MMTed is launching its new on-line show – MMTed Q&A – tonight. Live streaming begins Wednesday Night 20:00 East Coast Australia Time. We will be answering questions and introducing a special guest each episode.
Australia has endured a sequence of unplanned disasters over the last 12 months. The lingering effects of a long drought. Massive bushfires. Floods. And, then, if that wasn’t enough, along comes the worst of them all – the coronavirus. The latest release by the Australian Bureau of Statistics of the – March-quarter 2020 National Accounts data (June 3, 2020) – is now recording the early impacts on our national economy from the Pandemic. It will be worse when the June-quarter figures are released in September. Today’s data confirms what we have been tracing for several quarters – the Australian economy has now crossed the line into negative growth with sustained negative contributions from all private sources of expenditure. Household Consumption expenditure fell sharply as households increased their saving ratio. The overall contraction is less than has been recorded to date in other nations. But we should wait until the June-quarter before we get too optimistic. The obvious conclusion is that the Federal government has not supported an ailing economy enough to avoid the damage that negative growth brings. An urgent and major shift in fiscal policy towards further expansion is definitely required.
This is Part 2 of the two-part series which focuses on the question: If governments are not financially constrained in their spending why do they issue debt? Part 1 focused on the historical transition of the monetary system from gold standards to the modern fiat currency systems and we learned that the necessity to issue public debt disappeared as fixed exchange rates and convertibility was abandoned in the early 1970s. However, there are many justifications for continuing to issue debt that circulate. In this Part, I consider those justifications and conclude that the on-going practice of government’s issuing debt to the non-government sector is primarily an exercise in corporate welfare and should not be part of a progressive policy set.
One question that continually comes up when I do interviews is this: If governments are not financially constrained in their spending why do they issue debt? Usually, the question is expressed in an incredulous tone, meaning that the person asking the question considers this to be the gotcha moment, when they pierce the impeccable logic of Modern Monetary Theory (MMT) and show it for what it is – a sham. One problem is that there is a tendency to confuse motivation with function and many people sympathetic to MMT reduce it to simple statements that belie the reality. One such statement, relevant to this topic, is that government’s issue debt to allow the central bank to maintain a specific short-term interest rate target. Central banks have traditionally used government debt as an interest-rate maintenance tool. But that is a function of the debt rather than being the motivation for issuing the debt in the first place. So we explore those differences today as a means of clarifying the questions and confusions around this issue. This is Part 1 of a two-part series, which I will finish tomorrow.
Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.
I haven’t had time yet to fully work through the decision by the European Commission yesterday to provide grants and loans to struggling Eurozone countries. I will comment on that when I have had time to understand the implications and be in a position to provide fair comment. It seems to be a vastly inadequately response in quantum, on top of an existing lack of fiscal support. But more on that another day. Today, I am investigating the latest data from the ECB. On May 26, 2020, the ECB released its bi-annual – Financial Stability Review, May 2020 – which seemed to excite some journalists to advance narratives that ‘sovereign debt’ investors (although none of the Eurozone nations are sovereign) will soon become spooked by the sharp rise in public debt levels in Europe, which will “threaten to undermine private-sector spending” and stall any growth prospects. The quote is from a Financial Times article (May 26, 2020) – ECB warns of challenge for eurozone from soaring public debt – which followed the release of the ECB’s Review. The elephant is, of course, the ECB assets and its ability to control all yields on public debt at will.
Some Wednesday snippets today. Tomorrow, I will write about what I have been thinking about the Eurozone. There has been a lot of hot air about the Franco-German accord that Emmanuel Macron and Angela Merkel came to recently. Hot air is the operative term. The fault lines in the Eurozone continue to widen and the policy dissonance is becoming more acute as they deal, not only with the health crisis, but also the 19 economies that have been starved of investment and infrastructure development. This Saturday (May 30, 2020) marks the 75th Anniversary of the release of the famous ‘White Paper on Full Employment’, which outlined the responsibilities that the Australian government took on to ensure there were jobs for all workers who were wanting work. This White Paper really defined the Post-WW2 consensus and began a period of low unemployment, upward social mobility, the development of public education and health, declining income and wealth inequality and stable wage shares as real wages kept pace with national productivity growth. It wasn’t nirvana because lots of issues were still in need of solutions (for example, gender attitudes, indigenous inclusion, etc). But it was a blue print for an inclusive society with growing material prosperity. The vision was abandoned sometime in the 1970s as neoliberalism took centre stage and political parties on both sides of the fence gave up talking about full employment. To restore full employment as a primary social goal and government responsibility is an agenda I have pursed all my career. We should all read the ‘White Paper’ and recast it in modern terms and fight like hell for a similar vision that is apposite for the times and crises we now face.
On Friday, we had the extraordinary admission from our Federal government that they had overestimated the injection required to fund their wage subsidy JobKeeper program by some $A60 billion. When the overall program was announced the Treasury allocated $A133 billion to it. So now they are admitting to a 45 per cent forecasting error, which sort of dwarfs the worst errors that the IMF makes, and they sure make some bad mistakes in their projections. Whatever the reason for the mistake, the way the Treasurer has defended it is quite repugnant – claiming virtue out of the incompetence. And while all the Labor Party economists are talking about seeing the error from space, none of them picked it up or had the nous to realise that the figures didn’t add up when the Government originally released them. I am the only economist who wrote that the figures published by the Government didn’t make sense. I did that on April 29, 2020. I also wrote to the Treasury and the Treasurer requesting answers to questions that reflected my concern. They didn’t bother replying. Now everyone is wise after the fact. Anyway, the $A60 billion is a nice round figure. And I outline a plan in this blog post on exactly how the Treasurer can spend it and improve the well-being of more than a million Australians with a stroke of the pen.