Warren Mosler and Philip Pilkington are two economists who dare to think beyond the shackles of Rogoff-style austerity economics. They belong to the modern money-theory school, which starts by looking at how money actually works, rather than at how it should work. On this basis, they have made a powerful case that if we just get back to that basic problem of money creation, we may discover that none of this is ever necessary to begin with.
In conjunction with the Levy Institute at Bard College, they proposed an ingenious, yet elegant solution to the eurobond crisis. Why not simply add a bit of legal language to, say, Irish bonds, declaring that, in the event of default, those bonds could themselves be used to pay Irish taxes? Investors would be reassured the bonds would remain “money good” even in the worst of crises — since even if they were not doing business in Ireland, and did not have to pay Irish taxes, it would be easy enough to sell them at a slight discount to someone who does. Once potential investors understood the new arrangement, interest rates would fall from between 4 and 5 percent to a manageable 1 percent and 2 percent, and the cycle of austerity would be broken.
Why has this plan not been adopted? When it was proposed in the Irish parliament in May last year, Irish Minister of Finance Michael Noonan rejected the plan on completely arbitrary grounds (he claimed it would mean treating some bond-holders differently than others, and ignored those who pointed out existing bonds could easily be given the same legal status, or swapped for tax-backed bonds).
It is not even clear that anyone would even be hurt by such a plan. Investors would be happy. Citizens would see quick relief from cuts. There would be no need for further bailouts. It might not work as well in countries such as Greece, where tax collection is less reliable, and it might not entirely eliminate the crisis.
However, it would almost certainly have major salutary effects. It is hard to see any reason to reject it other than sheer incredulity at the thought that the great moral drama of modern times might in fact be nothing more than the product of bad theory and faulty data series.
David Graeber is the author of The Democracy Project.