The government spends money like most of us now, with online banking. The difference is, they don’t really have to “balance their checkbook.” That doesn’t mean they can spend indiscriminately and without consequence, as will be discussed below. But economic theory has largely ignored the dynamics of money and the crucial role of government spending in kickstarting the economy. The quote above does hint at a solution or a strategy to address some significant economic policy issues and environmental problems facing contemporary society.

I remember babysitting my car one January morning in 2003 (it’s a New York City alternative parking thing) and reading the Wall Street Journal. The article was disparaging the government spending surpluses that had been built up during the Clinton administration. This wasn’t a total surprise, as I was teaching economics down the street at New York University at the time, but we hadn’t had many surpluses to critique in the last several decades and the article challenged many reigning economic myths. The crux of the argument as I remember it was that debt is a significant player in global finance.

This post examines that contention and its implications for government fiscal policy. It looks at the role of federal spending and the implications of both debt and deficits for infrastructure spending and action against climate change and global pollution. We also need to confront unemployment due to automation and new technical innovations such as artificial intelligence and the Internet of Things (IoT). It examines the historical spending and tax practices of both Democrat and Republican parties and the implications of a relatively new theoretical focus called Modern Monetary Theory (MMT).

So, the Bush administration proceeded to navigate the return to deficits and reverse the surplus with a variety of spending measures, including expanding Medicare to pay for drugs and wars in Afghanistan and Iraq. As US Vice-President Dick Cheney used to say, “Reagan proved deficits don’t matter.” The former Secretary of Defense and CEO of Halliburton, a major defense logistics contractor, did know that they matter to the private sector.

President Ronald Reagan faced a tough economy when he was elected, much like President Obama would inherit 28 years later. Reagan drastically cut taxes and increased government spending, primarily on defense. As a result, he nearly tripled the federal debt during his two presidential terms. Consequently, by policy or default, he followed the “Two Santa Claus Theory.”

This perspective was set forward in “Taxes and the Two Santa Claus Theory” by Wall Street Journal editorial writer Jude Wanniski. He argued that the Democrats should be the spending “Santa Claus” and redistribute wealth while the Republicans should be the tax reduction “Santa Claus” and help spur income growth.

The theory gained traction in Republican circles as Watergate came to a head and the country struggled with vestiges of the Vietnam War. Wanniski had a meeting in 1974 with Dick Cheney, Donald Rumsfeld, and Arthur Laffer, the creator of infamous “Laffer Curve” that hypothesized that lower tax rates would increase government revenues. A consensus was forming that would be known as “trickle-down economics” and even nicknamed “Voodoo economics” by the first President Bush. The official face of the theory was known as “supply-side economics” as it was meant to reward “suppliers” of goods and services with lower taxes and decreased regulation.

It also became conflated with a new type of market fundamentalism promoted by Chicago school Nobel Prize winners Frederick Hayek and Milton Friedman. Hayek wrote The Road to Serfdom at the end of World War II that was a popular critique of the role of government in the economy. Friedman was also known for his anti-government stance. He championed markets and the price mechanism as more efficient forms of economic activity. His major contribution was in establishing a direct relationship between the quantity of money in the economy and price levels.

As the economy went into the deep “stagflation” recession of the late 1970s due to the two oil crises and the subsequent growth of Eurodollar markets, Hayek and Friedman found their ideas to be very popular, immortalized by Ronald Reagan’s classic inaugural line in 1981, “In this present crisis, government is not the solution to our problem, government IS the problem.”

The Federal Reserve increased interest rates to 20% by June 1981 and the prime interest rate, an important economic measure, exceeded 21% by the summer of 1982. It squashed the inflation but created a an even worse recession. In response, Reagan embraced both Santa Claus strategies: lower taxes and increase spending. The nation loved him for it.

It was politically expedient for Reagan to combine the two strategies. While criticizing “liberals” for their “tax and spend policies” Reagan did little to cut overall spending. He did shame “welfare mothers” – code for unmarried black women and in 1981, and cut Aid to Families with Dependent Children (AFDC) and other programs that targeted the poor. But the move was largely symbolic and more of a political message to his base, including Reagan Democrats, who resented the black migration to the North and the employment competition they faced as the automobile and other industries suffered competition from Germany and Japan.

Reagan also spent heavily on the military as he proceeded to create a post-détente Cold War II. He championed the MX nuclear missile and “Star Wars” that funded artificial intelligence and eventually the Internet (NSFNET) in an attempt to create a space-based defensive shield around the USA. The new deficit spending helped the economy recover and also create a global financial superstructure with US treasury bonds as a major hedge for the protection for traders’ positions.[1]

Reagan also pushed two of the most extensive tax cuts in American history. Following Kennedy’s cut of top marginal tax rate from 90% to 70%, Reagan cut them to 50% in his early years; in 1986, he further reduced the rate to 28%.

That latter point may not be that much of a positive, as Reaganomics set the conditions for massive wealth inequalities and the transfer of public wealth to private hands. Starting with the striking air controllers, Reagan aggressively shut down union activities. Still, Reaganomics did create a new set of economic conditions that rewarded entrepreneurship and “suppliers,” as well as stimulate technological development.

The 1980s economy was ripe to commercialize the technological developments of the Cold War and Space Race. Intercontinental ballistic missiles and NASA’s Apollo Moon program helped launch communications satellites and refined the transistor for their guidance systems into the microprocessor “chip.” By the 1980s, CNN and MTV were using satellites to equip cable TV with new 24/7 content. Apple was started by kids from Silicon Valley because it was initially a community or “industrial cluster” built on military spending and they grew up with electronics as part of their culture. Bill Gates quit Harvard as soon as he saw that the first Intel microprocessors were being used to create the Altair microcomputer.

Fiscal policy (tax adjustments and government spending) has a significant impact on the economy. John Maynard Keynes largely laid out the theories on fiscal and macroeconomic policy in the years between the great wars. The British economist and financial trader had been very concerned about the austerity measures imposed on Germany after World War I. He had been on the British Treasury team that went to the Versailles Peace Treaty but soon resigned in disgust, fearing the results of the austerity measures placed on Germany.

The Allies imposed crushing reparations on Germany that drove the country into a frenzy of inflation, starvation, and disillusion. His book Economic Consequences of the Peace (1919) was an extraordinary economic policy analysis and warned of major problems if the German economy was not stabilized. Keynes all but predicted the rise of Nazi Germany.

Keynes followed policy analysis with economic theory in his crowning achievement, The General Theory of Employment, Interest, and Money, published in 1936 during the height of the Great Depression. This classic book provided the rationale for government intervention in the economy. President Franklin Delano Roosevelt (FDR) was already deeply committed to the set of interventionist policies that would become known as the “New Deal,” but Keynes legitimized that intervention and provided a set of conceptual tools for analysis and policy formulation. Subsequent industrial mobilization for World War II solidified the importance of government spending, and in its successful wake solidified Keynes’ role as the dominant voice in economics. Keynesianism became the guiding star for managing the economy.

A variant “Santa Claus” policy perspective has circulated in Democratic circles for the last few years called Modern Monetary Theory (MMT). It argues that governments have a monopoly on the production of their money, and with it, the responsibility to use it effectively for policy purposes, even if it leads to larger deficits. Barring excess inflation in the economy, governments that can produce their own money should be willing to spend generously to ensure high levels of employment and a growing economy.

MMT was envisioned early in the 1990s by financial trader Warren Mosler and championed politically more recently by Stephanie Kelton, a Public Policy and Economics professor at Stony Brook University in New York. Unlike most economists who tend to marginalize money and central bank operations, Mossler’s and other traders’ financial viability depended on understanding the Fed’s monetary policy. Kelton, a former Bernie Sanders policy advisor, recognized the implications of Modern Monetary Theory for progressive objectives.

Everyone who played the board game Monopoly knows that the game starts with money handed out to each player. Likewise, the MMT argument is that government has consistently led economic development by spending money into the economy, which then can be used for various economic activities. Government spending creates money and expands the economy and rarely “crowds out” additional investment, as is one of the usual criticisms of MMT.

Mosler argues that the economy starts with a nation-state that “wants to provision itself.” It wants to pay for education, healthcare, infrastructure, military spending, etc., depending on the political consensus. So it creates a “tax liability,” which has to be paid in a specified currency. The government then creates that currency, and people look for opportunities and work to pay the tax, as well as build some savings and wealth.

This process creates “unemployment,” what MMT calls people looking for paid work in the currency they can use to pay the tax. Many people don’t work in modern society; they could be jail, or managing a family, or retired. These are not unemployed people because they are not looking for sources to pay their taxes.

The government’s ability to ensure a currency’s acceptance as a viable form of payment, and primarily through their taxability, makes spending US currency a likely mechanism for economic growth and guidance. The dollar is accepted as currency because it is the only tender that can be used to pay US taxes, but it is also desirable because it has ingrained itself in the market dynamics of society.

This charges government with a significant responsibility to survey the economy and the money supply effectively and responsibly. It means that the government has to spend and monitor the economy. It is not a household that has to live within its means, the same limitations do not constrain it. Just like the Monopoly game, it has to put some currency on the table to keep the game going.

MMT is not a license to spend indiscriminately as inflation is a significant concern. Inflation occurs when too much economic demand or too little supply of a good or service causes an increase in prices. But inflation coming from too much money is relatively easy to manage. Most hyperinflation cases come from disruptions in supply, such as the loss of manufacturing in the Weimar Republic after WWI or the decline of agriculture in Zimbabwe. Increases in taxes and regulations on business and finance can counter most inflation cases if spending deficits trigger price increases.

Other concerns about government spending involve exchange rates and debts to other countries. Dealing with the first means ensuring that the currency can float in regards to other currencies. The Nixon shock of the 1970s meant going off the gold standard and transiting to what Walter Wriston, the former CEO of Citibank, called the “Information Standard,” a global surveillance system based on international news and virtual financial markets. These systems allowed exchange rates to float and enable a currency to make certain adjustments by letting its value change in relation to other currencies.

Countries should also avoid going heavily in debt to other countries, and especially avoid borrowing money that requires repayment in a foreign currency. Walter Wriston used to say the “countries never go bankrupt.” Maybe not, but it creates a set of other critical dynamics. These include the temptation of creditor nations to continually extend credit to avoid economic declines. The absence of a bankruptcy mechanism also means they exert pressure on debtor countries to “structurally adjust” their economies to adjust to the concerns of creditor nations.

An example is the “Third World Debt Crisis” that recycled OPEC petrodollars into developing countries in the 1980s. Debt resulted in pressure to privatize public assets into securities that could be listed on global financial markets. Curiously, this led to the transition of government telecommunications agencies into private or semi-state corporations and facilitated the adoption of Internet Protocols that led to the World Wide Web. However, it also led to the privatization of water and other public resources and pressure to increase taxes and reduce social services.

As Kelton points out, MMT challenges our contemporary conceptions of money, deficits, and debt. One of the most dangerous metaphors we use to conduct our public policy is the notion of a “fiscal house.” This metaphor is based on the conflation of government finances with household finances and the idea of “living within our means.” And primarily, this means recognizing government is not a household that has to reconcile its checkbook. Governments should not live within their “means” but expand the realm of economic possibility.

MMT is not a socialist or utopian panacea for the economy; it is essentially an understanding of central bank operations and the role of money in the economy. However, it provides an opportunity to examine whether the Green New Deal or other Post-Covid-19 plans to address climate change’s challenges will be a drain on economic growth or an opportunity to create thriving sustainable economies.

Carbon-based combustible fuels are no longer the most efficient energy sources, but they require new smart grids and other infrastructure to be readily available. To mitigate climate change and pollution while ensuring low unemployment in an age of automation and artificial intelligence, it will be important to understand government spending. Engaging with MMT can provide insights into the fiscal spending process and challenge public policy to develop plans for sustainable economic growth and prosperity, while avoiding inflation and other negative effects of government spending.

Citation APA (7th Edition)

Pennings, A.J. (2020, Jan 27). The Two Santa Claus Theory of US Economic Growth and the Prospects of Modern Monetary Theory (MMT). apennings.com https://apennings.com/dystopian-economies/the-two-santa-claus-theory-of-economic-growth-and-the-prospects-of-modern-monetary-theory-mmt/

Notes

[1] Remember that Alexander Hamilton traded New York City’s status as the nation’s capital for the opportunity to assume the state’s Revolutionary War debt as the basis for a Bank of the United States. As a result, the government moved to a swamp in Virginia that would become Washington DC and New York City became the nation’s financial center. Likewise, in a digital financial environment that trades globally everywhere and all the time, Treasury bonds play a crucial role in coordinating wealth and as a hedge against risk in volatile markets.

Ⓒ ALL RIGHTS RESERVED

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Anthony J. Pennings, PhD is Professor at the Department of Technology and Society, State University of New York, Korea. He started his academic career Victoria University in Wellington, New Zealand before returning to New York to teach at Marist College and New York University teaching comparative political economy and digital economics. When not in the Republic of Korea, he lives in Austin, Texas.

Category: democratic political economies, digital monetarism, dystopian economies, smart new deal, telegraphic political economy
Tags: Altair > Federal deficits > government debt > Green New Deal > Information Standard > John Maynard Keynes > Jude Wanniski > Keynesian economics > MMT > Modern Monetary Theory (MMT) > New Deal > Two Santa Claus Theory > Versailles Peace Treaty

Korea in a Post-Covid-19 World, Part 1: The Korean New Deal

Posted on | December 6, 2020 | No Comments

In early November 2020, I attended the World Bank IDA – Korea Workshop on Innovation and Digital Technology in a Post-Covid World. Sponsored by the World Bank’s International Development Agency (IDA) and the Korean Ministry of Economy and Finance, it was held at The World Bank Group Korea office here in Songdo, Korea. I was too busy to go across town to attend in person, but found the virtual proceedings to be quite interesting. (Best to “fast-forward” to 30 minutes).

The conference covered many relevant issues dealing with technology in a post-Covid-19 world. For this series of posts, I am primarily interested in the vision of the future for the Republic of Korea that draws on the American “New Deal” and its intersection with technology and sustainable development. Below, I discuss the New Deal and its rhetorical reincarnation as the “Green New Deal” in the US and Korea in the wake of the financial crises of 2008 and the Covid-19 pandemic of 2020-21. I am also intrigued by Korea’s merging of the Green New Deal with a “Digital New Deal,“ which I will cover in a future post.

The New Deal was the name given to President Franklin D. Roosevelt’s (FDR) strategies in the 1930s to recover from the Great Depression and its influence that continued well into the latter half of the 20th century. It unabashedly used the power of government to reform the economy for industrialization and World War II mobilization, and later the containment strategies for global finance and Communism after WWII.

The World Bank is not a United Nations agency but instead came out of the New Deal’s Bretton Woods Agreements at the end of World War II that designed the new global finance and international trade regime. The World Bank’s IDA is managed by its 173 shareholder countries that guide its investment portfolio from more than 50 donor countries to promote economic growth and reduce poverty. So, the introduction of Korea’s New Deal at the jointly sponsored conference seemed appropriate.

The New Deal term has circulated extensively in the wake of concerns about climate change and, more recently, in thinking about the COVID-19 epidemic and its repercussions. Its (re)emergence has been traced to “A Green New Deal” report by the New Economics Foundation released in the United Kingdom in July 2008 and intended to initiate a comprehensive national plan to revive the economy and combat climate change. Written by the Green New Deal Group, it outlined a series of policy proposals to tackle the financial crash, global climate change, and the limits of an oil-based economy. But the Tories won in the UK in 2009, and the ideas were largely marginalized.

Likewise, in the US, the Obama administration focused on a general stimulus and healthcare in 2009. The American Clean Energy and Security Act died in the Senate before the Republicans swept the 2010 midterms. The idea of the Green New Deal died as well, except among progressive left politicians such as the Green Party’s Jill Stein and independent Bernie Sanders. Both waged 2016 presidential campaigns that included a GND. It became an issue in the 2018 midterm campaigns and helped propel Alexandria Ocasio-Cortez (AOC) into a Congressional seat (D-NY).

AOC then joined with Sen. Ed Markey (D-MA) in early 2019 to introduce the H.R. 109 resolution on February 7 in the 116th Congress. It recognized climate warnings due to greenhouse gas effects and called on the US to use its technological expertise to reduce harmful emissions. It also recognized that the New Deal and World War II mobilization created the biggest middle class in US history and that the Green New Deal should strive to create economic security, especially for vulnerable groups. Among the remedies for these problems, it suggested meeting “100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources” and distributing electricity through “smart grids.” This chart on the Green New Deal by the Data for Progress shows the uptick in interest in the term.

I was particularly struck by presentations on the Korean New Deal by the Ministry of Economy and Finance, introduced first by Deputy Minister for International Affairs Taesik Yoon and in more detail in the Keynote Speech by Dae Joong Lee. In “Linking the Korean New Deal with Innovation and Technology in the Post Covid-19 Era”, the ministry’s Director of Development Finance first reviewed the Republic of Korea’s response to the COVID-19 pandemic.

Korea was hit hard and early but effectively reduced the adverse health effects and by September had restored a good amount of its economic growth. This was due mainly because of its effective “test, trace, and treat” strategy to the virus.

But given the lingering effects of the pandemic around the world, Director Lee laid out the general plan for a Post-Covid Korean New Deal. It stresses a Digital New Deal and a related Green New Deal – within the context of a national “safety net” and an emphasis on employment and concern for the training of human resources.

Now, it’s one thing to put together some fancy PowerPoint slides and another to enact a nation-wide transformation of the political economy. But Korea tended to “walk the walk” recently and not just “talk the talk,” so I think its worth keeping an eye on Korea’s strategy for digital and sustainable development. The Korean digital strategy, as researched by my colleague James Larson, has paid off handsomely so far for the small peninsula nation.

In the next post I continue the discussion of Korea’s New Deal and its inclusion of a Digital New Deal and a Green New Deal.

Ⓒ ALL RIGHTS RESERVED

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Anthony J. Pennings, PhD is Professor at the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

Category: automatrix, smart new deal, sustainable development
Tags: digital development > Digital New Deal > GND > Green New Deal > Korea > New Deal > post COVID-19 > World Bank IDA

Starlink and the Return of Satellite Internet Service

Posted on | December 2, 2020 | No Comments

Arthur C. Clarke’s extraordinary vision and engineering analysis of “rocket stations” circling the Earth and providing global radio service has been challenged and surpassed over the years. It was an extraordinary vision, but technological innovations have continued to offer new designs and solutions. The current Starlink satellite system is a radical departure from Clarke’s original vision to put satellites into geosynchronous orbits along the equator. This post looks at a new satellite system being put into place by Elon Musk and his SpaceX operations and how it can reach remote locations traditionally underserved by traditional Internet Service Providers (ISPs).

Musk’s new company hopes to eventually launch as many as 42,000 satellites providing data services throughout the world from orbits as low as 400 km. In 2018 Space X received approval from the FCC for 7518 Ka-band and V-band (40 to 75 gigahertz-GHz) satellites at 335-kilometer orbits in addition to the 4425 satellites initially approved.

Clarke’s vision was achieved in the mid-1960s as part of the Apollo Space Program when three Intelsat satellites were put into geosynchronous orbit. It provided a telecommunications footprint over most of the world that could facilitate many telephone calls or a television broadcast. Many satellites followed, and global services such as CNN became available. The Iridium satellite system was designed and rolled out in the 1990s to provide mobile services. Its business model had difficulty competing with wireless companies and went into bankruptcy by 2000. It uses 66 active satellites in LEO (781 kilometers) for service to mobile phones and special antennas and has found its niche with government and international organizations.

Starlink connects its smaller, low earth orbit (LEO) satellites with laser communications. Light moves faster in the vacuum of space than through the glass conduits of fiber optic cables. Undersea cables transmitting light signals have largely replaced satellites for global communications, so connecting these smaller spacecraft provides a significant threat to the status quo.

Speed is very attractive for financial companies and other industries that need to move data with little latency. Transmitting across continents and oceans is much faster by light, and the lower altitudes make radio communications with earth-based antennas quicker. Significant customers are expected to be banks, hedge funds, and other financial operations that engage in high-frequency trading. eSports game competition is one area that I expect will take off globally as the diminished latency will literally create a “level playing field” between gamers around the world.

One of the benefits of satellite communications has been its ability to bypass borders of geography and nationality. It holds new promise for people in rural areas that have trouble accessing internet service providers. The man in this video, Brett Batie in Idaho, installs a Starlink antenna on his home and shows the process of “unboxing” and setting up the satellite connection.

The Starlink antenna is part of the beta testing of the satellite service, and the data is still being collected about the quality of the service. In this case, the service allows him to download data at 40 to nearly 100 Mbps and uplink at 10-25 Mbps. Quite a difference from the 2Mbps that he struggled to get previously from his ISP.

Musk announced the satellite program on Jan 18, 2015, with the launch of SpaceX. He had to file plans and get approval from the International Telecommunications Union (ITU) and the Federal Communications Commission in the USA. The plan was to initially serve Northern US and Canada. Those testing the Starlink service report that their antennas end up pointing north, so I expect that a string of satellites have been placed in in along a northern latitude. Geosynchronous satellites are placed exclusively along the equator.

Musk also announced that the Starlink program is designed to produce cash for SpaceX’s missions to Mars.

© ALL RIGHTS RESERVED

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Anthony J. Pennings, PhD is Professor at the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he was on the on the faculty of New York University. Previously, he taught at Hannam University in Korea and Marist College in New York. He started his career at Victoria University in New Zealand. He spent a decade as a Fellow at the East-West Center in Honolulu, Hawaii researching ICT4D. Originally from Goshen, New York, he now keeps a home in Austin, Texas.

Category: mobile technologies, space systems, visual literacy and rhetoric
Tags: Elon Musk > FCC > ITU > phased array antenna > SpaceX > Starlink

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