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Watch this space in 2017

By Ken Wolff

As with most political issues, the following few questions are inter-related: Turnbull’s future may well depend on the economy, on whether or not a new conservative party forms and whether there is a Trump-inspired trade or currency war between China and the US; our economy may well depend on what Trump does in relation to China, let alone whether Morrison displays any understanding of economics; and so on.

Will the Australian economy improve or continue to stagnate?

In December we had the news that the Australian economy had contracted by 0.5% in the September quarter. Most of the pundits do not expect that to be repeated in the December quarter, which means we would avoid a recession (which requires two consecutive quarters of contraction).

On the other hand, commodity prices are still weak, although better than they were, and if a US/China trade war erupts may weaken again. Every reduction in commodity prices flows through a large segment of our economy, affecting the supporting businesses and often, through reductions in the workforce, local businesses, and the impact then multiplies ultimately affecting government revenue. The Christmas season may help us avoid a ‘technical recession’ (that magical six months) but will we see another quarter or two of contraction during 2017?

This year will also see the end of car manufacturing in Australia. That has implications across a number of industries and, as some commentators have noted, it has been car manufacturing that has driven much of the technological innovation in the manufacturing sector. Turnbull’s ‘innovative and agile’ economy may become a little more wobbly as a result.

The end of car manufacturing will lead to increased unemployment, not only in the car industry but in the companies that previously relied on providing parts to that industry. Couple that with the lack of wages growth (the lowest since records have been kept) and the government will be losing more in income tax revenue and paying more in unemployment benefit, making it that much more difficult to achieve its stated aim of bringing the budget back to surplus.

The economy did not go well in 2016 and the prospect for 2017 isn’t all that good. Even in his MYEFO in December, Morrison lowered the estimated rate of economic growth for both financial year 2016‒17 and 2017‒18. The new forecast rate of growth isn’t even enough to absorb new entrants into the workforce (usually accepted as about 3%) and that is without considering that the economic growth forecasts for the past few years have proven optimistic. Certainly don’t expect a boom year but how bad it may be we will have to wait and see.

Will Scott Morrison ever understand the budget?

Ever since the Abbott/Turnbull government was elected, and returned last year, the government’s budget deficit has continued to grow. Low commodity prices, over which the government has no control, and slow wages growth, which government policies have actually promoted, have not helped.

Morrison, however, continues to focus on government spending rather than revenue raising. Although he has backed away somewhat from his earlier statement that the government had a spending problem not a revenue problem, his actions have remained focused on reducing spending. (I won’t get into the MMT argument here.)

The government has ignored the opportunity to borrow money at historically low interest rates to fund infrastructure. Although it is now talking more about infrastructure, it appears it may be at a time when interest rates could be on the rise again — US interest rates are certainly likely to rise during 2017 which may force some other countries to raise theirs in order to maintain their currency.

Our Reserve Bank still has capacity to reduce interest rates (although such reductions have done nothing to stimulate the economy so far). If it does reduce interest rates, and the US increases rates, the Australian dollar is likely to drop in value. The government will claim that helps exporters but it will increase the price of imports which may not help our ‘terms of trade’ and will also potentially lower our living standards by making imported consumer goods more expensive at a time when wages are barely growing — not something that would enhance the government’s electoral appeal.

Turnbull’s ‘innovative and agile’ economy and the promise of company tax cuts — which he continues to espouse despite it being unlikely to pass the Senate — are not issues that inspire the average voter. If any benefits are to flow to the economy from such ‘policies’, they will be well beyond the next election, so Turnbull and Morrison can’t look there for short term budget improvements but they seem to have no other plans to help the economy and by implication the average voter.

Will Morrison and Turnbull finally concede that they also need to raise revenue in the next budget? That will be one to watch although I expect that, if so, they will do their best to obscure the fact.

Will there be a new conservative party?

Cory Bernardi is creating a nation-wide conservative movement but not yet formally a new conservative party. It will be interesting to watch where that goes in 2017 and whether it turns into a fully-fledged political party.

The Liberal party will no doubt do its best to stop it happening as it would further split the conservative vote, although that may not be an issue until the next federal election. If such a party comes into being during 2017, it could have serious implications for the government because it has only a one seat majority in the House of Representatives. Even if only one or two Liberal or National members in the House were attracted to the new party that would create a situation where not only does the government have to negotiate with crossbenchers in the Senate but also in the House to have legislation passed. Although the conservatives already seem to wield considerable influence in the Liberal party room, if they held the balance of power in the House, that could actually increase their influence. That may even be a consideration in the formation of such a party: if they wish to create Australia in their conservative image, having a couple of members in the current House could help them achieve that, or force Turnbull to another election earlier than he would wish.

The electoral implications are that the conservative vote could be split between the Liberals, One Nation, the Nationals and the new party, leaving open the possibility that Labor would lead on first preference votes in more House of Representative seats and have an improved chance of winning them. And it is likely that a proportion of the preferences for a new conservative party would flow to One Nation (and vice versa) before they flowed to the Liberals, so it would be very interesting.

The timing of the creation of such a party could be determined by the election timetable. The earliest a federal election can be called, other than another double dissolution, is August 2018 but such a party may like to test its electoral appeal at a state election. WA has an election in March which now seems too soon to establish the party and create an organisation geared for an election. SA goes in March 2018 and the earliest Queensland and Tasmania can go to an election is April 2018 and May 2018 respectively: so to be ready to contest one of those the new party would have to be created no later than the latter half of this year.

Will Turnbull remain prime minister?

Personally I think he will in 2017 but 2018 may be a different story — unless he voluntarily decides to toss in the towel, deciding it is just too difficult to govern his fractious coalition and cope with the constant negotiation with the Senate crossbenchers (and potentially House cross benchers) to have legislation passed.

As indicated above the earliest an election can be called is August 2018. I doubt he would dare have another double dissolution before then as that would not go down well with the electorate (but if he loses members in the House to a new conservative party he may be forced to). But if the economy continues to stagnate, or underperform as a result of a US/China trade war, that will reflect on the government, as economic performance always does even if the government has little real control over many aspects of the economy, and he may well foresee that he cannot win the next election — although he could leave an election as late as possible (May 2019) in hope that things will improve. Much will depend on his own vanity and desire to be prime minister or whether he sees a short stint as having achieved his ambition.

Another key factor will be the possible creation of a new conservative party. For Turnbull that could be both a blessing and a curse. A ‘curse’ for the reasons described above but a ‘blessing’ if it freed him to express more of his liberal philosophy rather than the conservative agenda. A Malcolm Turnbull who again expressed liberal views would probably reignite his support in the electorate but then both he and the Liberal party would need to decide what to do about it. While a more liberal Turnbull may attract votes, it may be just as difficult to form government if a new conservative party also attracts votes: in fact, a more liberal Turnbull may draw some votes from Labor and the Greens while some of the Liberal base goes to the new conservative party — that would really redefine the political landscape in Australia. It could also lead to a minority government and I doubt Turnbull would want to be in that situation.

Turnbull will have much to ponder particularly in the latter half of the year unless there is an unlikely improvement in the economy and unless the Liberal party is able to forestall the formation of a new conservative party or even the growth of conservatism in its own ranks. Will Turnbull want to continue to lead unless those things come to pass? Will the conservatives in the party room decide to move against him for a genuinely committed conservative leader rather than one who panders to them only to keep the job? After all, the result of the 2016 election means Turnbull does not lead from a position of strength.

Abbott has spoken against the rise of a new party and will some in the Liberal party see Tony Abbott as the one who can provide a bulwark against defections to a new conservative party or even its creation? Although perhaps not intended, the pressure created by threats of a new conservative party may well enhance the chance of an Abbott return to counter it.

Will Trump really threaten the world as we know it?

While Trump may cause problems for the US with his apparently contradictory promises to halve the company tax rate, spend billions on infrastructure and improve the US budget bottom line, their impact on Australia will play out indirectly through the international financial system. Of more direct consequence to Australia could be his trade and foreign policies, particularly relating to China.

Trump may wish to be more friendly with Putin and Russia but he will have to remember that China and Russia are still close, if not as close as once they were. He also sees North Korea as a threat but will have little scope to do anything about it without Chinese support although he thinks that using trade as a lever may also force China to act. He may think he is a good negotiator but he and his appointees will run up against expert negotiators and some, like the Chinese, are certainly willing to play the ‘long game’, something which Trump and his ilk seem unable to do.

Australia may continue sitting on the fence and use ‘diplomatic speak’ to suggest that differences should be resolved diplomatically but that may become more difficult under a Trump presidency. Will Australia be forced to side with either the US or China on some key issue? That will be a difficult position for Australia given that they are two of our biggest trading partners.

On trade, Trump is keen to scrap US involvement in the TPP which will effectively be its demise. Turnbull has consistently insisted that the TPP is essential to Australia’s future, so what will its demise mean for that future? It will be another piece of Turnbull’s economic plan that fails to materialise — which in the case of the TPP may not be a bad thing.

The main concern is a potential trade war between China and the US. If the US becomes more protectionist and imposes tariffs on Chinese imports, that may reduce Chinese production which in turn will reduce demand for Australian resources, with all the economic consequences that implies. It could also mean that China sends more cheap goods to Australia that formerly went to the US and that could further undermine what manufacturing we have left unless we also declare that they are ‘dumping’ goods in Australia and impose punitive tariffs which will essentially be biting the hand that feeds us. If this scenario unfolds, Australia will be in a difficult place economically and in how to respond to the challenges it throws up.

In turn, it may also mean that China pays more attention than it already does to developing nations in Africa and the Pacific and that will have foreign policy implications for Australia. We have been cutting our foreign aid budget but if China redirects its effort, we may be forced to do more in that area or accept further growth of Chinese influence in the region — which way will we go?


The above are just a few of the questions that could arise during 2017.

Others include:

  • Will the housing bubble burst and the construction boom come to an end?
  • What will be the effect if we lose our AAA credit rating, not just for government but for our banks?
  • How will Australia deal with Brexit and the need to negotiate separate trade deals with the EU and the UK?
  • How will we address problems meeting our climate change commitments under the Paris agreement?

And of course there are the perennials such as how we handle refugees and Australian Muslims which will be influenced by the rise of the conservative forces.

It may prove to be an interesting year both here in Australia and internationally.

What do you think?

What are your answers to the questions?

What other questions will Australia face in 2017?

This article was originally published on The Political Sword

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Money is a Scary Subject

The devaluation of peoples’ hard-earned money is what Australians fear most. People fear inflation. Never mind the crime rate, political corruption, nuclear wars, family violence, pestilence and the like, inflation is the king of fear factors.

So, when you tell them that a currency-issuing government is not constrained in its spending capacity, they immediately imagine this nightmare scenario where a government will just spend and spend and spend.

This is just one of the reasons why people struggle to accept Modern Monetary Theory. Fuelled by ignorance and being fed the wrong information by others who don’t know any better, they cling to old standards such as the myth that running a country is the same as running a household.

They foresee inflation going through the roof, causing all manner of pain and suffering to families, their savings and their future well-being. The word hyperinflation often sneaks into the conversation as well.

It’s an entirely false scenario, there is no reason to think that way but, that is the way of people when they are opposed to something or are gripped by the fear of the unknown.

The other great difficulty is that most economists don’t accept it either because it goes against everything they have been taught.

The problem is that few of them have been taught macro-economics as opposed to micro-economics. Most of them, while acknowledging that we live in a fiat currency world, still maintain a gold standard mindset. That is the sum of their training.

gold-standardThat is why it is easier for people who have not studied economics, to accept it. Their minds have not been polluted with gold standard thinking. Common sense takes over.

People in the financial markets, for example, seem to understand it quite easily. Tell them that bond sales drain reserves and they get it, they understand it.

But within the world of the economist, it takes a heterodox-economist to lead the charge, someone trained and qualified in the old ways but who has broken through that glass ceiling. Sadly, there aren’t too many of them.

Very few, if any, policy makers understand it. Senior central bankers do, of course, after all they are the ones who juggle the numbers in their computers. But will they dare explain it to the politicians? The very thought of it makes them shudder.

They too fear that once a politician realises the possibilities associated with a fiat currency, the politician will wreak havoc upon a nation’s economy, spending recklessly. It’s a sad indictment of the perceived maturity of our leaders.

Perhaps the biggest problem in explaining MMT is the language used. Trying to explain to someone that their entire thinking processes need to be turned upside down if they want to grasp it, isn’t easy.

When you hear someone say, “The federal government spends by issuing currency and can never run out,” they don’t respond by saying, “great, let’s have full employment.” They say, “For goodness sake, don’t tell our politicians, they’ll just spend like crazy. We’ll become another Zimbabwe.”

Somehow, the language has to change. We have to develop a new way of explaining MMT such that the irrational behaviour of those who should know better, can be ignored.

banner-languageEngaging in a carefully considered language with simplistic clarity, a language that has factored in all the elements of disbelief and fear is a huge challenge.

It’s hard explaining that when a fiat currency is misused, inflation is a possible outcome, but that full utilisation of a nation’s resources (its people), improving our health, our education, lowering our crime rate, is a far better outcome.

It’s hard explaining that a nation is constrained only by its available resources and not by one or two percentage points of inflation. Under our present management, we can’t even achieve that.

It’s hard explaining that a currency issuing nation can always meet its commitments in its own currency, that it doesn’t need to borrow to fund its spending and can always pay for goods available in its own currency.

Why is it that the prospect of providing full employment, having a world’s best education and health system, a state of the art communications network, a respect for our natural resources and equality of opportunity for all, is restrained by ignorance?

This is the 21st century. Those medieval superstitions that so dogged the efforts of people like Galileo and Copernicus should be behind us now. Modern Monetary Theory, like all theories, needs proper implementation to be accepted as fact.

85After all, who can seriously say that the present theory of classical economics has proved itself worthy?

Money is indeed a scary subject. But it doesn’t have to be.

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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 4 – final)

By Ian Dooley

Responses to comments

If I respond to the comments on Ken’s post, perhaps that means we’ll get some different comments or questions on this article, rather than hearing the same points made again.

So here goes! The comments are in italics and bold, with my responses below each one. I have omitted, abridged or combined some for the sake of brevity and because some of the comments made no sense or were in agreement with Ken’s article:

Diannaart September 21, 2016 at 2:57 pm

Loving this – am beginning to get it. Maybe.

… and the government surpluses are actually reducing the money supply” – it is money no-one is using, therefore, stultifying or even damaging to the economy, right?

A surplus isn’t even “money no-one is using”. Taxation just destroys money. Similarly, we don’t talk about ticks that we have not written down yet on our chore chart as ticks we are not currently using. Those ticks don’t exist yet. We could imagine a world where we use double entry book keeping when we award ticks, so we have a piece of paper with “our” ticks on it, and when we award one we cross it off “our” list and then write it on the kids chart, but from the point of view of the kids, the ticks just don’t exist.

Troy Prideaux

September 21, 2016 at 3:39 pm

… I’m under the impression that it ideally relies on a full scope of levers to control inflation, employment, economic growth etc? ie. still utilising interest rates as a mechanism of controlling inflation and growth but with a greater emphasis on fiscal stimulus that can be funded with fiat money if needed. I’ve heard people like Warren Mosler mention that taxation should be the “thermostat” to control the temperature in the room (an analogy to inflation in an economy) but I would imagine that taxation control alone is not reactive enough (takes time to adjust rates etc) to deal with surges in inflation/deflation or growth? …

We don’t need to use interest rates to control inflation. Inflation is the result of spending exceeding the capacity of the society to produce. The most effective inflation anchor is a job guarantee that pays a socially inclusive minimum wage and sets government deficit spending at precisely the right level to inject demand to offset the savings desires of the private sector. This is the most “reactive” means of demand management (to use your terminology).

… Another point: does MMT accept that money can also be essentially created in the private sector and does it consider that finance and debt is such a significant component of the private sector? Take the GFC for example, billions of dollars which were created by the private sector via property speculation and irresponsible financing suddenly vanished into the ether when the values in such assets crashed? …

As discussed in my article above, private credit creation is more like banks creating “Disney Dollars”. They create deposits that are valid within their own institution and any settlements or transactions external to their institution (including when you pay your taxes) are done with government money.

None of that is questioning the validity of MMT, but my greatest concern about MMT is the power it can provide governments – particularly to (a) potentially recklessly spend for the sake of their own political interests and (b) potentially provide too much fiscal authority for governments to avoid economic crises that might be essential for economies with corrupt political systems – eg. where financial regulation and scrutiny (say) have been compromised considerably to the point of providing major structural faults that need political leaders to be forced into fixing (or at least be given the political mandate to fix) that can often only come with a good ol’ crisis.



Jimhaz September 21, 2016 at 4:09 pm

[What do you think?]

Not that I’d know, but my view is it is an absolute can of worms that would lead to disaster long term due to the non-discipline of pollies in the political cycle.

We don’t actually have an unemployment problem – we have an excessive immigration problem …

The maintenance of full employment is as good a marker as balancing the budget, for governments to adhere to. In fact, this is what happened from 1945 – 1975. Governments did not over spend, and did not cause inflation. People claimed that Whitlam did but the inflation of the 70s was entirely due to oil price shocks and nothing to do with his fiscal expansion.

We don’t have excessive immigration and at any rate all that would mean is more capacity to get things done. Immigration would be excessive if we had to import food in excess of exports in order to sustain the population but that’s not the case. Australia could get much bigger and still ensure full employment for all its citizens.

… If any conservative gov used MMT, all they would do would be to increase immigration levels, if any progressive gov used it they would spend it on non-income producing jobs, and we’d end up with a no win situation. It would also cause wage rises in income producing industries …

Putting the odd obsession with immigration aside, I assume what Jimhaz means by “income producing” is “tax paying”. This is the irrelevant kind of income because the government doesn’t need income in order to spend. All fiscal stimulus in income producing so long as the money is spent; that is spending equals income for you and I. By guaranteeing a job at the lower end of the pay spectrum we can ensure that people will spend the majority of the money they are paid which will achieve the desired fiscal result.

… I know it to be a false theory simply as everyone would now be using it were it not. There appears to be nothing actually inventive or clever about the theory. At best it is theory for a rainy day – not even just recessions – but a deep recession …

We are already using it. MMT describes how money works, in any legislative or exchange rate policy scenario. But ignoring the fact that MMT is not “being used” by anyone any more than gravity is “being used” by the planets to stay in orbit, this is where I like to bring things like “flat earth denial” into the equation. Someone knows this theory is false because everyone is not already doing it? Well, in fact we did have a policy of full employment in Australia until 1975, so we have, in recent history, conducted our economy in line with what might be termed functional finance, but does Jimhaz honestly not realise that there are countless times in history when the orthodoxy has been completely wrong? Hand washing is a great example

… That said, I’m not convinced the US Quantative Easing is more or less the same thing, so it might not hurt to get on the same bandwagon …

An understanding of the state theory of money helps us to see that QE is nothing more than a liability swap: the government swaps one liability (a bond) for another liability (reserve balances at the central bank). That’s why QE doesn’t achieve anything: it has no impact on demand in the economy because no-one spends the newly created reserves.

Nexusxyz September 21, 2016 at 5:48 pm

MMT is marginally better but will fail like all other economic models. The thing that determines ‘economic wealth’ is the acquisition, manipulation and management of technology to generate ‘competitive’ outcomes . Only investments in technology that generate value are worthwhile. Printing money without taking into account the ‘constraints’ of the earth is doomed and will generate tens of billions in mal-investment.

Harquebus September 21, 2016 at 6:23 pm

MMT won’t save us any more than any other mumbo jumbo economic theory. It is a cock’n’bull wish made up by those who think that we can extend even further into the unsustainable by replacing energy per capita with increasing amounts of currency and debt per capita. Ha! Good luck with that.

Both of these comments seem to think that MMT is “just another theory” which it is not. If you start by accepting the state theory of money, MMT is the logical extension of it, and all other economic theories are null and void because they reject the state theory of money.

The second point they both make is that we face real resource constraints which is absolutely true, but investing in the “human capital” of our society is just as valuable as investing in other forms of capital.

Kaye Lee September 21, 2016 at 7:47 pm

… That is one of my real problems with MMT – they seem to suggest that the RBA is an arm/tool of the government and hence the government can just create money. That is not the operational reality.

Actually this more or less is the operational reality. When the government right now deficit spends the AOFM issues bonds on the primary market to the same value. This gives the illusion that the government is “borrowing” to “Fund the deficit” but as we have seen above this is a logical impossibility. What it is really doing is first a liability swap (reserves for bonds) then creating more reserves. The bond issues allow the RBA to “soak up” these new reserves to hit its interest rate target, but the bonds themselves are created “out of thin air”, right? And bonds are basically as good as cash. I did a video about this here:

Diannaart September 21, 2016 at 7:57 pm

MMT could work if we changed some rules and elected people with integrity and an ability to prioritise on the basis of expert independent advice, but would you trust the current lot to understand where money should be spent?

This is my misgiving also.

I am beginning to understand how checks and balances could be used to prevent runaway inflation. By ensuring the government has specific uses for the money allocated such as for infrastructure, education, health – anything that can be given a $ value – and this can also include the environment, be it protection and/or restoration work -such as mining – in fact by placing $ value on damage we can seek restitution… yeah, I’m dreaming.

But, we can’t trust government with the current system and MMT is very open to …. creative accounting.

The government is already operating with MMT. All money systems are described by MMT. What you really mean is that we can’t trust the government to use a model of Functional Finance rather than Sound Finance, which I think is ridiculous because there is no difference between the two. In the first case we have the government set up to spend to the point of full employment, in the second we have the government set up to spend only as much as it taxes, or issue bonds when deficit spending and subject itself to “market discipline” which isn’t actually discipline at all. The government already does what it needs to do in order to hit the sound finance target and is perfectly capable of hitting a functional finance target too.

Harquebus September 21, 2016 at 9:42 pm

Not to mention the very real push for a cashless society. Create the virtual currency from nothing, force everyone to become a bank customer, restrict what can be bought and sold and then steal levy what we don’t spend through negative interest rates.

Brilliant! If you own a bank.

There is no difference between a virtual currency and notes/coins. In fact the vast majority of spending already occurs electronically and money has no value outside of the sovereign system which creates it.

Kaye Lee September 22, 2016 at 12:28 pm

I can accept all that Troy but we could be investing in Gonkski, public infrastructure, NDIS, sickness prevention, Childcare support, Training etc now but our government chooses not to. They would rather spend hundreds of billions on war toys and keeping asylum seekers away and paying polluters.

What we have is all parties in this country subscribing to the neoliberal world view of sound finance. This means that if a party wants to spend an appropriate amount on various services and maintain full employment, they are vilified in the media circus that is our election campaign. This is why we need the public to understand functional finance and MMT: the Telegraph can’t run a “black hole bill” cover if everyone knows it’s bullshit.

Diannaart September 22, 2016 at 6:15 pm

I can see how the federal government uses a form of MMT already – no gold standard to see here, we have had a fiat currency for decades.

All we need to do is find a watchdog to ensure the government spends on and for Australia and not just themselves and wealthy vested interests.

Easy peasey.

Aside from the policy choices about how to ensure spending in the public purpose, I just want to clarify that even under a gold standard MMT still describes how money works. Having a floating exchange rate means that we have maximised our domestic fiscal policy space.

Kaye Lee September 22, 2016 at 8:20 pm

“The money received is not used to finance net government spending. It sits in a multitude of accounts at the RBA. ALL GOVERNMENT SPENDING is newly created money.”

See that just isn’t true. Money is deposited in and withdrawn from government accounts at the RBA. You really lose me when you say stuff like that because it is NOT how it currently works.

This is what Scott Fulwiler would call the “weak form” of MMT.

When MMT economists explain MMT they usually present the situation as having a conflated central bank and government because, in the end, regardless of the “veil” presented over the top of the operations the reality of how MMT describes economies operating is still true.

However in Australia we do have an Official Public Account run by the RBA and when the government issues bonds, it does “increase the balance” of the OPA, and then “spend that back in”, as indicated in the video I posted above.

However there are a couple of key points: firstly, at the end of the operation the net financial assets of the private sector have increased by the amount spent by the government. Some of those assets are held in bonds, and some in reserves, but it is all a liability of the government. Bonds themselves are very “cash like” — they are liquid enough to satisfy the capital adequacy requirements of private banks and for all intents and purposes can be considered to be reserves on which we pay interest (sort of like a term deposit).

The other thing is that the OPA is a self executing consolidated fund. That means that the RBA will never “bounce a cheque” from Treasury. So the “balance” of the OPA is just an accounting trick, similar to my comment above about using “double entry book keeping” to issue ticks on our chore chart.

Harquebus September 22, 2016 at 8:21 pm

I am sure that MMT advocates have their data and I would be interested is seeing some.

Has MMT ever been implemented anywhere? If not then, one can not complain when someone else expresses an “opinion” about what is after all, just a “theory”.

MMT describes how all money systems work and has thus existed everywhere as long as money has existed. Functional finance, full employment policies and employment guarantee schemes have been implemented such as in Australia from 1945 – 1975, and the Jefes programme in Argentina, with spectacular results.

Kaye Lee September 23, 2016 at 9:54 am

“you still need $AU to pay your tax.”

I do not understand this at all. Why isn’t it just keystrokes as basically all transactions are? When I pay any bill, even to the government, I just do it on the computer – the money goes out of my account and into the account I designate, even if I am paying to another country – the bank just works out how much to debit my account to cover the other currency bill using the exchange rate. I personally don’t have to have US$ to pay a US bill. Why are taxes different to any other bill? Why couldn’t an American wishing to make a payment to the government just do exactly the same thing? Or are you saying the banks have to have electronic stocks of other currencies and if so, why? I don’t get it.

I explained this a bit in the section on private banking. When you pay taxes, the settlement occurs in exchange settlement funds at the RBA. Only government (or “high powered”) money can be used to pay taxes to the Australian government.

Foreign exchange is a little more complicated but basically central banks all have accounts with each other. So for example, the Fed has an account with the RBA, and that is where the Fed holds their AUD reserves. Likewise for the Bank of China etc. When you buy from China, you transfer AUD to the BoC account at the RBA, and at the other end the RBAs account at the BoC gets debited and the same amount in RMB gets paid to the vendor you purchased from.

All AUD reserves are on account at the RBA, all USD reserves are on account at the Fed and so on.


From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy, L. Randall Wray

Making Money: Coin, Currency, and the Coming of Capitalism, Christine Desan

Here is a short video by Christine explaining this new creation story of money.

I created a video to illustrate the “chore chart” example here on the Australian Employment Party YouTube channel.


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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 3)

By Iain Dooley

Logical conclusions

I hope by now you have been able to come to terms with the fact that currencies are always created by a sovereign and their value is driven by the willingness of the sovereign to accept the currency in payment of taxes.

In fact the “one sovereign, one currency” rule has been almost universal for thousands of years, except for one notable case and that is the Euro. This is basically why the Euro has been such a disaster, and why economists such as Wynne Godley were able to produce such prescient predictions of it’s failure.

So now we can use this simple fact to derive logically some of the obvious statements made by MMT.

1. The government should always spend to maintain full employment

Governments create money to move resources to the public purpose.

When we have people who are willing and able to work and where there is useful work to do in the public purpose it is insane for the government not to hire those people.

Think about the chore cart: would you ever claim that because a certain number of ticks weren’t redeemed this week that you would not issue more ticks to get chores done?

Think about a football game: would they ever stop the game and leave the players idle because they had awarded too many points?

Lunacy. Sheer lunacy.

2. The government cannot borrow its own currency

A unit of currency is nothing more than an acknowledgement of a contribution. It is basically a tax credit. A voucher issued by the government.

If I were to borrow a voucher that I issued, I would have to provide a receipt which would be equivalent to the original voucher.

In other words, since all government money is already a liability of the government, it cannot borrow it back.

This can be tricky to visualise so I created this video demonstrating how this works:

3. The government can never run out of money, but it can run out of resources

This is pretty simple. If we only have 2 kids we can’t just write down a million ticks and get more chores done. The limit of our spending is the capacity of the kids we have to do chores.

As I alluded to earlier this is also why the government needs to deficit spend. In a sophisticated economy, not everyone works for the government, and not everyone spends all their income.

If the government taxes back all the money it spends all it’s doing is destroying all the money it created by spending.

You should be able to see pretty clearly then that the government could sustainably run a deficit forever, so long as total spending doesn’t exceed the capacity of the society to produce goods and services (which would be inflationary).

4. Gold is never money, Bitcoin is never money

They are commodities and they can be used as money. If a government was stupid or ignorant enough then they could use gold or bitcoin to create their currency, but that currency would then suffer all the problems I enumerated above with fixed exchange rates and commodity monies.

5. Post money society is a reversion to the stone age

When people get fed up with how our economic and political structures work, particularly with growing inequality, they talk about creating an “alternative to money” (and many people see bitcoin or some other similarly misguided technology as the solution to that).

This is nothing more than the “poker chip” example I gave above. Without an obligation in common to a sovereign there can be no such thing as a successful currency.

So anyone talking about a “post money society” are really just talking about a society without a sovereign. Any such society will not have liquidity and a society without liquidity can’t undertake complex social projects such as building the internet and roads and stuff so it basically limits us to the type of technology available to stone age societies.

I don’t think there’s anything wrong with stone age societies, by the way. I think that they may well be much happier than we are, but I just wanted to make it clear that there is no “alternative to money”. Money is by definition liquidity provided to a community by a common obligation to a sovereign and is synonymous with sovereignty.

Tomorrow: Responses to comments


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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 2)

By Iain Dooley

What the Fiat?!

What you have created is a currency with a fixed exchange rate to a commodity.

Imagine if the computer broke one day and you sent it to get repaired. If the kids came to redeem their ticks on that day they might become disillusioned with the tick system because they could not play computer games.

In order to to keep them happy you could offer them extra ticks to be used when the computer is returned.

The rate at which the ticks accrue to children in the absence of the computer would be the “interest rate”.

This is the reason why a government with a fixed exchange rate currency cannot control its own interest rate (and why a government that allows its currency to float such as Australia can).

Now imagine your kids wander into a duplicating machine and all of a sudden there are more of them. Great! You can get more chores done right?

Only to the extent that there is enough computer time for them to redeem their ticks. If you had 1,000 children you would get to the point where the constraint would be computer time and you couldn’t get more work done, even though you had plenty of kids willing and able to work.

Fixed exchange rates have the same basic constraints whether they are a currency peg (where, for example we agree to convert AUD to USD at a fixed rate) or fixed to a commodity (such as a gold standard).

They work fine under certain conditions but ultimately they limit your domestic fiscal policy space to the extent where you might end up with unemployed kids; that is kids who were willing and able to do more work and earn more ticks but whom you could not pay because of the constraint of the underlying commodity.

The same would be true if, instead of ticks you issued pieces of silver stamped with your face. You would be limited in how much you could spend by how much silver you had access to.

As an interesting side note, imagine that the house next door ran the same scheme but they offered to create 2 coins with the same amount of silver you use to create one coin. Your kids might melt your coins for the silver content and have them re-minted by the folks next door, starving your mint of silver and limiting your spending capacity. This is basically what happened all the time in Europe in the middle ages and why commodity money is such a bad idea (further reading in the resources listed at the bottom of this page).

Basically fixing the exchange rate of your currency or making it out of some commodity constrains the currency and you’re going to have a Bad Time™.

So how do we make a currency that has value without tying it to some commodity?

People complain a lot about “fiat” currency and how it has no value because it’s made of paper and it’s based entirely on a confidence scam: as soon as the confidence drops the value of the currency drops and we’re in an inescapable downward spiral.

That’s how mercenaries thought of money when being paid to fight a war in the olden days. They wanted currency they could melt and take to a competing mint of the sovereign who won the war.

But they would always go and get the gold or silver minted into coin so they could spend it.

That is, the coin had a value that exceeded its commodity content because it was accepted in payment of taxes and therefore readily accepted by people under that sovereign rule as a medium of exchange.

In an already monetised economy, the value of the currency is defined by what is available for sale in that currency.

But how does a currency gain value initially?

The way that Christine Desan describes this (see video in resources section below) is that humans have always operated in groups, and that the leaders of those groups accept contributions from the members of the group in the interests of the group. When such a contribution is made ahead of time, a receipt is issued to the contributor as evidence (for example if I worked twice as hard this year than I normally do, I would get a ticket that said I worked an extra year’s worth of contributions).

This receipt can then be traded with other group members and becomes currency.

So outside of our family example it is the willingness of people to contribute to the good of the group and acceptance of sovereign rule (ultimately in the form of taxes) that drives value for the currency.

In other words saying that a currency will lose all value is tantamount to saying that the issuing sovereign will completely collapse and that nothing will be offered for sale in that currency.

This is also called hyper inflation and this is why you will typically see MMT proponents say that “no Australia cannot become Zimbabwe” (at least not in the near future … ) because hyper inflation or near total annihilation of the value of a currency also entails near total annihilation of the sovereign; that is to say for the US dollar to become worthless the US government would have had to collapse.

If that happens, then sure maybe you want to be like a mercenary from the middle ages and hold gold in the hopes that you can trade it for some other currency that has value.

But despite what manic street preachers and conspiracy theorists will have you believe, total collapse of the Australian and US federal governments to the extent that Zimbabwe or Venezuela or the Weimar republic in Germany collapsed is not really something we need to worry about right now.

It is not a collapse in the currency that causes a collapse of the government, but the other way around.

Private banking

Around this point in the article, I’m sure some of those still reading will be yelling at the screen “BUT BANKS CREATE 97% OF THE MONEY I SAW THAT IN ZEITGEIST AND YOU’RE JUST ANOTHER ROTHSCHILD!!1”.

Firstly let me just say that I agree with you that we have far too much private credit creation at the hands of banks and that financial deregulation has been a disaster for our society and our economy.

We need to rein in banks, and make finance boring again.

However banks don’t really create “money” in the same way that government spending creates “money”.

The “money” that banks create is kind of like Disney Dollars.

This topic could be a whole article of its own so I’ll just say that when banks issue loans they are creating deposits that are valid only within that bank.

Whenever a transaction leaves the bank that originally created the deposit, it has to happen in government money (either notes and coins in the case of a cash withdrawal or exchange settlement funds in the case of electronic transactions).

When an electronic transaction takes place, banks don’t have to settle up with each other right away, they only settle up at the end of the day so they only need enough government money to cover the difference in flows between institutions.

We’re getting too far from the point of the article but I just wanted to include this note on private banking here to ensure that no-one comes into the comments and tells me how this whole article is null and void because of private banking and how could I be so stupid.

Tomorrow: Logical conclusions


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Are governments ready for the coming economic and social changes?

By Ken Wolff

In 1930 John Maynard Keynes predicted widespread technological unemployment ‘due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour’.

In the decades since there has been rapidly increasing technological change but employment has generally been increasing, matching population growth, although not without winners and losers. The creation of new jobs often lags behind the pace of loss of jobs (as Keynes predicted) and those who have lost jobs are not always the ones who take the new jobs — they are often taken by the new generation.

Since the GFC, governments around the world have felt constrained in responding to the changes in the workforce because they lack money — they are in debt — and are being told by mainstream economists that they must return to budget surpluses. People losing their jobs are not being provided the full range of assistance they need to re-enter the workforce nor, in some cases, even the support to sustain themselves and their families whilst unemployed.

That is a direct result of the dominant neoliberal economic approach adopted by so many Western governments. The neoliberal emphasis on debt also has political implications and the following, although written about the US, could readily apply in Australia:

Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers. Workers have become so deeply indebted on their home mortgages, credit card and other bank debt that they fear to strike or even to complain about working conditions.

While the neoliberal approach remains in place, governments will not be well-placed to respond to current and coming changes in the economy and workforce — selling public assets to reduce ‘debt’ will not help people. Modern Monetary Theory (MMT), on the other hand, offers an approach in which sovereign currency-issuing governments are not so constrained. It is possible for a government to both retain public assets and have the money to provide more programs and assistance to people in these times of economic change. Unless governments embrace a new economic approach like MMT, then the technological unemployment predicted by Keynes is likely to be a real outcome.

The spread of robotics and computerisation throughout the workforce is already happening without us being fully prepared. While there is talk of the need for improved education in things like STEM, computer coding and even innovative approaches, and of the need for a flexible, agile and innovative workforce, these are essentially economic issues and we seem to be ignoring some wider social implications.

A basic question in the rise of robotics is that of ethics. One writer raised an interesting ethical question in the scenario of driverless vehicles: if a driverless vehicle ‘perceives’ that it is about to be involved in an accident and the only pathway to avoid the collision may involve hitting a woman with a pram, which decision will it make? A human would likely make a moral judgment to face the accident and minimise the impact by braking, swerving slightly or whatever action is appropriate but will an automated vehicle see saving itself as the primary response? Whether driverless vehicles can ‘learn’ to place humans first in such situations is debatable. While theoretically driverless trucks seem to be one of the next major targets of computerisation, I think there are still issues to be resolved but I doubt they will be prior to their introduction as the economic imperative will over-rule the ethical.

Computerisation generally will displace many people from their current work, as discussed in more detail in ‘An economy without people’. New forms of work will emerge but how long will that take? Much of the new work will require higher level skills: will we have the capacity to retrain people for the new jobs or do they simply move to the ‘scrap heap’ to be replaced by the next, better educated, generation? As unemployment increases, how will governments respond? If our government is already complaining about welfare costs, it will find it difficult to provide for the new unemployed as computerisation pushes further into the workforce. With an ageing population, there should be a need to keep more people in the workforce but that may no longer be possible.

Some unemployed may voluntarily enter ‘the gig economy’ to help tide them over. But the gig economy may also be on the rise as companies decide it is more ‘efficient’ (cheaper) to hire workers only as they are needed for specific tasks or projects rather than maintain a larger full-time workforce, meaning many more people will be forced into the gig economy. While for people it is ‘the gig economy’, for economists and businesses it is the ‘on-demand’ economy: that difference in terminology also shows how people can be removed from consideration in the coming changes. Whatever it is called, it will have many implications.

Nick Wales at the UNSW Business School has raised one basic concern:

“It polarises people”, says Wales. “Is this creating communities of entrepreneurs who have been marginalised from the traditional economy, such as housewives, students, retirees and immigrants, offering them the flexibility of part-time working? Or is it an underhand way for businesses to get around labour laws and pay these contractors low wages?”

If more and more people are working in the gig economy and on short-term contracts, what rights will workers have? They will not have paid sick days or holidays, or protection from unfair dismissal. Even many occupational health and safety rules may not apply. They will also need to provide for their own superannuation but the extent to which they can may well depend on how much they are able to earn. And will unions find new ways to cover them or is this the final death of unions? (If the role of unions diminishes even further what impact will that have on the future structure of the ALP?) Will these gig workers be treated as, or choose to become, small businesses? We have already seen the problems created by the use of ‘contract workers’ and in the new economy that looks set to expand exponentially.

How do banks respond to people who do not have full-time work/regular income if they are working gigs? At the moment, loans to such people would either be out of the question or, at best, be classified at high risk of default. If, however, this form of work becomes normal for a large proportion of the workforce, banks simply cannot ignore such a significant customer base. There will need to be innovative products that cater to the needs of such customers.

Banks may become more important in another way. There is a possibility that people will become more reliant on debt (loans and credit cards) to carry them through between gigs. It may be in the interest of banks to move into areas of lending currently dominated by the so-called ‘payday lenders’ as there is likely to be a growing market for such short-term products. Banks will have much thinking to do about their role in the new economy.

The gig economy has implications for how government views employment and unemployment as the 37-hour week may no longer be the norm. The OECD is already working on new indicators for employment and unemployment. It is likely, however, that any new definition of ‘employment’ will reduce access to unemployment benefits as it is likely to involve shorter periods of work. Even paying unemployment and other welfare benefits in their current form may no longer be appropriate as they are tied to levels of income. The ‘paperwork’ (data entry) involved in making constant adjustments as people move in and out of short-term jobs (some very short-term) will become onerous as the number of gig workers increases. New forms of payment may be required.

Then there are issues of government regulation and taxation. Already the ATO has ruled that Uber drivers must register for and pay GST as they are providing a ‘taxi travel service’. Current taxi drivers believe Uber is not competing on a level playing field because it does not need to meet the same licence and safety regulations. Victorian cab drivers are protesting a Victorian government announcement that it intends to deregulate the industry. While that may create the level playing field the drivers are seeking, they are not happy that the Victorian government is offering to buy back current taxi licences at a price below what many paid.

On the other hand, if more ‘workers’ are operating as contractors and small businesses, what impact will that have on government revenue, particularly if the push continues to lower company tax rates? Governments may need to reconsider that approach as ‘company tax’ could conceivably become the biggest source of revenue as more people in the gig economy register as small businesses to reduce their taxation.

Deregulation and ‘contract work’ or operating as a small business do not provide the full answer — although it will be attractive to the neoliberal economists and, as such, support for those approaches may be the advice that governments receive. It would mean a large workforce not protected by any provisions for safety, holidays, superannuation nor even hours of work. As Wales suggested, it would allow companies to under-cut existing wage structures and make full-time employment even less attractive for other competing businesses, creating a feed-back mechanism encouraging further use of gig workers.

The Aspen Institute in the US, however, does not believe that governments should regulate but allow companies, workers and consumers to experiment with new models:

… that can begin to give shape to a social contract for a changing economy and new century. We need a better system that ensures workers have the stability and security they need, without stifling innovation or undermining the flexibility the on-demand economy offers.

While suggesting that ‘stability and security’ are required for workers it is basically leaving that to ‘the market’ to determine. Given the history of market solutions, I would have no faith in it reaching a suitable arrangement — because, as explained in the first article in this series, ‘the market’ after all is people manipulating trading for their own advantage and it is to their advantage to have an insecure workforce that is less likely to make demands regarding wages and conditions. Government, even if intending to allow such an approach, must hover at the edges and be prepared to regulate minimum conditions.

While a new economic approach like MMT will help governments understand that they do have the money to deal with problems, it is not the answer to all the issues I have raised (it is, after all, a macroeconomic theory). I am concerned whether its Job Guarantee can be used in the new economy or whether it, too, is based on a model of full-time employment.

At Davros earlier this year, a report to World Economic Forum stated:

During previous industrial revolutions, it often took decades to build the training systems and labour market institutions needed to develop major new skill sets on a large scale. Given the upcoming pace and scale of disruption brought about by the Fourth Industrial Revolution, however, this is simply not an option. Without targeted action today to manage the near-term transition and build a workforce with future proof skills, governments will have to cope with ever growing unemployment and inequality, and businesses with a shrinking consumer base.

So the final issue is that it is not just workers who will suffer. Robotics, computerisation and an increasing number of gig workers will each contribute to ‘a shrinking consumer base’ and that has implications for business survival — in essence, their rush to reduce costs could be creating the conditions for their own demise. That in turn will impact government revenue in lower company and individual tax revenue — but only if they continue to cling to the neoliberal economic approach. If there is a silver lining to this ‘cloud’, it may be that the neoliberal economic approach will be shown to provide an inadequate response to the new situation.

With the possibility of declining consumption and problems redefining employment and unemployment, the concept of a ‘universal basic income’ may gain more traction. Although a proposal to introduce such a payment was recently voted down in Switzerland, it is being considered in Finland and the Labour Party in the UK has begun discussing the concept. In simple terms it is an income payment made to every man, woman and child. It has the potential to replace virtually all welfare payments including pensions, unemployment benefits and family support payments for children: in the case of unemployment, it would remove the need to redefine ‘employment’ to meet the circumstances of the new economy. As it would be paid to everyone, it means those who are working would also receive the payment and it becomes necessary to apply tax to the payment so that those who are in work return a much greater proportion of it in the form of tax. Even the MMT approach would require taxation of such a payment to ensure that it did not create demand beyond the productive capacity of the economy. For businesses it would help maintain the consumer base and so be of benefit to them. With fewer workers, the productivity benefits of robotics and computerisation will not be spread throughout society but further concentrated in the hands of the company owners and shareholders, unless something like a universal basic income is adopted. As robotics and computerisation spread and replace major portions of the workforce, such an approach may become the only viable option.

It appears we have a rocky road ahead. Governments will not be able to respond effectively if they cling to neoliberal economic approaches. Avoiding regulation and spending, and leaving resolution to ‘the market’ will be a recipe for disaster and even businesses will suffer. Without new approaches we will continue to have an economy in which people are placed last and well-being is barely a consideration.

It is time this conversation began because if we leave it until the impact is being felt, it may be too late to avoid a major economic downturn, ironically created by the very process businesses thought would boost their profits.

What do you think?

Are businesses blindly pursuing robotics and computerisation without fully understanding the wider implications?

Can ‘the market’ be trusted to reach new solutions or must governments first find new approaches (including MMT) to protect the people?

This article was originally published on The Political Sword

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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 1)

By Iain Dooley

In a recent article on The AIMN, ‘What is Modern Monetary Theory and will it help?‘, Ken Wolff gives an excellent outline of Modern Monetary Theory (MMT).

It’s a great article and covers all the key points about MMT with absolute clarity, and yet in the comments we still had many people who either:

  1. Said they were still trying to understand MMT
  2. Disagreed with elements of what Ken had said, or
  3. Claimed that MMT was somehow flawed (with reasons variously given or not given).

I have been “monsplaining” (a term I coined to describe the act of explaining MMT to people on social media) for about a year now and I have found that the key difference between critics and proponents of MMT is which creation story of money they subscribe to.

This is a debate that predates the development of MMT by about 350 years and one that most people don’t realise even exists.

Basically it comes down to the following 2 options:

  1. Currency arose spontaneously out of barter and markets are created spontaneously, or
  2. Currency is a constitutional project created by a sovereign which thus creates markets.

In the former story (advocated by people like Positive Money UK, Austrian school economists, monetarists and other orthodox economists) people created money because they are enterprising geniuses and then the government came and screwed everything up by wanting a piece of the action.

This is the dominant money creation story.

In the latter story people were living a life devoid of liquidity and therefore lacked the ability to create complex organisational structures in the public purpose. A sovereign creates liquidity in the form of currency that not only allows it to provision resources to the public purpose but also allows private markets to flourish.

I’m sure you can see how the money creation story you believe will determine all your subsequent economic and political views.

What does this have to do with MMT?

If you try to understand MMT without first accepting the state theory of money, you will face an uphill battle.

You will look at equations and find them daunting and confusing. You will be blinded by the operational contrivances of our current economic system. You will find statements made by MMT economists and proponents confusing and unintuitive, and will be prone to believing people when they criticise MMT based on their own flawed understandings of economics.

On the other hand, if you start by accepting the state theory of money, you will find that everything about MMT is a logical extension from it.

You don’t need maths or models and you can easily see through the veil created by our system of “sound financial policy” to the heart of how things operate.

The whole exercise becomes tremendously simple.

This is why MMT economists and proponents call orthodox economists “flat earthers” and why on more than one occasion I’ve stated that “disagreeing” with MMT is like disagreeing with gravity: you might not understand how it works, but this is how things do work.

And it’s not just how things work now that we have a “fiat” currency; in fact this term is misleading because all successful currencies have been “fiat”.

Even when money is made from a commodity, has a fixed exchange rate or is convertible to a commodity, it is still a “fiat” currency, it’s just that the way you set things up can restrict your domestic policy space.

But until you have internalised the state theory of money, you will not believe me.

So in this article I’d like to present the state theory of money, some resources where you can read further if you don’t believe me, and provide direct responses to several of the comments people left on Ken’s original article.

The economy is a chore chart

You are a parent and you have some children. You want your kids to do some chores around the house so you put a chart up on the fridge for each kid. When they do a chore they get a tick, and 10 tickets equals 15 minutes time playing computer games.

Some things should be immediately obvious:

  • The amount of chores you can get done is limited by the number of children you have, not the number of ticks you can write down
  • The children cannot redeem ticks unless you have issued ticks; in other words the “spending” of your currency precede the “taxation” of your currency
  • When you issue ticks, you create them and when the children redeem ticks they are destroyed

But something else has to happen before these “ticks” become “currency”.


What we have looked at a system where the transactions occur only between the parents or “sovereign”, and the children or “citizens”.

This is basically a communist system where we have 100% employment by the sovereign and no private purpose.

The kids have no mechanism to trade their ticks and do not produce anything for sale.

Now imagine that we created ticks inside a spreadsheet instead of written down on paper, and we created a system whereby kids could allocate ticks to one another.

We might find that the kids start to pay each other for things.

This would mean that kids actually wanted to have more ticks than they needed simply for getting their computer time. In other words, we would have to issue more ticks than were redeemed in order to allow this “horizontal” medium of exchange to exist (issuing more ticks than are redeemed? Should sound familiar to you: this is called “deficit spending”; more on this below).

So we might find that the kids actually do more work than they need to, in order to have some ticks left over after they redeem them for computer time to spend on goods and services created by their siblings.

But if the kids wanted a means of trading between each other, why didn’t they just make up their own system? Why didn’t they just do the bare minimum required to get their computer time, then do no more chores and create a “parallel” currency that allowed them to freely trade between each other?

Here’s a thought experiment:

Imagine they did: the kids decided to use poker chips. So each child did just enough work for the “sovereign” to cover their computer game needs, then they used poker chips to get each other to do stuff.

The chips could be redeemed later with the same or a different child to get them to do work in return.

The first week, child 1 worked really hard for all the other kids and collected all the poker chips.

The second week, child 1 said “okay now I am going to pay you guys to do work for me” and the other children said “nah we aren’t using poker chips any more” or “I only do 5 minutes work for 20 poker chips” or something like that.

There was no anchor for the value of the poker chips; nothing that they represented as an obligation to a sovereign that the children all had in common.

Such a fundamentally flawed system could never survive for very long, and could never be as robust as a sovereign monetary system (this little thought experiment should be enough to demonstrate to you how ludicrous the notion that currencies spontaneously emerge is, but again the resources provided at the end of the article go into this in much more detail).

This “parallel” currency failed and so the kids asked their parents for a way to trade officially issued ticks, and did more chores in order to acquire them.

Sure you might say that the kids could draw up a charter of value for poker chips and enforce that people accept them in payment but this is just another form of sovereign authority, albeit more democratic.

Tomorrow: What the Fiat?!


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What is Modern Monetary Theory and will it help?

By Ken Wolff

Modern Monetary Theory (MMT) is a macroeconomic theory for the current age in which governments have abandoned the gold standard and also floated their currencies. It is ‘macroeconomic’ and ‘monetary’ because many of its conclusions relate to the money supply in an economy. Does it offer scope for a new economic approach recognising people? Can it better assist responses to robotics and computerisation than current economic approaches?

Historically, gold was important because coins were minted from it (and silver). Even when coins were no longer minted in gold, the currency issued by governments was convertible to gold and governments needed to hold sufficient gold reserves to satisfy a potential demand from all holders of their currency — that was the gold standard. In that situation governments could not spend without first taking money from the economy (taxation) because the money supply was limited to match the quantity of gold. Following WW2, fixed exchange rates also meant that governments, through their central banks, had to defend the rate they had fixed by buying or selling their own currency in international money markets: that also affected the money supply in their home economy and also placed limitations on government spending. Floating currencies now allow central banks and governments to target domestic economic policy goals knowing that the floating exchange rate will resolve the currency imbalances arising from trade deficits or surpluses.

MMT points out that much economic thinking since the 1980s operates as though the gold standard is still in place — namely, that governments can only fund their spending by taxation and therefore deficits are bad — but some MMT proponents and supporters argue that this has ideological (neoliberal) rather than genuine economic underpinnings.

Since the abandonment of the gold standard, most countries, including Australia, now have a fiat currency — that is, it is created by government fiat (decree) — and it has no intrinsic value. My $50 note is not matched by $50 worth of gold any longer, nor is my plastic note worth $50 itself (in 2012 Australia’s polymer notes cost 34c each on average to produce irrespective of their face value). My note has value only because the government decrees it has and the government is the monopoly provider of currency: therefore it is the currency I need to participate in the economy and to pay taxes.

MMT places this new reality at the centre of its approach. A sovereign government issuing its own currency can never run out of money, never go bankrupt or default on its ‘debt’. That in a sense was Greece’s problem: as part of the Eurozone it was no longer an issuer of its own currency. In that circumstance, as for the states within a sovereign nation, the oft-used analogy of a household budget still applies but it does not apply to the sovereign issuer of a currency.

The ‘sovereign issuer of currency’ argument leads to probably the most well-known and sometimes controversial aspect of MMT, that a government can always ‘create’ money. The critics argue such printing of money — although these days it actually requires only a few keystrokes on a computer to create deposits in the private banking system — will lead to hyperinflation as in Zimbabwe or the Weimar Republic in post-WW1 Germany. MMT accepts that inflation is one factor that imposes a limit on government spending but that limit is not reached until all the ‘real’ resources of the economy are fully utilised — all human resources (full employment) using all available physical resources. If a government continues to spend after that, then dangerous inflation may result but, prior to that point, MMT argues that government spending to assist utilisation of available resources will not lead to uncontrolled inflation. For MMT, the issue is not just money but the real human and physical resources that are available to the economy and not currently being used:

If there are slack resources available to purchase then a fiscal stimulus has the capacity to ensure they are fully employed.

As a means to help control inflation, current mainstream economic thinking accepts the Non-Accelerating Inflation Rate of Unemployment (more commonly known by its acronym, NAIRU). The Australian Treasury uses NAIRU in its modelling as the basic foundation of longer-term stable inflation — currently the NAIRU in Australia is 5% unemployment. Before NAIRU, full employment was taken to mean there would be about 2% unemployment, allowing for people moving between jobs or unemployed short term for various reasons. In practice, NAIRU provides a ‘buffer stock’ of unemployed which basically means that having those extra unemployed, above the previously accepted 2%, provides downward pressure on wages growth because the unemployed are more willing to accept lower wages simply to have a job. The argument goes that if unemployment falls below the NAIRU level the competition for workers will mean employers accept demands for higher wages thus leading to higher inflation. (Despite the whole capitalist free market system being based on competition, whenever workers appear to have a competitive advantage it is decried as a threat to the economy!)

MMT rejects the NAIRU and instead proposes a Job Guarantee for the ‘unemployed’, sometimes referred to as ‘transitional employment’ which probably describes it better. As opposed to the NAIRU ‘buffer stock of unemployed’, MMT offers a ‘buffer stock of employed’ but this is done at a ‘fixed price’ — in Australia this would be the minimum wage, inclusive of standard employment conditions. It means the government supports employment until such time as a person obtains higher paying mainstream work and it will be in productive work using under-utilised resources:

What matters … is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available — if they are not already being used to produce something else — then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

On broader monetary issues, MMT says that there can only be saving in the private sector, inclusive of banks, businesses and households, if the government spends more than it collects in taxes: that is, only when the government adds money into the economy can there be private sector saving as well as investment.

A good, simplified explanation of this was provided by John Carney at CNBC in 2012:

The MMT people aren’t actually referring to you and I saving. They aren’t even talking about the entire household sector saving financial assets. They are talking about the entire private sector spending less money than it earns.

You can easily see why this would be impossible without the government spending more than it collects. Every dollar someone is paid is a dollar someone else has spent. If we all — every single person and company — spend less than we are paid, very quickly we will find we have to be paid less. The aggregate effect of savings is to reduce the total amount people are being paid for things.

So this is what MMT people are talking about when they refer to a “private sector desire to net save.” They mean that if you add up all the earning, spending and savings of every person and company in the economy outside of the government, sometimes you find that the private sector is trying — nearly impossibly — to earn more than it spends.

The only thing that can make private-sector net savings possible is government spending. If the government spends more than it takes in taxes, the private sector can earn more than it spends. Remember, if everyone pays less than they earn, some outsider must be paying more than he earns.

The MMT equation for this is:

(G – T) = (S – I)

Or in words, government spending (G) minus taxes (T) equals private saving (S) minus gross private investment (I). This is so because in macroeconomic terms the two represent the entire amount of money in the economy. And the other key of this equation is that it shows that money does not come into being in the private sector unless the government has first spent it (over many years now).

MMT points out that when governments run surpluses it leads to an increase in private sector debt because, in that circumstance, if the private sector wishes to save and invest, it has to borrow from the existing pool of money (and the government surpluses are actually reducing the money supply). This is explained by the concept that transactions between banks, businesses and households are ‘horizontal’ transactions and cannot change the amount of money in the economy (liquidity). Only a ‘vertical’ transaction between the government and the private sector can change liquidity (MMT includes both the treasury and central bank when it talks of ‘government’).

In the USA, on all occasions when the government has run surpluses, and reduced debt for a few years, it has been followed by recessions or depressions. Arising from the indebtedness forced on the private sector by the government surpluses, there comes a point when the private sector reduces spending because it cannot afford to take on more debt, thus creating an economic slow-down. In such circumstances, only government spending can relieve the situation. (It is also of interest that since 1776 the US government has been in debt in every year except for the years 1835 to 1837.)

In a globalised world, however, national economies do not operate in isolation so one more aspect needs to be added to the equation: exports (X) and imports (M).

(G – T) = (S – I) ‒ (X – M) or

(G – T) + (X – M) = (S – I)

If a country has a trade surplus that adds to private savings. Many countries, however, as Australia, operate a trade deficit which means that private sector saving is reduced and more reliant on government spending. And at a global level the nett outcome of all countries’ trade must sum to zero, so it is impossible for every country to run a trade surplus — a surplus in one country necessarily requires a deficit in other countries. So a trade deficit or surplus is not bad in itself but does affect private sector saving and creates more need for government to adjust its spending appropriately.

Although even MMT still talks about deficits and surpluses, my reading is that those words are less relevant in MMT. If a government can create money it can never really be in deficit (except perhaps in a point-in-time accounting sense). Even claiming that the deficit represents spending more than collected as taxes is not relevant. MMT says that the government does not need taxes in order to spend — it can always create whatever money it needs. The real purpose of taxes is to take money from the economy or, in economic terms, to reduce liquidity, meaning there is less money to spend and thereby total demand across the economy is also reduced. What taxes can achieve is to create ‘space’ for government spending. If an economy is already running at capacity and the government continues to spend, that is increases liquidity and demand without first making space for that spending, then high levels of inflation may result because there is more money in the economy to buy the same amount of goods and services, meaning people competing for those goods and services are willing and able to pay higher prices to obtain them. So taxes can be important in allowing government spending without dangerous inflation but are not necessary in themselves for that spending.

Similarly MMT argues that the sale of government bonds is not necessary to fund government ‘debt’. So-called ‘debt’ can actually be met at any time because the government can ‘create’ the money to do so. But as always the limiting factor is controlling demand in relation to the capacity of the economy so as not to allow dangerous levels of inflation.

MMT’s explanation is that the sale of government bonds is primarily a means of controlling interest rates: this relates to the overnight commercial bank reserves placed with the central bank but I won’t attempt to explain how that works. (This interview with Bill Mitchell for the Harvard International Review provides an explanation and also a good summary of MMT.) A secondary reason is that banks, financial markets and the private sector generally, desire government bonds as a safe haven to park money. Here in Australia, that became obvious during the Howard/Costello years when the government paid down its debt and saw little need to make new bond issues but the private sector complained and the government had to issue more ‘debt’ even though it had no debt: that fact alone gives credence to the MMT argument.

Although the approach is called Modern Monetary Theory, it places more emphasis on fiscal policy. Bill Mitchell writing on the current economic problems said, ‘until we stop relying on monetary policy and restore fiscal policy to the top of the macroeconomic policy hierarchy, nothing much is going to change’. Mitchell argues that governments have been using the wrong approach to overcome the current economic stagnation affecting many countries:

It is not that they have run out of ammunition. They have been using the wrong ‘ammunition’. For example, trying to drive growth with low or negative interest rates failed to work because the lack of bank lending had nothing to do with the ‘cost’ of loans.

It had all to do with the dearth of borrowers. Households, carrying record levels of debt and facing the daily prospect of losing their jobs, were not going to [start] suddenly bingeing on credit again.

Business firms, facing slack sales and a very uncertain future, could satisfy all the current (low) levels of aggregate spending in their economies with the existing capital stock they had in place and therefore had no reason to risk adding to that capital stock.

In the MMT model, the remedy to many economic problems is fiscal stimulus not austerity which only exacerbates the problems. And as a sovereign issuer of currency the government always has the capacity to provide such a stimulus when there are under-utilised resources in the economy.

Using fiscal policy, and the knowledge that governments can spend as much as they wish, limited only by available real economic resources and inflationary impacts, MMT suggests that the real issues are social policy issues. The debate should not be about ‘debt and deficit’ but what we as a society wish to achieve, wish to become, and, within the limits mentioned, governments do have the capacity to meet those goals. For me that is an important outcome from MMT, not just that it offers a new economic approach but that it offers scope for a new policy and political approach. To that extent, it does allow space for people by creating an economic approach that recognises social policy goals are of critical importance and the ability to achieve them is not so limited or proscribed as it is by existing neoliberal economic theory. For that reason alone MMT deserves more attention.

Next week, in the last of this four-part series, I will consider whether governments are ready for the coming economic and social changes.

What do you think?

Can MMT really change government thinking and overcome current neo-liberal approaches, not just in government but in Treasury?

Will it take a new generation of economists before MMT is accepted? Will that be too late to help the people?

This article was originally published on The Political Sword

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An economy without people

By Ken Wolff  

Last week I suggested that modern economic theory has lost sight of people but the reality is now becoming that many segments of the economy require fewer people to undertake the work and that has serious implications not just for the people losing their jobs but for the broader economy.

The loss of jobs is not new. In Australia since the 1970s there has been an ongoing loss of un-skilled jobs, particularly for males. In 2006 Sue Richardson, with the National Institute of Labour Studies at Flinders University, wrote in Unemployment in Australia:

By 2001, at every age, at least 20 per cent of men with no post-school qualification were not in the labour force. These men have not withdrawn from the workforce because they have handsome alternatives that mean they do not have to work … Overwhelmingly, the reason they are not in the labour force is because they cannot find work and have given up looking.

And in 2004 Bob Gregory wrote in Between a Rock and a Hard Place: Economic Policy and the Employment Outlook for Indigenous Australians:

An exceptional feature of the Australian labour market over the last three and a half decades has been the loss of unskilled male full-time jobs. This loss has been so substantial that as a proportion of males 15‒64 years of age one full-time job in four has disappeared. Most of this job loss has fallen upon the unskilled …

At the same time there were skills shortages. In September 2004 the Australian Industry Group reported a shortfall of between 18,000 and 21,000 in the manufacturing sector for skilled tradespersons.

And a shift in the make-up of the workforce was already occurring. In 2006, the then Department of Employment and Workplace Relations (DEWR) reported that between 2001 and 2006, 78% of new jobs were created in the four most highly skilled occupational groups: Professionals (17.4% growth), Associate Professionals (18.3% growth), Managers and Administrators (28%) and Tradespersons (10%) but job growth for Labourers had been only 0.6% in that five-year period.

Skills shortages continue. In February this year the Department of Employment published its list of occupations in which there were shortages during 2015. Twenty-five occupations were experiencing national shortages, including higher level occupations like surveyors, optometrists and audiologists. The list included trades such as motor mechanics and automotive electricians, bricklayers, glaziers, roof tilers as well as wall and floor tilers, air conditioning and refrigeration mechanics, chefs, hairdressers and cabinet makers.

The department also released its jobs outlook, Australian Jobs 2016. Overall employment was projected to grow by 8.3% over the next five years which appears to be little more than matching population growth. Six industries were expected to grow by more than ten per cent: Accommodation and Food Services (12.0%); Arts and Recreation Services (10.8%); Education and Training (13.0%); Health Care and Social Assistance (16.4% and it is also the largest industry by employment numbers); Professional, Scientific and Technical Services (14.8%); and Rental, Hiring and Real Estate Services (11.9%). Employment in Mining will decline (‒14.1%) as will Manufacturing (‒5.3%) and Agriculture, Forestry and Fishing (‒3.1%).

When it comes down to occupations ‘Professionals’ provided 41% of new jobs from 2010 to 2015 and employment is expected to grow by 14.5% to the end of 2020. Seventy-four percent of professionals hold a university degree. Professionals are also more likely than other workers to work full-time.

In that period of five years up to 2015 ‘community and personal service workers’ provided the second highest proportion of new jobs, 22% (they also make up about 10% of all employment). Their employment has grown by 16.3% since 2010 and is expected to grow by another 19% in the next five years. Nineteen percent hold a university qualification and 42% a VET Certificate III or higher but 55% are employed part-time. It includes child, aged and disability carers, waiters and bar attendants and baristas.

Technicians and trades work provided 11% of new jobs up to 2015 and employment grew by 5.2% in that time and is projected to grow 5.5% in the next five years. Most of these workers are employed full-time and 62% have a VET Certificate III or higher.

Among the lower-skilled occupations there were, late in 2015, 1.7 million clerical and administrative workers, 1.1 million sales workers, 1.1 million labourers and 740,000 machinery operators and drivers which is still about 40% of the Australian workforce. Their projected growth to the end of 2020 is 1.6%, 9.3%, ‒1.3% and 1.0% respectively. The groups include receptionists and office managers, checkout operators, real estate agents, truck drivers, forklift drivers, delivery drivers, cleaners, kitchenhands and packers, as well as labourers.

The more rapid projected expansion of highly qualified occupations appears consistent with the experience in America identified in 2013. But in America there had also been a loss of middle-ranking jobs, largely due to the automation of routine tasks, not only for manual labour (classified as routine manual work) but by the computerisation of office, sales and administrative work (classified as routine cognitive work). There had been an increase in the number of jobs for non-routine work, both cognitive and manual. The former (non-routine cognitive) requires higher levels of education and generally commands higher wages, but the latter (non-routine manual) involves work such as cleaning, food services, security services, home help, and so on. This is leading to a polarisation of the workforce in America, with more high-paid jobs, more low-paid jobs, and fewer in the middle.

The basic problem with those projections is that they are based on what has already occurred and do not take full account of the increasing pace of technological change nor the areas into which it might move in the coming decades (and the Australian projections are short-term, only for five years).

In January this year CSIRO (and Data 61) released “Tomorrow’s Digitally Enabled Workforce” in which it found that up to 44% of current Australian jobs were under threat of being replaced by robotics and other computerisation. It found that, as yet, there was no evidence of the ‘hollowing out of the middle’ in Australia but it did find:

… Australian men, particularly single men with less education, are becoming increasingly likely to drop out of the labour force. … Despite strong jobs growth in the service sector, it appears that for a growing number of men the labour market has little to offer unless they re-train.

That reflects the earlier findings of Sue Richardson and Bob Gregory. But it also found that in the future there will be a greater need for individuals to create their own jobs and even a need for higher skill sets to access entry-level positions. So a new flexible education will be required. Similarly, workplaces will need to be more flexible (which can also lead to greater casualisation and use of contract workers). Some changes, however, may lead to greater disparity in regional areas, particularly for older workers: past experience suggests that displaced older workers in regional areas do not relocate to find work but, if forced to, will relocate to cheaper housing in the same location. So new approaches to unemployment and transition to work will be required.

The difficulty with the emphasis on education and higher skills is that has already been happening in America but simply creating an oversupply. It was found that highly educated workers were being pushed down the employment ladder into lesser-skilled positions, pushing the low-skilled further down or out of the workforce altogether.

The CSIRO report did not go into the detail of individual jobs but its estimate of jobs at risk was based on a model used by Oxford University researchers who did a study of the US labour market: The Future of Employment: How susceptible are jobs to computerisation? That report found that 47% of US jobs are at high risk of computerisation. Given the work currently being undertaken on driverless cars, it is foreseen that in the next decade or two driverless trucks will become the standard form for movement of goods and many truck drivers will become redundant. Some have suggested that on major inter-state routes driverless trucks should actually have their own lane. So governments will also need to respond to those changes.

In Australia, Rio Tinto is already automating its Pilbara iron ore mines with driverless trucks and automated charge drilling and setting machines, and is also hoping to have driverless trains to deliver the ore to port (tests have been conducted but recent software glitches have delayed implementation). That is an example of even some skilled work being automated but the huge driverless trucks do require the worksite being ‘landscaped’ to suit.

As more data becomes available and can be stored, office and administrative support positions will be affected and further encroachment into manufacturing will take place. Even aspects of the construction industry could be affected as robotic prefabrication of parts takes place in factories, requiring fewer workers for the actual construction and even circumstances where robots can piece the prefabricated parts together on-site (as has already occurred in Japan).

The availability of ‘big data’ is important in expanding the reach of computerisation. For example, an American oncology centre is using computers to provide chronic care and cancer treatment diagnostics. This could be done because data from 600,000 medical evidence reports, 1.5 million patient records and clinical trials, and 2 million pages from medical journals were able to be stored and used for ‘benchmarking and pattern recognition purposes’. Examining such a vast amount of data would be impossible for a human but not a computer (if it is programmed correctly). As more ‘big data’ becomes available computers will expand their reach.

The report into the US workforce also found that automation will move into non-routine manual work in sales and services. A simple example is the increasing availability of robotic vacuum cleaners capable of replacing at least one task of a hired cleaner: how many other tasks will follow? This follows the historical pattern of technological change, namely breaking down apparently ‘skilled’ jobs into smaller unskilled components — the move from the traditional skilled ‘carriage builders’ approach to early car manufacture to Henry Ford’s production line manned mostly by unskilled workers. If this prediction proves correct, the growth in low-skilled service jobs that has been occurring in the US will actually begin to reverse during the next couple of decades.

This does not mean that all jobs in these areas will be lost but a significant proportion will be.

Jobs least affected will be those requiring creativity and social skills:

… generalist occupations requiring knowledge of human heuristics, and specialist occupations involving the development of novel ideas and artefacts, are the least susceptible to computerisation.

Others have since suggested that even some creative work can be done by computers: already there are computers capable of creating musical scores (no doubt based on ‘big data’). If that continues into the future, and AI becomes a reality, there will be almost no job that is not at risk.

This new world is giving rise to what is known as ‘the gig economy’. This means that, like a band of musicians, people will work ‘gigs’ for which they must search.

A study released in January this year by The Aspen Institute in the US found 45 million Americans (22% of adults) were working in the gig economy providing ride sharing, accommodation, food delivery and other platform-based services. For 14 million it was their main source of income and just over half, 23 million, were young, aged 18‒34.

However, most workers (72 percent) believe companies should be doing more to provide benefits, and more than two-thirds worry that as independent contractors and not employees, they don’t have a financial safety net.

Anecdotal evidence from participants suggests that many, but not all, see such ‘work’ as extra income to meet bills and so on, or as income in periods between mainstream permanent work. Or they are working many jobs to achieve a reasonable income and that can create problems — such as lack of sleep. Some examples:

I keep busy but I have to constantly juggle different gigs every day … What scares me most is that I have no guarantees, no steady pay, no stability. Everything could end overnight, so I can never make long-term plans. [young woman in Turin]

In the short term, this way of working works, but there is a long-term downside. It’s very difficult to build a future, to save for a downpayment on a house, say, or to save for [a] college fund, on a full-time Uber driver salary or even if you combine multiple freelance services. [Uber driver in Los Angeles]

I definitely advocate this way of working, but it’s not for the faint-hearted — if you’re working three or four jobs in a day, you need to be very disciplined and have a keen sense of priority. You have to be a bit of a workaholic: finding the balance and boundaries to fit everything in can be a bit of a juggle. And obviously not having paid time off is a downside. [Airbnb host, charity worker and interior designer]

Some professionals can do better in the gig economy as the internet (and specific sites) allow them access to a much wider range of clients in a much wider range of locations. For some, whose work can be done over the internet, the location of the client no longer matters and, therefore, having access to a larger number of potential clients is an advantage. Conversely, the sites involved also permit potential clients to more closely match the skills of their selected professional to the work required.

Companies will rely less on full-time employees and will hire on a task or project basis. This will apply across many job categories, not just professionals. Companies will be able to hire the specific skills required for a single task, so the work could range from a few hours to a few days. People will be able to specialise and offer their skills to many clients. But this will also spread the problems described by people currently working in the gig economy.

Such an approach is already moving down the employment ladder to very mundane tasks, and to ‘micro-tasks’ such as tagging images, extracting keywords, checking address data, which sometimes may be no more than a few minutes work for each ‘job’. These are termed human intelligence tasks (HIT):

At the time of writing [August 2015] there were about 300,000 HITs on offer on AMT [Amazon Mechanical Turk]. An average Turker (as they are referred to by AMT) can expect to earn US$2 to US$5 per hour on a good day but there’s no guarantee in terms of regular work availability.

Not all of these jobs will remain. Uber, for example, is already investing in and preparing for driverless vehicles. And computers can already undertake some of the minor tasks currently available. Whether people can be prepared in time for the new jobs that may emerge, or there will simply be massive unemployment, will be the big question.

All of the above may prove to be wrong as we do not have a very good record predicting the future — some things change less than we foresee while we seem to completely miss other significant changes. In the 1960s some popular magazines were predicting that by the early 2000s we would have flying cars, or at least hover cars. I also recall a television program from that time, specifically looking at future change, that predicted we would be required to work only ten hours per week in the new millennium to maintain our lifestyle.

Cars have changed, being more luxurious and incorporating many more safety features than in the 1960s but they still have wheels and still require roads. And, in Australia prior to the GFC, individual work hours were increasing, not decreasing. Our lifestyle has changed: the average new house is now twice the size it was (as is the cost); more homes incorporate central heating and/or air conditioning; televisions have grown both larger and smaller and few households are now satisfied with only one. But the biggest change that few, if any, predicted was the explosion in digital technology; the rise of computers, the internet and the information age; and now the portable devices that allow us to access that information at any time and almost any place.

So do we have the rise of robotics and ‘the gig economy’ right? We cannot say with certainty. But to the extent that they are already happening we do need to plan for them and consider their ramifications both for people and the economy as a whole because so much work will no longer require people, or require them for only short durations. We may not get it quite right but we cannot ignore it.

Next week I will consider Modern Monetary Theory (MMT) and what it may offer to meet the challenges of the new economy.

What do you think?

How far can robotics and computerisation go in reducing the need for humans? Is there a limit?

Will unions themselves become redundant if more and more people do not have work or enter (or are forced into) ‘the gig economy’?

This article was originally published on The Political Sword

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Here’s something to think about…

What does one do when one feels disempowered? What does one do when one feels one’s needs are being ignored, that one no longer has a voice? Well, there are several options.

If we feel that way, we can join one of the major parties and impress our opinions upon those leading the party through the branch system. We can try, but in all probability, that will end in tears.

We can disengage and go fishing or take up golf. We can simply disengage and count grains of sand, or we can voice our feelings through blogging that no one reads.

Another option is to voice our feelings, blogging to like-minded people who support us and affirm us. That is what contributors and readers of the AIMN do. We support each other in the hope that our voices will ultimately carry across the great divide and be heard by the major parties.

Some go to the extreme of starting their own political party. This has been a popular option of late. There is a glut of minority parties out there today, all started by people who were sick and tired of being ignored.

Starting a new political party is not that difficult. The recent surge in start-ups demonstrates this. It’s largely just a matter of paperwork. Getting it off the ground, however, is something else. Being heard and supported in great numbers though, is often a bridge too far.

Today, new political parties are like a poorly nurtured seed planted in winter. They sprout in the spring but die in the summer heat. Consequently there is one thing that they all have in common. None will ever bloom to their desired potential. None will ever form government. Not in a hundred years will that happen.

Yet, if we were to join them all together, make them as one party such that they become a much larger, single contender in the political boxing ring, there is a much better chance of their members being heard, of being listened to and having their concerns addressed.

Unity is strength. Which brings us to the point of this article. The Australian Employment Party was recently formed to extol the virtues of Modern Monetary Theory. On its own, it is just one more voice crying in the wilderness, one mostly ignored, one viewed by a sceptical electorate as another nut case collection of loonies having their moment in the sun.

Its co- founders, Iain Dooley and Tim Jones are not nut cases. Their raison d’être is to address the financial mismanagement of the government and the opposition who are welded to the neo-liberal philosophy of inequality. That’s right. Both the Liberal and the Labor party support a neo-liberal ideology that manages and promotes inequality.

Perhaps the Labor party is less inclined to this ideology than the Liberal party, but were they to deviate from their present manifesto, they would be sacrificing themselves to the outcry of the high priests of Capitalism and condemning themselves to the wilderness for generations to come.

The electorate’s response would be devastating and it would be terminal. Not because the electorate would know any better. But because, as captives to a biased media, they would never be able to recognise the benefits that would flow from a more equal society. They would never be given the chance.

Both Iain and Tim recognise the futility of forming a party that is unlikely to grow beyond cult status. Both realise that the only way to be heard and gain respect is to draw in more and more people from backgrounds as diverse as those that currently exist within that plethora of minor political parties already establish.

That is precisely what Iain is proposing. In an email sent out to members, he articulates the problem and the solution. It is an ambitious call, perhaps futile, but perhaps not.


iain-dooleyHere is what he writes,

“I started work on the AEP because I wanted to do one thing:

I wanted to do senate estimates… with someone from treasury or the RBA and get them to admit on camera that the government is not dollar constrained.

That taxes and bond sales do not finance spending.

That we can adequately fund health, education, social security and full employment without tax increases.

That we don’t have to grovel to the private sector for jobs and perpetuate environmentally destructive industries.

That poverty and misery and exclusion and inequality are solvable problems with a couple of tweaks to how we run our economy.”

The full text of Iain’s email is here.

Each of these minor political parties has their own concerns which prompted their formation in the first place. From the Seniors United Party of Australia to Derryn Hinch’s Justice Party, they all have a purpose and a goal. The beauty is that each and every one of them could be accommodated within the MMT economic framework.

Furthermore, and the most worrying thing for the major parties, is that at the last federal election they captured 24% of the primary vote, twice that of the Greens.

Imagine therefore, what a transformation it would be were they to combine with the Greens. At long last the two party dominance of the Australian political scene would have been smashed.

Now there’s something to think about!

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Don’t count on George to get you a job

Investing Daily is an online service which, according to them, gives “Profitable advice for smart people”.

A few weeks ago they published an article titled Coal’s Terrible, No Good, Worst Year Ever.

So what are the facts they are giving out to prospective investors?

“The recently released BP Statistical Review of World Energy registered new all-time highs for the production and consumption of oil and natural gas, and for fossil fuels as a whole. But the story for coal was much different. In fact, 2015 brought the biggest drop in coal demand since 1965, the first year the BP Review began tracking energy statistics.

How bad was 2015 for the coal industry? Since 1965, annual coal demand has only declined by more than 50 million metric tons of oil equivalent (MMtoe) twice. Following the global financial crisis demand fell by just over 50 MMtoe in 2009, and then last year it tumbled by 71.3 MMtoe.”

According to our Resources Minister Josh Frydenberg there’s no need for concern.

“I’m confident that Australia is better placed than most other countries to ride out the current cyclical downturn and be ready for the next market upturn.”

Counting on this being cyclical is foolhardy.

China has long been the world’s largest producer and consumer of coal. In 2015, its 1,920 MMtoe of coal consumption accounted for half the global total. China’s coal consumption grew for 15 straight years until 2014, increasing even during the 2008 financial crisis.

But now Chinese coal demand has declined for two straight years. The 29 MMtoe demand decline in 2015 was the largest on record, and was the result of flat power industry demand, higher production of renewable power, an increase in natural gas consumption, and a huge increase in nuclear power (+29%) production.

The U.S. had been the world’s second-largest consumer of coal, but the decline of its coal demand in 2015 — the largest in the world at 57 MMtoe — dropped the U.S. to third place among the world’s coal consumers. In fact, the primary reason for the huge global demand drop for coal in 2015 was the sharp decline in U.S. coal demand. This also resulted in the U.S. having the largest decline of any country in carbon dioxide emissions in 2015.  Over the past decade, U.S. coal demand has dropped nearly 30%.

In April, Peabody Energy became the latest in a long line of coal producers to file for bankruptcy protection in the US, citing a prolonged downturn in coal prices as the major driver behind its bankruptcy filing.  The move is significant since Peabody is the world’s largest private-sector coal producer.

Metallurgical coal prices have fallen roughly 75 percent since 2011, according to Bloomberg, and analysts are not expecting a turnaround anytime soon. “The outlook for coal players remains bleak,” Sandra Chow Singapore-based credit analyst told the news agency. “Any recovery remains a long way from here.”

Other coal producers who have filed for bankruptcy protection in the past two years include:

  • Alpha Natural Resources
  • Walter Energy
  • Patriot Coal
  • Arch Coal
  • James River Coal

Peabody stressed that it expects its operations to continue in light of the announcement, and that its Australian platform would not be a part of the filing.  But the Australian arm made a nearly $3 billion loss last year.

Peabody Australia Holdco also made a $1.2 billion loss in 2014, and its latest accounts show its total debt has increased to $10.7 billion while its total assets are worth $4.1 billion, leaving the company owing far more than it is worth.

Coal producers, and conservative politicians, have been banking on demand from India’s growing economy to boost the industry but, in April this year, India announced a 15% year-on-year decline in coal imports for the twelve months to March 2016, as the country remains firmly on track to meet its publicly stated goals of ceasing thermal imports by 2017/18.

Even a cursory look at the evolving energy policy in India makes it clear that Adani’s Carmichael mine project in the Galilee Basin has no future.

The Adani proposal is a low energy, high ash thermal coal deposit that would deliver coal into India at double the cost Coal India Ltd is supplying domestic coal and even at current depressed coal prices, it is more expensive alternative than domestic solar.

Indian fossil fuel subsidies have been radically curtailed in 2014/15, and India’s tax on coal doubled to US$4/t effective April 2016.

In this context, with unsubsidised, utility scale solar electricity now available at as low as Rs4.34/kWh (US$64/MWh) fixed flat for twenty five years, imported coal is structurally challenged.

Indian solar generation costs have fallen 25% in just one year. IEEFA forecasts that continued technology and economies of scale gains will continue at 5-10% annually, further eroding imported coal’s competitiveness.

But never fear.  George Christensen assures us that “The viability of the Adani Carmichael Coal Project is not in doubt” despite the Adani management saying that no capital expenditure is planned by the company for the project until there is “visibility” of a rebound in the coal price.

From the Axis Capital report…

Even the conservative International Energy Agency said late last year that it did not expect Carmichael and other projects in the Galilee Basin to be built. “It is not likely that the above listed projects will be operational by 2020, if ever,” it said in its latest medium term coal outlook.

The Coalition might tell us that they are the better economic managers but I sure as hell won’t be taking their advice on investment.

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Time for a new economic model

By Ken Wolff

Late in the 1970s Keynesian economics was largely abandoned when it failed to explain the stagflation that had occurred during that decade. Recently, in my piece ‘What economic plan?’, I quoted an Australian analyst with the CBA who suggested that recent national data released by the ABS was showing ‘bizarre’ results, an ‘anomaly’. That sounds suspiciously like the criticism of Keynesian economics in the ’70s. It suggests that it is time we reconsidered the current dominant economic models.

Under Keynesian economics inflation was normally associated with an expanding economy and increasing employment, leading to rising wages and prices. In the 1970s, however, inflation was rising but so was unemployment and production was falling — stagflation. Many put this down to the ‘oil-price shocks’ (which occurred twice during the decade) but Milton Friedman, with his monetary theory, put it down to faulty monetary policy on the part of governments and central banks. Although he had been developing his theory since the 1950s, the problems of the 1970s meant it was ready and waiting to be adopted and was initially taken up by the Reagan and Thatcher governments.

Friedman argued that inflation is always a monetary phenomenon: that prices could not increase without an increase in the money supply — he pointed out that the money supply should be matched to economic growth (GDP) to keep inflation under control and also to prevent governments simply printing as much money as they pleased. He also believed there was a ‘natural’ level of unemployment and inflation would also occur if unemployment fell below that level.

In his work Capitalism and Freedom he espoused the free market as the solution to many problems rather than leaving problems to government to resolve: government should keep an eye on the money supply and allow the market to take care of itself — the market was considered more efficient in dealing with inflation and unemployment.

His emphasis on monetarism and the free market led to two related approaches: supply-side economics and the rise of neoliberalism.

The free market which Friedman emphasised is based on the individual’s rights over private property, which the individual then uses to engage in the market. That was used by the neoliberals to place the individual at the forefront, not only economically but socially. The approach had been spelt out by the philosopher Robert Nozick during the 1970s.

Nozick considered that as each individual owns the products of her or his own endeavours and talents, it is possible for an individual to acquire property rights (as long as they are not gained by theft, force or fraud) over a disproportionate amount of the world. Once private property has been acquired in that way, it is ‘morally’ necessary (in a philosophic sense) for a free market to exist so as to allow further exchange of that property — it is only individual private property rights and market mechanisms that are logically important.

That captures much of the approach adopted by the neoliberals and helped give their approach a philosophic underpinning.

Nozick also posited that the state’s single proper duty is the protection of persons and property and that it requires taxation only for that purpose. That matches the current neoliberal argument for small government and minimal taxes and also fits with supply-side economics.

The basic argument of supply-side economics is that high taxes, particularly high marginal tax rates, are a disincentive to work, saving, investment and the efficiency of resource use. Some other taxes can also distort investment decisions by treating different types of capital investment unequally.

Supply-side proponents argue that:

  • lower taxes on wages will increase labour supply and increase employment by reducing the pre-tax real wage but increasing the post-tax real wage
  • lower taxes on interest and capital gains will lead to an increase in savings, leading to more savings flowing into capital markets and raising investment
  • for governments, lowering taxes will actually lead to higher tax revenue as people will work or invest more, thus increasing the size of the tax base

What have these approaches actually achieved since the 1980s?

Following supply-side economics, many governments around the world have, since the 1980s, lowered marginal tax rates on income, including company tax rates, and the rates for earnings from investments and capital gains. Many other economists accepted that some of the outcomes suggested by the supply-side theories were possible but their impact was measurable only in decimal points of a percentage and the benefits were not as large as claimed by supply-side theories. The tax cuts made by the Reagan government were a classic example of supply-side theory but led not to an increase in government revenue but a huge increase in government debt, which other economists suggested over-rode any potential benefit.

Economists acknowledge that supply-side actions take a long time to show their benefits — although governments usually prefer to take short-term actions.

In 1996 one researcher wrote of the USA:

Economic growth, at its simplest, is the result of more people working and more output per hour (ie, increased productivity). Given two facts — annual productivity growth of about 1.1 per cent for more than two decades, and a slowdown in the growth of the working-age population — slower economic growth is the inevitable result. Since cutting (or raising) taxes has made no obvious, large difference in productivity, the idea that tax cuts will noticeably increase long-term economic growth is without merit.

More recently, to cover the long term nature of supply-side changes, some research has looked at the history of tax cuts in the USA going back to 1945, thus covering a period of about 65 years (at the time of the research). The research was conducted by the Congressional Research Service and first appeared in 2012. It found that there was no correlation between lower tax rates and saving, investment or productivity. What was found was that the changes had helped concentrate wealth in the hands of the top 1%, and particularly the top 0.1% of income earners, as their tax rates had fallen by more than 50%.

The market emphasis on the individual, supported by the neoliberal approach, basically endorses inequality because it results from individual ‘effort’. It ignores social responsibility and the common good. I won’t go into this as we have covered it before on TPS but it leads to the economists and neoliberals seeing no role for government in ameliorating the situation, or as the philosopher Nozick put it:

While it is true that some individuals might make sacrifices of some of their interests in order to gain benefits for some other of their interests, society can never be justified in sacrificing the interests of some individuals for the sake of others. [emphasis added]

Under this approach, governments should not intervene in the market, nor over-rule individual rights to reduce the increasing inequality, although it has been government decisions, under pressure from supply-side economists and neoliberals, that has exacerbated the situation.

Greg Jericho, writing recently in The Guardian, also pointed to the unusual outcomes occurring under the current economic approach:

The OECD has just released its latest compendium of productivity indicators and it shows that across the world productivity growth was slower in the decade from 2004‒2014 than it was from 1996‒2004.

But as the OECD notes, the slowdown in productivity growth has come during a time of “rapid technological change” and increasing participation of firms and countries in the global market — things which should see improved growth.

It is a “paradox” which the authors of the paper rather unsettlingly attribute to among other things, difficulties of measurement.

For its failures, supply-side economics has been disparaged and dismissed as ‘voodoo economics’ (used by George H Bush as regards Reagan’s economic approach during the 1980 presidential primaries), although it still lingers among many governments, including the Liberal government in Australia. Despite the evidence, our government still believes that lowering taxes will help investment, economic growth and ultimately government revenue. In Fairfax papers on 9 June, Peter Martin wrote that the government’s company tax reduction would cost a nett $8 billion a year (after some increased income from personal taxation). For that cost, the benefit would be an improvement in gross national income of between 0.5% and 0.7% ‘after several decades’ or less than 0.1% per year (so low that at one decimal point it rounds to zero):

And the boost to jobs would be even smaller. Independent Economics says employment would eventually climb by 0.17% if the tax cut was funded by a tax on households, or by as little as 0.02% if it was funded by cutting government spending. That’s an eventual increase of between 2400 and 20,400 jobs. By way of comparison employment has climbed by an average of 24,000 per month over the past year. It means that after 20 to 30 years the $8 billion per year holds out the prospect of delivering an extra month’s worth of employment growth.

That certainly echoes the long-held criticism of supply-side economics that it produces only marginal improvements over very long time spans.

Another common problem is the acceptance of Friedman’s ‘natural’ level of unemployment: our government does nothing to reduce unemployment below 5%. That figure is the accepted norm within the Australian Treasury and its longer term projections, such as in the Intergenerational Reports, use that figure consistently over many years (linked to stable inflation). While it is all but impossible to achieve zero unemployment, prior to Friedman’s approach unemployment at about 2% was considered ‘full employment’. If we now accept that another 3% of the labour force (over 300,000 people in Australia) should always remain unemployed, doesn’t that also have an impact on demand and production?

To me, as an economic layman, controlling the money supply seems to have become more difficult because financial institutions have created artificial financial products that do not appear to bear any relationship to their actual value. In relation to the GFC, there was a small number of economists and market analysts, who pointed out that the total value of derivatives and futures traded was greater than the money supply in the US and of the total value of the goods being traded — so something had to give!

Following Friedman’s approach, perhaps that situation indicated the money supply was too low but, in fact, it was too high — deregulation of financial markets had seen to that!

Friedman and other monetarists envisioned strict controls on the reserves held by banks, but this has mostly gone by the wayside as deregulation of the financial markets took hold and company balance sheets became ever more complex. As the relationship between inflation and the money supply became looser, central banks stopped focusing on strict monetary targets and more on inflation targets.

For that reason, some argue that Friedman’s theory has not failed but that governments have moved away from it. Rather than controlling inflation through the money supply, control is now more focused on interest rates set by the central banks. On the other hand, Friedman argued for freedom in the markets and deregulation is just a way of achieving that — so is there an inconsistency in his arguments?

A number of governments around the world, have engaged in increasing the money supply (quantitative easing) following the GFC but it has not increased inflation (and growth) as Friedman’s theory suggests. Instead national economies are stagnating or growing painfully slowly and employment and production are not rising significantly. So if increasing the money supply is not working what will?

Whichever way you look at it there are more and more questions and anomalies in the current economic situation not explained by Friedman’s monetarism or supply-side theory.

A Keynesian would increase government spending and, if necessary, government debt to stimulate the economy. Friedman, however, warned that government debt is bad because it encourages governments to allow inflation to rise as a way to effectively reduce the debt — which was how many governments paid the debt they had accumulated during WW2. But as explained in ‘Bankers 3 Democracy 0’, such inflation is resisted by financial institutions because they are the ones that stand to lose.

Finally, some investment advisers in the US are warning that there is a danger that America could face the return of stagflation. While advising that it is only a small risk at this time, they are suggesting that investors may wish to hedge their position by placing more of their investments in gold and government bonds. If even Friedman’s approach is potentially leading to stagflation, shouldn’t it also be abandoned?

Do we return to Keynesian economics? Although supply-side economists say it shouldn’t work, it worked for Australia in the GFC: the Rudd government provided cheques to households to spend. That was pure Keynesian because it allowed a demand-driven boost to the economy without changing the underlying tax base (and thus future government revenue).

Which Australian political party will be brave enough to stand up to the economists, including those in Treasury, and say your current economic theories aren’t working? — reconsider what you are telling us and tell us something that will actually work! There are other economic approaches available, such as Modern Monetary Theory (MMT) and what is sometimes termed ‘middle out’ economics which uses a demand-driven model that emphasises the capacity for spending of the middle class to drive economic growth. Perhaps it is time that government, and the Treasury, gave these approaches more heed because Friedman’s monetary theory and supply-side economics certainly aren’t working.

What do you think?

Why should we stick by Friedman’s approach and supply-side economics when it is clear they are not explaining current ‘anomalies’ or ‘paradoxes’?

How can we support an economic approach whose greatest achievement seems to be increasing inequality?

This article was originally published on The Political Sword

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The Folly of Neo-Liberals

It is utterly appalling that the deteriorating state of the Australian economy is being swept under the carpet while Malcolm Turnbull and Scott Morrison continually tell the country that they can be trusted to steer us through this so-called transition.

Scott Morrison is using their default language, i.e. spin, to make it sound like we are entering some kind of initiation or rite of passage. It is nothing of the sort.

The talk of transition is nothing more than a piece of double-speak dreamt up by some strategy analyst inside the Liberal party “war room”.

That same strategy analyst was probably the one who came up with the idea that Labor were declaring a war on everything. We know that because everyone on the conservative side is saying it.

We have the war on business, war on workers, the economy and on pensioners. This is the sort of rhetoric we use to get from Tony Abbott.

The government is trying to conceal the fact that the situation has deteriorated since Tony Abbott and Joe Hockey took over in 2013 when we supposedly had a budget emergency; when a compliant media sucked up every word, too lazy to be objective or make valid comparisons.

How is it that the economy is in decline now and those same people who told us it was so bad in 2013, are now compounding their dishonesty telling us a completely different story today?

Just look at the indicators, all of which came from the Australian Bureau of Statistics (ABS).

$_86Workers in full time jobs fell for the third month in a row in April, fewer hours are being worked compared with 2013, the percentage of people in the workforce is lower than in 2013, gross debt has increased by $150 billion, interest rates have fallen a full 1% in a failed effort to stimulate activity, our trade deficit is now in excess of $2 trillion dollars, we are experiencing a wages recession and our GDP growth is totally reliant on our exports.

They spend more and they tax more. This is not a transition, this is a failure of policy.

The current major economic indicators are appalling, yet there is barely a whisper from the media who appear, once more, all too happy not to make waves, too lazy to question, too apathetic to bother calling them to account. Does anyone smell a conspiracy?

You can be certain the Coalition won’t quote any of the trend indicators. But they are clearly worried. Every time Scott Morrison and Malcolm Turnbull stick their heads up they look increasingly desperate.

Morrison is speaking faster and louder. Turnbull is warning of the “chaos of a hung parliament”.

On Insiders last Sunday, Greens Leader Richard di Natale argued for the first time the absurdity of trying to budget for a surplus at some defined period in the future. There hasn’t been a time in our history when money was so cheap.

He said he had been speaking to economists around the country who had been saying this very thing. They had been saying that we suffer from an infrastructure deficit.

If we continue to wait for business to show the way, it will only get worse before it gets better all because we have a government controlled by neo-liberals who govern for the banks, industrial corporations and the stock market.

maxresdefaultIn his latest blog, Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia, lays the blame with the IMF:

“In the last month or so, we have seen the IMF publish material that is critical of what they call neo-liberalism. They now claim that the sort of policies that the IMF and the OECD have championed for several decades have damaged the well-being of people and societies. They now advocate policy positions that are diametrically opposite their past recommendations (for example, in relation to capital controls). In the most recent OECD Economic Outlook we now read that there is an “urgent need” for fiscal expansion – for large-scale expenditure on public infrastructure and education – despite this organisation advocating the opposite policies at the height of the crisis. It is too early to say whether these ‘swallows’ constitute a break-down of the neo-liberal Groupthink that has dominated these institutions over the last several decades. But for now, we should welcome the change of position, albeit from elements within these institutions. They are now advocating policies that Modern Monetary Theory (MMT) proponents have consistently proposed throughout the crisis. If only! The damage caused by the interventions of the IMF and the OECD in advancing austerity would have been avoided had these new positions been taken early on in the crisis. The other question is who within these organisations is going to pay for their previous incompetence?”

That pretty much says it all.

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No jobs, no growth, but lots of spin.

Following on from Treasurer Scott Morrison’s underwhelming address to the National Press Club on Wednesday, the latest unemployment and underemployment figures for January bury his plans for any sweeteners he might wish to include in the upcoming May budget.

While October and November labour force data suggested things were looking up, December and January would seem to have at least partially corrected some highly contentious numbers.

Unemployment is back to 6%, up from 5.8 in December. Some 40,000 full time jobs were lost in January while 32,000 part time jobs were found. The net loss of 8,000 jobs has taken economists by surprise.

300,000 new jobs have been created since 2013 yet more people are unemployed now than there were in 2013. That means jobs have failed to keep up with growth, as small as that has been.

The unemployment rate in September 2013 was 5.7% with 697,000 out of work. The January 2016 figures are 6.0% and 761,000. That means  another 64,000 jobs need to be created just to keep pace with population growth. They haven’t even delivered on that, let alone actually begin to decrease unemployment.

We now have 761,400 unemployed and a further 1,051,200 underemployed giving us an under-utilised labour rate of 14.3%. That is the spare capacity within our economy that if fully employed, would see us in very healthy territory regardless of what might be happening offshore.

If it were serious about jobs and growth, the government, as the currency issuer, has it within its capacity to employ our under-utilised workforce in a broad range of activities both in the public and private sector, paying a liveable wage, creating demand and gaining tax revenue, without any need to borrow.

issueAs a sovereign currency issuer, it can do that. But it won’t. The economic activity that would follow if a further 1,839,300 people were employed and spending would transform our economy from its present flat, marking-time position to one of stunning vitality and innovation, a country on the move.

But that’s not going to happen. The flow-on benefits that would follow increased productivity, would include better health outcomes, less crime, less drug trafficking and more socially inclusive communities.

What responsible, caring government would not want that to happen?

The government must have a reason for continuing to tolerate such levels of unused resources. The most obvious reason is that they don’t want to spend beyond the level of taxation revenue, because of a false perception that deficit spending is bad. Such a view is counter-productive to the best interests of the population, because it fails to recognise the causes of unemployment, which is the lack of available jobs.

If the private sector can’t provide the jobs then the government is the only alternative. It’s not rocket science. We need to recognise where we want to go and what we need to do to get there, not be hindered by some archaic neo liberal belief that restricts us attaining our goals.

We need to stop thinking of government spending as wasteful when, in fact, it enhances our well-being. It helps us to become wealthy. Rather than use the word ‘spending’ we should be saying, ‘investing’. Try it. Spending equals exhaustion (spent). Investing equals opportunity for improvement.

tweedledum-deeNeither major party understands this. So the government concocts this half-hearted effort to give the impression that they are about jobs and growth when, in reality, they are not. They believe a pool of unemployed is necessary to keep a lid on wage claims and other perks that management take for granted.

Labor could adopt MMT (Modern Monetary Theory) principles, go to the people and say we have a better plan, explain how a fiat currency works and bring the people into their confidence, but they won’t.

And so we have this absurd situation where the media call the tune by forcing politicians into “gotcha” moments on how they will pay for their policies, a tactic that makes good television, but which causes great harm to economic management and our ability to have full employment.

And who benefits from this? The 1% obscenely rich who would still remain wealthy, but not to the same extent they enjoy today. We are governed by fools and for as long as the neo liberal view holds sway, the inequality gap will continue to widen.

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Our Government: Traitors to their own people

For the twelve months or so that I have been writing articles advocating the benefits that would come if our government implemented a Modern Monetary Theory (MMT) economic framework, I have been under the mistaken impression that MMT is a regime, or a doctrine that the government needs to adopt as an economic policy initiative.

For most of this time I have viewed MMT as the religion of the progressives in policy direction held back by the right wing neo-liberal conservatives who see MMT as a threat to western capitalism.

But recently, as Professor Bill Mitchell pointed out in one of his daily blogs, we are already living in an MMT monetary system. All the mechanics of a fiat currency system are already there to enable us to interact with MMT every day.

Bill Mitchell says, “The fact is that we are already living in the MMT world. We interact with each other every day in the MMT world. The monetary system, whether it be in the US, Australia, Japan or any of the Eurozone nations, is an MMT-type construct. It is not about moving to some new Shangri-La, which we might call the MMT world – we are already in that world.”

mitchThe big plus in realising this is that those who take the time to understand what MMT is all about, can expose the treachery and fallaciously idiotic claims politicians and neo-liberal economists make when they try to convince us that they know better when, in fact, they don’t.

When they say things like, “we can’t afford it, or “where will the money come from,” or even sillier statements like, “if we keep spending like this we’ll go bankrupt,” then you know that one of two things is true. They are either ignorant, or they are lying and are masking a hidden agenda.

Learning about and understanding MMT theory, empowers people to challenge politicians when they hear these ridiculous statements. It provides the knowledge to ask questions and demand honest, truthful answers.

All too often politicians dismiss as out of hand, policy options that are sound and reasonable, e.g. job creating projects that add value, like infrastructure spending. They dismiss calls for creating jobs in periods of mass unemployment citing complex reasons that they don’t really understand, but know won’t be properly examined.

The NDIS, the NBN and the Gonski educational reforms have all been modified or delayed on the basis of their so-called affordability. Through the MMT prism we know that is simply not true.

employWhen we hear government members citing reasons why job creation programs won’t work, we realise, when we view such comments through the MMT prism, government politicians have an ideological preference for maintaining a certain level of unemployment as a trade off against inflation.

But we know, through the lens of MMT that is not true. More treachery. We understand that a sovereign currency-issuing nation has options. Having that knowledge immediately exposes the ideological persuasions of politicians who try to convince us that their way is the more economically sound. We can conclude they have a hidden agenda.

MMT tells us that our fiscal capacity is defined in terms of our national resources, what we can produce and sell and the strength of our GDP. Our spending is not constrained to, or dependent on, how much we pay in taxes.

So, to view MMT as a policy direction or some peculiar idea that should be embraced or rejected, or “introduced” overlooks the fact that it is already a part of our economic system. It is already with us. Governments that refuse to acknowledge this basic truth are where the logjam resides.


Photograph by Dorothea Lange (Circa 1930s) courtesy of Google Images

Our government needs to grow up and stop implementing policies that favour the wealthy. They need to open their eyes to the options available that would see greater equality in the distribution of our substantial wealth.

Our government is a traitor to its own people when it allows poverty, poor medical facilities and substandard education to grow while permitting a particular minority subset to continually add to its already obscene wealth.

This sort of treachery needs to be exposed for what it is.

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