Regular readers will know that I have spent quite a lot of time reading the…
When journalists allow dangerous economic myths to pervade
Journalists have a lot to answer for in this modern era of constant media reporting across multiple modes of communication. I have previously argued that the trend has become one where journalists are used as broadcasting tools for press releases – that is, stories that appear to be news commentary are really just precised versions of some corporate press release or a statement from some right wing think tank. The lack of critical scrutiny where one line statements that on the face of it are highly contentious are allowed to ‘go through to the keeper’ is now the model for modern mainstream journalism. An example of this was the Australian Broadcasting Commission’s PM current affairs radio program last night (June 27, 2016) – Investors brace for another wild ride on international markets post-Brexit. The PM program is the ABC’s premier evening news and current affairs program where issues are meant to be taken apart and some so-called experts (from all sides) are meant to be interviewed so as to enlighten the public, who otherwise might be uncertain about the meaning and/or impact of some event. At least that was the intent of the program when it started many years ago. Now, it has become, like most of the ABCs current affairs reporting, a rather pale imitation of its original brief.
The issue discussed was as one might expect – what “the broader economic implications from the Brexit” might be.
One of the experts interviewed for the segment were Oliver Hartwich, a member of the Mont Pelerin Society who has worked in the Centre for Independent Studies (Sydney), a vehement free-market lobbying body that pumps out anti-government diatribes on a regular basis and advocates almost total deregulation of everything.
Another was a sharemarket trader and the other was a retired private bank economist Saul Eslake, who has long represented the interest of the financial markets in the media.
It was hardly a balanced panel of economists. So the ABC failed in its charter to present a broad spectrum of opinion in this segment.
But then we get into the actual Q&A material and it is easy to see the failure to interrogate the opinions, to test them for veracity.
The interviewer started by focusing on the sharemarket falls and depreciation of the pound since Thursday’s Referendum outcome in Britain and said that:
… if markets don’t settle down, University of Tasmania economist, Saul Eslake, doubts whether policy makers have the arsenal to deal with the consequences.
The economist Saul Eslake then spoke:
Policy-makers, governments, and central banks around the world have far less ammunition to respond to any such big falls in share markets than they had during the time of the global financial crisis because they spent almost all of the ammunition they had then preventing those falls from turning into a rerun of the Great Depression.
They succeeded in that objective, but they haven’t got much left in their lockers if the events of last Thursday turn out to have more far-reaching consequences for financial markets than they have thus far.
The interviewer didn’t stop to question the assertions here – they went out to the listeners as fact.
So here are the questions he should have asked.
1. What exactly do you mean by the term “ammunition”? Monetary policy, fiscal policy?
2. Is it not true that the RBA currently does not have zero interest rates, so it can cut further?
3. Doesn’t the Australian government issue its own currency? Doesn’t that mean it can purchase anything that is available for sale in that currency (AUDs) and that means all idle labour if it so wished?
4. How can a government that issues its own currency not have “much left in their lockers”?
5. Even if financial markets turn against government debt, why does the Australian government have to issue any debt, given it can spend without issuing it?
6. Even if the Australian government chose to continue issuing debt to allow the private markets to have a risk free asset to price risk off (that is, maintained the current system of corporate welfare), could not the RBA purchase all that debt and control yields?
7. Even during the GFC, bid-to-cover ratios on government debt auctions remained well above unity, which meant that more people wanted to buy the debt than there was debt to purchase. Why would that situation alter?
As I explained in this blog – There is no financial crisis so deep that cannot be dealt with by public spending – still! – the statement that – “There is no financial crisis so deep that cannot be dealt with by public spending” – does not mean that fiscal policy can bail an economy out of any problem.
As an aside, the title of that blog was the title of a paper I published in 2009 – you can read the Working Paper version for free (fairly close to the final publication). It reflects a basic insight that is derived from MMT once you fully understand that school of thought – its scope and its limitations.
When I say (and the other leading MMT writers say) – “There is no financial crisis so deep that cannot be dealt with by public spending” I do not mean the following:
- That fiscal policy can overcome the real losses to a nation’s standard of living that are associated with a major fall in its currency when there is a significant dependency on real imported goods and services.
- That fiscal policy can ensure that debts denominated in foreign-currency (public or private) can be honoured at all times.
What the statement means is that a situation can always be improved from where it is as a result of the operations of a crisis in the private financial markets.
It doesn’t mean the state reached after the fiscal intervention will be perfect. It means things can always be made better.
A nation has to ultimately confront its real resource constraints. Fiscal policy in the short-term cannot ease those constraints although it can ensure that the real resources available are utilised more fully.
A nation with heavy import dependencies (that is, real resource shortages) is also likely to suffer if its exchange rate collapses or world export markets for its goods and services slow appreciably. Fiscal policy can help to attenuate the losses but cannot ‘create food out of thin air’ like it can public spending capacity (money).
So in appraising what the statement means we should avoid setting up red-herrings or straw persons.
The bottom line is that a sovereign government like Australia can never run out of money and never needs to issue public debt as a matter of necessity. The public debt issuance is entirely voluntary and such voluntary actions have a habit of being quickly changed if they present too many ‘political’ problems.
It is thus a total lie to claim that a government will inevitably run out of domestic funding sources. All the discussions about AAA ratings are also irrelevant (and for Britain today given the corrupt ratings agencies have tried to steal some limelight and downgraded the rating).
Please read my blogs – Ratings agencies and higher interest rates and Time to outlaw the credit rating agencies – for more discussion on why the ratings agencies should be ignored in the context of public debt.
Ratings agencies cannot push up yields on government debt issuance unless the government lets them.
So what sense might we make of the assertion that Australia has “far less ammunition to respond” to a new crisis? Answer: no sense at all.
Whether the government has been running surpluses or deficits in the past is largely irrelevant to what it can do in the future?
Its outstanding liabilities (public debt) do not place any constraint on its capacity to spend. As we are seeing around the world, central banks can ensure interest rates stay low if they want which has the effect of dramatically reducing any interest payments on the public debt.
If you read Italian, this article is interesting – I tassi bassi della Bce e l’evoluzione delle finanza pubblica italiana. It shows how the low ECB interest rate environment has given the constrained Italian government space to maintaining spending even though tax revenue is falling because its interest payments have fallen dramatically.
The Australian government can always spend what it wants irrespective of whether it has been running surpluses or deficits in the past.
The deficits it created during the GFC after several years of surplus (with the result that private debt skyrocketed) do not constrain what it can do tomorrow.
Some might say – oh, but the politics are against higher deficits! Who says so? The current government won’t be voted out on Saturday (our next national election) because its has overseen higher deficits.
When it was in Opposition leading into the 2013 election it claimed Australia had run out of money and would soon be broke. That narrative soon ended when it took government. It is not dominant in the current election campaign.
The Labour government didn’t lose office in 2013 after introducing a massive fiscal stimulus in 2008-09 which saved the nation from the crisis. It lost office because of infighting and revolving leadership tussles.
So the politics can be spun to suit any outcome and if a major crisis was heading our way, the fiscal capacity could be unleashed in a blink of the eye.
When people say the government has run out of money and cannot afford fiscal stimulus, how do they explain the immediate spending that saved the banks in 2008-09? As Ben Bernanke said, the US central bank created the money out of thin air.
And so can any currency-issuing government if it desires.
So the claim that Australia has no further ammunition in a fiscal sense is a lie and the journalist should have brought that out in his interview.
On monetary policy, the interest rate set by the RBA is still above zero (1.75 per cent at present). So even if you believe in the effectiveness of interest rate cuts to stimulate demand, there is some room to go.
The reality is that monetary policy is not a reliable policy tool to use if one wants to stimulate effective demand.
The evidence over the last several years indicates that while central banks can always ensure there is sufficient liquidity in the banking system (reserves) to prevent any payments failures their impact on effective demand is weak and should not be relied on as the primary counterstabilisation policy tool.
This myth that a currency-issuing government somehow can ‘run out of money’ is also playing out in the Brexit commentary elsewhere.
The Fairfax press syndicated an article from a UK Daily Telegraph journalist today (June 28, 2016) – Brexit hardball: the European Union will treat Britain like Greece.
It is a bizarre example of someone who claims to be expert but is deeply ignorant of the key element that is necessary to establish his proposition.
Apparently, the EU mafia (Juncker, Tusk and co) will play hardball with Europe because the Greek experience last year taught the journalist two things:
… that in the cause of its salvation the European Union can be profoundly flexible and exceptionally brutal, and that events can swiftly take a momentum that is hard to control.
Okay, on the way Greece was treated we agree. It was “coup”. Greece is little more than a colony in receivership and its situation will worsen.
The journalist then speculates on what will become of the UK now that it “is almost certainly out the European Union”.
He claims that the Brussels elites “have been ready to say goodbye for a long time”, given Britain’s rather distant relationship with the rest of the nations.
They are now taking a cool, calm and collected approach to the excision. He speculates that while, according to the legalities of the Treaty, Britain retains full rights in the two year period while the exit is finalised, the reality will be differnt.
He thinks that the European Commission will rough-ride over Britain’s European presence (the insuffereable Jonathan Hill’s resignation being an example and Juncker’s demands that UKIP European Parliament members “pack their bags”) and things will get tougher not easier for Britain.
He argues that the European elite want to get rid of Britain as quickly as possible to head off other attempts within Europe to have membership referendums.
We can agree on that. The nightmare of their failed monetary system was already driving these exit movements. The empowerment of the British referendum will strengthen their demands.
But then we descend into the ridiculous.
The journalist writes that even though Greece made it “plain they wanted to remain Europeans”, which engendered some “goodwill”, they were still treated brutally by the establishment in Brussels and Frankfurt.
No such goodwill exists for Britain, now an ex-member.
So he think that:
1. “a Norway deal that means European Economic Area status, retained rights for the City of London and immigration – is almost certainly off the table”. Which I would count as a good thing. Norway pays into the corrupt EU but gets no say about its policies.
2. “clearing houses that trade in euros and generate billions for Britain will have to be domiciled in the eurozone”. Britain needs to reduce the domination of the City of London anyway. It needs to outlay speculative capital flows that do not help the real economy.
3. “Britain is not getting access to the single market” because Wolfgang Schäuble said “Out is out”. Well, I think Dr Schäuble will take advice from bodies such as the Bundesverband der Deutschen Industrie (BDI) which has already said that it would be counterproductive to block British trade access to Europe.
And, remember that Britain runs a current account deficit against Europe. I don’t expect any blocks to be put in place which would be any more significant than the 2 per cent tariff that the US faces. Trivial.
4. Exit “would likely result in a cut in GDP of six per cent and increase unemployment by 800,000, not including the risks presented by emergency spending cuts, or the “tipping points” presented by the crystallisation of financial stability risks”. None of which will remotely happen (there, that is a prediction) unless the British government abandons its responsibility to use its fiscal capacity.
And even the Tories in 2012, faced with on-going recession moderated their austerity ambitions and allowed the fiscal deficit to rise because they knew it would be electoral suicide to do otherwise (persist with their austerity obsession).
And the wrath that the Referendum has demonstrates exists in the poorer parts of Britain, which will further militate against any fiscal abandonment.
So where does the headline fit in? Just to scare people who might not otherwise appreciate that Greece is a small economy that uses a foreign currency controlled by the ECB, who abandoned its own commitment last year to maintain financial stability by acting on behalf of the Troika to threaten (blackmail) a weak Tsipras and his elitist cronies in Syriza to tow the line.
Britain is a large economy, with its own currency that floats on international markets and sets its own monetary policy.
It can ensure domestic demand maintains employment irrespective of any tricks the EU elites try out on trade. Not that I think the EU countries (particularly Germany) will entertain trying to block Britain out anyway.
The media has a lot to answer for in perpetuating these economic myths that help to sway public opinion away from sensible policy and help to create endemic uncertainty among households and firms.
The claims that the AAA downgrade in Britain is a sign of economic collapse is are wrong and the fact that the media do not question those claims and, indeed, give them oxygen, demonstrates my point.
Oh, for some journalists on our national broadcaster who actually know a bit and can force the politicians and commentators to answer questions that expose their underlying lies about economics.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.
This Post Has 18 Comments
“Oliver Hartwich … who has wored in the Centre for Independent Studies”. There’s a letter missing, but I’m not sure which one.
Hi Bill, I’ve been reading your blog for about a year now, but I have never heard you being interviewed on radio or tv. It seems there is a go to list of economists used for commentary in the MSM. Have you been approached much by media for comments in the past, particularly the ABC? Certainly the economic background one hears is always neolib. It makes one want to yell obscenities at the radio! Btw, three out of three in the last quiz!
“The media has a lot to answer for in perpetuating these economic myths”
I’ve been on media training courses, and the first thing they tell you is that the media has no interest in reporting anything. Their sole concern is eyeballs, impressions and copy sales. Thats’ it – everything else is secondary.
The brutal ‘deregulation’ of the media and the fall in sales means that the media can no longer ‘indulge’ in investigative journalism. It’s all pap and tissue paper reporting that cements the viewpoint that a journalists knowledge is a mile wide and an inch deep.
And the defunding of the national broadcasters is just part of that overall trend. The so-called ‘fourth estate’ has been dismembered by a combination of market forces and government defunding to ensure that it cannot hold corporations and politicians to account.
Media is always representing some interests, what is needed is media plurality. The totally objective and impartial journalist is a pipe dream, nevertheless promoted by the journalist profession.
That Paul Mason commented on Brexit.
“The global order is dying. But it’s an illusion to think Britain can survive without the EU”
And of course fascism and Nazis have to be relayed on. And comparing it with UK leaving the gold standard 1931; “But the flight from gold killed the global economic system.”
Then the piece goes on that ditching the gold standard (globalization) was regrettable.
“In 1931, the Bank of England could hike interest rates from 4.5% to 6%. This week, if it moves at all, the Bank will have to slash them to zero. That is the difference between possessing a well-stocked arsenal and a last bullet.”
There is that last bullet again and there is no more ammunition.
“The most depressing graph in economic history is of unemployment in Germany after Hitler takes power. It falls from 5.5 million in 1932 to half a million six years later. It shows the nationalist right has answers that, in the short term, often work better than those offered by democrats and globalists.”
So the neoliberal model will create utopia in the long run, when we all are dead? So a fast 90 % reduction in unemployment is depressing? Might also be depressing that Hitler was an animal lover? So if one wants to exercise sensible economic policies and be an animal lover one comes in terrible bad company. Because then concentration camps and genocide is an unavoidable necessity?
“We have to find an alternative economic model that promotes growth, wellbeing, rising wages and rising social mobility for the people of the developed world.”
I suppose that “alternative” is something unknown because “we” have to “find” it, sort of inventing something that never have existed. Of course in the long run it will maybe be invented, found.
But why Hitler and 1930s? Why not look at the post war period? Full employment (and animal lovers) without concentration camps and genocide.
A period when the domestic economies was the centerpiece for growth. The side effect is increasing import a.k.a trade. The opposite of so called export led growth where you export as much as possible and import as little as possible. The ideology of have your cake and eat it.
Maybe Mason should look at recent years UNCTAD reports.
I once worked with a journalist who explained that most reported news arrives via press releases. It doesn’t matter what the news is about, be it, the economy, education, health etc.
As someone who was once a school governor, I was appalled at the way the education system works. Students are deprived of real critical thinking and are taught to memorise facts to pass exams.
Is it any wonder that most people don’t challenge the status quo.
The media seeks to make profit and is not interested in the truth.
The media is every day more and more redundant. I for one would never have heard about MMT if if were not for internet blogs and all the mischief making by the neocons and neo liberals from Washington would have been difficult to locate. I consider myself quite well informed today. I understand how the corporate world trades on lies and threats, How we are bombarded by bad science and bad journalism in all the bought media.
There are brave and fearless journalists out there but they are not on any mainstream media payrolls, so their information comes from discovering their blogs and alternative news sites.
It will make a difference and it will force change.
According to Heiner Flassbeck, Germany has a trade surplus of 50 billion euros with the UK, only surpassed by Germany’s trade surplus with the US, which is 60 billion. For that reason alone, German industry should like to keep a close trading relationship with the UK. After all, without Germany’s huge current-account surplus, now 8% of GDP, German industry would have to shrink considerably.
By the way, the Swiss current-account surplus was 12% of GDP in 2015. The Dutch one was 11% of GDP in 2014. Sweden’s cumulative current-account surpluses since 2000 are the equivalent of one year’s GDP. Northern Europe is filled with mercantilists, but the Brits certainly aren’t among them.
When is the expanded version of the MMT textbook becoming available? Have I missed something, or is it now due out? Thanks
“….the 2 per cent tariff that the US faces”.
This isn’t quite accurate. The average is 2 per cent under World Trade Organisation rules, but some goods are much higher – eg cars 10% and clothes 35%. And I have read today that Britain is not a signatory to the WTO (not substantiated). The WTO rules are hugely complicated, and anyway it is extremely unlikely that Britain will not come to some agreement with the EEA. If, that is, it really does exit the EU about which I remain doubtful.
Apart fom that nit-pick you are absolutely on the button. I once dined with the Editor of a magazine in Covent Garden Market and complained that an article he had written was incorrect. He replied that he only writes what people want to hear. They just want to sell their newspapers and magazines. The truth is of little importance.
nice post – will rote learn questions to journalists.
National broadcasters have become near clones of the corporate owned media, who stubbornly and brazenly defend their self decreed right to inject the near constant political bias of an unelected political ideology into their content, when confronted with complaints from members of the public, on whose behalf their existence is mandated.
It can’t always be someone else’s fault.
“People will do anything in their power to avoid thinking.” [unknown 19th century naturalist]
The buck starts, and stops, with distributed common sense. Everyone else is just a lobbyist to public opinion.
In the end, we have to appeal to the common woman & man, and call THEM out. There’s no utility in putting it off.
The story of Mouseland reminds us of that lesson.
Hartcher the Dreadful from the SMH was singing from the Eslake songsheet too, almost word for word: “…And last time around, the Reserve Bank cash rate stood at 7.25 per cent at the outset of the crisis and 3 per cent eight months later. Today it’s 1.75 per cent. Most of the ammunition has already been spent. ”
It is mindnumbing horrific to see the media repeatedly claim it is about economics and at the same demonstrate it is a subject they have no understanding of and no wish to have an understanding of. Throw to “the experts” who are kowtowed to and who say the same things over and over and over. Economic history? forget it. Down the memory hole it goes or as Alex Cockburn said in another context “Hello, History? Get me Rewrite”
I’ve always had more time than you for Saul Eslake (certainly much more time than for that shill Oliver Hartwich). He’s usually quite thoughtful and is also personally one of the nicer people you could meet.
But you’re absolutely right about his answer this time – this “we’ve run out of ammunition” theme is simply, technically, demonstrably wrong even in a perfectly orthodox new Keynesian, or even a monetarist, framework. Let alone an MMT one.
The worst is that Saul is not alone in this. Very Serious People have now been spouting this (quite obvious) garbage in Australia since at least 2009 – see http://clubtroppo.com.au/2009/05/05/gobbledigook/ or http://clubtroppo.com.au/2011/09/02/a-disturbing-wikileaks-cable/
The story of Mouseland reminds us of that lesson.
Except that cats cannot pretend to be mice.
“It doesn’t mean the state reached after the fiscal intervention will be perfect. It means things can always be made better. A nation has to ultimately confront its real resource constraints. Fiscal policy in the short-term cannot ease those constraints although it can ensure that the real resources available are utilised more fully.”
Bill is this what happened with the Kirchener government in Argentina, when Argentina’s inflation began to climb steeply after 2009? As I recall they followed a number of your ideas, e.g. the job programme, so just wondering what went wrong there.
Great post. IMO, Bill, you should go on ABC’s Q&A. Pretty much every time I watch the show there’s an audience member who will talk about how Liberal/Labor aren’t doing enough to reduce the deficit, then *every* panellist who answers reinforces this “budget emergency” narrative, with the politicians on the show promising a surplus as if that’s what we need.
On this week’s show, the economist Chris Richardson was a panellist and said this:
“At some stage if you want a better budget – and you should because it would protect you in the next recession – if you want a better budget, you have to cut spending and/or raise taxes. And I’d say do both. I’m happy to see the bulk of the effort done on spending but it is a problem.”
I wish that someone, economist or not, would go on the show and dispel the myths surrounding the budget.
The ABC are at it again.
I’m watching tonight’s episode of The Drum and three men are telling me what the incoming government must do economically while the host agreeably murmurs “Mm-hm” off camera every now and then.
One’s an economist, one’s a lawyer and one’s a retired soldier.
Only the soldier’s credentials were given: I had to google the other two.
It seems we must appease Standard and Poor, return to surplus, regret the fact that the 2014 Budget wasn’t passed because “Sure. There’d have been a bit of pain” but we’d be much better off now and continue economic reform like sensible people.
A lawyer and a retired soldier. Not one question from the host. I’m appalled.