Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I was on a panel last night discussing the causes of poverty in Australia. The panel was rather diverse with housing, welfare and other representatives. There was a crowd of around 400 I believe. The format was difficult given that the panel of six was assembled in line at a table so could not see each other easily. But the real problem was that the facilitator, a national journalist, who had the role of asking questions to the panellists, chose to assert the standard neo-liberal macroeconomic myths in response to statements I made with respect to the causes and solutions to poverty. I was confronted with as-if facts such as “they have to get the money from somewhere before they can spend” in response to questions about public debt eventually becoming too large and foreigners funding our national (currency-issuing) government. I thought a facilitator was not meant to have an agenda but in this case holding out these neo-liberal myths perpetuated the standard agenda which guarantees that poverty will continue to worsen. There is a lot of work to be done before people will identify these neo-liberal myths as non-knowledge and readily understand that national, currency-issuing governments such as in Australia have no financial constraints and they spend out of ‘thin air’. Once that knowledge is accepted a whole new world opens up that allows us to see the path to reducing poverty and inequality.
Earlier this week (October 20, 2015), the American Enterprise Institute showed how foolish they are. They published an Op Ed – Progressives like Bernie Sanders have a novel economic theory that says they can spend, spend, spend – which attacks “something called modern monetary theory” in the context of how will Bernie Sanders “pay for his socialist utopia”.
First, I don’t see Bernie Sanders as being a socialist. The association that the conservative media continually makes in this regard is obviously designed to discredit Sanders without any serious appraisal of his proposed policy platform should he bcome president.
Second, when they do get to the policy level, the conservatives short-circuit any debate by questioning how he will “pay for his socialist utopia”.
The record hits the scratch – “How is he going to pay for all this?” Been there many times.
The AEI article uses an Economist Magazine definition of Modern Monetary Theory (MMT) to set the scene. Clearly, the journalist is too lazy to read the primary literature which is an issue. But the cited paragraph includes the bolded paragraph and a further sentence:
The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies and restore employment. They can spend without first collecting taxes; they can borrow without fear of default. Budget-makers need not cower before the bond-market vigilantes. In fact, they need not bother with bond markets at all.
So not the best summary of MMT but it does establish that:
1. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.
2. Tax revenue is not used to fund government spending. Governments tax for a number of reasons, which include creating a demand for its currency buy forcing the non-government sector to offer goods and services for sale in order to get access to that currency so that it can relinquish its tax obligations.
3. A sovereign government can always meet any of its liabilities which are denominated in its own currency.
4. A sovereign government does not have to issue debt in order to spend. In fact, governments just borrow back prior deficit spending. A government can always deficit spend without matching that net spending with debt-issi
5. A sovereign government is clearly able to spend freely to restore employment. It can always purchase any idle resources that are for sale in the currency that the government issues.
6. The government via its central bank sets the interest rate and can control interest rates along any segment of the maturity curve should it desire to do so. Bond markets do not have power over a soverign government.
7. A corollary is that foreigners can never fund government spending. China investors do not issue Australian dollars!
Okay, so how does that relate to Bernie Sanders?
The AEI author quotes the polling evidence in the US very selectively indeed. We read that:
A 2014 survey from GlobalStrategyGroup found voters said they prefer a presidential candidate focused on “more economic growth” versus “less income inequality” by 80% to 16%. And voters preferred by 62% to 33% a candidate focused on “economic growth to provide more opportunities for everyone to succeed” versus one focused on “economic justice to level the playing field for middle and low-income Americans.”
It all depends on how the question is asked.
The Gallup Poll published on May 4, 2015 – Americans Continue to Say U.S. Wealth Distribution Is Unfair – reported that:
– 63% of Americans say money and wealth distribution is unfair
– These attitudes are substantially unchanged over past 30 years
– Slight majority of 52% favor heavy taxes on rich as fix
Further, over the last 75 years, the proportion in favour of “heavy taxes on the rich” as “one method of redistributing wealth” has increased from 35 per cent initially to 52 per cent now.
The New York Times-CBS New Poll (June 3, 2015) – Americans’ Views on Income Inequality and Workers’ Rights – found that:
Most Americans say that it is mainly just a few people at the top who have a chance to get ahead and that the money and wealth in this country should be more evenly distributed …
Further, 66 per cent think that there should be income and wealth redistribution in the US. 65 per cent thought that the “the gap between rich and poor in this country is a problem that needs to be addressed now”.
And, 57 per cent said the “government … [should] … do more to reduce the gap between the rich and the poor”.
And, 68 per cent said they wanted higher taxes for the rich.
On Workers’ rights, 71 per cent favoured raising the “federal minimum wage” from $US7.25 an hour to $10.10.
So American clearly want the Federal government to deal reduce income and wealth inequality. They also want it to “grow and expand the economy” (Gallup Poll, 2011).
The two concerns are not incompatible and do not represent some sort of ‘trade-off’ that the government has to choose between.
This is especially the case when we consider that the IMF is even producing evidence that higher income inequality is detrimental to the growth prospects of a nation.
The IMF paper (April 8, 2011) – Inequality and Unsustainable Growth: Two Sides of the Same Coin? – concluded that:
… longer growth spells are robustly associated with more equality in the income distribution.
A prerequisite for resolving the unsustainable imbalances that led to the financial crisis will be to dramatically redistribute income back to workers – so that real wages growth closely tracks productivity growth and workers in sectors with little union representation are able to similarly participate in national productivity gains.
And the IMF is also now releasing research findings that demonstrate how fiscal policy can stimulate growth and reduce income inequality.
For example, the IMF Staff Discussion Notes paper (No.12/8R) – IMF Income Inequality and Fiscal Policy (2nd Edition) – which was published on September 27, 2012, noted that fiscal policy can influence the distribution of income:
1. “directly through its effect on current disposable incomes”.
2. “indirectly through its effect on the future earnings capacities-and therefore on market (i.e., pre-tax-and-transfer) incomes-of individuals”.
In the period before the GFC (and the fiscal austerity) the IMF paper concluded that “(f)iscal policy has played a significant role in reducing income inequality in advanced economies, especially in economies with high initial pre-tax and transfer inequality”:
In every year between 1985 and 2005, fiscal policy (i.e., direct income taxes and transfers) decreased the average Gini in 25 OECD countries by about one-third, that is, by around 15 percentage points …
They document nation-by-nation breakdowns of the extent to which fiscal policy has played a role in reducing income inequality up to 2005.
Significantly, the design of fiscal policy matters:
Most of the redistributive impact of fiscal policy is achieved through the expenditure side of the budget, especially non-means-tested transfers, although income taxes are also important in many economies.
The AEI author claims criticises the elevation of income inequality is a major issue non-issue “despite weak economic evidence that inequality is bad for economic growth”.
The evidence now being produced is anything but weak. The results linking increasing income inequality to inferior economic growth performance are statistically robust and powerful.
This is a precursor to the AEI attack on MMT.
He attacks any notion that advanced, currency-issuing nations should “boost demand and growth” through “more public investment, like infrastructure spending”.
Why is that a problem? He prepares us for the standard neo-liberal lies through the questions and cynical answer:
But is that possible given America’s large public debt and a deluge of entitlement spending on the way?
If only the debt, I dunno, didn’t matter and government could just spend, spend, spend. The final piece of the puzzle. Maybe even a holy grail or sorts. But with MMT, as Darth Vader put it, “The circle is now complete.” And it’s ironic: Democrats used criticize Republicans for supposedly saying, “Deficits don’t matter.” Now they might be saying it, too.
Deficits do matter but not in the way the conservatives claim. They matter because they have to be sufficient to allow for the non-government spending withdrawal from the income stream.
First, governments can spend without the tax revenue.
What the tax liabilities do is reduce aggregate demand in the private economy so that the government can have real resource space to buy the unsold output and use the purchased goods and services to pursue its socio-economic program (its ‘mandate’).
Another way of thinking of this, which is slightly more lateral is to consider the following.
The purpose of government spending is to move real resources from private to public domain to facilitate the government’s economic and social program.
As government spending is not revenue-constrained, taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities and fulfil net savings desires.
So by design tax impositions can be said to create unemployment (people seeking paid work) in the non-government sector, while government spending reduces the unemployment as it satisfies the need for funds created by the tax liabilities.
As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period).
Involuntary unemployment is idle labour unable to find a buyer at the current money wage. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns.
Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending.
So whatever Darth Vader said the fact is that deficits do matter. They have to be sufficiently large (or small – whichever way you think about it) to allow the economy to sustain full employment and ‘fund’ the non-government’s desire to save overall (as manifest by the private spending decisions).
Within that charter, the composition of the net public spending (the deficit) can be designed to ensure that income inequality and poverty is prioritised. There is no conflict in the two aims – sustaining full employment expenditure levels and reducing inequality.
Last night, at the forum, I offered views like this. I was met with some hostility from the facilitator. My understanding of the role of a facilitator is to probe rather than assert specific (ideological) viewpoints.
For example, instead of stating (as if fact) – “the government has to get the money it spends from somewhere … so debt is a problem” the correct framing would have been “but the conservatives would say that debt is a problem because the government has to finance its spending, what do you say about that?
But, alas, it was mostly the former approach. As if the government was a household and couldn’t run up too much debt otherwise foreigners would stop funding it!
The facilitator might have reflected on the interchange in March 2009 between the US 60 Minutes program and the then Federal Reserve Chairman Ben Bernanke.
The interview is largely a litany of mainstream statements but at one point the Chairman gives the game away to the interviewer Scott Pelley.
Bernanke provided a very clear statement about how governments that issue their own currency actually spend.
At around the 8 minute mark of the segment, Bernanke starts talking about how the Federal Reserve Bank (the US central bank) conducts its ‘operations’ (in this case, how it conducts government spending).
Interviewer Pelley asks Bernanke:
Is that tax money that the Fed is spending?
Bernanke replied, reflecting a good understanding of what we call central bank operations (the way the Federal Reserve interacts with the member banks):
It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.
That is, the US government spends by creating money out of ‘thin air’.
There is no financial constraint on national government spending (government spending is not financed by taxes) where that government issues its own currency.
Such a government spends by making electronic entries into accounts in the commercial banks.
No printing press. No debt is required. No taxpayer revenue is used.
A currency-issuing government can always do that and should net spend so that all the idle resources (particularly labour) are productively employed.
The solution to poverty is not complex. It is about a lack of income. That is often due to unemployment and insufficient wages (working poor).
By ensuring there are enough jobs for all – and maintaining that continuity across the private spending cycle by introducing a – Job Guarantee – a national government can use its fiscal capacity (driven by the fact it issues its own currency) to reduce poverty and income inequality while sustaining economic growth.
I also note that a lot of comments have been coming in about how academics should not ‘lecture’ to those not trained in certain fields as if they are superior or something. I am deleting all these comments now – the point has been made and personal attacks are unnecessary and pointless.
The point is that academics have a responsibility to bear witness to the public debate and provide knowledge to citizens to inform their judgement. Knowledge is powerful and should always be privileged over intuition or ‘opinion’.
The knowledge provider is not better than others or superior. They just have worked things out in specific areas and have a duty to pass that knowledge on.
Claiming that politicians should be given a soft ride because they are just meeting the expectations of the public who have genuine desires and preferences is a curious argument for a progressive to make if the public is forming those desires and preferences on the basis of non-knowledge – for example, falsehoods about how the monetary system works.
In that instance, I have a duty to point out the myths and criticise politicians who perpetuate them whether by design or through their own ignorance. That duty doesn’t imply any class distinction, superiority, “snooty nose’ or whatever other insulting comments you wish to post. A duty is a duty and an academic life is a calling based on that duty.
But, knowledge is always superior to myth.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.