Having just watched Insiders, I’m even more convinced that we have to change the conversation about the economy. Bill Shorten did a good job of making the case that it doesn’t matter who leads the Liberal Party – they all support the same austerity policies. But he had a bit more difficulty dealing with Barry Cassidy’s (stupid) question about how would Labor deal with the deficit. Bill got round it well enough – by not mentioning the D word. But this is precisely why we have to change the conversation. The deficit versus surplus debate doesn’t reflect some underlying economic truth. It is a political construct, which arises from a particular view of how the economy works. It is wrong, and we need to change it.
The debt and deficit narrative suits right wing, small government proponents. They want to limit government activity, and leave everything up to the market. So of course they want to limit government spending, and give tax breaks to the rich. So they tell us that wealth trickles down, that is, giving more wealth to the already wealthy will enable them to create more jobs.
This is of course nonsense, as an increasing number of mainstream economists acknowledge. (What the rich actually create is tax havens.) Austerity doesn’t work. The problem with western economies is now deflation – not enough demand to generate production and jobs. We need the opposite policies. Less inequality of wealth would mean more people able to buy goods and services, and more jobs for people supplying them. Jobs on government projects are just as real as jobs on private projects in terms of the demand they create. And as Wayne Swan wrote recently about inequality, ‘Essential to combating its rise is the recognition that nurses, builders, teachers, labourers, hairdressers, shop assistants and waiters are as much generators of growth as bankers, investors, businesses and multinational companies.’
So why do we buy the debt and deficit narrative? The problem is the way we, the general public – and apparently political commentators like Barry Cassidy – have been taught to think about the federal budget. To make the mysteries of macro and micro economics, fiscal and monetary policy clear to us, politicians from both sides customarily use the analogy of the household budget to frame discussion of the federal budget. You can’t spend more than you earn. You can’t just put it on the credit card. We’re putting a burden of debt on our children if we exceed our income now. I heard Abbott say just the other day ‘we’re living beyond our means.’ And so Shorten is asked not ‘what policies does Australia need to become a fairer and more productive society’ but ‘how will you deal with the deficit?’ The household budget is a clever and pervasive analogy. It doesn’t APPEAR to have an ideological bias. But it does. It plays perfectly into the debt and deficit/large versus small government narrative of neo-liberalism (or market capitalism, or whatever you want to call it) – and it must be challenged.
Fortunately it is being challenged.
During the GFC, the Labor government took the budget into deficit to stimulate the private sector. And it worked. Australia was largely spared the full impact of the Crisis, and did not have its economy decimated by the sort of austerity slashing and burning of the public sector that is still crippling European economies. This was described as neo-Keynesian economic policy, based on the idea that it was OK to even out booms and slumps through government stimulus.
This is fine as far as it goes, but it still only offers a minor corrective to the idea that the surplus/deficit debate is at the heart of good economic management.
Now a few economists are going further. I’m certainly no economist, but their critique makes sense to me. It has the horrible name of Modern Monetary Theory. What it basically says is that governments with the power to issue their own currency are always solvent, because they can always – shock horror – ‘print money’, though this is done electronically these days through the issue of government bonds (aka quantitative easing). It therefore makes no sense to say that taxation revenue ‘funds’ government spending, and that therefore we can or cannot afford proper welfare provision or whatever. Abbott’s ‘living beyond our means’ only makes sense in light of the misleading analogy with the household budget, where our books have to balance. A government which has monetary sovereignty (ie can print its own money – unlike Greece) does not have to balance its books. In this theory, the balance is between government surplus and private debt: a government surplus can only be built on increased private debt – as happened during the years Peter Costello was treasurer – and vice versa. The level of government spending is in practice constrained by the level of inflation – too much money chasing too few goods. So what needs to happen is that government spending must be in areas that increase the productivity of the economy. To quote the Wikipedia page on MMT, ‘the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.’ And at the moment, the mantra of achieving a surplus by cutting government expenditure is built – though they don’t say so – on maintaining a relatively high level of unemployment. This is a conscious choice made by the Abbott government.
(Here you might say ‘but they aren’t able to achieve a surplus’, and you’d be right. Other factors like falling commodity prices and low business confidence have seen to that. They could still achieve a surplus if they cut spending – and raised unemployment –but this would be even more deflationary, to say nothing of politically suicidal.)
This means that a government could – if it so chooses – promote near full employment through government spending. This increases the tax base, and reduces welfare costs. It also makes the society more equal and inclusive. The constraints are political, not economic.
And the reason these political constraints bite so hard is that we all think that the federal budget is like our household budget. I know it’s fun to make political capital out of Hockey’s ‘promise’ to return the budget to surplus when he can’t, but much better to avoid all the hand-wringing over surplus and deficit altogether. Labor is caught in the same narrative. They need to unlearn this budget lesson – and quickly.
In this YouTube, Stephen Hail – who unlike me is an economist – explains it far better than I can. It’s quite long, but really worth watching. He also references Bill Mitchell, Australia’s leading MM Theorist, and professor of economics at the University of Newcastle. Here is a link to his interesting and challenging blog. And this is A Kindergarten Guide to Modern Monetary Theory. Please spread the word.