Fiscal Policy Management is not a Theoretic Problem but a Political One
Both the academic originators of MMT and its most prominent partisan political supporters, especially on the American left, ostensibly support the development of assertive, coherent, and entrepreneurial fiscal policy regimes, restoring democratic governance in the articulation of macroeconomic policy management. In diverse ways, I find such an appeal problematic. On a theoretic level, the Keynesian foundations of MMT does not command absolute credibility in its perspectives on individual expectations and on the broader resolution of the complex of collective action problems constituting macroeconomic systems. Such a conclusion does not, in any sense, qualify as an acceptance of the diverse counter perspectives of New Classical/Walrasian theory or Monetarism, but it does accept that each theoretic tradition makes valid and at least somewhat persuasive arguments concerning the translation of individual decisions into the broader functioning of economic systems. On an entirely different level, however, we cannot ground a final verdict on MMT or its particular predictions of the effects of a fiscal authority-driven macroeconomic policy on purely theoretic predictions. Theories, however formally articulated and corresponding to a broader academic tradition, invariably shape the way every individual lives their experience of economic processes and, in turn, shape the functioning of an economic system. On the other hand, economic theories are simultaneously shaped by non-economic conceptions (e.g. race, gender, religion, family-life, civics, morality, etc.) that refract any pristine individual imagery of how the world in general should work, and these conceptions combine to determine how individuals approach both economic and non-economic processes. Most critically with respect to the articulation of coherent macroeconomic policy in national economies characterized by democratic governance, they determine how individuals approach a range of policy problems and how they approach electoral processes with the goal of electing representatives who will more accurately represent their perceived self-interests.
In the United States, the proverbial stew of divergent theoretic conceptions shaping the mindsets of individual citizens as they approach the voting booth for a series of local, state, and federal elections legitimately reflects, on some level, an understanding on the part of each individual as to how the US economy works and how it can best be managed by divergent levels of fiscal policy makers, but, at the end of the day, economics constitutes a single element in the broader determination of how American citizens cast their votes. Another very important, if sometimes unconscious, motivation in American politics is located in race and the problems arising in a shifting ethno-cultural social landscape where certain groups that have enjoyed a long history of privilege feel threatened, a sentiment made viscerally evident in at least some white reactions to recent protests over police brutality toward African-Americans. Moreover, at the intersection of economic theory and unconscious, implicit racism, sexism, and nationalist nativism, we encounter the formation of certain individual conceptions of morality, shaping the reactions of individual American citizens, in diverse and divergent political/partisan contexts across the United States, toward public initiatives to stimulate the broader US macroeconomy. In this respect, I have in mind the sort of mindset that takes offense to the extension of public funds for poverty relief, on the one hand, because such initiatives substitute for self-help organizing and for the responsibility of individuals to accept private employment even under less than appealing conditions and compensation rates, and, on the other hand, because government bureaucracies do not respect a differentiation between the "deserving" poor and parasitic populations who simply know how to "game the system," a difference implicitly colored with racial dynamics. In other words, the development of fiscal policy measures at the federal level in the United States is a process that continuously reflects thick, stifling, partisan "us versus them" dynamics, constituting the ultimate limitations on what the federal government, acting on the behalf of the unified monetary and fiscal sovereign agent (i.e. the state as the collected body of all American citizens), is able to enact as macroeconomic policy.
This suggestion goes beyond my earlier argument that the divided loyalties of monetary and fiscal authorities in the United States toward divergent structures of interest groups makes a well-coordinated set of fiscal and monetary policy regimes difficult except under drastic and dire circumstances. When we come to explicitly consider the partisan divides characterizing the unified fiscal authority evident, primarily, in Congress and, secondarily, in the compliant execution of Congressionally enunciated fiscal policy by the chief executive and its respective administration, we are always trapped in the complex intersections of racial, gender, ethnic/nationalist, cultural, and income-oriented divides that articulate multifarious and frequently non-overlapping interest blocs in the legislative and administrative determination of fiscal policy. Fundamentally, the existence of such non-overlapping interest blocs, in turn, reflects the existence of divergent groupings across the larger US population, demanding that the federal government act as an ever compliant representative of its interests, enacting policies from which it will benefit at the expense of other groups who have previously benefited wrongly from ill-crafted policy or outright nepotism. In these terms, it isn't merely difficult to approach significant problems in macroeconomic policy management from the standpoint of a singular, consensual, general interest of all citizens across the national macroeconomy of the United States - it is, at the present time, under the influence of the Trump administration's highly divisive and visceral partisan tactics, virtually impossible.
Considering the problem more concretely, MMT has most prominently come to the public stage in the US in the context of proposals for a "Green New Deal," incorporating a range of public policies intended to finance a broader transition of the US macroeconomy from fossil fuel intensive energy use to preponderant use of sustainable energy, reduction of carbon emissions generally, and management of the production of ecological wastes, while simultaneously redistributing incomes by various mechanisms to cushion the impact of such changes, redress past ecological injustices on diverse segments of the US population, and, more generally, enhance access to paid employment, health care, and education across the US population. Promoters of the Green New Deal have, notably, argued that the massive price tag of such initiatives could be paid for through federal debt financing, essentially implying that the Federal Reserve can simply buy up massive quantities of new federal debt and, in turn, print up new currency to pay for new administrative initiatives. At this point, academic originators of MMT, like Stephanie Kelton, have interjected that their point was never to argue that the federal government could pay for a massive new incorporation of federal fiscal intervention into the US macroeconomy by just firing up the Federal Reserve printing press for an open-ended issuance of new money, but that a certain space exists for the fiscal authority to adjust macroeconomic productivity by transforming the use of existing, employed factors of production and calling forth available, idle factors of production. Effectively, it may or may not be possible to undertake a radical transformation of the US macroeconomy of the scale envisioned in the Green New Deal without some increase in price inflation and some degree of crowding out of private investment, but more modest fiscal expansionary initiatives, paid exclusively from the expansion of government debt, might be undertaken without a palpable effect on the aggregate price level and existing levels of private investment.
Acknowledging that a certain disconnect may exist between the partisan backers of the Green New Deal and the academic promoters of MMT, per se, the larger problem arises in the partisan disconnect between the progressive backers of the Green New Deal and diverse other corners of partisan political opinion, alternately critical of scientific claims on carbon-related ecological change, critical of the potential to finance such a large expansion of the federal governmental footprint across the US macroeconomy, and critical, for diverse reasons, of the disproportionate impacts of proposed Green New Deal policies across segments of the US population and electorate. Emphatically, it is entirely unclear to me how the passage of anything as large and as sweeping as the Green New Deal could ever be enacted, even if the Democratic Party won a landslide electorate victory in the 2020 presidential election and swept its way into power in both houses of Congress. The Democratic Party, itself, as the host of most partisan supporters of the Green New Deal, constitutes a diverse multi-racial, multi-ethnic, interregional partisan coalition, including large constituencies of political moderates who either question the necessity of a major initiative to adjust to the effects of climate change or question the ability of the federal government to pay for it through expansion of debt. More importantly, a notable base of support for the present administration in the Republican Party categorically rejects the existence of climate change and/or its basis in human utilization of hydrocarbons, the necessity to respond to climate change, and the efficacy of broad transformations of the US macroeconomy to benefit populations that it views suspiciously as an undeserving "other." To the extent that we characterize this last conception of enmity in implicitly or explicitly racial terms, the partisan terms of debate over something as contentious as the Green New Deal appears especially visceral and categorical. As such, I would contend that, the compelling arguments in favor of a wholesale transformation of the US macroeconomy to confront climate change notwithstanding, there is no political consensus in favor of enacting such a broad federal governmental response to climate change, in itself, however such a response might be financed, and it seems unlikely that the extraordinarily diverse and divergent ensemble of electoral constituencies across the US will ever be able to marshal such a consensus. You cannot embark upon a critical large scale transformation of diverse aspects of the way of life and the functioning of the economy of the United States in response to an existential human crisis when close to fifty percent of the American electorate insists that such a crisis is a hoax, fabricated by unpatriotic liberals and radicals seeking maliciously to destroy the global political and economic dominance of the US.
My larger purpose in this section should be sufficiently clear at this point. It is always worthwhile to investigate the theoretic foundations of divergent ideas in economic policy and to consider how conflicting conclusions on policy regimes enacted by fiscal and monetary authorities might appeal to contradictory bodies of theory, in turn reflecting different conceptions on human nature, expectations, and the role of government in correcting market failures. On the other hand, such discussions can never get the heart of the problem of conflict over policy regimes without a consideration of the broader ideological structuration of partisan struggle in a body politic, especially when certain cultural divisions, like race, exert a more forceful and visceral effect in defining the interests of individuals and determining the political coalitions to which they lend their support.
Democratic governance of institutions like public fiscal policy management demands, minimally, the capacity to realize a basic consensus across divergent partisan interests in order to steer the articulation and execution of policy. A national polity as large and as diverse as the United States has always encountered difficulties in finding consensus across the span of policy mechanisms entrusted to the federal government under the US Constitution of 1787 and forthcoming statutory enactments across over two hundred years in the exercise of governance. Presently, given the continuous evolution of partisan divides across the American polity, especially those involving race, and the evolution of mass media, as the means by which we communicate information and ideas including partisan rhetoric of varying degrees of sophistication and crudity, I would argue that we have arrived at a point where the possibilities for consensus across a range of public policy areas in the United States are rapidly dwindling. We are certainly not in a position to come to a consensus regarding necessary actions in long range response to climate change, but we are simultaneously not favorably positioned to come to terms, more minimally, with a set of more extensive intermediate term fiscal measures to respond to the economic downturn brought on by the COVID-19 pandemic when the federal government alone is capable of issuing public debt in our sovereign national currency to pay for macroeconomic stabilization measures. The United States is currently struggling with the false dichotomy of privileging public health or economic productivity, to a substantial extent, because the US Congress and the Trump administration are collectively incapable of articulating anything better than an ad hoc, dysfunctional federal response to prevent further consequences of a steep decline in employment and a temporary closure of large segments of consumer service industries in most regions, let alone the likely demise of several hundred thousand Americans.
With the present failure of the United States to articulate and execute a deliberate and sensible fiscal policy that might, at least partially, make use of the insights extended by MMT to resolve certain pressing national catastrophes, it is worth asking how and why an alternative fiscal and monetary organization of the United States might benefit both macroeconomic productivity and a range of other policy regimes by restoring democratic consensus and policy coherence. The following section constitutes, in some sense, a utopian vision, but it is, alternatively, an effort to articulate a sensible theoretic argument that might inform a particular kind of revolutionary transformation. Moreover, it seeks to forge linkages between MMT and its Keynesian forebears and the alternative form of economic theory that I introduced in the initial post in this series based on ideas introduced by American urbanist/urban economic theorist Jane Jacobs. This theory takes space and the economic integration of networks seriously while simultaneously arguing that we need to understand how larger economic aggregates, like national macroeconomies, either reflect a coherent interweaving of networks or sow together a hodge podge of incompatible regional economies. When we merge these insights with a conception of monetary economics, we can begin to come to terms with a definite argument to revise our understandings of economic space, preliminary to a reconsideration of the nation-state as the basis for an economic scale.
A Jacobsean Counterpoint to MMT: On the Disaggregation of Large Unified Fiscal-Monetary Zones
To begin, we need to go back to the theoretic territory of Adam Smith, to "the propensity to truck, barter, and exchange one thing for another, (Smith (1776),
Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter 2, at:
https://socialsciences.mcmaster.ca/econ/ugcm/3ll3/smith/wealth/wealbk01)" the underlying principle of markets. Smith develops a basic conception identifying the advantages arising from divisions of labor against the basic idea that exchange, oriented toward the specializations of particular individuals and groups at every scale of economic activity (i.e. at the task level within enterprises (e.g. the famous pin factory) and at broader social levels up to the extension of globally integrated supply chains), leads inevitably to general expansions on productivity, providing greater consumption possibilities across an economy. Divisions of labor on diverse scale of productive economic activity (i.e. production of goods and services for consumption by intermediate or final users) are the ultimate building blocks of economic life, but the division labor presumes, in itself, the existence of market exchange and/or non-market distribution of outputs across networks of successive users. Without exchange, the division of labor and its benefits toward total output and consumption possibilities would break down.
The important principle that Jacobs emphasized in regard to divisions of labor and exchange is that the networks of economic life that develop have a geographic footprint - they have space. When we put spatially defined local exchange networks together, we can begin to construct something that can be characterized as a regional macroeconomic system. These macroeconomic systems have an inside and an outside, and we can pattern exchange relations with the outside through the language of trade (i.e. imports and exports). Jacobs' analysis goes further, however. Some regional macroeconomic systems have cities and others do not. A city, for Jacobs' purposes, is a center of gravity for economic activity that, in turn, embodies certain dynamics of economic activity. Cities attract populations and, as such, attract imports of goods from outside areas (both near and far) to satisfy the needs of resident populations. In order to pay for imports, cities begin generating exports. As divisions of labor in export production develop, new exports develop by following the logic of the division of labor in different directions and discovering the potential demand for byproducts of existing production processes. Over time, if they are truly dynamic cities, they begin replacing their imports with domestic substitutes, and, as they get better at producing such substitutes, their import replacements become exports themselves and their patterns of exchange with the outside change. Their new exports pay for new imports that, if the process continues, will subsequently be replaced (see Jacobs (1969), The Economy of Cities, especially Chapter 5, "Explosive City Growth").
As they begin generating import replacements and pursue development of byproduct production processes, the numbers and ranges of jobs cities generate expand rapidly. Capital for investment, retained from the earnings of interregional commerce, also expands. Some of these jobs and some of this investment capital spill out into their immediate hinterlands, where the range of economic activities taking place becomes wildly variegated. Industry and commerce and agriculture occupy space in close proximity, promoting some outflow of city populations across the broader region. Technologies developed in the cities also spill out, transforming the production processes and the way of life of populations on the outer edge of the region. Agricultural processes that were previously labor intensive become mechanised, freeing up labor for other jobs. Other technologies expand and improve consumption possibilities in outlying areas, improving the quality of life to residents. All of these forces of economic dynamism constitute the city regional economy as a particular regional macroeconomic system (see Jacobs (1984), Cities and the Wealth of Nations, Chapter 3, "Cities' Own Regions").
Critically, for Jacobs, there a multiple other types of regional macroeconomic systems, where the different dynamics generated by city economies manifest a more circumscribed effect on more distant spaces. Some regions become captive markets for specific imports destined to feed city regional economies. They develop exclusively around their privileged export commodities, and they rise and fall with the markets for these commodities, and with the ready substitution of more competitive sources, without ever developing the full economic dynamism that characterizes city regional economies (Jacobs (1984), Chapter 4, "Supply Regions"). Other regions manifest ready supplies of labor for work taking place in city regional economies. Migrants from such regions meet the demand for additional workers in the city regions and, in return, workers may send back remissions of income to the family back home. However, even as remissions fuel increased consumption in the home regions, they never generate any meaningful economic dynamism, because they are too far away to be impacted from the other forces of city regional economic development (Jacobs (1984), Chapter 5, "Regions Workers Abandon"). Still other regions host industrial processes drawn out of city regions, perhaps lured out by favorable tax benefits or infrastructure deals, but the introduction of a single production process from a city region does not generate any of the other associated economic dynamics of city regional development. Planting a factory in the middle of nowhere provides some jobs for locals until the tax benefits paid by the local government run out and the footloose firm leaves, lured to set up a factory somewhere else (Jacobs (1984), Chapter 7, "Transplant Regions"). Still other regions don't get factories but they get city capital, feeding consumption by locals to, for example, build real estate and consumption amenities. Alternatively, capital might pay for certain infrastructures (e.g. highways or power infrastructure) intended to lure city regional production processes out into an otherwise undeveloped region. Without any of the other forces of city regional dynamism, city capital eventually finds other places to invest and older relatively undeveloped investment targets get left behind without the capital needed to finance robust indigenous economic development (Jacobs (1984), Chapter 8, "Capital for Regions Without Cities"). Finally, other regions are simply ignored by city regional economies entirely. Such regions just stagnate, disconnected from outside exchange networks, city capital, the attraction of city labor markets, the effects of technological change on production processes and on the practices of everyday life. Properly speaking, they are strictly trapped in some degree of subsistence.
If we consider all of these differentiated forms of regional macroeconomic systems as the constitutive elements of wider entities characterized as national macroeconomic systems, then, according to Jacobs, we face an evident quandary to determine how each of these forms might logically fit together. Evidently, we are faced with a problem of piecing networks together to understand the particular roles served by disparate nodes within the network, where the overall relevance each part of the network is manifestly uneven in relation to the other parts and certain pieces appear wholly misplaced, like a piece to a jigsaw puzzle mistakenly included in the box of a different puzzle. Emphatically, in Jacobs' imagery, the city regions are the key integrators of broader relations with other regions and, for that matter, with other city regions as bilateral exchange partners between divergent networks of other city-integrated systems. Exchange relations between city regional macroeconomies may, thus, involve multiple city regions in a given nation-state but they are as likely to transcend the political boundaries of the nation-state, especially in the contemporary global economy, as supply chains spread out spatially between multiple national macroeconomies. As task divisions of labor in the production of particular goods and services spread out across space through the influence of technological change, most notably with regard to transformation of the costs of transportation and communications, it becomes difficult to definitively place the origins of particular final goods and services. Such goods and services have been produced and assembled in a multitude of places transcending national boundaries. Some of these places reside within city regional macroeconomies, others can be found in regions disproportionately impacted by the forces of city regional macroeconomies and integrated through subordinate and dependent relationships with agents in city regions.
The presence of dynamic city regional economies in a national macroeconomy has important consequences in the larger structure of Jacobs' theory. It may be the case that consolidation within the political space of a nation-state helps facilitate networking of cities and more dependent regions, like supply regions. In the absence of internal tariffs, the flow of basic and intermediate goods may be easier if cities are unified with the sources feeding their production processes. The same can be said with regard to supplies of labor coming from regions within the boundaries of the nation-state. On the other hand, the developmental processes of city regional economies tends to contort the development of other regions. Any regional economy that allows itself to become simply a supply region for a city regional economy will never develop the kind of dynamism evident in city regions. Regions left behind that seek to attract a factory or some other engine of economic development from cities do not attract all of the other sources of economic dynamism evident in cities. A factory in the middle of nowhere is just a factory in the middle of nowhere that cannot spur anything economically meaningful outside of itself. In important ways, the presence of a dynamic city regional economy in a national macroeconomy actively produces the underdevelopment of its dependent regions.
In a broader sense, the presence of a dynamic city in a national macroeconomy strengthens the larger macroeconomy in international markets. The demand for the nation's currency to purchase the goods and services exported by the city raises the value of the currency in international exchange. Stronger currencies impose a burden on struggling regions that need support to build demand for their exports. The opposite problem exists for cities in national macroeconomies where the dominant national exports are rural in nature - cities can never develop solvent demand for their exports because rural economies raise the value of the national currency to such a level that their goods and services become too expensive in international exchange. In important ways, the determination of international currency exchange rates takes on a certain salience for Jacobs relative to the development of dynamic city regional economies and the capacity of other regions outside of city regions to reach a threshold level of economic dynamism. The presence of one truly dynamic city regional economy in a national macroeconomy may, if the macroeconomy is sufficiently small, crowd out the potential for development of other dynamic city regional economies. Other regions might get trapped in developmental dead ends, largely as a function of currency/exchange rate feedback effects on dependent or otherwise disconnected economies.
More importantly, aside from the potential benefits from elimination of internal trade barriers constituted by the establishment of national macroeconomic space, nothing in the complex development of spatial economic linkages from dynamic city regional economies gives us any reason to prioritize national macroeconomies as relevant economic entities around which we should construct macroeconomic theory. Economic theory, at least since Adam Smith, has traditionally taken it as a matter of course that the nation-state is a logical starting point to define the boundaries of an economic system, and, hence, theoretic concepts and statistical analytical frameworks in, say, trade theory have continuously been considered from the standpoint of relations between nation-states and, as such, nationally-constituted macroeconomies. We, thus, consider trade and current account balances from the standpoint of national macroeconomies, measuring imports and exports of goods, services, and capital as if national boundaries convey something meaningful about transactions between or across firms and consumers when they happen to extend over longer and longer expanses of geographic space. Similarly, we collect statistics like gross domestic product (GDP) on the basis of national macroeconomic entities as if the aggregation of production statistics across every region of a nation-state tell us something relevant about the economic life of the nation-state as a whole. Finally, to the extent that nation-states incorporate the sovereign functions of monetary and fiscal policy management, the determination of money supply and interest rate targeting and of taxation and fiscal expenditure policies exerts a palpable if highly disproportional impact on every inch of national macroeconomic space, but, on the other hand, the exercise of such centralized authority takes no account of the particular internal and external organization of economic activity undertaken through contained regional economies and the particular ways in which particular fiscal and monetary policies exert positive and negative effects on different parts of a national macroeconomy. Critically, the larger development of macroeconomic theory and analysis as, alternately, an effort to incorporate and formalize the unique insights of J.M. Keynes or to criticize and diverge from the Keynesian tradition, has never seriously questioned the spatial/aggregate foundations of macroeconomics in the nation-state. In this respect, MMT, as a faithful offspring of Keynesian theory, is no different.
On the contrary, from Jacobs' perspective, the very consideration of nation-states as macroeconomic units makes no logical sense. A nation-state is the object of political and cultural processes extending over a broader span of time, linking people together as citizens in a unified project that may or may not coincide with the economic relations within which the same people may participate. Often, these processes involve military conquest and consolidation of space through which a culture of bloodshed and inclusive belonging through sacrifice forge connections between citizens who might otherwise experience staunch differences in interest over the consequences of macroeconomic policy. More importantly, many nation-states are subsequently held together by military expenditures, categorized by Jacobs' among a series of "transactions of decline," fiscal policies intending to suture expansive national territories including stagnant regions without cities by taxing wealth creation in dynamic cities and transferring such wealth to economically struggling regions (Jacobs (1984), Chapter 12, "Transactions of Decline"). In these terms, Jacobs, who abandoned the US during the course of the Vietnam War for Canada in the interest of preventing her children from being drafted into military service, betrays a larger contempt for the antagonistic raisons d'être of military expenditures. Not only do such expenditures facilitate foreign wars and empire building, in turn feeding cultures of militaristic nationalism, but they drain capital from dynamic and entrepreneurial city regions to pay for populations in outlying sterile regional economies to manufacture weapons, provision, and staff military bases.
In a larger sense, fiscal policy, however it is crafted, invariably appeals, in this Jacobsean imagery, to the needs of correcting disproportionalities in national economic development both caused and structured by the existence of dynamic city regions. Large nations that contain a wide diversity of regional macroeconomies must, in this regard, undertake fiscal policies that will redistribute wealth away from cities and redirect them to less dynamic regions in order to maintain the political integrity of the nation-state, at the expense of its long term economic vitality. Such policies might include military expenditures with their particular mix of economic, political, and cultural effects, but they might simply involve the development of social welfare policies to prop up the consumption possibilities of regions that are perpetually left behind, or they may involve construction of infrastructures intended to attract economic development to abandoned regions on the premise that private investment in less favored areas can be readily crowded in with highways, railroads, and cheap electricity.
At this point, it is worth pointing out that there is something fundamentally antagonistic between the logic underlying Jacobs' approach to macroeconomics and that of the Keynesian tradition. It is not necessarily that Jacobs rejects the necessity of fiscal policy to address regional economic disproportionalities but she clearly identifies it as a critically important source for the decline of economic dynamism in city regional economies. Emphatically, this necessity is political - whatever must be done to hold the country together, even at the expense of economic dynamism, must be done. Conversely, for Keynes, especially at the time The General Theory was published, macroeconomic policy management and, in particular, an active role for the government in fiscal policy presents itself as a necessity for the preservation of democracy against global militarism and the rise of both fascism and Stalinism. For Keynes, a regulated system of free markets, with fiscal maintenance of aggregate consumption capacity and investment levels, especially where the expectations of private entrepreneurs to obtain adequate rates of return from investments are waning, is imperative to maintain the vitality of democratic governance, political and economic liberalism, and cultural openness. Jacobs and Keynes, in their respective contexts, seize on different problems in their evaluations of economic development, macroeconomic policy, and, especially, the exercise of fiscal policy by governments.
In certain ways, Jacobs advances from a position accepting the basic economic logic promulgated by Adam Smith more faithfully than Keynes. For Jacobs, if only dynamic and entrepreneurial actors in city regional economies can maintain their liberty to embark on new work, pursue the division of labor and specialization in new directions, and replace their imports, then they can continue to be economically dynamic and produce greater prosperity. Dynamism in economic development is her critical focus, and, in her view, dynamism invariably has severe and permanently destabilizing effects. This focus and the grounding of her analysis of economic dynamism in city regional economies leads her to counterpose redistributive fiscal policy against the dynamic generation of interregional inequalities and disproportionalities as dichotomous alternatives if liberal economic policies allow actors in cities to pursue unhindered development.
Critically, however, Jacobs does offer a third alternative, although she suggests that it is only a "theoretical possibility" that she, further, characterizes as a "utopian fantasy." If the regional economies contained by nation-states were allowed to "amicably" part ways, embarking upon the formation of new sovereign entities, then the sorts of radical fiscal redistributive therapies to ameliorate interregional inequalities would not be necessary. At the sacrifice of internally contiguous spaces devoid of trade barriers, the economic spaces of the nation-state could be broken up to allow struggling regional economies the freedom to achieve a threshold level of economic dynamism, separated from the destabilizing effects of existing city regional economies. In a word, Jacobs' utopian fantasy is quintessentially secessionist - the break-up of nation-states into smaller regional states, focused on the pursuit of dynamic economic development at the expense of more extensive political and cultural unities. Moreover, against the backdrop of a larger critique of the militaristic origins and nationalist ideological underpinnings of the nation-state, Jacobs' argument interjects the spirit of the Smithean vision of a world unified in mutually beneficial economic development. If the break-up of nation-states would promote more aggressive economic development and enrichment of successor regional states, previously stifled, alternately, by fiscal transactions of decline or by their fiscal dependencies on dynamic city regional economies, then, theoretically, improvements in the consumption possibilities and quality of life for the populations of successor states might justify the overthrow of the nation-states.
I want to consider the details of this utopian fantasy of secession a little further. Under unified national macroeconomies, fiscal policy, to a significant extent, represents an effort to mitigate interregional inequalities generated by divergent regional sources of economic strength within the nation-state. If the principal export industries within the macroeconomy are rural agricultural, and extractive in nature and, hence, for Jacobs' purposes, the national macroeconomy largely serves a supply role to foreign city regional economies, then fiscal policy might serve to promote the fledgling industries of its domestic, nascent city regional economies by levying tariff protection on foreign imports. Conversely, in national macroeconomies where one or more city regional economies constitute the primary sources of economic dynamism and generation of exports, the standard imagery of fiscal policies enforcing transactions of decline prevails. The latter imagery characterizes Jacobs' consideration of the US macroeconomy and federal fiscal policy initiatives, especially relative to military expenditures and the subsidization of economic developmental policies in foregone regions, like the New Deal electrification of Appalachia. Again, in this respect, Jacobs' position on fiscal policy remains focused on the role of city regional economies as the drivers of economic development. Anything that deprives cities of resources to obtain substantial quantities of imports as grist for the mill of import replacement will impede economic development. On the other hand, as in the case of tariff protection, it is conceivable for fiscal policy to support the development of city regional economies.
Jacobs' consideration of monetary policy is quite extensive and relates to the issue of feedback effects on city regional economies. In this respect, fiscal policy appears, in part, as an ameliorative for positive and negative feedback effects arising from monetary policy and, in particular, from fluctuations in external exchange rates. In a unified national macroeconomy with a single currency of exchange, the value of the currency will reflect, in part, the strength of the nation's exports in external exchange, evident in exchange rates with the currencies of trading partners. In national macroeconomies where rural agricultural and extractive primary goods are the principal exports, the strength of such exports may have positive effects on external exchange rates, enabling nascent city regional economies to accumulate favorably priced imports. However, the overall weakness of city regional institutions in such macroeconomies may impede the capacity of city regions to undertake robust import replacement. As with fiscal policy, the effects of exchange rate fluctuations in a national macroeconomy depends on the source of the fluctuations.
For national macroeconomies in which appreciation of exchange rates is driven by the strength of exports from city regional industries, within the terms of Jacobs' theorization, city regional economic development will be broadly supported through the accumulation of replaceable imports in a context where imports are already being actively replaced. Conversely, for other types of regional economies, either dependent on domestic city regional economies, on foreign city regional economies, or otherwise unconnected regions, the effects of exchange rate fluctuations may be very different. In particular, for regions that export goods and services in broadly competitive international markets, exchange rate appreciation may result in substantial deterioration of regions' competitive positions. In general, the effects of exchange rate fluctuations across the space of a national macroeconomy will vary substantially. The strengthening of a national currency in international exchange may bolster particular regional economies, or it may cause the collapse of export sectors in other regions. The weakening of a national currency, by contrast, may bolster exports in particular regions, especially if international markets are strongly competitive, but such a diminution of the strength of currencies must diminish the capacity of city regional economies to accumulate replaceable imports and, thus, diminish the pace of economic development in city regional economies.
If we pursue the theme of Jacobs' utopian secessionist fantasy with regard to fiscal policy and monetary union, the full break-up of a national macroeconomy would require a break-up of fiscal and monetary authorities and, as such, a break-up of the unified monetary zone. This represents something different than the continuity of free trade within a contiguous economic space that may include multiple currency zones. The free trade bloc constituted by the United States, Canada, and Mexico, for example, incorporates broad reductions in tariff barriers between the three component economies even as each economy maintains its own national currency. If, on the other hand, one of these component economies undertook a break-up of the sort envisioned by Jacobs, then, presumably, it would incorporate the introduction of new regional currencies in each of the new sovereignties introduced by the break-up. Each of these currencies, given liberal management of exchange rates, would float in exchange with other regional currencies and with currencies outside of the former national macroeconomy. As such, the feedback effects of monetary policy in each of the new sovereignties would be limited to the privileged space of each new sovereignty. By presumption, strongly dynamic city regional economies might enjoy an appreciation in the value of their new regional currencies, feeding aggressive import replacement. Conversely, other, weaker regional economies exporting goods and services within more competitive international or interregional markets, might see the values of the new currencies fall, giving a boost to their capacity to compete with other regions.
The possibility of breaking-up unified monetary zones brings us back to the insight offered in my first post on MMT that in order for MMT's theories on fiscally-driven macroeconomic policy management to work effectively and efficiently we must have proportionally scaled fiscal and monetary authorities. As suggested there, this is a pertinent insight for the Euro-zone economies, who might someday wake up to the reality that a unified monetary zone was a terrible idea. On the other hand, in the context of Jacobs' larger theory of development in city regional economies and on the economic mismatches of national macroeconomies, there is a more general potential to integrate MMT arguments into an economic program shaped, in turn, by the Jacobsean secession fantasy. If, for example, one of the major national economies of the North American free-trade area was to break-up into a set of new sovereignties, each with its own sovereign currency, then each new sovereignty would empower itself to borrow in its own currency, on the strength of the economy's internal productivity, its factor resource base (i.e. its particular factor utilization thresholds), its economic dynamism (i.e. in Jacobs' view, its containment of a dynamic city regional economy), the external demand for its exports (including demand from regions included within the no longer existing national macroeconomy), and the degree of trust conferred on its new currency by both domestic and foreign users of the currency. As such, given a relatively strong position in internal productivity, factor resources, and external demand for exports, such an economy might have a significant available threshold to undertake a fiscally-driven regime of macroeconomic management, counteracting cyclical dynamics in private investment in order cushion the wellbeing of consumers against economic downturns. It might, additionally, maintain some leeway to undertake redistributive policies to counteract inequalities generated by the course of economic development.
Approaching these possibilities from a Jacobsean perspective, there is always a danger that active Keynesian/MMT-style fiscal interventions in macroeconomic development might counteract the dynamic potential for development in city regional economies. If, by their very nature, city regions create and nurture inequalities to be corrected slowly, over time by the functioning of free markets, then aggressive fiscal policy remedies, especially redistributive initiatives, might hinder the capacity of entrepreneurs in city regions to continue to innovate and transform production and market engagement of the regional economy over time. In this sense, there is a built-in libertarian bias in Jacobs' theories on macroeconomic policy, reflective, to some degree, on a quasi-Austrian (e.g. Schumpeterian) approach to development. In this regard, it is worth advancing the observation that Jacobs' ideas are replete with possibilities if not wholly unproblematic. Somewhere at the intersection of Keynesian thinking and broadly alternative streams of thought, not only those of Jacobs but of numerous other theorists, a pathway may exist out of multifarious problems of economic, political, and cultural life in the present world.
For my purposes here, Jacobs' theories offer the intriguing possibility of jettisoning the nation-state as a relevant spatial scale for understanding macroeconomics and linking the everyday actions of entrepreneurs, investors, workers, and consumers to economic space. They contribute, in my view, to a broader conversation on how to approach the resurgence of militant nationalism and degradation of democratic governance globally and, perhaps less clearly, how to remedy the growth of inequalities in income, consumption, and potentials for economic growth and development. Emphatically, to the extent that theories hold the potential to transform the way the world is seen in order to transform the way it exist, perhaps it is time for economics, as a discipline, to call out the nation-state as an anachronism and a hindrance to further human development, in both economic and ecological terms. For the sorts of progressives, both in academic and political settings, who peddle the ideas of MMT, moreover, it is worth asking how we can reshape the scales of political governance to restore the vitality of democratic governance as a basis for approaching all of the relevant concerns to which policy makers might address fiscal remedies.
