How could you vote for any of them?

Next Saturday (August 21, 2010) Australia gets to choose a new federal government which will govern for the next three years. These are crucial years because the economy is still mired in the uncertainty that accompanied the financial crisis and private spending is still very subdued. Growth around the world is still being supported by fiscal stimulus and without it economic activity will decline again. The majority of the economic indicators in Australia and elsewhere are pointing to a new slowdown as the fiscal stimulus wanes. So it is absolutely essential for the next Australian government to maintain strong fiscal support. The only problem is that both the major parties are having a battle to win votes on the platform of who can get the biggest budget surplus in the shortest period of time. It doesn’t bear thinking about. The conclusion is that none of the main parties are worthy of a vote. And the third party in contention (at least for the balance of power) – The Greens – are similarly blighted when it comes to macroeconomic policy. How did we get into this mess?

There are two main political parties contending for government in Australia: (a) the incumbent Labor government, which historically was the political arm of the trade union movement and used to advocated socialism as a major policy platform, but is now a pale imitation of anything remotely like a workers’ party; and (b) the Liberal-National coalition, which is an amalgam of conservatives and rural interests and represents the top-end-of-town.

The other party of any influence is The Greens, who will probably hold the balance of power in the upper house (which is a powerful position to be in). They currently have no lower house presence and are unlikely to gain any in this election although there is an outside chance of that happening. The Greens represent mainly disaffected Labor voters (often old socialists) and a new younger elite of so-called “tree huggers” and climate change activists. They have no coherent economic policy. Please read my blog – Neo-liberals invade The Greens! – for more discussion on this point.

What our leaders are saying

In this Melbourne Age article – It’s about the economy: Gillard – we read that our Prime Minister:

JULIA Gillard has painted Tony Abbott as an irresponsible spendthrift, putting economic management at the core of her bid for re-election at a no-frills campaign launch in Brisbane.

“The real risk for debt and deficit in this campaign is Mr Abbott,” Ms Gillard said. “Mr Abbott is the risk to our budget surplus and to the future of the government’s balance sheet.”

This is what our Prime Minister said in her campaign launch. If you cannot cope with obscenity look away and scroll forward quickly.

The simple facts that the global financial crisis caused debt and deficit for economies around the world and when we look at other major advanced economies, they have a debt, on average, 15 times greater than ours … [The Opposition leader] … doesn’t tell you that when you look at the debt of this nation, it’s the equivalent of someone who earns $100,000 a year having a $6,000 loan. That’s where our nation is positioned.

Now let me say this: I want to repay that debt. I definitely want to see this nation repay that debt, and that’s why I’ll bring the Budget to surplus in 2013 and it’s why each and every day of this campaign, every time I have announced that we would spend on a new priority, we have also announced we would make the matching savings because I will not delay bringing the Budget to surplus by one hour, by one day. The Budget is coming back to surplus in 2013.

The Prime Minister was interviewed by a leading political journalist on the Today program (August 15, 2010).

She said the Opposition was “too big a risk – too big a risk for our one-point-three-trillion dollar economy particularly when Mr. Abbott is racing towards $30-billion of spending and what we know now is he’s spent almost a billion dollars each day of this campaign and that spending would halve our budget surplus. It’s too big a risk”.

It gets worse.

She was asked about economic management and she said:

Now the task emerging as we are, strong from these difficult economic times is to keep building for the future and that requires the Budget back to surplus …

The Opposition leader Tony Abbott was asked in an interview this week (August 15, 2010) about his “pledge to get rid of the deficit and reduce debt”. He was specifically asked: “Why are you so confident of reducing debt when at this stage the figures don’t stack up?” His reply was (in part):

… Firstly, we will be getting all of our policies independently costed … Secondly, we will be releasing also later this week a kind of full balance sheet, if you like, of all our spends and saves, and I am confident people will be persuaded once those two things have happened that spending will be less and debt will be lower under us.

Then there is the question of my own competence. First, I was a senior minister in the most economically competent government in at least a generation. Second, as health minister I was responsible for the most complex, large-spending portfolio in the Commonwealth and there were no roof batt scandals or school hall rip-offs on my watch. Finally, and I’m not in the business of saying this is the be-all and end-all, but for what it’s worth I do have an economics degree and I note that Julia Gillard lacks such a degree, as does Wayne Swan.

Note the so-called “most economically competent government in at least a generation” was that government that saw the explosion of private sector indebtedness; a massive degradation of public infrastructure including schools, hospitals and road; virtually no growth in real wages; and the best labour underutilisation rate they could achieve was 9.9 per cent (see below).

They set up the conditions for Australia to go down the tube with the rest of the World in the recent downturn.

I guess he also studied economics at one of those Departments that students should boycott. Certainly when you consider his next statement:

… this idea that the spending spree got us through the recession is just … nonsense. If spending got you through recessions, why was there a recession in America? Why was a recession in Britain? Spending does not get you through recessions – having a fundamentally strong economy gets you through recessions …

Enough said really. They had recessions in the US and Britain because they didn’t spend enough. Australia also didn’t spend enough but the spending gap was smaller. China certainly spent nearly enough and kept its economy growing strongly although there was some rising unemployment.

An economy cannot be strong without sufficient aggregate demand (spending).

Today, the Opposition released their costings and have according to ABC news promised “to deliver $6.2b surplus”. The report says:

The Coalition says it would deliver a budget surplus of $6.2 billion – almost double of that forecast under Labor … in 2012-13 … and in 20013-14 a surplus of $7.3 billion.

The Government’s budget forecasts have predicted a return to surplus in 2012-13 of $3.5 billion.

When considering their plans it is obvious that if they try to achieve these outcomes, then the swing in non-government spending in terms of percentages of GDP that would be required to make up the spending gap created by the public contraction over the next two fiscal years would would have of proportion that we have never seen before in history. It won’t happen. Read on to see what will actually happen.

The real economy setting

The following graph shows the two main components of the labour force underutilisation rate for Australia as measured by the Australian Bureau of Statistics – Table 21. Labour underutilisation by Age and Sex – Trend, Seasonally adjusted and Original.

There has been virtually no mention of labour underutilisation in the campaign.

The underemployment rate and the unemployment rate sum to what the ABS call the total labour force underutilisation rate. It is, in fact, a conservative estimate of the total idle labour due to deficient aggregate demand because it excludes the hidden unemployed who are counted by the statistician as being outside the labour force.

The graph shows observations for the February quarter 2008 by age groups (which was the low-point unemployment rate overall for the last cycle. The total labour force underutilisation rate at the peak of the growth cycle was still 9.9 per cent comprising 3.9 per cent official unemployment and 5.9 underemployment (part-time workers who desire more hours of work but cannot find them).

As the downturn ensued these rates rose and by the May quarter 2010 (most recent data for this series) the official unemployment rate overall was 5.2 per cent (it has since risen) and the underemployment rate overall was 7.0 per cent (it has also risen since) given a total labour wastage rate of 12.2 per cent. Given the declining labour market since the May quarter it is clear that the total idle rate is nearer 13 per cent now.

If you examine the different fortunes of the age cohorts you easily see where the burden of recession lies.

Our young workers were already disadvantaged during the last growth cycle (total labour underutilisation of 18.9 per cent was the best achievable by a budget surplus constrained economy) but by the first quarter 2010 this rate had risen to 24.7. When the third quarter results are released we will see this rate higher.

The relatively high waste also extends into the 25-34 year old group.

These are the future workers. They are the ones who will be expected to achieve productivity gains as the baby boomers retire and die off. They are being systematically deprived of work and skills development by poorly conceived government policy.

There has been very little said in the election campaign about this issue. The major policy announcements that have any relevance are offering to pay a pittance to young workers to relocate and/or threatening nasty penalties if the workers fall through the increasingly pernicious work test framework. At the edges we have heard some talk of new apprenticeships but just the promises made by various politicians are relative to the problem like dots in the ocean.

But neither party is taking responsibility for the lack of job creation in the Australian economy and the fact that the net employment that is being added is largely part-time in nature and driving underemployment up. Neither party is committed to a job creation strategy and have implied they both think it is a matter for the private markets.

They both limit the role of government to disciplining the victims (the unemployed) with increasingly onerous work test. Neither party has announced they will increase the unemployment benefit above its current level which is below the poverty line. Please read my blog – Why are we so mean to the unemployed? – for more discussion on this point.

There was an reasonable summary of the problems facing the Australian economy at present by the Melbourne Age economics journalist Tim Colebatch – A deficit of difference – published August 17, 2010.

Colebatch noted that:

For all its shortcomings, the stimulus was essential to get us through the financial crisis … without the stimulus – and the bank guarantees that headed off a financial collapse – Australia would have suffered a far worse downturn.

The $21 billion of handouts to households allowed many to pay down debt and others to keep retail demand rising – and shops are big employers. Even the $16 billion for school buildings – delivered only after Australia had begun to emerge from the crisis – has played a key role in the recovery of growth and jobs since work began a year ago.

Why? Because private sector activity collapsed. In the non-residential sector – excluding education – approvals halved from $28 billion in 2007-08 to $14 billion in 2009-10. Bank lending to business has shrunk by $87 billion, or 11 per cent – and for many companies there are no other lending sources.

Think about that. Even now, there are 150,000 more Australians out of work and 180,000 more working shorter time than before the crisis. Growth is sluggish, and GDP per head remains less than two years ago. Ask yourself: what would Australia be like now had the government not pumped all that money into new construction?

He noted that while construction normally takes the brunt of an economic slump in the current period it was growing because of the stimulus measures aimed at infrastructure building.

Without the stimulus, construction would have collapsed in 2009-10 as it did in 1990-91 – when 15 per cent of construction workers lost their jobs. That’s another 150,000 people unemployed, with flow-ons throughout the economy costing who knows how many more jobs.

Even so, the national economy is growing very slowly and is in danger of reversing as the stimulus wanes. The Chinese economy which has helped our export sector is also slowing in line with reversals in the UK, Europe and the US.

Private spending throughout the world, including in Australia is very flat and there is an unwillingness by borrowers to re-enter the credit cycle. The only thing that has been keeping growth positive in every advanced nation has been the fiscal policy initiatives, and, to a lesser extent, the lower interest rates.

Most of the main economic indicators for Australia are looking like there will not be a sudden burst of growth any time soon.

I have done a lot of media interviews in the last week or so coinciding with the daily policy announcements by the major parties leading up to the election. When asked what I think about the current state of the economy my reply is precarious and in need of further fiscal support. I am one of the few national media commentators saying this.

Even the letter signed by more than 50 Australian economists which was released this week to give support to the Labor Government failed to take them to task for the poor state of the economy that remains because the stimulus was too small. The letter also failed to demand a stop to the surplus rhetoric.

Please read my blog – The letters economists write … – to see why I declined to sign the letter.

A macroeconomics primer for the politicians

What parades now as macroeconomic policy is a mishmash of half-truths and fallacy. We trace the origins of the financial crisis before us to erroneous macroeconomic policy stances. The pursuit of public surpluses meant that the maintenance of growth had to rely on the private sector going increasingly into debt. The government balance is the mirror, dollar-for-dollar, of the non-government balance.

In my 2008 book with Joan Muysken – Full Employment abandoned we considered the problems with budget surpluses in detail.

Australia is a modern monetary economy which means it has three essential features:

  • A floating exchange rate, which frees monetary policy from the need to defend foreign exchange reserves).
  • A sovereign government which has a monopoly over the provision its own, fiat currency
  • The monetary unit defined by the government has no intrinsic worth. It cannot be legally converted by government, for example, into gold as it was under the gold standard. The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.

From the national accounting conventions the following must be true – the Australian government deficit (surplus) equals the Australian non-government surplus (deficit).

The failure to recognise this relationship is the major oversight of neo-liberal analysis which then permeates into the mindsets of the politicians and the advisors of the main parties. They are so blinded by neo-liberal myths that neither major party deserves office.

What they do not understand is that, in aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.

The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.

Additionally, and contrary to neo-liberal rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings.

The decreasing levels of net private savings which are manifest in the public surpluses increasingly leverage the private sector. The deteriorating debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity.

The analogy neo-liberals draw between private household budgets and the government budget is false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.

Unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income. Involuntary unemployment is idle labour unable to find a buyer at the current money wage.

In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns.

Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

So if you want to reduce labour underutilisation then you would not be cutting public spending when the private sector is trying to save and the external sector is in deficit. Our politicians do not understand this.

While the sovereign government is not financially constrained it still issues debt to control its liquidity impacts on the private sector. Our politicians do not understand this. They are obsessed with reducing the public debt levels by trying to target budget surpluses but in doing so are squeezing the private sector.

The only way the economy can grow in those circumstances is for the private sector to increase its own indebtedness. So we replace risk-free public debt (that is unnecessary anyway) with risky private debt which is an unsustainable strategy.

What the politicians do not understand is that government spending and purchases of government bonds by the central bank add liquidity, while taxation and sales of government securities drain private liquidity.

These transactions, which we term “vertical” (invoking the hierarchy of government and non-government), influence the cash position of the system on a daily basis and on any one day they can result in a system surplus (deficit) due to the outflow of funds from the official sector being above (below) the funds inflow to the official sector.

Please refresh your memory of this by reading the following blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3.

The relevant point is that the system cash position has crucial implications for the central bank, which targets the level of short-term interest rates as its monetary policy position. Budget deficits result in system-wide surpluses (excess bank reserves).

Competition between the commercial banks to create better earning opportunities on the surplus reserves then puts downward pressure on the cash rate. But importantly, these “horizontal” transactions (between non-government units at the same hierarchical level) cannot eliminate the surplus reserves. Only vertical transactions provide net adds to and subtracts from the reserve system.

In this context, if the central bank desires to maintain the current target cash rate then it must provide an alternative to this surplus liquidity by selling government debt (a vertical transaction).

In other words, government debt functions as interest rate support via the maintenance of desired reserve levels in the commercial banking system and not as a source of funds to finance government spending.

If you are uncomfortable with that reality then I suggest you get over it. It is the only functional purpose of debt issuance in

What is the problem with budget surpluses?

At this point we can clearly articulate what is the problem with budget surpluses.

Any growth strategy predicated on fiscal surpluses and increasing levels of private debt is inherently unstable and ultimately unsustainable. We should have learned that lesson from the current economic crisis. Unfortunately the politicians and their advisors clearly do not understand what went wrong.

First, the levels of debt rendered private agents increasingly susceptible to small changes in external conditions including policy changes. For example, the increasing fuel prices in recent years endangered the solvency of highly geared households. In turn, debt defaults were less confined than in the past because of the size of financial derivatives market which has grown to drive the proliferation of credit.

Second, private agents eventually had to increase their saving to reduce the precariousness of their balance sheets.

Both sources of instability mean that aggregate demand would fail resulting in unsold inventories, reductions in production levels, job loss and rising unemployment.

The resulting unemployment is involuntary in nature by which we mean labour unable to find a buyer at the current money wage. It also invokes the idea of a systemic macroeconomic constraint that renders an individual powerless to improve their employment circumstances.

Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition.

The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns.

In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending.

The non-government sector depends on government to provide funds for both its desired net savings and its tax obligations. The private sector cannot by itself “net save” because saving is a signal to lend and so savers are always in an accounting sense matched by a borrower.

To obtain these funds, non-government agents offer real goods and services for sale in exchange for the needed currency units. This includes, of-course, offers of labour by the unemployed.

Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. In general, deficit spending is necessary to ensure high levels of employment.

The concept of a budget surplus is often misunderstood. The current Australian Treasurer has recently been talking about a “$40 billion hole in the budget bucket”. Well there is no hole because there is no bucket. To explain this we need to understand what happens when the sovereign government runs a budget surplus.

It is often argued that the surplus represents “public saving”, which can be used to fund future public expenditure. With the current decline in government revenue and the need for a dramatic fiscal injection generating rapidly declining surpluses in Australia, many commentators are erroneously claiming that the Government will run out of funds and will have to postpone or abandon its much-touted infrastructure development plans, including the upgrade of the broadband network.

In rejecting the notion that public surpluses create a cache of money that can be spent later, MMT tells us that the government spends by crediting a reserve account. That balance doesn’t “come from anywhere”, as, for example, gold coins would have had to come from somewhere.

It is accounted for but that is a different issue. Likewise, payments to government reduce reserve balances. Those payments do not “go anywhere” but are merely accounted for.

The following accounting relation, often erroneously called the government budget constraint (GBC) can be used to show the impact of budget surpluses on spending and private wealth:

where G is government spending net of interest payments on debt, i is the nominal bond rate, B is the stock of outstanding bonds, M is base money balances, and T is tax revenue. In an accounting sense, when there is a budget surplus then ΔM < 0(destruction of base money) and/or ΔB < 0 (destruction of private wealth). The budget surplus may be applied to running down debt (that is, forcing the private sector to liquidate its wealth to get cash) but this strategy is finite. In recent years the Australian government followed the pattern of several sovereign governments and established the Futures Fund. This amounts to the Treasury competing in the private equity market to fuel speculation in financial assets and distort allocations of capital. However, this behaviour has been grossly misrepresented as providing future savings. Say the sovereign government ran a $15 billion surplus in the current financial year and then purchased that value of financial assets in the domestic and international capital markets. From an accounting perspective the Government would no longer have run that surplus because the $15 billion would be recorded as spending and the budget would break even. In these situations, the public debate should be focused on whether this is the best use of public funds. It would be hard to justify this sort of spending when basic infrastructure provision and employment creation has been ignored for many years by neo-liberal governments. Please read my blog - The Futures Fund scandal – for more discussion on this point.

The alternative when a surplus is generated is to destroy liquidity (debiting reserve accounts) which is deflationary. The weaker demand conditions would force producers to reduce output and layoff workers with rapid increases in joblessness. Investment irreversibilities driven by uncertainty of future demand conditions then retard capacity growth and prolong the downturn.

So what the politicians do not understand is that the pursuit of public surpluses will necessitate an increase in the net flow of credit to the private sector and increasing private debt to income ratios as long as the external deficits remain.

The current financial crisis is now evident that a threshold has been reached where the private sector, by circumstance or choice, becomes unwilling to maintain these deficits? It also means that reliance on rising indebtednesses to underwrite private spending is now unsustainable and an alternative growth strategy, based on fiscal expansion has to be introduced.

In terms of fiscal policy, there are only real resource restrictions on its capacity to increase spending and hence output and employment. If there are slack resources available to purchase then a fiscal stimulus has the capacity to ensure they are fully employed.

While the size of the impact of the financial crisis may be significant, a fiscal injection can be appropriately scaled to meet the challenge. That is, there is no financial crisis so deep that cannot be dealt with by public spending.

The politicians should study some basic macroeconomics before lying to the public

The politicians and their advisors clearly do not understand the flow-of-funds approach to the analysis of monetary transactions.

This approeach highlights both the importance of the distinction between and vertical and horizontal transactions and the fundamental accounting nature of the budget constraint identity.

It shows categorically that the government budget constraint is only ex post accounting identity (that is, just records what has gone) rather than being an ex ante financial constraint (that is, a statement of revenue constraints on government spending).

It also shows that if the sovereign government runs cumulative surpluses which destroy net financial assets then the non-government must accumulate deficits in the form of increasing indebtedness which are unsustainable.

Please read my blog – Stock-flow consistent macro models – for more discussion on flow-of-funds macroeconomics.

While the approach is not for the introductory student if you persevere you can get the point. The following table is taken from a paper I wrote in 2008 and shows a simplified transactions table of the three sectors (government, private domestic, external).

Here, Gross Domestic Product, Y, is equal to Private expenditure, PX, plus government expenditure, G, plus exports, X, minus imports, M. The ROW account reveals that imports minus exports and transfers paid by the external sector, TF, equals the balance of payments deficit. Every item in the Production (GDP) account is matched by a corresponding negative entry in some other column. Taxes net of transfers are received by the government. Net property income, taxes and transfers, TF and TP, are paid by the external and private sectors, respectively.

The final row totals reveal that public sector net borrowing, PSNB, equals the private net acquisition of financial assets, NAFA (private savings less investment) minus the balance of payments surplus (or plus the deficit), BP.

From the perspective of a stock-flow consistent approach to macroeconomic modelling, this gives the fundamental accounting identity that government savings (surplus) or tax revenue net of government spending and payment of interest on bonds is equal to the non-government sector’s dis-saving.

That is, public sector net borrowing equals the private net acquisition of financial assets (private savings less investment) minus the balance of payments surplus (or plus the deficit). As governments have moved away from deficit spending at levels typical of the post-war period of full-employment, private sector debt levels have escalated.

The reason why this has happened is that causality flows from fiscal policy to the private sector simply because economic influences over the rest-of-the-world account change quite slowly, with income effects dominating over the price effects that are championed by neoclassical theorists.

In contrast, fiscal policy responds immediately to government decisions about spending and taxing. The transmission mechanism behind these changes is complex, as it operates within a portfolio setting, by changing relative rates-of-return between real investment, the equity-premium, and the term structure of bonds.

The other way of expressing all this is to use the more familiar sectoral balances terminology that I have introduced often in this blog.

To refresh your memories go to this blog and read the Question 1 answer.

Consider the accounting identity for the three sectoral balances:

(S – I) = (G – T) + (X – M)

This sectoral balance equation says that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

Thus, when an external deficit (X – M < 0) and public surplus (G - T < 0) coincide, there must be a private deficit.

Please note that is bolded – there MUST be a private deficit.

So the major parties have as their central macroeconomic platform the increasing indebtedness of the private sector. The Australian household sector already hold record levels of debt and has been saved from mass bankruptcy by the fiscal stimulus.

When will one of the senior journalists understand this and probe the Prime Minister about her constant mantra that her government will get back into surplus by 2013?

While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.

The following graph is derived from data available from Australian Bureau of Statistics. It shows the sectoral balances for Australia from 1974 to 2010.

While the external balance (current account deficit) has fluctuated with the commodity price cycle, it has continued to deteriorate slightly over the longer term.

Accordingly, the dramatic shift from budget deficits to surpluses from the mid-90s onwards has been mirrored by a corresponding deterioration in private sector indebtedness.

The only way the Australian economy could keep growing in the period after 1996 was for the private sector to finance increased spending via increased leverage.

This was an unsustainable growth strategy. Ultimately the private deficits became so unstable that bankruptcies and defaults forced a major downturn in aggregate demand. At that point the budget moved very quickly back into deficit.

To restore stability to aggregate demand and to prevent a major depression the government balance had to move further into deficit. With an external deficit, the government balance has to be in deficit for the private balance to be in surplus.

In terms of the slightly worsening current account deficit, we can interpret that as signifying an increased desire by foreigners to place their savings in financial assets denominated in Australian dollars.

This desire means that that the foreign sector will allow us to enjoy more real goods and services from them relative to the real goods and services we have to export.

We note that exports are always a “cost” while imports are “benefits”. As long as there is a foreign desire for our financial assets, the real terms of trade will provide net benefits to Australian residents which manifests as the current account deficit. An external deficit presents no intrinsic problem despite views by the orthodoxy to the contrary.

But at present the intention of all the parties (including The Greens) to “force” the budget back into surplus is misguided in the extreme. There is no thirst for credit in the private domestic sector. There is not thirst for private credit anywhere in the world. The credit binge that allowed many governments to run budget surpluses is over.

In the context of an external deficit and a strong desire by the private domestic sector to save, any forced fiscal austerity will cause GDP growth to decline and unemployment to rise. It is likely that the budget will head further into deficit as a result of the operations of the automatic stabilisers.

It is mindless to tell the Australian public day in and day out that you will get a massive surplus by 2013 without any reference to the behaviour of the other sectors in the economy. These behaviours are all pointing to the need for persistent and larger budget deficits.

But our leaders and would-be leaders do not have the slightest understanding of that.


None of the parties get any of this and therefore disqualify themselves from government in my opinion. The so-called expert commentators and journalists also do not understand it and so they let the politicians get away with blue murder when they bandy economic concepts around.

I realised long ago that the public debate and public life is a total fake. Almost all the experts who pontificate daily and command authority and salaries to match have not fundamental understanding of how the monetary system operates. They thus lie to the public.

The public could understand the basic principles of MMT if the media gave more time to sensible discussion. I speak to journalists every day and they tell me that the message is too hard to get across.

So when casting your vote this weekend … you know what to do!

Under Australian electoral law as defined by the Australian Electoral Commission I am not allowed to encourage voters to write essays on their ballot papers outlining the basis principles of MMT and explaining why none of the major parties (including the Greens) deserve to hold office. So I won’t!

That is enough for today!

This Post Has 25 Comments

  1. Dear Bill,

    Have linked this blog in an email to as many people in my AUS address book that I know take something of an interest in the coming competition of the ‘blind leading the blind’ – hoping it will become a modest chain!! This election reminds me of one of those film clips you see of people in winged contraptions leaping off tall cliffs. Cheers …


  2. Firstly you ask how I could vote for any of them, but the answer should be obvious: TO KEEP THE OTHER LOT OUT! I suggest you do likewise!

    Secondly I disagree with your conjecture that Any growth strategy predicated on fiscal surpluses and increasing levels of private debt is inherently unstable and ultimately unsustainable. An ever increasing amount of private sector investment is desirable and sustainable through most of the economic cycle. During the remainder of the time when it isn’t, the public sector can fill the gap.

  3. Bill please replace former post with this one.


    Government Surplus = Non Government Deficit.

    When government runs a surplus the private sector either cash intheir chips and / or after that they must obtain credit.

    Long story short: Government Surplus forces private sector into positions of unsustainable borrowing / credit. Eventually, the debt gets too big and the private sector poos itself. The bottom end of town goes bust and the top end gets billions of dollars in corporate welfare.

  4. I have been conducting a bit of an experiment on a couple of forums to see whether attitudes can be changed in the face of solid evidence. So I’ve used the points Bill makes here eloquently and the evidence from the couple of external economists (the video and the article in the FT) to see whether it makes any impression.

    And yet I still get the same ‘what I believe must be true because that’s my experience’ responses. Here’s a few so that you all know what you’re up against.

    “They should worry because the coupons and redemption won’t buy a kilo of potatoes when its due. In effect the debt becomes worthless and something that is worthless is the same as defaulting.”

    “Though it is theoretically true that a sovereign state can print its own currency to infinity, that currency has to pay people to buy food to eat, energy to heat their homes and petrol to fill their cars. Foreign countries can always demand payment for their commodities in something other than the currency. ”

    “Saying debt is money is what has got us into this pickle. Debt is not money, though money is used to purchase it and repay it. Debt is nothing more than a promise. Equating debt with cash is treating the debt as though it provides 100% guaranteed durability, which it does not. Treating the debt as the equivalent of cash on a balance sheet is where the problem lies (and where the lies are). ”

    “Righto, but you cannot define it as an asset swap if you are replacing interest bearing paper with non-interest bearing paper. Interest bearing paper does increase the money in supply throughout it’s lifetime. If it didn’t then only the very very nervous would be buying it. ”

    “The money system works only because people believe in it, or rather they believe other people believe in it. The money system is a vast complicated con trick to deceive people who make real things in to giving them to people who create nothing real or useful in return.

    Am I missing something or does the emperor really have no clothes?

    Give that man a coconut! – The emperor really really really has no clothes. Buy Gold. ”

    “But fiat money tends to amount to words on paper, while gold is something more than that.”

  5. My fear is that they do understand, because economics can be cast as a game of winners and losers. The key to me is that you note that the unemployed have services that they cannot sell at the current money wage. Presumably, if the money wage lowered, some of them could be employed. Destroying public services also has the effect of reducing the “share” of Australia’s economy enjoyed by the non-affluent.

  6. Dear Bill,

    I agree that all the mainstream politicians in Australia either lie, do not speak openly or have no idea about how the economy works. However this doesn’t mean that the suicidal (lack of) environmental policy of the Liberals makes no difference to our future or that Internet censorship proposed by the Labor should not be opposed.

    I shared your views about the politics for quite long when I lived in Poland (since I had retired from the active involvement in the politics circa 1990). I would say that the majority of people were also quite disillusioned. Voting was not compulsory and certain political processes driven by the Church and the neoliberals (who infiltrated all the political parties including the post-communist “social democrats”) were not stopped.

    The political situation deteriorated so badly (mainly due to the 20% unemployment causing social dislocation) that I eventually left the country as I didn’t want my children to grow up in a neo-medieval society full of social injustice, nationalism and religious fanaticism. I am very happy that I made that decision in 2003 despite having a stable job and good living conditions.

    On Saturday I am going to at least try to throw the spanner into the current two-party oligarchic system offering no real choice for Australia. The Greens in the Senate can still block the Internet filter even if their ideas about the economy are naive and they may apply some pressure on carbon dioxide emission reductions.

  7. One other thing, Bill: be thankful you don’t live in Britain! Our options may be bad, but the Poms not only have it far worse, but also have an electoral system that discourages anyone else from standing!

  8. Keeping a large pool of un- and underemployed citizens has another benefit to the military-industrial state ( at least here in the US). There will always be some who will “voluntarily” join the army and be paid pittance to risk life and limb because they have no other options for work. This is the current version of the Jobs Guarantee.

  9. So, a bit off-topic, but I figured I would just comment in the most recent thread:

    I’ve begun reading your site (and some other MMT material) just recently, and I had a question that I would be happy for anyone to answer (including you other commenters). Is there some sort of relationship between policy running counter to MMT and increasing wealth inequality?

    It strikes me in the discussion of all of this, given the potentially very distributive nature of fiscal policy, how does MMT theory address wealth inequality? Because it seems to me that there might be some merit at looking at the economy in useful segments. Example in that Reagan ran a pretty aggressive deficit, but began a trend of dramatically rising wealth inequality pursued over several subsequent neo-liberal administrations. Was this because his deficit was merely insufficient compared to previous deficits? Is it a simple matter of surpluses=inequality (and if so, how exactly? That’s something that seems to be alluded to in much of this but I’m still so new to MMT that I have not read anything explicitly on this if it exists)?

    Or, is it that he essentially ran essentially MMT policy on the very wealthy (reducing taxes on the rich, gov’t corporate welfare, thereby increasing savings), while doing the opposite for the poor (failing to substantially cut taxes, destroying infrastructure investment etc, reducing savings)? I.e., is it possible to, on a national level, run fairly MMT-compliant policy while at the same time still screwing the lower and middle classes? Must we apply MMT policies in a specific, morally-guided way to achieve real gains in prosperity for all, or will MMT-compliant policy in general simply produce a more equal income distribution and greater standard of living for the lower classes?

    It seems to me it is perhaps the former (which, as a progressive, is fine with me, if perhaps a more difficult thing to sell politically), but that at least MMT offers a useful lens for understanding how Reagan/Thatcher style economic policy can result in the huge wealth disparities we see today — selectively pursuing MMT-style policies on only certain segments of the economy would put those segments at a strong advantage than other segments, creating pockets of wealth and success within otherwise suffering populations, averaging out in such a way as to mask the realities at hand.

    But, as I say, I am a newcomer to all this, and it is very interesting and seems far more sensible to me than mainstream economics that I learned in school, but I am probably not articulating myself well. I am basically just stating some intuitions, and hoping someone can direct me to related information!

  10. “I speak to journalists every day and they tell me that the message is too hard to get across”.

    From the Australian Journalists Association Code of Ethics:

    Respect for truth and the public’s right to information are fundamental principles of journalism. Journalists describe society to itself. They convey information, ideas and opinions, a privileged role. They search, disclose, record, question, entertain, suggest and remember. They inform citizens and animate democracy. They give a practical form to freedom of expression….

    – and on it goes describing how best to achieve this. Nowhere do they bleat – if it’s too hard screw the above and just give up!

    Besides, the MMT message distilled could easily be taught to kids at school, like they do any other system – its social potential
    and efficacy in managing real resources is incredibly easy to understand.

    I wonder if the ‘put it in the too hard basket’ attitude to journalism and reporting was there when they first started out? Withstanding being gelded, spooked, brainwashed, institutionalised, down-trodden or paid for along the way, it’s a poor excuse to sidle around journalistic integrity!

  11. Sam:

    Let me give it a shot. When Reagan started off in 1980/81 – the country was in an fragile condition due to the high-interest squeeze cost-push inflation Volcker policy. The Reagan admin started off very ideological – they cut government spending – or perhaps more accurately they started dismantling the social safety net and had not yet ramped up the military engine.

    The drop in government spending + the ongoing high-interest rates created the big Reagan recession – the largest since the Great Depression at the time. Unemployment reached 10% (unheard of at that time). Then, for some odd reason, the Reagan administration figured out that “deficits don’t count”. They found that yahoo Laffer and he provided the ideological cover for the Reagan tax cuts – which were the excuse to further cut social programs while ramping up defense and other spending. Huge deficits followed.

    This spending, along with a private credit boom (the seeds of the S&L crisis) fueling an asset inflation (equities, housing) saved the Reagan administration, and there was Mourning, I mean Morning in America once again. The rest is history.

    The point of this story being, there can be “good” government deficits and poor ones, the political powers can always (make that: will always) direct a great part of the spending to their cronies (although spending, like money, is fungible and does “leak” out to the rest of us – another way to think of “tinkle down” economics).

    So, while MMT does describe the mechanics of the monetary system as an objective operational description – there are of course value judgments involved – one can use a hammer to hit oneself (or someone else) in the head just as easily as that nail. It is kind of like nuclear physics – once you get it, there is no turning back.

  12. @pebird — gotcha. So you can, using an understanding of an MMT, operational view of the economy develop fiscal policy that will increase employment but not necessarily achieve any other sorts of social goods.

  13. Also, with regards to the topic at hand — I think the only way MMT can gain acceptance rapidly (rather than going through the decades-long process of attaining mainstream respect in academic circles, becoming standard curricula, and then informing the positions of students who take it with them to the halls of power) would be if it were sold as something else.

    Now, I work in politics in America (so at least some of us read this sort of work!) but my opinion is that you would have to, at best, stop just short of outright lying in order to sell full-employment MMT policies to the public. Basically, as policy, the whole school of thought would need tremendous re-branding. First of all, the name sucks (no offense to anyone). But to more crucial matters, you absolutely cannot admit to just printing money without financing it. Even though that’s one of the central points that MMT is trying to illustrate, it runs counter to so many (probably) biologically-ingrained notions that humans have.

    Concepts of owing, guilt, debt, etc, seem to be human universals, and they’re very emotionally powerful. Hell, in German, the word for guilt and the word for debt are actually the same thing. These are not simply economic dogmas — these are moral, emotional concepts that very well may be built directly into the human brain by hundreds of thousands of years of evolution. An evolutionary psychologist would say that these are cheater-detection mechanisms that were probably crucially important to our ancestors’ survival in the social environment of nearly all of the last few million years.

    So, honestly, I don’t know how one would even begin to sell MMT to the public at large, in any country. I guess the key might lie in spending without issuing debt to “finance” that spending. Because, although in the government would be running a deficit in literal terms, the lack of issued debt could be used to tell the public that this is a way for the government to spend money without increasing the deficit. Because, really, people don’t care that the government is changing more numbers on spreadsheets up rather than down — they care that the government is accumulating debt (regardless of all the unique realities of government debt in a modern sovereign nation). So, to most people, a deficit only matters because it is a measure of debt — of guilt, of irresponsibility, of profligacy, of a lack of self-discipline. It’s about what the deficit represents morally and emotionally.

    Thus, if one emphasized being able to spend without incurring debt, then maybe that would be a starting point for the selling of MMT to the public. It would at bare minimum require a tremendous amount of message discipline, and essentially ignoring and out-shouting the accusations coming from the opposition that “you’re just printing money!” You’d probably have to stay vague — saying things like “This spending bill is debt-neutral, but the opposition wants to rack up the deficit/cut spending/raise taxes/whatever unappealing thing!” and just keep repeating that instead of actually explaining or responding to criticism. Basically hope that people’s desire to get stuff from the government (especially at the prospect of getting it “for free”) overrides their suspicion of how government could possibly spend without incurring debt.

  14. Some days this blog saves my sanity.
    I’ll be the first to admit that the nuances of MMT escape me. I don’t read the material closely enough. As the technical details of how the monetary system operates bores me to stupefaction, I am eternally grateful to Bill and regular commentators who work so hard to demystify and elucidate the inner workings of our monetary system.
    I wonder if journalists are MMT adverse because they get lost in the complexity of how monetary systems operate or because their employers would be apoplectic if they explained the basic principle that government deficits represent private surpluses and that mostly government surpluses at the very least represent a complete waste of time.
    ‘Besides, the MMT message distilled could easily be taught to kids at school.”
    I couldn’t agree more. Any kid who can find their way around a Cuisenaire rod, and most can by 7, will get MMT. It takes years of highly sophisticated coaching in the place of good basic teaching to make grown adults (some of them with PHD’s) dafter than the average 7 year old.

  15. However, this behaviour has been grossly misrepresented as providing future savings. Say the sovereign government ran a $15 billion surplus in the current financial year and then purchased that value of financial assets in the domestic and international capital markets.

    From an accounting perspective the Government would no longer have run that surplus because the $15 billion would be recorded as spending and the budget would break even.

    Its a bit complicated. I think some accountants may not treat it as a surplus but I think the budget will still be a surplus. Every sector income and expenditures. If the income is higher than expenditures, it is saving. How I allocate the saving is a slightly different question.

    During a period, if the government has accumulated the surplus in its account at the central bank, the private sector is in deficit. (assume no external world for simplicity). In the same period, let us say that instead of reducing its debt, the government purchases some corporate bonds from the secondary markets. This does not make the private sector deficit go back to zero.

    If the G in G-T includes purchases of financial assets, then it can turn the surplus into a non-surplus. If however, if G simply is interest payments plus purchases of consumption goods (and usual expenditures) from the private sector, then there can be a surplus even though the surplus may be used to purchase financial assets.

    In a more complicated example, the TARP, the public sector borrowing requirement increased but the deficit didn’t by $700b. The number (increase) was $200b or so 🙂

    Let us say I start working with no deposits in the bank. During a period, I earn an income and have my expenditures – what I do with the deposits at the bank is a different question. My purchase of equities during the first accounting period, does not make my surplus a non-surplus.

    (Of course, the Future Fund is a waste of time.)

  16. Please excuse my ignorance here, Ramanan.

    Do you mean that it depends on whether the government treats its monetary sovereignty as fungible or treats it as some sort of ‘manna from heaven’ financial asset?

    If it does the latter isn’t that the grossest form of insider trading?

  17. pebird: “Then, for some odd reason, the Reagan administration figured out that “deficits don’t count”. They found that yahoo Laffer and he provided the ideological cover for the Reagan tax cuts – which were the excuse to further cut social programs while ramping up defense and other spending. Huge deficits followed.”

    Were the Reagan deficits not part of the “starve the beast” plan? A plan that is based on gold standard thinking, not MMT. The idea of the huge deficits was to make social spending at some future time unaffordable, as the nation approached bankruptcy.

    In time, people like Dick Cheney realized that deficits do not matter (in the sense of leading to default or bankruptcy). That realization should spell the end of the starve the beast strategy. However, since enough Democrats believe that the gov’t is running out of money, the strategy can still work, but the coup de grace on the “beast” must be delivered while the Dems and the general public share that mass delusion. Is that not happening as we speak?

  18. The problem with selling MMT to the public is that it is being sold on the neo-liberal grounds of deficit spending/financing which is deeply ingrained into household thinking and there might be no way to escape it until we start educated kids about limited resources and what we can make out of them. Why not shifting the ground completely and into a field where neoliberals can not fight back?

    The starting point is the one that Bill sometimes makes and that is the role of government. Since government is here with us regardless of whether one likes it or not (it is like fiat money is here and noone will go back to gold standard) then government should be here for something. Government is to provide public goods. What public good means is defined in the elections. So it can be public education and health-care like in most part of Europe and it can be military dominance throughout the world. Once the country decides on what public goods it wants than taxes can be justified simply because public good is … public. This approach shifts attention from financial matters to the actual results of resources utilisation. It also draws a clear line between private sector and public sector activities. Generally this line should not be crossed by neither party meaning that if government is charged with infrastructure than no private company can (profitably) engage in this activity. It becomes a public business and the only money leakage from this activity is wages and real resource purchases. But this happens anyway. The will be no argument about public vs private sector efficiency because they do not overlap and it is not possible to compare apples to oranges. The no-competition requirement is very much related to the skill-set required by each activity. As soon as education, health care, infrastructure development, etc. become a domain of public interest it also becomes a unique set of skills required by this activity. Surely, there will be overlaps for managerial skills but this will be a small share of overall employment. Job guarantee can be also integrated as certain long-term public activities like infrastructure can clearly be anti-cyclical. So no financial questions. Only public goods vs private goods. And then we indoctrinate our kids at school that this is how they should think about their lives 🙂

  19. Sam: “So, honestly, I don’t know how one would even begin to sell MMT to the public at large, in any country.”

    It will not happen overnight, I do not think. But it could. For instance, last year when the CSPAN interviewer, Steve Sculley, asked President Obama, “At what point do we run out of money?”, instead of replying, “Well, we are out of money now,” he could have said, “The American government cannot run out of money.” That simple statement would have opened a lot of minds.

    A lot of people understand that the U. S. (along with most other nations) has a fiat currency, they just do not like it.

    I think that what will lead to acceptance is success. When asked in London why the American colonies had become so prosperous, Benjamin Franklin replied, “Colonial Scrip.” The opportunity now exists to link prosperity and fiat currency. Demonstrate the unreality of the debt/deficit phobia, and people will take note.

  20. Regarding the idea of selling MMT to the public at large, I think there is a very long, hard road ahead. I suspect, like me, most people here have tried to explain MMT principles to those unfamiliar with them or make an argument in relation to economic policy of their own government taking into account the operational realities outlined by MMT. Some of the reactions are bizarre, even from otherwise informed and intelligent people. I think this is because it is not merely a process of reasoning, it requires people to operate outside a conceptual framework which is presented to them day in and day out in the mainstream discussion (the notion that sovereign government budgets are the same as household budgets). Once a person is able to make the radical break from that beguiling but false framework a lot of other things become clear instantly. It is getting someone to take that first step which is so difficult.

  21. “(the notion that sovereign government budgets are the same as household budgets)”

    Perhaps then the way to explain it is to turn it on its head. Alter the household budget so that it is the same as a sovereign government – show them what happens if they spend money and can ‘recover’ it via percentage taxation. Then they’ll see that the difference between what they spend and what they get back from their taxation is that saved by the chain of people receiving their cash.

  22. I do want to emphasize that I think opposition to MMT goes a lot deeper than “prevailing wisdom” or neo-liberal arguments (I also have to say I find the use of terms like “dogma(tists)” “lies” “fraud” and so on to be extremely unproductive and also probably inaccurate. I am sure for someone like Bill, having run up against neo-liberal orthodoxy (a more acceptable term) for more than 30 years, it is very frustrating, but this is hardly a unique thing. This is, in fact, rather the default for the sciences, no? Initial skepticism form the establishment paradigm, followed by a grueling process of gaining acceptance (admittedly probably harder in a social science due to murkier definitions of proof), followed by becoming the new paradigm that someone will eventually rail against who can add another level of complexity to our models of the world.

    I genuinely believe that the idea the realities of a modern monetary system are unintuitive on a biological level. There is a very strong likelihood that human brains are built with concepts like owing, deserving, earning, debt, loans, etc. So, to say “this isn’t actually the way the world works at a certain level, even though it’s nothing like your daily life or the evolutionarily ingrained concepts you hold dear” is a much bigger sell than just overcoming neo-liberal ideas.

    It’s like trying to get people to understand the gambler’s fallacy, or to abandon religion. There are certain cognitive mechanisms in the brain which are just damn hard to get past. I would think that advocating MMT in the public understanding would be pretty similar to advocating atheism, in terms of difficulty, ceiling on acceptance, and actual understanding of the logical framework that justifies it (as opposed to merely trusting elites, which arguably is a big portion of why many Western European countries are more evolution/science/atheist friendly; they don’t really understand these notions, but they respect what academic elites say and are more accepting of authority — which also means these countries would probably be more ripe for MMT as well, as long as there is some academic consensus on it). In places like America and Australia, on the more conservative end of the industrial world, you’d probably have to go the Enlightenment route: just as a bunch of atheists once got together and claimed to be “secularists,” something similar might be a true ceiling on how well MMT could ever really be understood/received by the public.

  23. It’s bad enough when neo-liberals tell us what to think. However, when neo-liberals start telling us that their way of thinking is a natural process ingrainied into all of us then the alarm bells start ringing.

    The biological metaphor was crap when Marshall wrote about it in 1890 and nothing has changed since except for the push by neo-liberals to advance

    Without fail we get this crap day in and day out from politicans, the mass media, and the muppets of business.

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