Federal Deficits: Debunking Government Myths
By Denis Hay
Introduction
The fear of federal deficits is a common narrative used by politicians to justify austerity measures and cuts to social services. However, this fear is often based on myths and misunderstandings. Stephanie Kelton’s book, “The Deficit Myth,” provides a comprehensive analysis of these misconceptions, revealing how a proper understanding of government spending can lead to more effective and compassionate public policy.
Understanding the Deficit Myth
Defining the Deficit Myth
The deficit myth is the belief that federal government budgets work like household budgets, needing to balance income (taxes) and expenses (spending). Stephanie Kelton argues that this analogy is incorrect for countries with monetary sovereignty, such as Australia. These countries can create money to fund their spending, meaning they are not constrained by tax revenues in the same way households are.
Historical Context
The fear of deficits has not always been prevalent. After World War II, many countries used deficit spending to rebuild their economies. However, in recent decades, neoliberal policies have emphasized the need for balanced budgets and austerity measures. This shift has led to a reduction in public investment and social services, often harming economic stability and growth.
Common Myths About Federal Deficits
Myth 1: Taxes Fund Government Spending
The belief that taxes directly fund government spending is widespread. Politicians argue that higher taxes are necessary to fund public services, leading to resistance against tax increases and public spending. However, in countries with monetary sovereignty, taxes serve other purposes. They help manage inflation and redistribute wealth but are not the primary source of government funds. The government can create money to fund its spending, making the direct link between taxes and spending a myth.
Myth 2: Borrowing Burdens Future Generations
Another common myth is that government borrowing today will place an unbearable debt burden on future generations. This belief leads to resistance against borrowing for public investment and social programs. However, government borrowing does not work like household debt. For a sovereign currency issuer, borrowing is a tool for managing the economy, not a burden that needs to be repaid in the same way personal loans are. Future generations will inherit the benefits of public investments made today, such as improved infrastructure and social services.
Myth 3: Deficits Are Harmful and Unsustainable
Many believe that deficits lead to economic instability and should be avoided. This belief drives austerity measures and cuts to essential services. However, deficits can be beneficial, especially when used to fund public investments that stimulate economic growth. Stephanie Kelton argues that deficits are not inherently bad and can be a tool for economic stability. She highlights examples where deficit spending has led to positive outcomes, such as the New Deal in the United States and post-war reconstruction in Europe.
Political Manipulation of Deficit Fears
Spin and Misinformation
Politicians often use deficit fears to influence public opinion and policy. By framing deficits as dangerous, they justify cuts to social programs and avoid raising taxes on the wealthy. This manipulation has real consequences. Essential services like healthcare, education, and infrastructure suffer from underfunding due to unnecessary deficit fears.
Impact on Social Services
The manipulation of deficit fears has a significant impact on social services. Politicians argue that deficits must be controlled to avoid economic disaster, leading to cuts in public spending. This results in underfunded healthcare, education, and infrastructure, harming the most vulnerable in society. By understanding the true nature of deficits, we can advocate for policies that prioritize public well-being over unnecessary austerity.
The Reality of Federal Deficits
Government Spending Mechanics
In a country with monetary sovereignty, the government can create money to fund its spending. This ability allows for greater flexibility in addressing economic needs without relying solely on tax revenues. Understanding this concept is crucial for debunking the myths about deficits. Government spending does not depend on tax revenues, and deficits do not pose the same risks as household debt.
Economic Benefits of Deficits
Deficits can be beneficial for the economy. They allow for investments in public services, infrastructure, and social programs that stimulate economic growth and improve quality of life. Deficits can also help manage economic downturns by providing necessary funds for public investment. By understanding the benefits of deficits, we can advocate for policies that prioritize public well-being over unnecessary austerity and dispel the “deficit myth“.
Case Studies and Real-World Examples
Successful Use of Deficits
Countries like Japan and the United States have effectively used deficit spending to manage their economies. Japan has maintained high levels of public debt without experiencing economic collapse. The United States used deficit spending during the New Deal to recover from the Great Depression and during World War II to fund the war effort. These examples show that deficits are not inherently bad and can be a tool for economic stability.
Australia’s Current Situation
In Australia, deficit fears have led to underfunding in crucial areas. By understanding and dispelling these myths, Australia can better use its monetary sovereignty to improve public services and economic health. Australia’s current approach to deficits has led to cuts in social services and public investment, harming the most vulnerable in society. By understanding the true nature of deficits, we can advocate for policies that prioritize public well-being over unnecessary austerity.
Conclusion
Summary of Key Points
The myths surrounding federal deficits are powerful but misguided. Understanding the truth about government spending can lead to more informed public policy and a better quality of life for all Australians. Deficits are not inherently bad and can be a tool for economic stability. By understanding the true nature of deficits, we can advocate for policies that prioritize public well-being over unnecessary austerity.
Call to Action
It’s time to question the narratives about federal deficits and advocate for policies that prioritize public well-being over unnecessary austerity. Share this article to spread awareness and join the conversation on how Australia can use its monetary sovereignty for good.
Thought-Provoking Question
How might our understanding of public finance change if we dispelled the myths about federal deficits?
Social Sharing
Share this article with your contacts and on social media to help debunk the deficit myths and promote a more informed and compassionate political system.
By dispelling the myths about federal deficits, we can move towards a more compassionate and ethical political system that prioritizes public well-being. Understanding the true nature of deficits and government spending is crucial for creating a more just and fair society.
References:
The Australian Institute: Modern Monetary Theory
This article was originally published on Social Justice Australia
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Steve Davis
Return to home pageBeen on the phone to Jim Chalmers Denis? Or is he constrained by caucus solidarity?The sooner Labor tip the neoliberal KoolAid down the sink,the sooner we’ll make real progress..of course, this requires courage,something that has been in short supply so far in this government.
Good response Harry,
Austerity budgets reduce the capacity for the poorest to purchase the basic needs of life, so austerity budgets appear favour the wealthy but actually undermine the larger economy.
Looking at the various ways spending is cut, social services, health care and other support payments, cruelly undermine the most vulnerable and deny employment opportunities. Ah, but we have to have a pool of unemployed people to keep wages down and profits up (don’t we?)
Excellent Denis, excellent.
As Prof. Clara Mattei points out, austerity is not just a tool to protect the wealthy, it paves the way to fascism when people look for a way out of their suffering.
Good response Harry,
Austerity budgets reduce the capacity for the poorest to purchase the basic needs of life, so austerity budgets appear favour the wealthy but actually undermine the larger economy.
Looking at the various ways spending is cut, social services, health care and other support payments, cruelly undermine the most vulnerable and deny employment opportunities. Ah, but we have to have a pool of unemployed people to keep wages down and profits up (don’t we?)
And we all know how good conservatives are at economic management. Going back to the 1960’s, Menzies raided the pension fund to achieve a balanced budget, hence our pensions are paid from general revenue. Good move Libs, you’ve been liars and crooks like forever.
Neolib koolaid is the fiction of trickle down. The ALP is only interested in following donor/owner (US-UK) instructions & like unions only care about self. The critical party here is the Greens. Bandt almost got MMT a couple of years ago then ran away.
We are being told that spending is fuelling inflation and that the RBA may need to increase interest rates again to ‘dampen down spending’. Yet we are also told that the spending we are seeking to dampen down is driven by increases in four main areas all of which are beyond the control of the consumer :
1.imported fuel oil costs (petrol and diesel)
2.international sea-freight costs which have increased by 300% since the middle east conflict started.
3.Increases in food and consumer costs driven by profiteering but also 1 and 2 above.
4.Rents and housing costs driven by thirteen interest rate increases since May 2022 – from an all time low cash rate of .10% to the current 4.35%.
So, how can the average punter curb his or her spending to ward off further rate increases when these pressures are outside the control of the consumer ?
It’s simple Terrence. We starve. Think of it as an economically mandated weight-loss program.
I shall offer myself up as lone dissenter.
I AM OVER MMT!
I’m not going to provide a point-for-point deconstruction of MMT – I simply haven’t got the time or the crayons! If you’re looking for a revolutionary’s critique, maybe start with MMT: A Bankrupt Theory for a Bankrupt Capitalism. Disclaimer: I haven’t actually read it myself – but I’m sure it raises a few critical points that even the most fervent advocates of MMT might want to consider.
From an anarchist’s point of view – are you reading this, Steve? – I have to point out that any argument, about anything, not just economics, that reserves for or ascribes to the authorities of the state powers, rights and capabilities not accessible to the people themselves, starts off on very shaky ground.
Hence, to insist that government budgets are substantially different from anyone else’s budget is sorely mistaken. State authorities make demands on the productive capacities of the jurisdiction under their control, same like anyone else. State budgets are usually the largest budget in a jurisdiction, and usually by a large margin, and therefore have much greater inertia – meaning that the consequences of bad (or good) management take a lot longer to show up. But when they do, they tend to show up in a big way!
From a Marxist point of view, MMT is nothing more than a particularly insidious version of commodity fetishism, i.e. the superstitious ascription of economic agency to money.
If you really believe in MMT, you might also want to consider the more esoteric assertions of the Kabbalah, or perhaps manifesting.
Please, guys. Drop it!
“From a Marxist point of view, MMT is nothing more than a particularly insidious version of commodity fetishism, i.e. the superstitious ascription of economic agency to money.”
Arnd, I know too little about economics to comment, other than to say that from the little I’ve read about MMT, I got the impression that it’s the opposite of what you say. That it’s in fact a repudiation of the financial framework that keeps the masses living at just about the poverty line.
As I see it, if the power-brokers are not in favour, then I am.
Can you explain why it’s a version of commodity fetishism? Thanks.
Hi Steve, this is going to be a long post.
There’s a Wikipedia site explaining Commodity fetishism … – but it makes even my head swim.
Going back to how they explained conventional economics, back in civics lessons in junior high school in the 70s, there’s three factors of production: natural resources, capital, and labour.
According to Marx, that is wrong, and there’s only one factor of production: human labour. (It’s the Labour theory of value, and Marx didn’t actually invent it, but borrowed it from Adam Smith and extended it.)
Natural resources are just there, they can’t produce anything (and are of commercial value only when capitalist claim them as property for themselves and extract rent from all those who want access – you’ve heard of rent-seeking?)
Capital – machines, equipment, railways, ports, airports … is itself the product of human labour, and not, according to Marx, an independently existing factor of production.
From these basic definitions follows a whole different description, analysis and critique of capitalism. If you want to give yourself a great whopping headache, read Capital Vol. I. I did, some thirty years ago. Never again!!
One of the upshots is that we are all terribly mistaken about the economics that we allow to dominate our lives, and Marx’s nickname for this upside-down and inside-out confusion is “Commodity Fetishism”.
to be continued…
Commodity fetishism, part Ii The basic idea goes something like that: We produce goods – which are called goods because they are good for something: bread for eating, pushbikes for going places, etc. Goods have use value. But we do not produce things that only we ourselves use – that would be a subsistence economy. We produce goods for commercial exchange – you know, “butcher, baker, candlestick maker”. Goods produced for commercial exchange, and during commercial transit (from the factory to the exporter, to the importer, to the retailer, and to the customer) are commodities, and don’t have use value (nobody uses a pushbike in its pre-assembled state, in a carton, on the shelf in a big warehouse). But they do have exchange value – a price. And a healthy economy, the exchange value reflects the use value. The more those two differ, the worse is your economy. Once these commodities are in the hands of the end user, do they revert to being goods (the pushbikes gets assembled, and people use it to go places). There is, however, one commodity that remains in commercial transit forever, and never converts to anything that people actually use – and that is money (and its derivates: government bonds, share certificates, gold bars, sea shells, Lucky Strike cigarettes, during and after WWII…) That makes money a very special commodity – in fact, it’s the commodity that rules them all! Money is special in many ways, one of them being that you can never have too much of it. You can have too much bread – and it goes off. You can have too many pushbikes clogging your warehouse, and you have to organise a sale. But money – just sit on it. It doesn’t go off, and it costs nothing to store – in fact, people will pay you to “store” it for you! Thus, being the ultimate commodity, within capitalism (the religion of commodity fetishism) demand for money is absolutely unlimited – and has long since ceased to have any real meaning. Or in other words: in very real ways, the connection between the “real” economy and the finance economy (Main Street and Wall Street) is becoming ever more tenuous. Huge amounts of (these days mostly virtual) money are being shifted around the globe at the push of a few keys – but the situation on the ground (Sydney traffic snarl, home affordability, fresh food availability, hospital waiting lists) does not improve. And this is where MMT comes in: it kind of recognises and plays on the superstitious and increasingly meaningless demand for money, and basically says: just let’s feed it. And what I am saying is: let’s not, please! All you achieve is to accelerate the already diminishing relevance of money as a means to control and administrate the exchange of goods (commodities, because: Capitalism). We need to re-orient the economy, not just flood it with ever greater amounts of money. Or, in other words: it’s not the lack of money as such that is the problem here, but its phenomenally unequal distribution!!
Commodity fetishism part III
sorry, guys! I wanted to correct a spelling error, just before the editing window closed, AND LOST ALL PARAGRAPH SPACING
Thanks Arnd.
This response was written for your first comment.
A quick glance at your second comment tells me that we are getting closer!
I did familiarise myself with commodity fetishism years ago, but this old brain has forgotten most of the detail.
The fetish aspect, if I read your wiki link correctly, comes from the assumption that a commodity has a good in and of itself, and that this ignores the social input (labour) that went into its production.
My former interest in this centred on the next step — that the flawed assumption then led to conspicuous consumption, ie, consumption for its own sake, and that the economic structure that was developed to accommodate this encouraged gross inequities, such as described by J K Galbraith, that we have a system that gives the same value to the need of a hungry person for a meal as to the need of a wealthy person for yet another luxury.
So Galbraith’s example shows how the mistaken belief that commodities have a mystical value in and of themselves (the very definition of fetish) has corrupted the financial/economic system in which we operate.
Or as you put it, “one of the upshots is that we are all terribly mistaken about the economics that we allow to dominate our lives, and Marx’s nickname for this upside-down and inside-out confusion is Commodity Fetishism”.
And if we are honest with ourselves we see that although this sounds far-fetched, it’s actually true. We instinctively respect a person with a vast accumulation of commodities. Or wealth in other words. We all participate, to varying degrees, in the commodity fetish. Hopefully, this is no more than the result of life-long conditioning by a corrupt social system.
But I still cannot see that MMT is a version of the commodity fetish. To go back to Galbraith’s example, the need of a hungry person for a meal is not a fetish. And if MMT can alleviate the struggles of the needy, then I’m all for it.
I might have to refine this after taking in your second comment.
Arnd, thanks for great explanation of use value and exchange value, and the money fetish.
I agree with everything until “And this is where MMT comes in: it kind of recognises and plays on the superstitious and increasingly meaningless demand for money, and basically says: just let’s feed it. And what I am saying is: let’s not, please!”
I know exactly where you are coming from on this and agree entirely. But we cannot wait until the liberal economy collapses of its own accord or is swept away by revolution. We have to deal with the reality that we live in a liberal economy.
People are suffering now and if MMT can alleviate that, if MMT can balance just a little the “phenomenally unequal distribution” you refer to, then so be it.
Yes and no, i.e. government budgets are not equivalent to household budgets, the latter is a common metaphor fed to older voters, when in fact many households have much higher debt than the government; backdoor to austerity, lower taxes, smaller government and ‘Kochonomics’.
By coincidence on the latter Buchanan’s ‘segregation economics’ i.e. fossil fuel Koch Network, shares donors in the US with nativist Tanton Network, includes their Cafaro and ‘The Over Population Project’ (inc. contributions from SPA types) which a contributor has cited MMT, why?
The reason we run high temporary border churn over i.e. measured by the NOM net OS migration, is to raise GST etc. from ‘net financial budget contributors’ esp. international students, to ameliorate ageing population, lower tax take and more retirees tugging on budgets e.g. increasing old age dependency ratios.
MMT is being cited to avoid the need for ‘immigration’ of non Anglo/European working age or students by claiming MMT is the solution, hecne no need for immigration, but where the models, issues and the actual application in reality of MMT?
‘A relatively new macroeconomics – modern monetary theory (MMT) – has strong evidentiary support and is good news for population activists.’
I have to wonder when Michael and Carol Taylor took a punt on starting this site that they’d end up hosting some seriously heavy hitters of opinion and knowledge(apparently),but I’m loving it,even though some of the discourse is straining what’s left of my grey matter.I know it’s a vain hope,but I’d like to think some of the fucking idiots in the government might pay attention.Do they know this site even exists?Probably not,and it is their loss.I reckon the next Federal election is going to rattle the shit out of our status quo politics.
While I’m on a roll,why doesn’t Skull Dutton just merge with One Nation? Or perhaps there’s only room for one fuckwit at the top.
Steve,
Yerbut … it can’t.
Look at all the gratuitous government spending during and after the pandemic. Governments everywhere borrowed money to blow it on “Keynesian pump priming”. That money did a few loops in the economy, and did indeed prompt a little extra consumption, and temporarily eased many poor people’s dire situation – they doubled the dole, if I remember correctly.
But rather quickly, all this money ended up in the bank accounts of those people who already have Moore money than they need: business owners and share holders.
And what did they do with this surplus money? They certainly did not spend it on consumption, and domestic consumption especially – go to the pub or restaurant, spend weekends in the Hunter, etc. – which would have been good for the economy and jobs. After all, everything someone consumes must be produced first.
But that’s not what people with heaps of loose cash do. What they do with it is invest it. In housing, for example. And with plenty of investors driving demand for real estate, the price goes up. And hey presto, you have yourself a housing affordability crisis!
Of course, home owners love it. Already little Johnny Howard noted that no home owner ever complained about his real estate increasing in (exchange) value (but not use value – no matter how expensive your house, all you can do with it is live in it).
Banks love it – the value of the mortgages they write, and with it their profits – goes up and up.
Politicians love it – most if them own multiple properties. And home owners who see the values of their houses go up, vote for those politicians. At least sometimes.
Plus, the rising (exchange) value of real estate can be used as security to take out credits … – to invest even more in real estate. So the economy looks like it’s growing and growing – at least on paper.
And with every re-iteration of this cycle, the distance between haves and have-nots opens up a little further.
All that MMT is doing, is pump more money into this economy, and thereby turbo-charge the dynamics of increasing wealth concentration, WHICH ARE BAKED INTO CAPITALISM!
DON’T DO MMT!
Let’s talk about tax reform! Let’s shift the tax burden away from income, and on to wealth! Let’s not allow the figment of the imagination that is MMT steal our thunder!
Arnd, nice work, you’ve convinced me!
And yes, simple steps such as taxing wealth would work.
Of course, one of the problems we have is that under liberal systems the focus is not on welfare, it’s on profits. In other words the welfare of the economy instead of the people.
The people exist to serve the economy instead of the reverse.
Under liberalism, every gain made by working people, such as taxation changes, is eventually undermined. Liberalism has to be eradicated.
See what I mean?
Thanks, Steve.
Of course, we have barely scratched the surface.
To better understand commodity fetishism, it might be helpful to also get your head around the implications of c-m-c inverting into m-c-m. There’d have to be oodles of articles on our great w.w.w. elaborating this cryptic clue.
A much more straightforward approach rests on a simple evaluation of operand conditioning. You’ll remember Pavlov’s dogs, which, by hearing a bell ringing everytime they were fed, ended up salivating at the tinkling of a bell, regardless of whether there was any food or not. In that sense, MMT looks like advocating to ring the bell more loudly and vigorously, so as to make more dog food appear. (And, to be honest, even though I have been at this for many decades now, EVEN I STILL SALIVATE AT THE SIGHT OF MONEY! It’s one of those “acculturations” that are just very hard to beat.)
And look, we all have and use money (some have more, some have less, and some have a distinct lack of it) every day without paying too much attention. But once you begin to pay some attention to money, what it is, what it is supposed to do – it does get interesting.
Have a look at Local Exchange and Trading Systems, for example.
Or the ideas of Silvio Gesell and the Wörgl Experiment.
Check out Geoism.
Note how the later two claim to foster true “economic freedom”. Whilst I do not necessarily agree that they do (both Freigeld and Geoism present as alternatives to Marxism), at the very least their claims provide a tractable refutation to the notion that the neo-liberal economic model is the only version of market liberalism, and that TINA (“There Are No Alternatives” – Margaret Thatcher).
And whilst I do not believe that any of the above can provide any sort of complete solution to our economic woes, they can make significant contributions. More importantly, each does highlight a different problematic aspect of our money-driven society, and enhance our comprehension of the truly baffling concept called “money”.
Which, in a manner of speaking, also holds true for MMT. I may sound as if I have a special grudge against it. Which I kind of don’t. I happily award two or three point to MMT for trying, and I don’t wish to dismiss them as especially idiotic – but what they succeed in, inadvertently, is to show up how truly, desperately idiotic capitalism actually is.
“…how truly, desperately idiotic capitalism actually is.”
And with a tenuous grip Arnd.
It relies on the masses having faith that they too can improve their lot.
Once that faith evaporates the system is in trouble.
Ideology, almost by definition, prevents reality from being a factor in calculations. So when “greed is good” got the upper hand in the 80s, the fools could not see far enough ahead to realise that winding back social gains, while assisting short term profits, would undermine long term profits in two ways –reducing the capacity of the masses to consume, and undermining the very factor that keeps the show going — faith in the system.
Steve, the definition of neoliberalism: Everyone and everything is a commodity to be traded for profit regardless of the social or environmental costs.
Arnd,
Good links.
The LETS link particularly appealed as it articulates a form of practically applied grass-roots communal anarchism that I actively embrace and employ, since it not only empowers individuals and local communities, but also helps actively dilute current systemic perversions instituted at a larger level.
Trading labour or surplus produce without any actual currency exchange (direct barter) denies governments an avenue of transactional revenue, which is especially significant when they routinely misuse our taxation skimmings for things like like nuclear submarines, subsidies for industries of environmental rapine, and nepotistic political sinecures.
As for your links to the theories of Gessel, Worgl and Georgism, to be honest, although superficially agreeable, they were formulated prior to majorative electronic currency, and the potential permutations within such theories go well beyond my certainty of knowledge and applied paygrade, which is grounded in field ecology rather than theoretical economics, and priced well below the average wage.
PS, I recall you recently mentioning that you were a long time between bushwalks.
I heartily recommend that you rectify this.
Immersing oneself in the environmental ‘life support systems’ that sustain basic survival helps reaffirm greater feelings of humility and gratitude, which is not a bad thing (spiritually speaking).
” the definition of neoliberalism: Everyone and everything is a commodity to be traded for profit regardless of the social or environmental costs.”
Indeed Denis, but it was liberals, referred to by Marx and Engels as the bourgeoisie, who “… drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. (and) resolved personal worth into exchange value.”
The only difference I see between libs and neo-libs is that the neo-libs feel unrestrained since the fall of the USSR, and are prepared to go harder. And will ruin it for themselves in the process. And the planet as well, as you imply.
Crikey Denis, you really got us going with this one !
Liberal;
a) willing to respect or accept opinions or philosophies different to ones own.
b) relating to a political-social philosophy that promotes individual rights, civil liberties, democracy and free enterprise.
Bourgeoisie;
a) referring to ‘middle class’, particularly regarding materialistic values or conventional attitudes.
b) capitalists who own most of the wealth and means of production.
Yup, ‘liberal’ and ‘bourgeoisie’ are entirely interchangeable terminologies.
Oh dear.
Corvy’s having a comprehension breakdown again.
He seems to think that his definitions of liberal and bourgeoisie are incompatible, that they refer to two different concepts. They do not.
At least he’s consistent.
He consistently tries to reduce complex issues into a few words. Or as the great Ernst Mayr put it — Reduction beyond the point where analysis is useful.
The amusing thing in this case is that as well as displaying a disturbing lack of familiarity with a subject on which he chose to comment, he missed the point of my showing that the reduction of everything and everybody to items of exchange had begun over a century before the appearance of neo-liberalism.
Amusing also, in that even if his incorrect position on liberal v. bourgeoisie had been correct, my point still stood.