I read an article in the Financial Times earlier this week (September 23, 2023) -…
The title gives the game away – Hope all that’s left as growth slows to crawl. It was written by Ross Gittins, the Sydney Morning Herald’s economics editor. Hope is all we have because this thing we call the economy is beyond us and not something we can control. That is the mainstream conceptualisation of the economy as some sort of deity which we just have to offer our sacrifices to and hope for the best. Australia is weathering a renewed burst of deficit terrorism. The media is running stories every day at present about the need to make massive cuts to federal spending and how taxes have to rise to “repair” the budget. The way the issue is being framed by the media is asinine in the extreme. Worse is the fact that the media is refusing to offer a balance to the issue. There is no debate. Mindless TV presenters and journalists are just pumping out “press releases” from partisan think-tanks without the slightest reflection about whether the underlying assumptions are correct. A bad day for informed debate.
Australia and the world are experiencing a Micawber moment. The economic prospects aren’t reassuring, but there’s not a lot we can do except hope something will turn up. Wherever you turn, the outlook is for continuing sub-par growth.
The following cartoon that accompanied the story frames the people (us) as hapless rabbits taking the medicine without any inkling to what is going on.
I have just finished a paper with Louisa Connors titled – Framing Modern Monetary Theory – which we will present at next week’s – 14th Path to Full Employment Conference/19th National Unemployment Conference. This is the (mostly) annual conference that my research centre hosts in Newcastle (this year – December 4-5, 2013).
In that paper, we consider two models of the economy. We use two diagrams that come from the book by Anat Shenker-Osorio – Don’t Buy It – which justaposes these two models.
[Reference: Shenker-Osorio, A. (2012) Don’t Buy It: The Trouble with Talking Nonsense about the Economy, PublicAffairs, New York]
The first conception we consider is the conservative view, where the basic assumption is according to Shenker-Osorio “people and nature exist primarily to serve the economy”.
This narrative tells us that a competitive, self-regulating economy will deliver maximum wealth and income if allowed to operate with minimum intervention. The economy is figured as a deity that is removed from us though it recognises our endeavours and rewards us accordingly.
We are required to have faith (confidence), work hard and make the necessary sacrifices for the good of the “economy”: those who do not are rightfully deprived of such rewards.
The economy is also figured as a living entity. If the government intervenes in the competitive process and provides an avenue where the undeserving (lazy, etc) can receive rewards then the system becomes ‘sick’.
The solution is to restore the economy’s natural processes (its health), which entails the elimination of government intervention such as minimum wages, job protection, and income support.
The key messages are “self-governing and natural”, which force the obvious conclusion that “government ‘intrusion’ does more harm than good, and we just have to accept current economic hardship”.
Although subscribers to this view would have us believe this is a rational narrative, in fact it represents a type of ‘magical thinking’ more appropriately associated with medieval views on the relationship between individuals and the world.
The orthodox narrative teaches us that our own outcomes are dislocated from the success of the system and so success and failure are both represented as due primarily to our own efforts.
The extent to which private wealth can be seen as linked to socioeconomic status and stable, high quality infrastructure is minimised. Similarly, the unemployed are seen as being responsible for their jobless status, when in reality a systemic shortage of jobs explains their plight.
This narrative is so powerful that progressive politicians and commentators have become seduced into offering ‘fairer’ alternatives to the mainstream solutions rather than challenging mainstream assumptions root-and-branch.
For example, progressives timidly advocate more gradual fiscal austerity when they should be comprehensively rejecting it on the basis of evidence that it fails, and advocating larger deficits to solve the massive rates of labour underutilisation that burden most economies.
Progressives and conservatives are hostage to the same erroneous beliefs about the way the economy operates, yet the public is compelled to believe there is no alternative (TINA) to the damaging economic policies being introduced.
This is the line that the tenor of Gittin’s article and the accompanying cartoon represents.
In Charles Dicken’s book, David Copperfield., Mr Wilkins Micawber, is characterised by his belief that no matter how bad things get “something will turn up”.
The reference by Gittins to Mr Micawber is that our slowing growth and rising unemployment is beyond our control and we just have to hope that something will happen that will change the economic trajectory – he suggests that our best hope is for a depreciation in the Australian dollar.
The article promotes the latest IMF World Economic Outlook assessment and he chooses to quote an IMF official as saying that “most countries”:
… rich and poor – have little ‘space;’ left for further fiscal or monetary stimulus.
He notes that the IMF is seeing the hope not in terms of reversing the cycle with traditional expansionary policy measures (such as, increase the government deficit), but rather in “structural” terms – “strong plans with concrete measures for medium-term fiscal adjustment and entitlement reform” – not much new there.
The IMF have learned very little from the crisis that they helped to cause and which they helped to make worse.
Gittins claims that structural approaches take time to work – although the type of structural reforms proposed by the IMF will “work” where we take that to mean impoverishing more people, entrenching high unemployment and underemployment and undermining the working conditions and job security for workers.
That doesn’t sound like a very impressive path to prosperity.
He thinks that:
In theory, we do retain ‘space’ to further stimulate demand with either lower interest rates or increased government spending … As for the budget, it has been in deficit for four years already, so no one is keen to go any deeper.
It is not just a matter of theory. A currency-issuing government has no financial constraints and can never run out of money.
Fiscal space is thus more accurately defined as the available real goods and services available for sale in the currency of issue.
These are the “means” available to government to fulfil its socio-economic charter. The currency-issuing government can always purchase whatever is for sale in its own currency.
This is also related to the intergenerational (ageing) population claims that pension and health care systems will be unsustainable in the future.
There are no financial constraints on a currency-issuing government providing first-class health care and/or pensions in the future.
The challenge of rising dependency ratios will be whether productivity growth ensures there are adequate real goods and services available to maintain growth in living standards with fewer workers available. These are not financial constraints.
A variation on this proposition is that public debt imposes intergenerational burdens when past budget deficits have to be paid back. Deficits are not “paid back” and intergenerational burdens are linked to the availability of real resources. For example, a generation that exhausts a non-renewable resource imposes a burden on the next generation.
- Fiscal space is not defined in terms of some given financial ratios (such as a public debt ratio).
- Fiscal space refers to the extent of the available real resources that the government is able to utilise in pursuit of its socio-economic program.
In terms of framing, we should always be cogniscant of the national accounting reality that the government deficit always equals the non-government surplus, and the government surplus always equals the non-government deficit.
For most nations, the combination of external deficits and a desire by the private domestic sector to save overall, means that the non-government sector will act as a drain on overall spending in relation to income flows.
This means a continuous budget deficit is required to sustain a given level of activity.
A progressive macroeconomics agenda has to recognise that a normal state will require continuous government deficits over each business cycle rising and falling with fluctuations in non-government sector net spending. Rarely, will a government surplus be appropriate.
Further, government deficits are not just appropriate in times of recession or slow growth. They are required whenever there is a non-government desire for a surplus, which is the typical case.
In terms of a progressive frame to counter the neo-liberal obsession that there is not enough space, we might continually reinforce the frame:
Government deficits are normal, surpluses are atypical
This means that ‘balanced budgets over the cycle’ type arguments, which progressives use in order to appear responsible – ‘deficits in bad times, surpluses later when times are better’ – are destructive and fall into the misleading ‘deficits are bad’ frame.
Progressives would thus frame the concept of fiscal space in terms of the idle real resources that can be brought into productive use via higher government spending and/or lower taxation. The idle resources signal that the government deficit is too low or the surplus is too large. The desired destination is zero waste and the required action is a larger deficit.
The claim by Gittins that we just have to “hope something turns up” is thus a passive neo-liberal representation of our options, which are in denial of the obvious alternative.
The alternative view of the economy we outline in the paper noted above is where the economy works for us as our construction and people are organically embedded and nurtured by the natural environment.
… we, in close connection with and reliance upon our natural environment, are what really matters. The economy should be working on our behalf. Judgments about whether a suggested policy is positive or not should be considered in light of how that policy will promote our well-being, not how much it will increase the size of the economy.
In this view, the economy is seen as a constructed object and policy interventions should be appraised in terms of how functional they are in relation to our broad goals, which a progressive vision would articulate in terms of advancing public well-being and maximising the potential for all citizens with the limits of environmental sustainability.
The focus shifts to one of placing our human goals at the centre of our thinking about the economy.
This perspective echoes the principles of functional finance outlined by Abba Lerner in his 1943 article.
[Reference: Lerner, A. (1943) ‘Functional Finance and the Federal Debt’, Social Research, 10(1), 38-51]
Consistent with this, Modern Monetary Theory (MMT) highlights the irrelevance of a narrow focus on the budget balance without reference to a broader human context.
In this narrative, people create the economy. There is nothing natural about it. Concepts such as the ‘natural rate of unemployment, which imply that it should be left to its own equilibrating forces to reach its natural state are erroneous.
Governments can always choose and sustain a particular unemployment rate.
We create government as our agent to do things that we cannot easily do ourselves and we understand that the economy will only serve our common purposes if it is subjected to active oversight and control.
The two visions of the economy can be summarised in value terms as individualistic (neo-liberal) and collectivist (alternative).
For a progressive, collective will is important because it provides the political justification for more equally sharing the costs and benefits of economic activity.
Progressives have historically argued that government has an obligation to create work if the private market fails to create enough employment.
Accordingly, collective will means that our government is empowered to use net spending (deficits) to ensure there are enough jobs available for all those who want to work.
In other words, it is not just about “hoping something turns up”. We should demand our governments use the policies available, which work in known ways, to improve our circumstances.
I was already depressed and then I saw the headline last night (see graphic) and thought (not!) that the Grattan Institute, which has joined the queue of neo-liberal think tanks (not that they do much thinking), might have had a bit of an epiphany.
After all “boost” means to increase and the deficit certainly needs to increase right now given the sluggish real GDP growth and the rising unemployment.
In April 2013, I wrote a blog – The day the Australian media failed the public, again – which considered the appalling coverage the Australian media had dealt with the lead up to the May federal budget deliberations.
The so-called big deal at the time was that the then federal government had revised their estimates of the 2012-13 budget deficit upwards after downgrading growth estimates.
It also followed the Treasurer’s announcement that they would not be able to achieve a surplus in this year as planned. The media seemed to have thought that the earlier pursuit of the surplus at a time when non-government sector spending growth was modest at best and the the economy was only growing on the back of the 2008-09 fiscal stimulus was actually responsible policy.
They seemed to be “surprised” that the surplus would not be achieved and forecasters quickly were revising their estimates to higher deficits after failing dramatically to see why the initial promise of a surplus by 2013-14 was the stuff of angels dancing on pinheads.
The reality was that the government was never going to remotely achieve a surplus given the fundamentals in the economy and the pursuit of it was extremely damaging for growth. The rising unemployment and flat employment growth over the last two years is the result of that highly irresponsible fiscal stance.
In that blog, I also considered a “report” from the Grattan Institute that claimed that Australia is facing a “decade of massive budget deficits if state and federal governments don’t rein in spending, and increase taxes”. They claim that “by 2023 the combined annual deficit of state and federal governments could balloon to $60 billion”.
I did some elementary arithmetic and it showed that if GDP grows by 3 per cent per annum on average over the next decade (which is under the government forecasts and below trend) then a $A60 billion deficit will be about 2.9 per cent of GDP in 2023.
In relative terms that is not what I would call “massive”. But then it makes no sense to conclude anything about that figure unless we know what it is supporting in real terms and what the spending and saving desires (and actions) of the non-government sector (external and private domestic) are.
The Grattan Report was so bad that if it had been presented by a first-year macroeconomics students I would have failed it and advised the person to pursue another career.
Well, obviously suffering from attention deprivation, the Grattan Institute is back with another (recycled) report which once again the mainstream media is salivating over. The director has been on morning TV and radio this morning repeating his moronic analysis – “we have to repair this deficit now” sort of drivel.
No critical reviews, no hard questions like “why is the deficit a problem?”. It is just assumed to be a problem by the journalists.
And Gittins was back to it this morning as well. His column today with an uncritical promotion for a recycled “report” from the Grattan Institute.
The article – Will Abbott be deficient on deficits? – was accompanied by the following cartoon appeared – a Tree Metaphor – with an axe to cut it down.
There was no balance in this article. Why wasn’t the tree constructed as a beautiful growing thing mirroring what happens to non-government net financial assets when the government is running a deficit?
That would be too much to ask. The Fairfax press now has a banner head under their daily papers (Sydney Morning Herald, Melbourne Age) – Independent. Always – which is just an attempt to separate themselves from the openly neo-liberal slime presented by Rupert Murdoch’s News Limited publications.
The problem is that Fairfax continually act as vehicles for the same slime. They might be more muted in their headlines and a little more subtle in the narratives but Independent they are not.
Gittins claims that the Grattan Report teaches us that:
We can’t grow our way out of this deficit. Being ‘structural’, it already assumes the economy is back to growing normally … With one exception, the only way a structural deficit can be reduced is to make explicit decisions to cut spending or increase taxes.
This could have been a first-year examination question. Gittins would fail as would the Grattan Institute researchers.
Think about it for a second. On its own logic, if the economy is growing normally then the fiscal settings must be correct.
The idea that a “structural” deficit is bad per se is nonsensical. Budget deficits are neither good nor bad and, in accounting terms, equal the non-government surplus.
In behavioural terms, they are required when spending intentions of the non-government sector are insufficient to ensure full utilisation of available productive resources. The context matters because the budget is a vehicle to achieving socio-economic goals rather than an end in itself.
The progressive starting point has to be the social purpose of government policy rather than a view of the economy to be a natural entity, separated from us, which gets sick if government attempts to alter its natural course.
But the important point is that the notion that the Australian economy is “back to growing normally” defies the data. The real GDP growth rate is well below even conservative estimates of trend and unemployment is well above the last low (February 2008).
Further, underemployment is rising and taken together there are more than 13 per cent of willing workers not able to work (at all or enough hours).
So the structural deficit is too low not too large. And a deficit of around 4 per cent of GDP is probably indicated.
The problem with the public debate is that the media which frames it refuses to seek balance in their stories.
The journalists are driven by headlines rather than presenting information.
I have a long flight coming up. So …
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.