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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?!


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!

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.

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.

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.

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.

Printing Money

Adair Turner is a British Lord as well as a businessman and academic. He is, according to Wikipedia, a member of the UK’s Financial Policy Committee, a chairman of the now abolished Financial Services Authority, a former chairman of the UK Pensions Commission and a member of the Committee on Climate Change.

Recently, this celebrated Baron Turner of Ecchinswell issued a paper that he delivered to the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015.

Turner’s article is heavy reading but it is summarised and commented on more simply, by John Cassidy of The New Yorker under the title, ‘Printing Money’.

As most of us know, the term ‘printing money’ is a misnomer. Apart from a small percentage of notes and coin, today all money is processed via electronic transfers from the Central Banks to the private banks who in turn credit their respective account holders. Money today is, essentially, just numbers in a computer moved around in millions of transactions every day.

Turner’s article is essentially about Overt Monetary Financing (OMF) which is the creation of debt free money to fund government deficits.

At present most Western fiat currency issuing governments finance deficits by issuing interest bearing bonds to the private bond market.

Such a process is a hangover from the fixed exchange rate mechanism of the gold standard era.

mitchOMF, as described by economist Bill Mitchell “brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.”

Modern Monetary Theorists (MMT) support OMF. It is money creation without debt.

The difficulty supporters of MMT have faced in the neo-classical world is that whenever we attempt to explain it, the words, ‘printing money’, ‘Weimar republic’, ‘Zimbabwe’ and more recently, ‘Greece’ are thrust in our faces as if to suggest that such a proposal would send us bankrupt, that hyperinflation or at least some kind of inflation would destroy our economy.

The reality is that none of these outcomes would result with OMF. Inflation occurs when excessive spending outstrips the ability to supply. However where a nation has underutilised resources, i.e. unemployment, and OMF draws on those resources to increase supply and meet that demand, inflation will not happen.

In reality, it is the pathway to full employment which brings about an increase in the tax base, a debt free fiscal position, as well as growth and higher living standards.

There are those that argue that continued growth based on the exploitation of finite resources is unsustainable and they are right. However, people are our most important resource and within us we have one resource that is not finite: the mind.

socialGround-breaking discoveries in technology and social cohesion continue to reduce our dependence on natural resources. They will continue to do so as our minds continue to search for better ways to do things. And money, a product of the mind, which has evolved over time to be what it is today, is now another of our most powerful resources.

It is as infinite a resource as is organisation, initiative and discipline. But money has, almost from its inception, been corrupted by individuals and governments to service greed.

Money needs to be restructured to serve its most wholesome purpose: equality. Modern Monetary Theory seeks out that wholesomeness, that equality.

As a direct consequence of the corruption of money as a resource, evidenced by the GFC, we now have the gurus of macroeconomics throwing their hands in the air, bereft of ideas on how to restore economic growth. Little wonder they are now slowly but surely turning their heads towards the simple principle of Overt Monetary Finance.

Turner writes, “My proposals will horrify many economists and policymakers, and in particular central bankers. Printing money to finance public deficits is a taboo policy. It has indeed almost the status of a mortal sin.”

While Cassidy writes, “Given the problems of debt overhang and slow growth, and the high toll that an extended period of economic stagnation could take on Western democracies, we face a choice of dangers. We could revert to the standard model, hoping that another round of debt issuance in the public and private sectors will juice the economy. Or we could resort to something different and radical: the electronic printing press.”

Bill Mitchell’s blog on the subject of Adair’s article and Cassidy’s response to it, reflects his own take on the changing attitudes to the way economies are managed.

He writes, “It is interesting that more people are now talking about things that the MMT crowd have been writing and thinking about for a fair while now.

It is clear that ideas that were considered ‘crazy’ some years ago and now being entertained as being plausible by the mainstream media.

Given the vilification that our small group endured when we set out on this MMT journey, I find all of this rather amusing. Apparently it takes a British lord to give an idea credibility. So be it.

It is better that these ideas penetrate the mainstream debate through which ever means than be sequestered by the mainstream media and wheeled out as a way of humiliating commentators who dare to challenge the mainstream paradigm.”

lennonLet us hope that as the world continues to struggle with flat demand and little improvement in employment, some national leaders with a sense of vision and a passion for equality, will catch on to the idea and implement a strategy to mobilise our underutilised resources. Such a vision would go a long way toward that mythical image John Lennon created when he penned, ‘Imagine’.



Make the bosses richer and the customers will come

The Liberal Party do have a plan for jobs.  Whether it will work is another matter. This, according to them, is the list of their achievements contributing to job creation so far:

✓ Repealed the Carbon Tax

This was supposed to save households $550 a year (for one year anyway).

Kevin Andrews gleefully announced that they had increased defence spending by another $9.9 billion in the last budget. For the 9 million households in Australia that represents $1100 per household.  He also said that “Since its election, the Government has invested more than $22 billion in Defence capability projects.” That represents almost $1000 for every man woman and child in the country.

And this doesn’t include our war in Syria or our new paramilitary Border Force.

Add this to the revenue turnaround between collecting $7 billion from polluters to paying them $3 billion and I think we can safely say that any saving a household got through slightly lower electricity prices has been well and truly spent on war and “national security”.

✓ Repealed the Mining Tax

Since the mining tax was repealed we have seen a huge drop in investment in mining and thousands of job losses, a decline that is projected to continue. We also lost the benefits that were attached to the MRRT like the increase in the superannuation guarantee.

✓ Agreed Free Trade Agreements with China, Korea and Japan

The FTAs have contributed to the death of manufacturing in this country and the write down of billions in revenue over the forward estimates. The concerns about foreign workers are justified considering Andrew Robb admitted that 84% of the current 457 visa workers were not subject to labour market testing and that situation will remain.

✓ Announced $2.45 billion in annual red tape savings

These savings are hilarious. People buying prepaid mobile phones will only have to go through the identity check once, not twice. They say that will save $6.2 million. Rejigging the e-tax website so the data entered the previous year shows up will supposedly cut costs by $156 million. Another interesting one was claiming a $17 million saving by scrapping regulations that banned people using mobile devices on take-off and landing in planes. One of the acts they got rid of was one that required you to provide your mule or bullock for military purposes. Many of the changes were about punctuation or grammar.

✓ Established the $484.2 million Entrepreneurs Infrastructure Programme

To make way for the Entrepreneur’s Infrastructure Programme the Coalition axed eight other government initiatives including Commercialisation Australia, the Innovation Investment Fund, Industry Innovation Councils and Enterprise Connect. Shuttering the existing programs from January 2015 will deliver savings of about $845.6 million over five years, the government estimates.

✓ Created new employment opportunities through a $50 billion commitment to transport infrastructure

Making announcements does not create employment for anyone but the spin doctors. Actual infrastructure spending has basically dried up

✓ Established a new $6.8 billion jobactive employment services package, commencing 1 July 2015

Once again, creating an employment service provider does not create any jobs except for the service provider

✓ Delivered a comprehensive reform package for the VET sector

Reforms without resources aren’t much use. This sector remains severely under resourced and the reforms do nothing to address teacher training and skills.

✓ Introduced Restart – a wage subsidy to help Australians aged over 50 to find employment

In January, the Guardian reported that, in the first six months, only 510 employers had taken up the scheme, which was projected to help about 32,000 a year.

✓ Established the Small Business and Family Enterprise Ombudsman

✓ Expanded tax concessions for Employee Share Schemes

✓ Begun to introduce changes to support crowd-funding

✓ Extended unfair contract term protections to small business

I can’t see how any of those last four create jobs.

They then go on to laud their $5.5 billion jobs and small business package.

  • 1.5% tax cut for small companies ($1.45 billion)
  • 5% tax discount for small unincorporated business capped at $1,000 pa per individual ($1.8 billion)
  • Immediate deductibility on every asset costing less than $20,000 for two years ($1.75 billion)
  • Measures to help young disengaged youth become job ready ($331 million)
  • Measures to encourage job seekers to look for work ($25 million)
  • Measures to help employers take on unemployed job seekers ($19 million)
  • Measures to cut red tape for businesses – work-related portable electronic devices will be FBT free ($40 million)
  • Measures to encourage start-ups and entrepreneurship ($70 million)

Tax cuts and incentives for business might put a small amount of money back into the business owners’ hands but it does nothing to create demand or bring in the new customers that would necessitate extra staff.  Encouraging young people and helping them to be work prepared is good, but it doesn’t add to the number of jobs available.

With interest rates so low (or even without if you are an MMTer), we should be investing in nation building infrastructure, in social reform that improves productivity, in preventive health and quality aging, in education and research that prepare us for our future, in lifting people from poverty and providing them with affordable housing, in public transport, renewable energy and other sustainable industries.

We should be increasing our public spending, not on war and border protection, but on things that will make our lives better now and prepare us for the changes that automation and climate change and finite resources will demand.

An Economic Blueprint for a Sustained Recovery

In response to the AIMN article, “Unemployment rises with no plans for Growth”, Andreas Bimba outlined a recovery path that provides politicians from both major parties with a blueprint for major industrial, commercial and social reform. His comments warrant a wider exposure.

He writes:

What the Conservatives and also the Labor Party fail to realise is that ongoing government deficit spending can create employment, expand the economy and generate more tax revenue.

The business sector also cannot increase production and investment if wages and consumer demand are static or falling. A growing money supply is needed to harness the labour and talent of the unemployed and the underemployed and to activate dormant economic capacity.

Such deficit spending doesn’t need to be funded by issuing more treasury bonds but should preferably be funded by ‘printing’ or creating money out of thin air in which case interest payments are not needed nor does this money need to be repaid.

If the money is utilised for economic expansion it won’t be inflationary either. Such deficit spending is not black magic and could be thought of as the purchase by the government of shares in the national economy.

The current approach of the banks introducing new money into the economy by providing low interest loans for speculative investment in existing properties and the share market actually harms the economy and increases wealth disparity.

Worthy areas of government expenditure are infrastructure such as public transport, interstate and regional railways, cycle paths, public housing, some roads, redevelopment of cities to reduce energy and water use and renewable energy generation.

Low interest loans and other incentives can also be provided to industry and consumers to improve energy, water and raw material efficiency.

scienceThe power of science and technology should be harnessed much more than currently through greater funding of R&D and higher education but with the objective of local industries as well as the wider community being the main beneficiaries.

For example research to reduce the fossil fuel needed for steel and cement production and to improve renewable energy production.

Environmental conservation and health, education and social services are also highly beneficial areas of greater employment. We should also aim to manufacture a significant portion of the materials, appliances and equipment needed for the sustainable economy to meet local demand and for export.

Moderate levels of trade protection will however be necessary in most cases as the rest of the world at the same time will be developing these new industries and aggressively selling on world markets.

A central economic development organisation similar to the Japanese Ministry of Economy, Trade and Industry (METI ) rather than the current destructive neo-liberal Australian Productivity Commission would also greatly increase the chances of success. Singapore is also a good role model for economic development.

Professor Goran Roos, Honorary Professor at Warwick Business School in the UK, has also developed strategies for economic development for the South Australian Government where pillar industries that work closely with government and private R&D organisations and academia are fostered.

Personnel flow freely between business, government, research institutions and academia. These pillar industries aim to eventually attain the critical mass to be world competitive in high value adding, knowledge intensive areas.

New businesses and areas of opportunity are constantly spun off the pillar industries and from the research undertaken but develop in a supportive environment. Renewable energy is a suitable pillar industry. California’s Silicon Valley is an example of this cooperative approach.

Australia’s current neo-liberal preference for low value added commodity export industries will never provide sufficient employment and will increasingly leave us vulnerable to the appalling social costs of global economic recessions.

The most profitable portion of these commodity export industries will however still be important as revenue and foreign exchange earners.

billThe job guarantee scheme as proposed by MMT economist Bill Mitchell should be implemented to soak up any remaining unemployed.

All of the above economic development must be within the constraints of reducing national CO2 emissions by 6% p.a. as recommended by Professor James Hansen and more generally of reducing our environmental burden.


AIMN Interview: Bill Mitchell – an unreasonable man

George Bernard Shaw observed that; “A reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself.  Therefore, Shaw argued; all progress depends on the unreasonable man.”

Within Shaw’s definition, Bill Mitchell is an unreasonable man.

As an economist, Mitchell has persistently argued against the Chicago School theory of ‘trickle down’ since the mid 1980s and continues to do so today.  He remains in his own words; “One of a few trying to pull together post-Keynesian theories with other insights to create what we now call Modern Monetary Theory.”

“However,” he adds “there’s now a lot more than five people talking about it and reading about it, following our work, and I get a lot more invitations to speak overseas. There’s now a second generation of MMTer’s who are our young Ph.D. graduates going out and spreading these ideas.”

As someone who is wary of giving interviews and who guards his written work closely, it came as a surprise when Mitchell agreed to my request to talk about MMT.

“A lot of what I tell them often goes over their heads” says Mitchell referring to the MSM. “They rarely if ever mention my name, and then they go to my blog site, paraphrase what’s there and write it up as their own work.”

The plan was to ask Mitchell a range of general questions across a broad spectrum of MMT, rather than a detailed explanation of two or three of the finer points of a controversial discipline that is rapidly gaining popularity as an extremely powerful counter argument to neo-liberalism, especially among the unemployed.

Economics tragics may visit Mitchell’s blog site should they wish to examine Modern Monetary theory in greater depth.

I found the softly spoken Mitchell not only generous but also patient, for which I offer my sincere thanks.

(Italics are the author’s}.

I began by asking Mitchell: “What are the most common misconceptions about MMT?”

Mitchell: It’s not so much misconceptions about MMT but rather peoples misconceptions of the capacities of governments.

The classic analogy that people have whether they articulate it or not, is that the government is like a super sized household, and I’m talking about currency issuing governments here, not Eurozone governments,” he emphasised.  “And are subject to the same constraints that a household is.

We all know about budgets. They’re things we have to continually manage on a weekly basis in our households. We give our kids a ‘budget’ to teach them the value of money.

So it’s natural that we personalise our integral understanding of how the government approaches things, and the first thing that we presume is that the government can run out of money. After all, we can run out of money, and we know that if we want to spend that we’ve got to earn income and we relate that at government level as raising taxes or that we have to sell assets.

If we want to raise money we have to sell some stuff on e-Bay, and so we interpret that in the government sense as privatisation. The third option is that we have to go to the bank and borrow or use our credit card and we interpret that as government borrowing.

So from this, we build a picture of government being like us. We see it as bigger than us but we see it financially constrained in the same manner that we are, and just like us it can’t ‘max our credit card out’ or ‘spend like a drunken sailor’ and that ultimately we’ve got to pay the piper, and all these morality tales that we build into frame the narrative.

That’s the biggest misconception. We don’t appreciate that the Government has no financial constraints.”

AIMN: MMT always draws fire from its critics through its insistence that governments can simply print more money to cover debt.

Mitchell: This is the second misconception. The average person has a total misconception of a ‘cost’. So, when MMT says that the government has no financial constraints, that’s not the same thing as no constraints. For example, you and I can’t buy anything and everything that we want in Australian dollars because we can only buy what our spending resources allow us to.

As a currency issuing government though, we can buy whatever we want. Whatever is for sale in the currency of issue – we can buy, and… that’s all it can buy! This means that it is not constrained by how much money it can spend but what is available for sale.

In other words, we’ve converted the concept from a financial constraint to a real constraint. Material things, goods and services.

For the individual, cost is calibrated in monetary terms, how much did it cost for this phone? What is the cost of a holiday?

These are real costs for us because if we spend the money on them we don’t have the money to spend on other things because we’re financially constrained, whereas for a currency issuing government, the numbers that go on the financial statements they punch into the “Budget papers” are not costs at all.

AIMN: How is money creation accounted for?

Mitchell: Someone in an office types it into a spread-sheet. They (Reserve Bank and Treasury), have double accounting ledgers for seignorage and notes.

The accounting’s important, because it has to equal the accounting that shows dollar for dollar the government deficit equals the non-government surplus. It’s very important that people understand this.

If you want the non-government sector to run down debt, then the government sector has to run-up debt. It’s wrong to say that the accounting is irrelevant, but it’s trivial in the extreme.

When the crisis hit the US, the Federal Reserve immediately transferred 80 billion dollars with one key stroke into the American private banking system – boom! – just like that.

When Ben Bernanke appeared before Congress to explain where the money had come from, he was asked; had it come from taxes? No, said Bernanke. Then where did it come? Bernanke replied that; ‘you’re best to understand that it came out of thin air.'”

Notes and coins are trivial. They’re just a small part of it.

The other really important issue is what the concept of a “cost” is because we always talk about what the cost to government is. The cost isn’t something that appears on numbers statements or balance sheets. The cost is the real resources that are being deployed by that spending.

The “cost” is a real resources concept, not a financial concept.

So when we say ‘what does it cost for the Government to run a program?’ It’s not the dollar outlay that appears in the papers. The cost is the actual real resources that are diverted or used in that program.”

AIMN: Define real resources.

Mitchell: Well, I would argue that the federal government of Australia and all currency issuing governments should make an unconditional offer of employment at a fixed wage to anyone who can’t get a job.

Then the question becomes ‘well, how can the government afford it?’

My argument is that while the typical narrative will assess the cost in the terms of the wages paid, the overhead costs and the supervisory costs and say the cost of the program is 20 billion but this is not the cost at all.

The cost is what extra food are the workers who are converted from unemployed to employed going to consume? What extra clothing are they going to require? How much extra transport are they going to use? What materials and equipment are those workers going to use, and working capital to convert into productive output?

That’s the real cost.

The real resources of a  Job Guarantee program would be the extra tools the worker’s using or the materials needed.

So when people say ‘How can they afford it?’ Of course they can afford it as long as those real resources are available and one of the clearest indications that there is a massive amount of real resources available, is unemployment.”

AIMN: You’ve been highly critical of the Job Network System/Jobs Services Australia in the past, do you think that the new model, Jobactive will fare any better than its predecessors?

Mitchell: When governments at different periods over the last decades abandoned the post WWII commitment to full employment, they created a head ache for themselves because even though they were intent on reducing public outlays, short of leaving people to starve or shooting them, they had a huge pool of unemployed that they had to manage in some way.

And consistent with all of the ideology of outsourcing and privatisation etc… they created this nightmarish system of managing the unemployed, which I call an industry. The Job Network system, Job Services Australia and the latest incarnation which has just started to unfold. It’s a new industry and it’s one that has zero productive output.

Its sole role is to manage the unemployed, rather than get them work which was the stated aim since it began in 1998.

The vast array of empirical evidence reveals that it has failed dramatically. Before the GFC, the headlines in the MSM continually featured statements from industry stating that we had massive skill shortages in Australia.

How do you get skill shortages when you’ve been spending billions of dollars allegedly re-training people, and preparing the unemployed with new skill sets? All of the evaluation, one way or the other, indicate that it’s a parasitic, failing industry.

It’s creating a profit seeking behaviour or if it’s a not for profit organisation, some sort of rent seeking behaviour which is somewhat different but always manifests in high executive salaries and high management fees and captures public funding. We also know of the massive fraud in the scheme.

It was meant to be a private market for job services, and it was using all the ideological took kit from the mainstream economics textbooks about the benefit of free markets.

Yet, it wasn’t a market at all.

The government set the price because it set the contracts, the firms weren’t allowed to compete in a market, there were no competing job services. It was all stage-managed. The consumer set the prices and fixed them, there was no competition. It was just a nasty little way of deflecting public responsibility into the private providers who will have a socio-pathological bias in the way they treat the unemployed.

The whole concept of being unemployed was re-framed and suddenly the unemployed became clients or customers.

They’re not customers! They’re unemployed – they haven’t got a job!

Yet, now they’re clients, as if they’re consumers, as if they’ve got choices. In the first model of the JNS, they didn’t have any choices about placements, which is also seems to be the set up with the latest model.

The unemployed are not are a market, they’re not a product!”

AIMN: How does MMT circumvent further unemployment and create jobs?

Mitchell: First you have to understand why unemployment arises. The Neo-liberal ideology that supports this harassment of the unemployed through this unemployment ‘industry’ has created the narrative and the construction that the cause of unemployment is the individual cause. If the person hasn’t invested in skills earlier in life, has a lackadaisical attitude to life, doesn’t want to work, prefers to live on the dole even though its well below the poverty line, that somehow this is created as some sort of Shangri-la that people aspire to as a life style choice.

The unemployed, who are the victims of systemic failure, are suddenly in the media and therefore in the public eye, as the cause of the problem.

You can’t search for jobs that aren’t there. You can push and shove and harass people to search harder but if there’s only 100 jobs and there’s 120 people chasing them, bad luck! You can rev up people through fear and income support loss but if there’s a shortage of jobs – there’s a shortage of jobs!

If you understand the systemic failure – and when there’s systemic constraints individuals have very little power – one person against the system. Why does the system fail to produce enough jobs? Marx knew the answer, and later in a more acceptable form in the West, so did Keynes.

An economy is an input generating, output generating, spending machine.

If the income that’s generated in some period isn’t re-spent the next period, then the production plans of the firms that were based upon that expected spending will fail. They’ll overproduce. When they have unsold inventory, they lay off workers.

It’s so basic. Spending equals income and that equals output It’s the most basic rule of macro – economics that’s been lost in all of this.”

AIMN: Critics of Keynesian economics are quick to point out that Keynes theories eventually led to stagflation. Why would MMT be any different?

Mitchell: Keynesian economics were developed during the fixed exchange rate period, when governments did have financial constraints because of convertibility issues, the tying of currency stocks to gold stocks. Nixon ended Bretton-Woods in 1971 even though it continued to live on for another few years in various forms.

That meant that the central bank was no longer required to maintain the exchange rate, and that monetary policy was no longer tied to the need to attract capital inflow and to suppress imports to maintain the currency position. The Keynesian economics of the ’50s and ’60s was within a fixed exchange rate system, whereas Modern Monetary Theory understands that, but talks about the implications of the break down of Bretton – Woods. The world changed dramatically in 1971 but economic thinking didn’t change with it.

Keynesian economics didn’t create stagflation. The commitment to full employment didn’t create stagflation. Most people have this idea that if the government ‘spends too much’ it creates inflation.

The only way you can attach meaning to that is if you think of inflation as a certain amount of goods being available for sale and too many people wanting to buy them. In economics this is called ‘demand-pull’ inflation. Too much demand for the supply.

Inflation makes sense in that context and therefore you understand that if any of the components of total expenditure like the consumption, investment, or government spending or export spending are in sum greater than what’s available for sale, then there’s got to be some rationing device because we know that the production process responds by increasing output when there’s more spending but if it can no longer increase output it has to ration that demand somehow and that’s by price rises.

That’s a sensible thing and therefore we understand that all expenditure components generate inflationary forces if they outstrip supply. The stagflation of the ’70s, stagflation being inflation and unemployment, the inflation component had nothing to do with the demand being too strong, it was the oil price rise. and so we had up until then the relatively rarer concept of ‘cost pushed’ inflation where oil prices rose, raw material costs rose, the costs of production rose, that pushed up prices and then the government responded to that with contractions to fiscal and monetary policy which caused the unemployment.

As long as you don’t have raw material shocks, and spending is keeping pace with productive activity then there wont be inflation.”

AIMN: Does MMT think it’s worthwhile chasing the very wealthy for their taxes providing they aren’t spending their gains, rather, why not run an increased deficit over a over a short term. What about the rest of us?  Why can’t we have the option of saving rather than paying taxes?

Mitchell: The fundamental principle is that if the non government sector which is made up of the external sector and the firms and households all together and all of their spendings and savings plans, don’t spend as much as they earn each period, then there’ll be a spending gap.

If that gap’s not filled then there’ll be unsold goods produced  from last season, leading to worker lay-offs. So the fundamental idea relates back to the causes of unemployment. If the non-government sector isn’t intent on spending all their income each period, then the government sector has to fill the gap. Typically, it has to run a deficit.

Then you say; what about all those rich people who have got lot’s of savings? Why don’t you tax them more and run a smaller deficit. But if the government reduced its deficit to tax individuals who aren’t spending, then you’re going to get another spending gap and then the level of spending will fall below what’s required to maintain full employment.

Progressives love the idea of taxing the rich but MMT’s builds on the work of Abba Lerner’s 1940s work, Functional Finance and what Functional Finance tells you is governments never tax to raise funds.

The function of tax is to reduce the spending power of the non-government sector. Why do we want to reduce to spending power of the non-government sector? So that you can create more space, real resource space for the government sector to spend, so you keep the economy below the  inflation constraints.

The level of taxes that you’d want to raise in total are calibrated by the amount of spending space that you want the  government to have to maintain full employment. So taxes aren’t to raise revenue. That argument implicitly assumes that you could reduce your deficit because you’d have more money.”

AIMN: So you’re not in favour of the ‘Buffet Solution’ to tax the the rich?

Mitchell: It completely misunderstands the role of taxation and that’s an understanding that MMT completely re-orientates your thinking about.  It’s to reduce spending power to create more real resource space. Given that there’s got to be an overall tax take to make real resource space available for the governments program, it’s not to fund the government’s program, it’s to make the real resources idle that the private sector may have been using, labour and other resources. Because if you don’t make those idle then the government will just create inflation.

Given that there’s got to be some level of taxes commensurate with your aspirations for a public sector program then the question is valid; how do you raise the revenue?  What principles might be bought to bear? One of them is fairness and equity. Do you want low income earners having less purchasing power and the higher income earners paying tax disproportionate to their income?

Is it better to deprive the high income earner the third BMW in the garage or the yacht? Or the latest holiday to Aspen, relative to taking the food off the table of a low income earner? These are equity issues and MMT can’t guide on equity issues. They’re moral philosophies that you have to bring to bear on public policies and society has to develop its own set of norms for that.

I believe that I have a progressive leaning and I think that fairness tells me that I would much rather a low income earner having more food on the table or going to a cafe once a week or attending a sporting event or the cinema than a high earner going to the best restaurants in Aspen every a year.”

AIMN: Finally, any thoughts on the style of economics currently being taught in high school?

Mitchell: It’s consistent with the problems in the undergraduate programs in universities in that it’s essentially teaching a wrong paradigm, it’s ingraining students with invalid constructions about the way the monetary system operates. It uses metaphor and terminology that are plain wrong and it reinforces the inapplicability of the paradigm being taught. My view is that students would be better off not studying it at high school.


Now for something completely different …

When in the past I’ve written about why the prevailing ‘debt and deficit’ narrative is neo-liberal rubbish, people responding to my blog have asked why it is so difficult to get commentators, progressive politicians and the pubic to accept this. Obviously getting the neo-liberals and their media cheer leaders to question that narrative is impossible; it’s in their DNA and their political lives have come to depend on it. But you’ll still find relatively objective commentators, to say nothing of Labor front-benchers, not buying into it. Why?

Clearly not because it is ‘true’, or makes economic sense, because it isn’t and doesn’t. It doesn’t take much understanding of economics to see that cuts in government spending, depressed business confidence and investment, flat wage growth and increasing unemployment suggest we’re going in the wrong direction, and that even easing the cash rate further isn’t going to help much. And it presumably isn’t that hard to see that at least some of this arises from political decisions, such as those embodied in the last budget.

Ah, but the commentators say. There is a structural problem. Revenue is down. Health and welfare costs are rising. We can’t afford the ‘nice’ things we want. Even if this is true – and there are those Modern Monetary Theorists who say it isn’t – dealing with it remains a political problem. Need more revenue? Change the taxation regime. Too much spending? Stop spending on wasteful things. We’ve all seen recently just how hard it is to increase taxation, or stop spending on people who’ve come to expect it. But who and what you tax, and who and what you spend on are political, not economic decisions. Labor is freaked by it, understandably so, given the success of axe the tax and Labor waste throughout Labor’s term in office, and at the last election. How can they escape the current pervasive narrative?

The only way to change the politics is to change the language we use.

Modern Monetary Theorists, who think that budget deficits are and should be the normal state of affairs, and presumably neo-Keynesians, who accept the necessity for budget deficits in some circumstances (like now) all have to contend with this problem of language. Professor Bill Mitchell, a leading MM Theorist, did a great job in this article in the Guardian on the ‘unemployment industry’. Following on from his appearance on 4 Corners program The Jobs Game, he slammed the privatised employment services sector, and the thinking behind it: ‘The unemployed cannot search for jobs that are not there. It is a cruel hoax to punish the victims of the jobs shortage.’ He also pointed out the particular use of the the language in which the debate is conducted: ‘Since January 2013, employment has grown by a pathetic 2.1%, while the working age population has grown by 3.7%. Yet the public narrative still focuses on the supply-side – the allegedly “lazy” and “unskilled” unemployed.’ He also criticised both Liberal and Labor for their use of terms like dole bludgers, cruisers, job snobs and more recently, leaners –all terms that blame the unemployed and suggest they depend on tax payers’ generosity.

Professor Mitchell has also tried more generally to change the way economics is discussed at a popular as well as at an academic level. In his blog in November 2013 titled How to discuss Modern Monetary Theory, he looks at ‘the use of metaphors in economics and how Modern Monetary Theory (MMT) might usefully frame its offering to overcome some of the obvious prejudices that prevent, what are basic concepts, penetrating the public psyche.’ I hope he won’t mind my sharing an amended version of a chart he included:

Focus of AttackMetaphorIntent
Government spendingLiving beyond means, maxed out credit cardIrresponsible, excessive, need to stop spending at once
Budget deficitBudget black hole, running out of money, ballooning debt and deficitGovernment budget like household budget, running out of money
Public debtMortgaging the future, burdening grandchildren, intergenerational theftNation is a badly managed insolvent firm, being horrible to children
Income supportWelfare dependency, dole bludgers, leaners etcLazy, undeserving, parasitical


These are the metaphors we day in day out from the LNP government and their supporters in the media, but regretfully also at times form more neutral commentators and the Labor front bench.

There’s much more to Mitchell’s post than discussion of these metaphors, including another table comparing mainstream – neo-conservative – macroeconomic prescriptions with MMT ones.

But the post also acknowledges that it’s one thing to recognise when the metaphors about the economy are serving a particular political agenda. It’s another thing to find different words. As Mitchell points out, ‘deficit’ always sounds bad, as something lacking, though a budget deficit can be either a useful tool or bad economic management, depending on the circumstances. Some of the other terms he thinks may be in need of different metaphors for explanation, or at least alternative terminology, are budget balance, budget surplus, public debt, government spending, government taxation, national income, Income support payments and full employment. Some of those commenting on the blog – and there are lots of them – recognise the need to ‘sell’ a different version of economics, but few have any really good ideas how. For example, if you can call government spending national investment, it is harder to equate it to waste, but it still doesn’t challenge the pervasive metaphor that government budget is just like yours.

Whether or not progressive politicians and commentators come to accept MMT, or remain neo-Keynesians, we still need different language to talk about what really happens in the economy, who wins and who loses, and what role political decision really play in it. If I hear the phrase ‘budget repair’ one more time, I’ll scream.

Any suggestions?

It’s the Economy, Stupid

Having just watched Insiders, I’m even more convinced that we have to change the conversation about the economy. Bill Shorten did a good job of making the case that it doesn’t matter who leads the Liberal Party – they all support the same austerity policies. But he had a bit more difficulty dealing with Barry Cassidy’s (stupid) question about how would Labor deal with the deficit. Bill got round it well enough – by not mentioning the D word. But this is precisely why we have to change the conversation. The deficit versus surplus debate doesn’t reflect some underlying economic truth. It is a political construct, which arises from a particular view of how the economy works. It is wrong, and we need to change it.

The debt and deficit narrative suits right wing, small government proponents. They want to limit government activity, and leave everything up to the market. So of course they want to limit government spending, and give tax breaks to the rich. So they tell us that wealth trickles down, that is, giving more wealth to the already wealthy will enable them to create more jobs.

This is of course nonsense, as an increasing number of mainstream economists acknowledge. (What the rich actually create is tax havens.) Austerity doesn’t work. The problem with western economies is now deflation – not enough demand to generate production and jobs. We need the opposite policies. Less inequality of wealth would mean more people able to buy goods and services, and more jobs for people supplying them. Jobs on government projects are just as real as jobs on private projects in terms of the demand they create. And as Wayne Swan wrote recently about inequality, ‘Essential to combating its rise is the recognition that nurses, builders, teachers, labourers, hairdressers, shop assistants and waiters are as much generators of growth as bankers, investors, businesses and multinational companies.’

So why do we buy the debt and deficit narrative? The problem is the way we, the general public – and apparently political commentators like Barry Cassidy – have been taught to think about the federal budget. To make the mysteries of macro and micro economics, fiscal and monetary policy clear to us, politicians from both sides customarily use the analogy of the household budget to frame discussion of the federal budget. You can’t spend more than you earn. You can’t just put it on the credit card. We’re putting a burden of debt on our children if we exceed our income now. I heard Abbott say just the other day ‘we’re living beyond our means.’ And so Shorten is asked not ‘what policies does Australia need to become a fairer and more productive society’ but ‘how will you deal with the deficit?’ The household budget is a clever and pervasive analogy. It doesn’t APPEAR to have an ideological bias. But it does. It plays perfectly into the debt and deficit/large versus small government narrative of neo-liberalism (or market capitalism, or whatever you want to call it) – and it must be challenged.

Fortunately it is being challenged.

During the GFC, the Labor government took the budget into deficit to stimulate the private sector. And it worked. Australia was largely spared the full impact of the Crisis, and did not have its economy decimated by the sort of austerity slashing and burning of the public sector that is still crippling European economies. This was described as neo-Keynesian economic policy, based on the idea that it was OK to even out booms and slumps through government stimulus.

This is fine as far as it goes, but it still only offers a minor corrective to the idea that the surplus/deficit debate is at the heart of good economic management.

Now a few economists are going further. I’m certainly no economist, but their critique makes sense to me. It has the horrible name of Modern Monetary Theory. What it basically says is that governments with the power to issue their own currency are always solvent, because they can always – shock horror – ‘print money’, though this is done electronically these days through the issue of government bonds (aka quantitative easing). It therefore makes no sense to say that taxation revenue ‘funds’ government spending, and that therefore we can or cannot afford proper welfare provision or whatever. Abbott’s ‘living beyond our means’ only makes sense in light of the misleading analogy with the household budget, where our books have to balance. A government which has monetary sovereignty (ie can print its own money – unlike Greece) does not have to balance its books. In this theory, the balance is between government surplus and private debt: a government surplus can only be built on increased private debt – as happened during the years Peter Costello was treasurer – and vice versa. The level of government spending is in practice constrained by the level of inflation – too much money chasing too few goods. So what needs to happen is that government spending must be in areas that increase the productivity of the economy. To quote the Wikipedia page on MMT, ‘the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.’ And at the moment, the mantra of achieving a surplus by cutting government expenditure is built – though they don’t say so – on maintaining a relatively high level of unemployment. This is a conscious choice made by the Abbott government.

(Here you might say ‘but they aren’t able to achieve a surplus’, and you’d be right. Other factors like falling commodity prices and low business confidence have seen to that. They could still achieve a surplus if they cut spending – and raised unemployment –but this would be even more deflationary, to say nothing of politically suicidal.)

This means that a government could – if it so chooses – promote near full employment through government spending. This increases the tax base, and reduces welfare costs. It also makes the society more equal and inclusive. The constraints are political, not economic.

And the reason these political constraints bite so hard is that we all think that the federal budget is like our household budget. I know it’s fun to make political capital out of Hockey’s ‘promise’ to return the budget to surplus when he can’t, but much better to avoid all the hand-wringing over surplus and deficit altogether. Labor is caught in the same narrative. They need to unlearn this budget lesson – and quickly.

In this YouTube, Stephen Hail – who unlike me is an economist – explains it far better than I can. It’s quite long, but really worth watching. He also references Bill Mitchell, Australia’s leading MM Theorist, and professor of economics at the University of Newcastle. Here is a link to his interesting and challenging blog. And this is A Kindergarten Guide to Modern Monetary Theory. Please spread the word.

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