

Although authorities recently banned Kweichow Moutai Co, a maker of grain alcohol baijiu, from calling itself China’s “national liquor” brand, the company’s shares have almost doubled in the past year. And the stock price of Chinese coat maker Bosideng International Holdings Ltd surged more than 200% in the past year as consumers bypassed rival Canada Goose Holdings Inc after Canada’s detention of Huawei Chief Financial Officer Meng Wanzhou.

Alibaba’s popular shopping site Tmall says it saw a jump in sales of domestic brands around China’s National Day, thanks to what it called “a wave of patriotism” tied to the seventieth anniversary of the founding of the People’s Republic of China. The retail site says eight of its ten highest-grossing beauty brands came from China, and a video game called Homeland Dream, developed by Tencent Holdings Ltd, shot to the top of the most-downloaded charts.

China’s celebration of self is also manifesting in so-called red tourism and red culture, where Chinese film, hip-hop, and even science fiction seem to be having a moment. State officials say that half a billion people in 2018 visited patriotic sites such as Beijing’s Tiananmen Square and Military Museum and that authorities plan to spend 2.64 billion yuan ($373 million) to develop attractions through 2020.

Sensing a business opportunity, China’s social media stars are embracing their love of country. Many are also scared of running afoul of Beijing’s strict rules on what can be said on the internet, which puts the onus on online account holders to temper their own posts, as well as fans’ replies and comments in groups they moderate.

These social media influencers – who have a big impact on the $413 billion worth of goods expected to be sold through social e-commerce in China by 2022 – routinely get calls or messages from account managers with advice on what’s politically sensitive. And when brands they’re working with get on Beijing’s bad side, as happened recently when products made by Givenchy, Coach, and Versace listed Hong Kong as a separate country, social media ambassadors quickly sever ties.

One Shanghai-based blogger with more than 300,000 fans on Instagram and Weibo used to stick to photos and videos of Christian Louboutin heels and Gucci gowns. But for the seventieth-anniversary celebration she decided to post something a little different: an old photo of a Chinese model in a red silk dress posing in front of Tiananmen Square for Vogue China. The caption read: “China, red hot”. In June she also posted a photo of herself in a billowing pink dress holding a flower over her left eye with the caption “Calling for peace, #hongkong #China”, a reference to protests in the semi¬≠autonomous city.

She says the shift in Chinese nationalism has caused her to rethink whom she works for, and even which fashion-week runway shows to see. “I avoided Coach, Versace, and Givenchy because as a public figure I think it’s extra-sensitive what your stance is”, she says. “I don’t think I would openly support any brands that publicly disagree with the political beliefs of the majority of the Chinese people”.

The same goes for beauty blogger Melilim Fu, who has started her own line of skin-care and beauty products emblazoned with “Made in China” labeling. “All these shoppers know everything is made in China anyway, so there’s an opportunity for products with good prices and quality to capture that sense of national pride”, says Elijah Whaley, who co-manages the brand.

Across all categories on Tmall, three-quarters of brands incorporated the phrase “Made in China” on their product pages, up from less than half in 2017, according to research firm Gartner L2. Another study from researcher Nielsen in August showed that 68% of Chinese consumers preferred homegrown brands.

MacRitchie, of the Australian talent agency, has learned that to appease his Chinese clients he has to stay away from American spokespeople: For a recent ad campaign for a Chinese sportswear brand, he chose European supermodel Karolina Kurkova instead. His client is a Chinese national with Chinese investors, “so they don’t want to invest in American celebrities because it seems ideologically at a crossroads with where we are right now”.

– With Qian Ye, Bruce Einhorn, and Zoe Ma