skip to Main Content

Where has the centre gone?

Answer: out towards the far right. Today’s blog adds to my previous posts where I consider so-called progressive interventions in the policy debate and show that they are really nothing more than attenuated forms of neo-liberalism. The evidence is that what goes for progressive input these days bears no resemblance to what we used to consider represented progressive thinking. The way the population has been inveigled into accepting policy positions and justification that are represented as “centrist” but are, in fact, what we used to call right-wing positions is one of the success stories of the neo-liberal era. The tendency of so-called progressive organisations to mimic the language and concepts of the right is one of the main constraints on advancing a solid attack on the conservative orthodoxy that created and perpetuated the crisis and which is setting nations up for a repeat in the coming years.

The previous blogs in this series of “outing” the faux progressives were:

In the UK …

In the UK last week, the Institute of Public Policy Research released a Report – Cutting the deficit: There is an alternative – which outlines its alternative plan for fiscal consolidation and was written by Tony Dolphin.

The IPPR describes itself in this way:

Our research and policy ideas have helped shape the progressive thinking that is now the political centre ground since 1988. Our work has always been driven by a belief in the importance of fairness, democracy and sustainability. And now, at a time of economic and political crisis, we are using radical thinking to take this agenda forward.

So this is probably what goes for a progressive-centrist position these days in the UK. It is stunning how far right the progressive movement has moved.

The IPPR Report tells us its motivations are as follows:

The Spending Review to be announced on 20 October is certain to be one of the most significant political events of this Parliament. The country is braced for spending cuts on a scale without precedent in the post-war period. Progressive economists believe the Coalition’s plan for rapid and deep deficit reduction will put at risk the fragile economic recovery and undermine prospects for future growth and shared prosperity.

However, beyond simple protest, it is incumbent upon those who are critical of the Coalition government’s plans to propose credible and costed alternatives. This briefing paper sets out to do just that.

Can someone (who is actually progressive) please tell Tony Dolphin that there is no requirement at all for “those who are critical” of the British government’s destructive plan to withdraw fiscal support for its economy to “propose credible and costed alternatives”? His E-mail address is

Since when does the progressive side of politics have to march to the tune of the conservatives?

The constructive option for the progressives should be to challenge the whole conception that conservatives have of the monetary system and to show that the alleged financial constraints that are driving this whole disaster are purely ideological in nature.

The progressives should be ramming home the point that the neo-liberal ideology can draw no authority from any credible body of economic theory. They should be developing reports and other documents which highlight the scale of the “real” problems in the UK – the persistently high unemployment which leads to dramatic losses of income and a major decline in real standards of living and the disproportionate way in which these real costs are being shared.

They should totally reject the “financial” justification for the fiscal austerity push which will be outlined in more detail in Britain in the coming week.

They should never enter a debate which presupposes the need for fiscal austerity by proposing “fairer” ways of cutting back. In doing so, they concede the battle and help perpetuate the myth that there is some underlying justification for fiscal austerity at this time which has merit.

To put a finer point on this, the progressives in the UK should be unambiguously outlining alternative programs of fiscal expansion right now and providing guidance to the public on the increased utilisation of real resources that such expansionary measures will allow. That is the only context for offering “credible and costed alternatives”.

But that is not the context that the so-called progressive IPPR are working in and as such they become as much a part of the problem as the conservatives they seek to distance themselves from.

The IPPR report is riddled with neo-liberal deficit reduction arguments – but always (to promote their pretence to being progressive) attenuated with “more reasonable” time-frames and magnitudes. But the message is the same – fiscal consolidation is required and it can be a bit slower.

A true progressive position would be to challenge the retention of the Bretton Woods link between budget deficits and public debt-issuance given that nearly 40 years has gone since the fixed exchange rate/convertible currency system was abandoned.

Recall that under the fixed exchange rate system – the pure gold standard or USD-convertible system backed by gold – the constraints on government were obvious.

The gold standard or the modified system under the Bretton Woods agreement meant that existing gold reserves controlled the domestic money supply of a nation. Gold reserves thus restricted the expansion of bank reserves and the supply of high powered money (Government currency). While there were complexities, effectively, the central bank could not expand their liabilities beyond their gold reserves. In operational terms this meant that once the threshold was reached, the monetary authority could not buy any government debt or provide loans to its member banks.

As a consequence, bank reserves were limited and if the public wanted to hold more currency then the reserves would contract. This state defined the money supply threshold. Some gymnastics could be done to adjust the quantity of gold that had to be held. But overall the restrictions were solid.

The other implication of this system was that the national government had to “finance” its public spending by taxation or by debt issuance. The government was not able to just credit a commercial bank account under this system to expand its net spending independent of its source of finance. As a consequence, whenever the government spent it would require offsetting revenue in the form of taxes or borrowed funds.

That monetary system (Bretton Woods) collapsed in 1971 under pressure from a series of “competitive devaluations” by the UK and other countries who were facing chronically high unemployment due to persistent trading problems in the 1960s. Ultimately, the system collapsed because Nixon’s prosecution of the Vietnam war forced him to suspend USD convertibility to allow him to net spend more.

This was the final break in the links between a commodity that had intrinsic value and the nominal currencies. From this point in, governments used fiat currency as the basis of the monetary system.

The fiat currency system – such as that run by the UK at present – has two defining characteristics: (a) non-convertibility; and (b) flexible exchange rates.

We always have to recognise this major shift in history before we can understand why the economic policy ideas that prevailed in the previous monetary systems (based on convertibility) are no longer applicable.

You cannot assume that the logic that applied in the fixed exchange rate-convertibility days translates over into the fiat currency era. The fact is that it doesn’t. The IPPR report fails this test of historical comprehension badly.

What I call neo-liberal macroeconomic reasoning is really the sort of reasoning that prevailed in the days prior to fiat currency. While there were debates about how to conduct macroeconomic policy in those days, there were some obvious key constraints that I have outlined above. This is irrespective of whether you want to call yourself a Keynesian or a Monetarist. The shift in history also renders most of the textbook economics outdated and wrong, in terms of how they depict the operations of the fiat monetary system.

When I talk about modern monetary theory I am referring to the fiat monetary system. I am recognising that a fundamental shift occurred in history when Bretton Woods collapsed and this has dramatically altered the opportunities available to sovereign governments.

First, under a fiat monetary system, “state money” has no intrinsic value. It is non-convertible which means that you can take a $AUD coin to the government and in return you will get a $AUD coin back. There is no responsibility to do more than this. So for this otherwise “worthless” currency to be acceptable in exchange (buying and selling things) some motivation has to be introduced. That motivation emerges because the sovereign government has the capacity to require its use to relinquish private tax obligations to the state. Under the gold standard and its derivatives money was always welcome as a means of exchange because it was convertible to gold which had a known and fixed value by agreement. This is a fundamental change.

Second, given the relationship between the commodity backing (gold) and the ability to spend is abandoned and that the Government is the monopoly issuer of the fiat currency in use (defined by the tax obligation) then the spending by this government is revenue independent. It can spend however much it likes subject to there being real goods and services available for sale. This is a dramatic change.

Irrespective of whether the government has been spending more than revenue (taxation and bond sales) or less, on any particular day the government has the same capacity to spend as it did yesterday. There is no such concept of the government being “out of money” or not being able to afford to fund a program. How much the national government spends is entirely of its own choosing. There are no financial restrictions on this capacity.

This is not to say there are no restrictions on government spending. There clearly are – the quantity of real goods and services available for sale including all the unemployed labour.

Further, it is important to understand that while the national government issuing a fiat currency is not financially constrained its spending decisions (and taxation and borrowing decisions) impact on interest rates, economic growth, private investment, and price level movements.

We should never fall prey to the argument that the government has to get revenue from taxation or borrowing to “finance” its spending under a fiat currency system. It had to do this under a gold standard (or derivative system) but not under a fiat currency system. Most commentators fail to understand this difference and still apply the economics they learned at university which is fundamentally based on the gold standard/fixed exchange rate system.

Please read my blog – Gold standard and fixed exchange rates – myths that still prevail – for more discussion on this point.

However, the IPPR don’t broach this issue at all and chooses to say that their:

… alternative plan would reduce the budget deficit more slowly than George Osborne proposes. That means more borrowing in the short-term, which in turn means a higher trajectory for public debt.

You thus easily see the paradigm that the IPPR are operating within – neo-liberalism. Their work is thus part of the problem rather than being anything that would guide a reasonable and constructive progressive response to the policy crisis that the conservatives are forcing on the UK population.

To see how misguided the IPPR report is you only have to study their subsequent public debt analysis. They estimate that under their more “reasonable” fiscal consolidation plan that:

… the UK’s net debt in 2015 … would be 76% of GDP – putting it fifth-highest in the G7. The alternate plan would probably shift the UK one place higher. But debt in 2015 would still be lower than in Japan, the United States and Italy.

They produce a Table which combines Japan, Italy, the US, France, the UK, Germany and Canada without blinking an eyelid much less having the capacity to recognise that four nations (Japan, the US, the UK and Canada) in this list of seven are sovereign and 3 are not (France, Germany and Italy). The IPPR appear incapable of knowing what the implications of this difference is.

Let’s tell them: the EMU nations are at risk of insolvency because they surrendered their currency sovereignty upon joining the Eurozone and agreeing to use a “foreign” currency. The other four nations have no solvency risk. There is no legitimate overal financial comparison that can be made in this regard between the seven nations. Such a comparison is as absurd at identifying a “yellow logarithm”.

Remember Karl Marx’s analysis in Chapter VI of Capital where he noted that labour-power (the individual’s capacity to work) in a capitalist context is:

the aggregate of those mental and physical capabilities existing in a human being …

This is the product that is sold in the labour market – not labour per se, which is the capitalist’s use of “human muscle, nerve … [and] … brain” held by the worker.

Marx then said that to consider the value of labour which is “itself a process of productive consumption of labour-power” was as irrational as speaking about a
“a yellow logarithm” (see Marx, 1867, Capital Volume III, page 818). The point Marx was making not just semantic but an exposition of the fundamental contradictions in Classical economic thinking in terms of determining the value of commodities.

So I use the same terminology to illustrate that anyone who compares the public debt and budget positions of say Italy with the UK clearly does not understand the fundamental differences between the two different monetary systems that these two nations operate within. Those differences negate all the analysis that is presented in this section of the Report with respect to the UK.

By conflating the opportunities and constraints that the UK faces with those that say, Italy faces and considering the governments of both nations to be “financially constrained” in the same way testifies that the IPPR are part of the neo-liberal propaganda machine and are content to perpetuate the myths contained in the mainstream macroeconomics literature.

They further demonstrate their lack of understanding and their neo-liberal biases by quoting Reinhart and Rogoff on so-called “dangerous” and “growth-retarding” public debt ratios. In this context, the IPPR approvingly conclude that under their “alternative plan”:

… debt peaks at a level comfortably below this threshold.

The article the IPPR report is referring to is Reinhart and Rogoff (2009b) who claim that when public debt ratios are “higher-than-90 percent” there is a “marked negative effect on the growth rate of real GDP”.

If you read the Reinhart and Rogoff paper you will find their principle theoretical authority justifying their “90 per cent rule” claim that higher public debt ratios lead to lower growth is none other than Robert Barro – he of the discredited Ricardian Equivalence Theorem. They say:

Assuming taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact imply is likely to lower potential output.

When has that ever happened? Have they done detailed analysis to show that governments pay back debt by raising taxes? Answer: none at all. Public debt ratios come down historically when economic growth resumes.

Please read my blogs – Pushing the fantasy barrow and Islands in the sun … – for more complete critiques of Barro’s lunacy. His predictions about tax increases following increases in public deficit were historically wrong. His arguments have no credibility at all in theoretical or empirical terms.

So why would a so-called “progressive organisation” use authorities that have been discredited so comprehensively?

It is clear that the markets know that the debt of Japan and the US is risk-free. There is always inflation risk but that is not the point that underpins the Reinhart-Rogoff fairy tale. The markets know that there is no risk of deliberate default.

The Reinhart-Rogoff models are now continually being used by conservatives to construct all sorts of doomsday scenarios. The IPPR clearly buy into this framework.

But these scenarios all ignore history which tells us that public debt ratios rise and fall largely on the dynamics of economic growth. When growth is strong enough public debt ratios fall. Further, given the central bank sets the interest rate and the government can choose to issue debt at the short-end of the maturity curve, it can guarantee that the debt ratio falls even when they continue to support non-government saving intentions and maintain growth via deficits.

This is quite apart from the need to have a debate about why governments should abandon the issuance of debt when they no longer face any “funding” constraints.

While historically strong growth has driven public debt ratios down and fiscal austerity, which will definitely scorch the UKs domestic growth rates will drive the debt ratios up (via the negative reaction of the automatic stabilisers), the fact is that these “financial ratios” (budget deficit to GDP, public debt to GDP) impose no financial constraints on a sovereign government.

There is no need to raise taxes to pay off debt. The government services this debt in the same way it pays pensions or buys some military equipment – it credits bank accounts. It doesn’t need to raise funds to do that nor it is constrained by what its budget balance was in the last period or the period before that.

The responsible policy action in the UK right now is for the governemtn to ensure high rates of aggregate demand growth in line with growth in real capacity and keep yields on their debt low (which they can easily accomplish).

There have been no sovereign defaults in the modern era. Yes, the UK government could suddenly default for political reasons (although it would be hard to conceive of any situation where it would see political advantage in doing so). But in that sense default is not impossible. But it would not be because it could not afford to meet its debt obligations or had “run out of money”.

The UK government can never run out of money. It is preposterous to ever conclude otherwise. It is clear why conservatives appeal to Reinhart and Rogoff for authority. They want to perpetuate their lies and know that the public will not be in a position to see through the economic analysis and realise it is fraudulent.

But why would any progressive want to appeal to the “false authority” of Reinhart and Rogoff and blur the fact that their analysis only applies to public debt held in foreign-currencies by countries with pegged exchange rate arrangements and is therefore totally non-applicable to the US, the UK, Japan etc? It beggars belief.

Clearly, the IPPR is not a progressive organisation which uses “radical thinking” to advance a progressive agenda. It is, in fact, another neo-liberal mouthpiece pretending to be otherwise.

Meanwhile, in Australia …

As a result of being in the UK last week, I (fortunately) missed a speech made by the Australian Prime Minister Julia Gillard in Brisbane (October 12, 2010) – Reform is not easy, but it works – which outlined her new government’s approach to economic reform.

A few days later (October 13, 2010) a former State minister in the NSW State Labour government Rodney Cavalier launched his book – Power Crisis: The Self-Destruction of a State Labor Party. In a promotional article – Brutal reform only hope of saving Labor.

Cavalier outlines the malaise that has beset the “progressive” side of politics in this country. He argues that the grass roots party membership which used to drive party policy and ensure it has enough funds to prosecute election campaigns etc has been replaced by:

Taxpayer funding of election campaigns and big donations from corporations have replaced what used to come from party fundraisers and union donations. Hard work on the ground by branch members has been replaced by direct mail, focus groups, quantitative and qualitative polling, broadcast, emails, public relations and a standing army of full-time staff paid for by taxpayers. Taxpayers also pay for much of the postage, telephones and travel. What is the problem if the membership disappears?

Cavalier’s use of the term “taxpayer funding” reveals that he should read the following blog – Taxpayers do not fund anything. The term he might have more appropriately used was “public funding” of election campaigns.

Anyway, in his latest book Cavalier notes that:

On any objective criteria, Robert Gordon Menzies was well to the left of any minister in any contemporary Labor governments. Menzies believed in high rates of tax for high income earners, pump-priming the economy, public ownership of telephones, airlines and banks, centralised wage fixing, legislated protection of union rights and the right to bargain collectively.

For overseas readers, Menzies was the doyen of the traditional conservatives and was the longest-serving Prime Minister of Australia (two terms – April 26, 1939 to August 26, 1941 and December 19, 1949 to January 26, 1966).

He exploited all the McCarthy-ist anti-communist scares (a “red under every bed”) to solidify his electoral support. He also pursued the American alliance which dragged Australia into the illegitimate and corrupt Vietnam War. His government used conscription (National Service) to draft boys to die in Vietnam. He also was totally subservient to our ties with Britain and its increasingly bizarre royal family.

He told Australians that he was “British to the bootstraps” and thus held back the development of our own national identity.

His social policies were conservative (censorship, purges of homosexuals, single mothers, and other minorities including our indigenous population).

He was forced by popular sentiment to retain full employment as a policy goal but as Victor Quirk mentioned in his blog – Job Guarantees and social democracy – Menzies was always trying to find ways of breaking that commitment and use unemployment to attack his nemesis – the trade union movement.

So to say that a Menzies (and his government) is “well to the left” of “any contemporary Labor governments” is a stunning recognition of how far right the current polity has moved.

Overseas readers should also appreciate that the Australian Labor Party was formed to represent the political arm of industrial labour – the trade union movement. You can find more about the traditions of the ALP – HERE.

In the National Constitution of the ALP 2009 it says that:

The Australian Labor Party is a democratic socialist party and has the objective of the democratic socialisation of industry, production, distribution and exchange, to the extent necessary to eliminate exploitation and other anti-social features in these fields …

You will not find this document by going to the ALP home page and trying to trawl through its policy links. In the publicly-available documents, the Party now describes itself as a “social democratic party” ((Source).

Some difference.

The fact is that the ALP are nothing remotely close to being the progressive “socialist” party as their forebears intended them to be.

To see how far to the “right” the current ALP (and hence the Australian government) has moved one only has to read the Prime Minister’s speech in Brisbane last week.

he PM began by claiming that her government supported “(t)he importance of hard work – fulfilling the obligation you owe to yourself and to others to earn your keep and do your best” – a “fair go through a great quality education” – “need to respect and value other people” and that it her government would “keep the economy strong through … [its] … policies and plans”.

She said in a flourish of meaningless rhetoric:

Because we are a Labor Government; a reforming Labor Government, in the great tradition of previous Labor Governments. Because we believe in hard work, a fair go through education, and respect. Because we know that we can’t deliver on any of those values without a strong economy and because we know that we can’t deliver on a strong economy without economic reform: significant fiscal consolidation; leveraging new investment in human capital; restructuring markets untouched by earlier waves of reform; right through to economic reforms in areas as diverse as carbon, water, and skills.

So immediately “fiscal consolidation” is about creating a “strong economy” and is a primary economic reform component. That is neo-liberal speak par excellence.

She boasted that the Australian economy was strong and “350,000 jobs had been created in the last year alone”. The fact is that there were 350 thousand net jobs created (given the job creation and destruction rates are both positive).

She declined to mention that unemployment has barely fallen in that period and underemployment has remained more or less constant at 7.5 per cent.

She rightly points out that the government’s fiscal response to the crisis was positive and early and was a significant reason for the fact that our economy largely avoided the recession. But there is no mention of the fact that it was the larger and continuing fiscal expansion in China that has allowed our terms of trade to remain strong and deliver growth gains through net exports.

If the Chinese government had the same plans to cut their net spending position as the Australian government currently is espousing then our growth would be looking very shaky indeed.

With reference to the external economy, she claims that the “mining boom” has been “raising the living standards of every Australian” (via higher export revenue and hence rising aggregate demand) it is nonetheless putting “upward pressure on our currency” which “makes life even harder for exporters of services and manufactured and farm goods”.

One might question whether the growing underclass in Australia (as inequality has widened and the benefits of growth not shared very proportionately across demographic cohorts or regions) has enjoyed the mining boom? Clearly, the teenagers of Australia has not enjoyed any of the recent growth in employment. They have lower employment levels now than before the crisis and around 25 per cent of them are either unemployed or underemployed.

Of those who are in part-time work, a growing proportion are underemployed and shifting from one dead-end job to another. The claim by the neo-liberals that any job is fine for the teenagers because they use “bad jobs” as a stepping stone to career employment is not supported by empirical research.

While the PM claims we have to be careful of creating a reliance on mining for growth it is clear that this reliance is actually being reinforced by the current fiscal strategy of her government. By withdrawing the fiscal support that has largely driven growth over the last few years the government is squeezing the private domestic sector (around 75 per cent of Australian economic activity is non-traded) and will once again force that sector to increase its indebtedness to fund growth.

If the private domestic sector seeks to increase its saving ratio and thus deleverage somewhat then the economy becomes precariously dependent on net exports for growth. No mining boom lasts indefinitely and when it slows the whole economy will once again be threatened.

The PM then outlined what her government meant by economic reform. She said:

When you get economic reform right, you fuel the drivers of sustainable long term economic growth. Reform lifts participation, and greater participation will ease the constraints on growth from the increasing number of Australians who no longer work.

Reform is not easy – but it works, and for reform to be real, I know every Government decision matters and every dollar counts.

So what is the first step in this reform process (she later talks about the need for more privatisation etc)?

She said:

First, we must deliver fiscal consolidation. This has always been the first step in economic reform. That was true in the 1980s, it was true in the 1990s. It’s especially important for us now.

Just as we made a targeted and timely investment in jobs during the downturn, so we must make targeted and timely savings during the recovery. Just as our strong budget position in 2008 allowed us to navigate a difficult global challenge, so we must strengthen our budget position now to deal with the next global challenge to arise.

How does cutting net public spending improve public education and the quality of academic research?

How does cutting net public spending drive productivity growth?

How does cutting net public spending ensure that the 1.2 million Australians who do not have enough work find it?

The evidence from the credible research literature is that structural transformation (changing industry composition, movements of resources from one sector to another etc) is most efficiently accomplished when there is strong economic growth. As noted above, the government’s strategy to push the budget back into surplus as quickly as possible will squeeze economic growth.

Further, it will promote a private-debt growth strategy given that net exports are unlikely to become a net positive growth contributor. That is the strategy that led us into the crisis and will merely set us up for a return to crisis once the mining boom tapers again.

How does cutting net public spending have anything to do with lifting saving in the economy?

In terms of the latter point, it makes no sense to call a budget surplus a contribution to “national saving”.

When individuals (households) save they postpone current consumption because they want to have higher future consumption. Saving is a time machine for non-government entities to allow them to transfer consumption across time. The obvious motivation is that they face a budget constraint – as users of the currency – and have to forgo consumption now if they want to save.

For the monopoly issuer of the currency – the sovereign government – there is no such financial constraint on spending. It does not have to forgoe spending now to spend in the future. It can always spend what it desires at any point in time irrespective of what it did last period or any previous periods.

Further, when the government runs a budget surplus the purchasing power it extracts from the non-government sector doesn’t go anywhere – it is not stored in any account to use for later purposes. Just as a budget deficit (excess of spending over tax revenue) creates net financial assets (in the currency of issue) a budget surplus destroys net financial assets.

There is no store of purchasing power when the government runs a surplus nor does it make any sense for a government to think in those terms. It can always spend what it likes.

So it is nonsensical to characterise a budget surplus as being “saving”. It is more correctly described as the destruction of non-government purchasing power and non-government net financial assets (wealth).

Finally, there is no such thing as a “strong” budget position for a sovereign government such as Australia. There can be a strong real economy – which would mean that there was sustainable growth delivering full employment and price stability – but that might require a budget deficit or a surplus – depending on the external and private domestic balance.

The PM is referring to the budget surplus that Labor inherited courtesy of the negligent fiscal policy of the past conservative government. Quite apart from the source of that surplus and whether it was apposite for the times (it was not!), its existence gave the Labor government no extra or less capacity to use fiscal policy to offset the crisis.

Running a budget surplus does not provide extra fiscal capacity! A sovereign government is never financially constrained and so has all the spending capacity it requires in each period to address shortfalls in aggregate demand regardless of its part fiscal position. It is a total misrepresentation to claim that past surpluses represent a pool of spending capacity that enhances future spending.

The PM clearly thinks that lying to the people is a sound political strategy. She invokes the household-government budget analogy to drive home her claim that fiscal consolidation is at the heart of the reform process:

We come to the consolidation task well placed. Australia’s debt is lower than any major advanced economy – our net debt will peak at 6 per cent of GDP in 2011-12 – equivalent to someone who earns $100,000 a year taking out a $6,000 loan.

This compares to the net debt of the G7 economies – which will reach 90 per cent of GDP in 2015.

The public debt currently outstanding has no analogy in terms of private debt holdings. A private individual has to be mindful of their capacity to repay any debts they incur because such an individual is financially constrained. A sovereign government is never in this position.

Veteran Melbourne Age economics journalist Kenneth Davidson also considered the PMs speech in his article last week (October 18, 2010) – Obsession with debt reduction puts nation-building on hold.

Davidson says that the “The PM is wrong to give priority to paying off Australia’s small debt”.

He argues that the current Labor government:

… is even well to the right of the OECD experts who last month put out a report on fiscal consolidation after the blow-out in member countries’ spending and public debt levels following the global financial crisis. The report said that even countries with very high levels of debt should be cautious about reducing debt levels too quickly and running the risk of a “double dip” recession. For countries such as Australia, with debt levels equal to less than 60 per cent of gross domestic product, there was scope to expand their levels of debt in order to maintain recovery. Australia has a debt of about $90 billion and is forecast to peak at about 6 per cent of GDP in 2013. In fact, Australia’s debt could grow by about $4 billion a year without changing the level of debt as a proportion of GDP.

I would not cite the IMF report as an authority and give the readership the impression that a public debt ratio threshold of 60 per cent carried any meaning. The IMF report also conflated EMU nations with sovereign nations.

The fact is that public debt ratios for a sovereign government are meaningless artifacts and should never be the policy focus.

So while I agree with Davidson that the current Government’s obsession with “fiscal consolidation” is lunacy his framework for addressing that point is flawed.

Davidson correctly argues that when the government is claiming it will be “undergoing the most significant consolidation in 50 years” and will “reduce Commonwealth debt by 4.5 per cent, equal to $60 billion, over the next few years” thhat this is

… hardly the stuff of nation-building.

I agree with that.

The government inherited from the conservatives and then worsened appalling deficiencies in public education. The conservatives had pushed more and more public funds into private education as a means of undermining the public system. The current government perpetuated that bias. There is a crying need in the public system for a significant expansion of funding.

Davidson agrees:

Real education reform would begin with bringing funding levels of state schools up to the level of non-government schools, but that would involve tough decisions such as taking on the Catholic hierarchy and middle-class parents who tacitly support education inequality.

Real economic reform is not about cutting net spending. It is about ensuring real resources are used to enhance productivity. The majority of children are still educated in the public system. The future productivity growth depends on high quality outcomes being delivered from that system. It makes not sense to starve the public system of funds so that the budget outcome can reach some surpluse.

Davidson discusses health and other large nation-building areas that require expanded public spending.

He says that:

If Gillard wanted to look for a relevant business-private market analogy, she might ask how private shareholders would judge a company with a zero debt level as its top priority when the company is considered credit-worthy by its bankers and when profitable investment opportunities are going begging for want of funds.

The directors of such a company would not be congratulated by the shareholders. On the contrary, the directors would be accused of presiding over a “lazy balance sheet”.

They would but once again it is not applicable to compare the spending-financing decisions of a private (financially-constrained) company with the decisions of a sovereign government which is never revenue constrained because it is the monopoly issuer of the currency.


I am still tired from travel and have lots to do today. So …

That is enough for today!

This Post Has 18 Comments

  1. It’s funny how often things have to be pointed out:

    1) A fraction has a denominator.
    2) You cannot compare government finances to someone’s personal finances.

    Economics is still having “does the Earth revolve around the sun or the Sun revolve around the Earth” -type discussions.

  2. If you think about it enough, the entire financial/ political system is abstract and absurd.

    Millions of people sitting at home without work, some are hungry and in poor health. All that is required is someone to tell them what to do and structure work for them. If we had a half decent brain cell between ourselves; we could see what needs to be done, communicate with each other and make it happen. Why do we have to get financial permission to do anything? Families share work and resources between family members all the time. With nary a financial transaction. Just lever common sense up to world wide level. I’ve always suspected isolated jungle tribes have a more advanced social systems than us dumb assed town dwellers.

    The large forehead folks at the Venus project have taken the whole economic process beyond finance. Do excuse me, I’m just in a dreamy mood, waxing lyrical. I also think, the Venus chaps are a few too many evolutionary branches ahead of the game.

    Running a sane fiat currency policy would be a small but positive step towards advanced civilisation. I despise the way Gillard is taking populist baby steps …… backward.

  3. Just a thought: won’t currency traders sell currencies where money is determinedly created? Or at least do so more quickly?

  4. In the UK, you wonder how people can so easily accept the notion that the Govt can ‘find’ £200 billion plus another £150 billion to exchange for gilts if, at the same time, they are ‘borrowing’ similar amounts to ‘finance’ deficit spending. Then it gets worse they also, given that reasoning, accept the idea that this is somehow not repaying ‘National Debt’.
    Neil described it as some kind of pointless hysteria that would be the subject of psychology PHD’s for years to come.
    He’s not wrong.

  5. “Neil described it as some kind of pointless hysteria that would be the subject of psychology PHD’s for years to come.
    He’s not wrong.”

    Look at the walloping poor old Blanchflower is getting at the Guardian. He had the temerity to say deficit spending “might” just be a little bit ok.

    My dainty little Avatar is staying well out of that brutal thread. At the same time there’s another article showing all the Governments have similar spending patterns relative to GDP. I’m guessing they are scared (for their own safety), to show who ran the biggest deficits.

  6. Sean Fernyhough: Money is determinedly created whenever the government deficit-spends. This is the norm, even in the neoliberal era. If zero-interest money = currency is created either by QE gymnastics or by not issuing bonds to raise interest rates in the first place, then interest rates will drop. This can affect currency trading, but that is all. The real backing of a currency is the productivity and wealth of the nation that issues it. If the newly created money is used to strengthen this real backing, the currency will be stronger in the long term.

  7. If we had a half decent brain cell between ourselves; we could see what needs to be done, communicate with each other and make it happen.

    There is a developing branch of economic called evolutionary economics. What you are talking about here they see as a coordination problem in terms of evolutionary theory.

    David Sloan Wilson, Economics and Evolution as Different Paradigms XIII: May the Best Paradigm Win

    Check out the white paper linked to in the post. The whole Wilson series is excellent, too.

    In our white paper, we agree with their assessment but also point out the profound lack of integration among the many disciplines comprising the SBE sciences. Future research must avoid both problems, which requires speaking a common language. Evolutionary theory can provide the common language for the SBE sciences, as it is already doing in the biological sciences. The white paper has over 60 signatories, representing a community that is already speaking with a single voice.

  8. Andy, your point rather chimes with a point made by Wright Patman, (chair of the House of Representatives Committee on Banking and Currency (1965-75)). He said:

    “When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money…”

  9. Hmmm … I was thinking about any progressive and/or social democratic politician who was/is living up to Bills challenge. The last one I can remember is the Austrian chancellor Bruno Kreisky who (in)famously remarked: I prefer some more billions of debt in Austrian Schilling instead of having some more 100.000 unemployed (1975). BTW: He won the election. PS: Kreisky had no idea and interest in economics beside knowing his Karl Marx and Austrian Marxism. I think he was a an intuitive MMTer and didn’t trust any economist. Hayek wrote him a lot of alarming letters which Bruno always used to joke about these economists.

  10. @Tom,

    Thanks but I suspect evolutionary economics might be a bit beyond me. The thread was interesting as it descended into the evolution of Apes and my favourite chimps the Bonobo. Bonobo’s IMO are the most advanced Ape species. They have learned to live sustainably and simply pass the time bonking themselves silly.

    Seriously, having grasped the basics of MMT I don’t find Economics such a scary or difficult topic any more. The economy could run very smoothly in any desired trajectory by curbing the manipulations of minority self interests (Mainly, we need to stop our financier friends creating asset bubbles/ credit bubbles).

    It’s seems harder to stop idiot electorates and politicians choosing the wrong direction. It’s Financiers and traders who add volatility to the economy. They have an extremely strong incentive to make trading profits. They push momentum trades to the limit and accelerate the rate of change. Constant boom and bust. This is the part of the jigsaw that adds uneccessary anxiety to the lot of the working man.

    My priorities are.

    1) Curb financial trading by targetted credit controls and tax incentives designed to drive market stability.
    2) Educate the electorate and politicians to choose an appropriate economic vector.
    3) The electorate has to choose how they want to distribute wealth and tax accordingly.

  11. @Andy says: Tuesday, October 19, 2010 at 0:06

    Tony pleased himself, so they can all please themselves. This is little america, politically, the support-ship-UK. Reading Susan Jacoby’s American Age of Unreason I thought she almost could have been describing the UK, my home country.

    Over the years we have been encouraged to associate anyone who complains (ie demonstrate) is likely to be a thug/neanderthal/lazy/scrounger (unless it is about foxes!). It’s worked pretty well, along with the greed and selfishness that has been encouraged. There are too few alternative views being offered in the mainstream media – we can choose neoliberal, neoliberal or neoliberal.

    Don’t know if what I’ve written means anything, but it’s the description of my little world and what I see around me each day. People are angry, stunned and are helpless to stop it.

    It’s quite frightening.

  12. Andrew @ 12:16

    Evolutionary biology shows the prevalence of coordination and its usefulness in nature. The “invisible hand” is supposed to provide that coordination to economies, hence, societies, through the operation of markets. This is the basis of neoliberalism.

    Of course, for scientists the “invisible hand” is a bit of a deus ex machina so contemporary economists have felt compelled to come up with a rationale for it, such as rational expectations and efficient markets. The problem is that these rationales contradict what researchers have shown in related social, biological and evolutionary sciences.

    The global economy is a closed system searching for a principle of coordination. The neoliberals are bent on establishing their fantasies about free markets as that principle. What these scientists are proposing is finding way of heading this off and replacing it with something that is based on a theory whose assumptions are grounded in empirical evidence, that is, knowledge based on what we know about how Nature operates, humanity being a subsystem of Nature as the overarching system. Before we so seriously foul the nest that we become extinct, or at least a lot less numerous and much less prosperous.

  13. Tom,

    The white paper is almost as wordy as Bills blog :). I’m sure we can learn lot’s of useful things from Nature. Off the top of my head, I’m thinking of genetic algorithms and neural networks. Nature has pretty good control systems so there’s a good chance something good will come of this.

    I don’t want to sound facetious, but I think the problem we have here is more of a farmyard problem. The pigs are taking too much pasture off the sheep and cows. I will be happy if we can wrestle the tractor off the pigs.

  14. Why do we look at biology but do not look at psychology which changes much faster and have much more direct effects on what we, humans, do in our lives and how we respond to anything we encounter? I believe that if economics wants to make another step further (from where MMT stands) as science it should look into psychology. This is the only way how MMT can further elaborate into, first of all, JG and less so tax system, regulation, etc. Too often (economic) logic gives opposite results to what psychology would give and at the end it is psychology (if correct) should and will overwrite any microeconomic analysis.

  15. Andrew: I don’t want to sound facetious, but I think the problem we have here is more of a farmyard problem. The pigs are taking too much pasture off the sheep and cows. I will be happy if we can wrestle the tractor off the pigs.

    Agreed, but this is like the story of the mice trying to put a bell on the cat that is harassing them. It will take either a revolt of the masses or getting the pigs to see that coordination is in everyone’s interest including theirs, since the pie will be bigger even though their slice may be smaller and that other less coordinated options, like maintaining the status quo, are to much less advantageous for them. The better course is to get the pigs on board with coordination.

  16. Sergei, the trouble is that psychology, like economics, does not have an agreed upon paradigm. Biology does (excepting the creationists, very few of whom are scientists with standing. Psychology, like economics, is still largely in the religious category, with many competing sects.

  17. For the record. I did e-mail Tony a link to the this review of his report and he did do me the courtesy of replying.


    Thanks – I found it very interesting. I am trying to see it as constructive criticism!


    Not sure what that means.

  18. “but this is like the story of the mice trying to put a bell on the cat that is harassing them. It will take either a revolt of the masses or getting the pigs to see that coordination is in everyone’s interest including theirs.”

    Good analogy. In the case of the pig a bell would be nice. There’s also another challenge trying to stick a cork up his butt. Pigs are very clever, they have most of the sheep on their side. It’s looking bad for the few good sheep.

    Because pigs are greedy we might get half a break if they fence off too much pasture. Even some of the more dim witted sheep might notice something wrong when they get hungry enough. We can forget about the horses, they are on the pigs side.

    I see the pigs enviously looking at other farms, as their own pasture dries up. Maybe one day the neighbouring pigs might teach our pigs how to water their own pasture.

    I just wonder. If a country in South America or Asia get’s it’s economy really humming with MMT principles. Maybe the arrogant braniacs here might swallow a bit of pride and follow suit.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top