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It’s the Economy, but who actually understands it?

If you can believe the current polling, it tells us that most people rate the economy as one of the top three issues in this election. They rate it highly but in reality, they know very little about it.

The average voter understands the economy in the narrow corridor of his/her own circumstances; the mortgage, household bills, savings, credit cards and the like. They also know we borrow as a nation, but few would know how it is done.

But ask them how much the nation owes or what is net debt or do they understand the principle of the three sectoral balances and all you get is a blank stare. Ask them to explain what the automatic stabilisers are in an economy and you might as well whistle Dixie.

They have been clouted from ear to ear by the conservative side who have railed against Labor’s track record on economic management, yet the Coalition has performed abysmally in that area, themselves. Such is the power of a prejudiced media that most people cannot be convinced Labor do it better economically.

The greater reality, however, is that both major parties have got it wrong. Really wrong!

Economics Professor Bill Mitchell of the University of Newcastle and founder of the Centre for Full Employment And Equity (CofFEE) travelled to Spain on a lecture tour recently and while there produced a 15 minute video that ought to be mandatory viewing for politicians and voters alike.

The questions asked of him in the interview are in Spanish, but his answers are so clear and precise, you don’t need an interpreter. He explains in simple, easy to understand language why deficit spending is necessary and good for our economy.

The video is presented here. It needs no further introduction other than to recommend that all who watch it, share it with those who, you know are ignorant of the power of a currency-issuing government.

It might be asking too much, but perhaps those who watch it and rate the economy as an important election issue will have learned something and have reason to query how our politicians could be so naive as to think spending cuts lead to prosperity.

They might come to understand that the strength of our economy lies with people working and producing goods and services; that underutilised resources are a drag on our capacity to lift living standards.

Then again, they may not.

 

 

 

31 comments

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  1. Kaye Lee

    Greg Jericho wrote a good article comparing economic performance of the two majors in government.

    “Research by the Australia Institute reveals that across a broad range of economic measures, the Abbott/Turnbull government has performed the worst of any Australian government since Menzies took power in 1949. ”

    They keep harking back to Howard’s surpluses but…..

    “Howard’s average growth was just 0.85% better than the average 2.85% growth observed throughout the OECD. By contrast Rudd’s GDP growth was 2.9% better than the OECD which saw GDP fall by 0.7% during Rudd’s period in office:”

    https://www.theguardian.com/business/grogonomics/2016/jun/14/new-research-abbott-and-turnbull-the-worst-economic-managers-since-menzies

  2. Jane Power

    Thanks! Great post, we need more of this and more people to understand and especially the journos;)

  3. Shelley

    Brilliant! Now if everyone can watch this and hold our politicians to account, that’d be great. I was at a candidate forum the other night and several of them told us that the country is broke, can’t afford pensions, medicare, education, refugees etc. If you don’t understand MMT, you shouldn’t be able to stand for election! Thanks for posting

  4. Kade

    the economy exists on transactions and the flow of money, yet CEO’s and high income earners are hoarding their wealth and essentially stifling the economy. And what of ‘efficiency’, how does this create jobs and spending? When manufacturers of goods mechanize production in the aim of efficiency and profits it undermines the very nature of “people working and producing goods”. Machines and technology can’t go out into the world and spend income. Corporations that operate in this way don’t create jobs they annihilate them.

  5. Kaye Lee

    We are giving tax cuts to banks as regional branches everywhere close and ATMs, credit cards and online banking take over. We are giving tax cuts to the big supermarkets as they move to self service checkouts and collude to undercut prices to farmers. We are giving tax cuts to the mining companies as they lay off thousands because they are moving to production phase and delaying/abandoning new projects.

    I own a small business. A tax cut to me will not make me employ someone. More customers with some disposable income might.

  6. sandrasearle

    John Kelly, thank you for the video explaining MMT by Prof. Bill Mitchell. You have done quite a few articles trying to explain just how MMT works and slowly but surely I have begun to understand that WE, as a Sovereign Nation have the ability to print our own money to spend as we please on good forward looking policies as long as the deficit is a responsibly controlled one. It does not matter how long the deficit lasts as long as those policies i.e. infrastructure, education, health, housing etc provide the people of this country with employment. When there is full time employment it means that people will be able to spend thus driving demand for goods and services, which then creates more employment and a source of taxation revenue.
    Does the LNP really think that they are the better money managers – I don’t think so as they still think that ‘trickle down’ economics from the Reagan/Thatcher era is the one that works.
    There is a feeling lately though, that the economic brains-trusts of the ALP are beginning to think that the MMT economic way of running a controlled deficit is a better way to ensure the positive policies they are espousing to can and will benefit this great nation of ours for the future of the generations to come.

  7. Freethinker

    Thank you John for the article and video, You can bet that I will share it.
    Just wonder John how many economists in our Universities are sharing this views?
    Cannot be many looking at the way that economists commenting about this issue and politics in Australia.
    I wonder if Professor Bill Mitchell have a blog where I can asking his views about economy indicators.

  8. Chris Heale

    Thanks for the article. We need to send the politicians over to Japan to really get this spending idea out there.

  9. Jack Russell

    Testing for ability and suitability is overwhelmingly prevalent everywhere, in all societies.

    Everyone is subject to either acceptance or rejection based on testing in one form or another – except for political candidature. No wonder politics is such global shit hole of collective corruption and incompetence!

    Yes. Test them. On several levels. Beginning with psychlogical, ethical, critical thinking, and progressing to planning, management, economics, etc.

    It is regarded as the top job so, therefore, only top marks are acceptable – only those in the 99-100 percentiles may serve – and may only continue to serve for as long their performance remains within those percentiles.

    In my opinion…

  10. Kaye Lee

    Even for people who struggle with MMT, the logic is obvious. If you invest in things that bring a greater return, the economy will grow. If you lift people out of poverty and provide a well-educated, healthy, skilled workforce, childcare, and the necessary infrastructure in a stable political environment, business will prosper. If people are employed, we reap social and economic benefits and their increased disposable income will boost demand and therefore jobs.

    You don’t necessarily have to understand Bill’s sectoral balance – just look at what happens to private debt when public debt (governmnet spending) goes down – private debt skyrockets.

    For those who still are struggling to accept that we can afford to run deficits, a couple of points…

    We have about $120 billion stashed in the Future Fund. Our superannuation funds have kazillions which can be invested in domestic infrastructure should we so choose. As John points out, we can’t actually go broke but even if you don’t believe him, we are nowhere NEAR going broke. Governments CHOOSE to borrow, the reasons why have caused very long conversations on other threads – basically it is a construct to appease investors.

    BHP, in its long and very profitable history, has NEVER been out of debt. As anyone in business knows, debt works for you if you invest in the right things.

    Unlike households who must plan for retirement, the government is never going to stop earning – there is no need to get out of debt provided it is spent wisely instead of on non-productivity enhancing things like $400 billion on war toys.

  11. Chris Heale

    The Mugabe regime solved the problem of not enough inflationary stimulus by printing more money!

  12. Kaye Lee

    Provided there is unused productive capacity in the economy, which there is with the underemployment rate, and you are are sensible on how you spend it, (Rolls Royces for everyone wouldn’t be a good idea), then there is no problem with “printing more money” though it would probably be achieved by electonically crediting an account at the RBA.

  13. Freethinker

    Thank you Kaye for the link, I appreciate it.

  14. totaram

    Thanks again, John. Great job.

    Jane Power, and Shelley.
    If enough people start absorbing these ideas and start asking questions to our politicians, they might finally stop believing this nonsense that we don’t have the money to afford health and education and come to a better understanding of macroeconomics for Australia.

    Currently all political parties all held hostage by these neo-liberal myths, and the coalition always win the economic argument because this is THEIR ideology. It’s a bit like trying to push the theory of the big-bang but falling back on Genesis in the Bible every time.

    Unfortunately, it is too easy to conflate the federal govt and a household or a company as if they are similar and the same ideas apply. This causes huge confusion. Worse still, we have countries in the Eurozone, which have given up their sovereign currencies and now run into trouble. They are wheeled out as examples of the “debt and deficit disaster” that will befall Australia if we don’t cut govt. spending. Australia is not like them at all.

    Please watch the entire sequence of videos again and again. And if you get confused, go to the blog and you can even buy Bill Mitchell’s text-book, which is available cheaply for Kindle.

  15. totaram

    Chris Heale: All Australian money is “printed”- that is, created ex nihilo. These days “key strokes” are used to create the money in someone’s account. Zimbabwe is a peculiar case of economic collapse because of Mugabe’s handing over all farms to his supporters who didn’t know how to run them efficiently. By the way, where is Zimbabwe today? Has it disappeared?

    You can read “Zimbabwe for hyperventilators 101” here:

    http://bilbo.economicoutlook.net/blog/?p=3773

    Printing money does not cause inflation by itself. Spending money can cause inflation and it doesn’t have to be govt. spending. Look at all the housing bubbles in Japan, the USA and Ireland. They were all caused by private spending. The US housing collapse caused the GFC. So what is your point? Nothing.

    Obviously you don’t understand macro-economics at all. Do you know or have you heard of the three sector financial identity? Start with that. It might explain a few things to you. Such as the fact that the private sector in Australia cannot pay down its enormous debt (around 150% of GDP) unless the govt runs deficits. The govt can run these deficits easily, because even if it “borrows” its “debt” is barely 40% of GDP. Japanese govt debt is currently around 200% of GDP and Japan hasn’t slipped into the sea. Bond yields there are “negative”!

    I’m glad you didn’t mention the Weimar Republic and Greece – the other favourite examples of the “deficit hawks”

  16. Bacchus

    Thanks for this John.

    Just recently I took the opportunity to read Warren Mosler’s ‘The 7 Deadly Innocent Frauds of Economic Policy‘. It is available to download from his site (http://moslereconomics.com/) as a .pdf file.

    For those who haven’t read it, it is a very easy read (at least Part I is) and explains MMT concepts very well.

    Warren Mosler is an economist who has worked in the banks and on Wall St, trading bonds – he’s a genuine insider with practical knowledge of how the system really works.

    Highly recommended!

  17. Chris Heale

    Totaram- “The BoJ is soaking up the entire budget deficit under Governor Haruhiko Kuroda as he pursues quantitative easing a l’outrance.”

  18. totaram

    Chris Heale: They have been saying this for 20 years and it didn’t happen. Check back using Google When will they agree that they are talking rubbish? I didn’t read the article. I don’t need to. The telegraph indeed! Rupert Murdoch at his best is it? If you think some article in the MSM actually tells you something useful about macro-economics, you are seriously deluded. Read the text-books first. Then you can read this, which is written by someone who holds a professorial position in economics at a University (Bill Mitchell)

    “Japan – another week of humiliation for mainstream macroeconomics” March 3 2016.
    http://bilbo.economicoutlook.net/blog/?p=33094

    All these things claimed in that telegraph article, have been dealt with and debunked. If you think you know better, that is fine. You are like the AGW deniers who keep posting links to long-debunked articles by some quack “scientist”, who can show it is all alarmist nonsense. Well, you have the right to believe what you like. Facts and logic are hard taskmasters.

  19. totaram

    Chris Heale: Just what is your point? Just putting out links to newspaper articles or “quotes” from some unknown source don’t mean anything. State your point. What do you wish to assert?

  20. Chris Heale

    Totaram- The US housing collapse was caused by the US government leaning on the Banks to encourage them to loan money to low income African Americans so that they could improve their living standards. These sub prime loans were then bundles up and used as Investment vehicles for many unwary overseas investors including some Australian councils. I would like to see the US government take the US government to court and punish themselves with a big fine. Hopefully not paid by the US taxpayer!

  21. totaram

    Chris Heale: The US govt. should sue the banks who “bundled up the loans” and sold them to unwary investors as being of AAA rating, when they were obviously not so secure. So much for your wonderful credit rating agencies who are quite corrupt, and the concerned banks. These banks were then also betting (using derivatives) that the mortgages would default. Thus they stood to make a profit no matter what happened. So far no one in those banks, or ratings agencies has even been indicted for wrong-doing. Not going to happen either. The banks were bailed out, by the govt. (using key strokes, not taxpayer funds – ask Bernanke) and continue on their merry way.

    The point of all this, that it is the financial service industries (in particular banks) and the rich 1% who are to blame for the problems and they then orchestrate all this concern about govt. deficits, which can actually lead to a decent living for ordinary people.

  22. Chris Heale

    I also assert that the Japanese Government debt of 250% of GDP will not be paid for by the current Japanese retirees earning negative interest rates forever. Eventually the Japanese government will have to look abroad for fresh investors who will not accept negative interest rates from a A+ rated Government. The Japanese government is paying roughly 50% of its revenue in debt repayments. How much will this be when hard headed overseas investors are sought to replace placid Japanese retirees?

  23. Athena

    “The Mugabe regime solved the problem of not enough inflationary stimulus by printing more money!”

    Chris Heale, Mugabe had already taken land from the farmers and given it to his mates, who knew nothing about farming. So when he started printing money, supply was unable to keep up with demand and that resulted in inflation.

    Japan has been running a huge deficit for many years without any problems. Where they are starting to run into trouble is by diverting labour away from supplying goods and services and into preparing for the 2020 Olympic Games. Japan has allocated a fortune to repairing the damage caused by the Fukushima nuclear accident and most of the money hasn’t been touched due to a lack of available labour.

  24. wam

    economy is a fright word and as meaningless as bullying. At the end of every news are some large numbers of dax hanging with tiny numbers down or up. Not one on my facebook has any idea what they mean or why they are quoted. during gillard I watched currency to give me some idea and I bought some american and kiwi for fun and up to 25% and 35% profit. i did try to understand that gillard hovered about 20% debt to america/poms 100% and japan 200% ie 5/10 times worse. This prompted me to ask if the rabbott thought gillard was disastrous what did he think of the poms. But such easy comparisons were obviously wrong and labor took the bashing and still do not lay claim to the AAA that empty will trash..

  25. paul walter

    I think the Kaye Lee comment, 4. 09 Pretty much got to the gist and that rests in what “economics” means for Goldman Sachs, say against most of the rest of us.

    Kaye Lee sees it as a potential whose realisation would make for a qualitative change in life for all, obviating the need for excessive defence spending, say. For Monsanto, it is about skimming the economy for the gain of a few regardless of harm done, which is why “reform” in their understanding always deals with extracting more value from workers and customers seen as commodities and conveniences.

  26. FightClubber

    Didn’t Dick Cheney state that deficits don’t matter?

    Funny how conservatives flip flop like that. Fiscal hawks one minute and profligate the next. Depends on where the money ends up I suppose.

  27. totaram

    Chris Heale: ” How much will this be when hard headed overseas investors are sought to replace placid Japanese retirees?”

    You haven’t read my links. That is exactly what “they” said 20 years ago, and have been saying every year since – a spectacular failure of predictions but, hey never mind. Just keep repeating the prediction. It’s bound to come true one day (NOT). Even a stopped clock is correct once in 24 hours.

  28. Pingback: It’s the Economy, but who actually understands it? | THE VIEW FROM MY GARDEN

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