More public infrastructure means higher taxes – False, go to bottom of the class

Metaphors! They are more than a fancy way of emphasising some point – that is, their power goes beyond meagre linguistic construction. The research suggests they are part of our deep mental or neural capacity, which we draw on to sort out facts and ideas. They are conceptual devices intrinsically linked to the way we think abstractly. Metaphorical language reinforces our ideology (worldview) and so it is no surprise that political parties have become very interested in framing their messages using simple and common metaphors which resonate with the way we feel about things. George Lakoff, a cognitive linguist, considers we do not make our political choices on the basis of rational dissection of competing facts and arguments but rather respond to central (or grand) metaphors with reinforce our worldview. We thus consider facts or argument within that framework of thought. I am doing a bit of work in this area as a way of understanding why central Modern Monetary Theory (MMT) propositions (which are so patently obvious and have strong explanatory capacity) evade acceptance among people, even those who express liberal perspectives (in this context meaning – are open to new ideas).

In the 2012 book written by Anat Shenker-Osorio – Don’t Buy It: The Trouble with Talking Nonsense about the Economy – we learn that language is a tool that conservatives use to limit what we might consider to be possible. They construct the “economy” in such a way as to distort the way we comprehend economics.

Her preface contains reference to South Park – where:

I’m here to see some boring. There’s no need to actually read long economic treatises, sit through lectures, or decipher expensive textbooks; you don’t have to bother scrutinizing graphs the on the Wall Street Journal business page to learn what’s going on right now in the U.S. economy. it simpler than you think: All you need to know about the economy you can get from cartoons – a single show, in fact.

In their magnum opus, “Margaritaville,” season 13, episode 3, South Park creators … have done us a service, revealing over the course of twenty-two animated minutes what it might otherwise take several semesters at a decent business to learn. The episode opens in the small Colorado town of South Park, which is wracked by a sudden and serious economic decline. After a period of collective soul-searching, the locals hit upon the obvious cause of rampant unemployment and plummeting stock values: the Economy is pissed.

The citizens cower upon realising the truth – the Economy is an angry and vengeful God. Because South Parkers have paid insufficient homage to it, the Economy visits ruination and recession upon them. A character lectures a crowd of rapt listeners, “There are those who will say the Economy has forsaken us. Nay! You have forsaken the Economy. And now you know the Economy’s wrath.”

The solution in South Park, as will be familiar to modern day Greeks and low-income Americans, is sacrifice.

As she goes on to point out, “sacrifice” is “not an arbitrary or accidental word choice”. In fact:

It’s become a hallowed term in our national lexicon, the preferred prescription for achieving propitious economic results.

Someone has to pay. If the government spends we have to pay for it via taxes. Taxes are bad so we dislike them. Linking them directly to government spending in a causal train then colours what we think of government spending.

It comes from a bad. We have worked hard for our income and then we are being taxed to pay for who knows what – those – Welfare queens – the classic Reaganism from his 1976 election campaign.

The inference was not just that people were not working for their incomes and being supported by us who were working hard – sacrificing – but that these bums were also cheating, defrauding – why, they were criminals

The metaphor appealed at all conservative levels.

It was deliberately loaded terminology, based on the identification of one person in black person in Chicago who was sprung cheating the welfare system. But the language inferred it was the general condition, applying to all.

And that government spending was “mostly” going down this gully-trap (drain).

The conservatives then say we need “tax relief” from this cheating, once again introducing the notion that taxes are oppressive parts of the state and we can break free of them by making the state smaller and which will allow us to more fully enjoy the fruits of our hard work – our sacrifice.

Lakoff would say that government spending could be more usefully framed as an investment in public purpose, which is why I always refer to spending on the proposed Job Guarantee as an investment rather than a cost. Investment is good, cost is bad.

It is clear that MMT proponents have to work harder on the terminology we use and the frames we create. If Lakoff is correct, and I am currently designing an experimental project (which I will probably invite blog readers to participate in once the research design is complete), then all the operational insights MMT has to offer will not break through unless we find a way to de-activate the conservative frames that have been embedded in the neural networks of our brains and which frame the way we respond to “facts” and “ideas”.

Lakoff thinks that the conservatives have worked out that once their message (frames) are supplemented with suitable metaphorical vehicles, the task is to repeat these metaphors ad infinitum until they become everyday expressions, which are used by the media to headline news stories and by us as opening lines at dinner party repartee.

The conservative right have a well advanced understanding of the use of language and how to frame language appropriately to elicit support for some policy, even if the policy proposed ultimately undermines the position of the person supporting it.

The classic – The 14 Words Never to Use – by American conservative spin doctor Frank Luntz is a case in point.

There was a good demonstration of the use of central metaphors in the Sydney Morning Herald today (September 24, 2013). The article – Either we pay the tax or we lose the service – written by the economics editor Tim Colebatch, exploits common (but false) metaphors such as the “taxpayer funds” and, implicitly, – There ain’t no such thing as a free lunch (TNSTAAFL).

While the expression was not introduced by Milton Friedman, he was the one who made it popular in economics debates with the release of his 1975 book with the same title.

Somehow the adage TNSTAAFL has become the central concept of economics – the rule we have to live by. In economics, it is used to denote the concept of “opportunity cost” – which in Mankiw’s textbook is characterised as “To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another”.

But it is a very slippery concept when it enters the public debate.

In the SMH article, Tim Colebatch says in relation to the likelihood of Goods and Services Tax (GST) increases, which until now have been an area that no politician will venture, that:

The pressures for reform are mounting, and will keep mounting.

He describes the so-called system of vertical fiscal imbalance in Australia, which are embedded in our Constitution such that:

… the states do not have the revenue they need to meet our expectations for schools, hospitals, transport infrastructure and the myriad other services state governments provide.

That gap will only widen as rapid population growth and an ageing society increase the demand for services … [this] … issue is the big one, and the one we must face up to.

The Australian Constitution creates revenue-raising and spending responsibilities at each level of government in our federal system. The states deliver most of the services (as noted in the quote) but have limited revenue-raising capacity. The currency-issuer – the federal government – raises most of the tax revenue and redistributes it back to the states through an elaborate algorithm.

The algorithm is contested by the states who by dint of their larger population bases pay more (via their citizens) to the federal government in tax than they receive back in redistribution.

This process of horizontal fiscal imbalance is supervised by the Commonwealth Grants Commission and ensures the less populated states receive enough revenue to fund infrastructure and services commensurate with the goal that all citizens should have access to the same quality of service no matter where they live in this vast continent. In practice, there is quite a difference in quality and scope of public infrastructure and service delivery but the principle is embedded in our system.

In 2000, the Federal Government introduced a – Goods and Services Tax – to broaden the tax base and reduce the plethora of state and territory taxes, which were thought to be inefficient etc.

The GST was flawed in many ways (too many exemptions) but is collected by the federal government and redistributed to the States as an offset for the taxes they surrendered. There is constant debate about its magnitude (10 per cent) with many states arguing that it should be higher.

This is the context for the SMH article.

Tim Colebatch writes that although the current arrangements (collection and redistribution) are “a constitutional mess”, the GST:

… is a fair, efficient and non-discriminatory tax, which most Western countries charge at a much higher level than we do.

Implying that we are not that hard-done by relative to “most Western countries”.

It is not “non-discriminatory” because of the exemptions. Because it is a single-rate tax, it is regressive, meaning that lower-income earners pay a higher proportion of their income than higher-income earners.

However, when considering regressivity, we have to consider the overall fiscal system, rather than one component of it. Progressives often fall into the trap of considering the tax side and ignoring the spending side. It is the progressivity of the fiscal system in general that matters.

The conservatives attempted to counter the regressive argument by pointing out that the government also cut income taxes to offset the rise in GST. However, those income tax cuts were concentrated at the high income levels and so the impact of the introduction of the GST was clearly regressive (overall).

But that is a digression.

Tim Colebatch’s thesis is that with an ageing population the demand for more and better state services will rise which means that the politicians will have to:

… explain to us why the services we want from them have to be paid for, and that the GST is the best option for the purpose.

So the causality is clear: we want more services -> they have to be paid for -> that means higher taxes -> so the debate becomes centred on
what is the best tax to increase rather than understanding the role of taxes and the real constraints on spending.

Colebatch assumes we just accept the notion that there is no free lunch which is expressed at this level in terms of nominal public outlays being backed by tax from us.

He uses the example of the growth of Melbourne and Sydney, each of which will approach the size of London by 2050 (on current projections). He concludes that:

To function efficiently, they will have to have metros. To build the metros, we will have to pay more tax.

See the slippage in logic. More real things – more nominal tax revenue.

What drives that causality? The unstated (and thus unquestioned) assumption that our levels of government are revenue constrained. Which in operational terms is false at the federal level but true at the state level.

So is this a binding constraint at the state level? Yes, if all public infrastructure and service delivery requires state outlays independent of the federal government. But, there are plenty of examples of the federal government taking over, in part, or fully, state responsibilities in Australia.

The Constitution does not prevent the States ceding funding (or even operational) responsibility for all the major service delivery areas – health, education, transport, public infrastructure etc.

So in fact it is false to say that it is a “law of nature” (that is, inviolable) that if we want more metro train systems to cope with the expanding population that we have to pay more tax.

That all depends. If the federal government takes responsibility for funding this extra infrastructure then there is no inevitability that we need to pay more taxes. We might have to but it would not be because the government has to raise revenue in order to spend.

A sovereign government, such as Australia, is never revenue constrained because it is the monopoly issuer of the currency. We might have erected an elaborate array of voluntary institutional and accounting structures to make it look as though tax revenue backs spending but these are meagre neo-liberal chimeras.

Please read my blog – On voluntary constraints that undermine public purpose – for more discussion on this point.

So why might we still have to increase taxes to build the new metro systems (as an example)?

To understand that you need to understand the role of taxes in a modern monetary economy with a sovereign national government (which excludes the Eurozone, for example).

In the 1960s, just before the collapse of the Bretton Woods system of convertible currencies (where governments did have to raise taxes and/or issue debt to spend), the economics profession introduced the notion of the government budget constraint (GBC) into the literature, which was part of a deliberate strategy to argue that the microeconomic constraint facing the individual applied to a national government as well.

The “government is a big household” metaphor.

The argument then went that just as the individual had to pay the piper when he/she spent so to did the government. This provided the conservatives who hated public activity and were advocating small government, with the ammunition it needed.

It used this concept (GBC) relentlessly to justify the sort of reasoning that Tim Colebatch lays out in this article.

Taxes do not fund government spending. Taxes drain private purchasing power. Why do that?

Cue Abba Lerner and his notions of functional finance. Here is a useful Biography of Lerner.

Lerner’s objective was to advance economic policy debate beyond what he called “sound finance” (which is the precursor of modern mainstream (neo-liberal) thinking). So he juxtaposed the his “economics of control” policy thinking with the dominant laissez-faire approach that prevailed during the Great Depression.

He considered macroeconomics was all about “steering” the fluctuations in the economy. Fiscal policy was the steering wheel and should be applied for functional purposes. Laissez-faire (free market) was akin to letting “the car” (from his Chapter 1 analogy) zigzag all over the road and if you wanted the economy to develop in a stable way you had to control its movement.

This led to the concept of functional finance and the differentiation from what he called sound finance (that proposed by the free market lobby). Sound finance was all about fiscal rules – the type you read about every day in the financial press – such as, balance the budget over the course of the business cycle; only increase the money supply in line with the real rate of output growth; etc.

Lerner thought that these rules were based more in conservative morality than being well founded ways to achieve the goals of economic behaviour – full employment and price stability.

He said that once you understood the monetary system you would always employ functional finance – that is, fiscal and monetary policy decisions should be functional – advance public purpose and eschew the moralising concepts that public deficits were profligate and dangerous.

Lerner thought that the government should always use its capacity to achieve full employment and price stability. In modern monetary theory (MMT) we express this responsibility as “advancing public purpose”.

In his 1943 book (page 354) we read:

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance …

Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability …

This is why MMT proponents always criticise the mainstream use of fiscal rules that are divorced from a functional context.

Why is a budget surplus desirable when a nation has 62 per cent of its youth unemployed, close to 30 per cent national unemployment and an economy that hasn’t grown for 5 years and is now approaching 2/3rds of its previous size?

The answer is obvious. It may be that a budget surplus is necessary at some point in time – for example, if net exports are very strong and fiscal policy has to contract spending to take the inflationary pressures out of the economy. This will be a rare situation but in those cases I would as a proponent of MMT advocate fiscal surpluses.

But just mindlessly rehearsing the logic that “we need a new metro system therefore we need to pay more taxes” not only reinforces a societal dislike of public transport systems (which has obvious environmental and social equity consequences) but also leads to the maintenance of damaging fiscal rules which perpetuate the sort of data we have been seeing on a daily basis since the crisis began.

Indeed, it perpetuates the whole Eurozone debacle – the introduction of a system that can never deliver sustained prosperity to its citizens.

Lerner outlined three fundamental rules of functional finance in his 1941 (and later 1951) works.

1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

2. By borrowing money when it wishes to raise the rate of interest, and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.

3. If either of the first two rules conflicts with the principles of ‘sound finance’, balancing the budget, or limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

So apart from attempting to manipulate the allocation of resources (such as tobacco taxes to encourage people to smoke less), the primary function of taxation is to help attenuate aggregate demand (spending) and provide room for public claims on real resources to be non-inflationary.

That should help us understand the problem with Tim Colebatch’s logic.

If, by the time the new metro systems (as an example) are required, Australia is operating at full capacity – meaning there is a clear opportunity cost in real terms to building the system (labour and capital has to be diverted from one use to another) then the increased public spending on the train network has to be accompanied by higher taxes.

This is not because the government would need the revenue to buy the real resources necessary to complete the project but, rather, because it has to deprive the non-government sector of those real resources at that time. That is, the tax increases are required to ensured nominal demand (spending) does not exceed the real capacity of the economy.

That is not hard to understand. So why doesn’t Tim Colebatch – the Fairfax economics editor – allow his readership to achieve a better understanding of these issues?

Clearly, when there is significant idle labour (and capital) the opportunity cost of using those idle resources is next to zero. Maybe, a person who works will eat a bit extra than an unemployed person – so a small extra real cost involved.

But the nominal spending the government would use to deploy these idle resources is not a cost at all. In those cases there would be no need for extra taxation.

Further, spending on capital works in these instances could easily be realised without a cent of debt being issued or any tax hikes.

Not a cent is required to allow a sovereign government to spend whatever it likes subject to goods and services being available for sale. This is not the same thing as saying the government can always build infrastructure without concern for other dimensions in the aggregate economy.

As noted, if the economy was at full capacity and the government tried to undertake a major nation building exercise then it might hit inflationary problems – it would have to compete at market prices for resources and bid them away from their existing uses.

In those circumstances, the government may – if it thought it was politically reasonable to build the infrastructure – quell demand for those resources elsewhere – that is, create some unemployment. How? By increasing taxes. But the higher tax rate would not be about raising funds for the spending.

Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

Tim Colebatch continues with the myth:

Our population is ageing rapidly, as the baby boomers move out of work and into retirement – to be followed within 15 years by GenX. This will slow revenue growth and increase demands on hospitals and aged-care services. How will we pay for it?

That’s what taxes do. They are the way we pay for the services that government provides for us. There are other ways, such as higher user-pays charges (hands up if you too think it’s a scandal that taxpayers pay 70 per cent of the bill for Melbourne’s public transport, and passengers just 30 per cent.) But asking people to pay for the services they use seems to be no more popular than getting them to pay taxes.

Please read my blog – Ageing, Social Security, and the Intergenerational Debate – Part 3 – for more discussion on why this just misses the real point.

Conclusion

My investigation into how these debates are framed continues. It is clear that our national economics commentariat, who command central positions in the debate by dint of the concentration of media ownership in Australia, continues to mislead people and frame the debate in such a way as to prejudice a reasonable discussion about the way government spending is made operational and the constraints it faces.

We will, inevitably, continue to make poor policy choices in such a falsified environment.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.