Australia – inflation still falling while the RBA governor keeps inventing ruses to keep hiking rates
It's Wednesday and there is a lot going on in the data release sense -…
It is Wednesday and so a shorter blog post today while I spend more time writing other things. But there was one issue that was raised in the comments in the last week following my blog post – Build it in Britain is just sensible logic (July 26, 2018) – that I thought warranted attention. The government is not a household is a core Modern Monetary Theory (MMT) proposition because it separates the currency issuer from the currency user and allows us to appreciate the constraints that each has on its spending capacities. In the case of a household, there are both real and financial resource constraints which limit its spending and necessitate strategies being put in place to facilitate that spending (getting income, running down savings, borrowing, selling assets). In the case of a currency-issuing government the only constraints beyond the political are the available real resource that are for sale in that currency. Beyond that, the government sector thus assumes broad responsibilities as the currency issuer, which are not necessarily borne by individual consumers. Its objectives are different. Which brings trade into the picture. Another core MMT proposition is that imports are a benefit and exports are a cost. So why would I support Jeremy Corbyn’s Build it in Britain policy, which is really an import competing strategy? Simple, the government is not a household.
The trilogy of blog posts is my most recent discussion of issues relating to trade:
1. Trade and finance mysteries – Part 1 (May 8, 2018).
2. Trade and finance mysteries – Part 2 (May 9, 2018).
3. A surplus of trade discussions (May 23, 2018).
Household consumers are users of the currency and aim to use their disposable incomes to create well-being, primarily for themselves and their families.
We exhibit generosity by extending our spending capacities to others when we give gifts.
But our aims are to get the best deal we can in our transactions. That means we like goods and services that satisfy our quality standards at the best price possible.
Which means that we will be somewhat indifferent to geography. If local suppliers are expensive and imported goods and services are cheaper, then as long as quality considerations are broadly met, we will purchase the imported commodity and be better off in a material sense.
If other nations are willing to send more goods and services to us than they get back in return then the real terms of trade are in our favour.
Exports require we give up our use of those real resources while imports mean we deprive other nations of the use of their resources.
There are nuances obviously.
A nation with lots of minerals (Australia) may not feel it is too much of a ‘cost’ to send boatloads of primary commodities to Japan or China.
We also individually might ascribe to broader goals in our purchasing decisions, although the evidence for this is weak.
For example, some of us believe that imports are only a benefit if they come from nations that treat their workers reasonably (no sweat shops, killing trade unionists etc) and do not ravage the natural environment in the process of producing the goods.
I would guess those concerns do not dominate our decision making generally because if they did China would not have huge export surpluses.
But there are nuances.
However, a government is not a household. It has a wider remit (objectives) than a household and must consider a broad range of concerns when it uses its currency-issuing capacity to shift real resources (as goods and services) from the non-government sector to the government sector to fulfill its elected mandate.
In that sense, imports remain a benefit but the broader concerns make the net decision more complex than it is for the non-government sector.
The government must consider regional disparities. When a household is making a decision to purchase a good or service, what is happening elsewhere in the nation might not rank very high in the decision.
The government must consider how best to maintain full employment. A household is really only concerned with their own employment although that doesn’t preclude us being generally concerned with high unemployment rates.
But ‘buy local’ campaigns typically do not work when they try to steer household consumption expenditure.
The government can always maintain full employment through its fiscal spending decisions. We know that because it can always purchase the services of all idle labour that wants to work and receive payment in the currency of issue.
So from that starting point, there is no question that mass unemployment is a policy choice not some uncontrollable outcome of a ‘market’.
In that context, the challenge for government is to work out how to frame the spending capacity to get the best employment outcomes.
* Direct public employment – that is, obvious.
* Subsidy of local non-government firms – that is, operate by lowering the unit costs for firms to render them profitable when they otherwise would not be.
* ‘Build it in Britain’ – that is, use procurement policies to sustain sales for local firms rather than subsidise their costs.
None of these full employment strategies negate the insight that imports are a benefit to a nation.
But the government has to consider broader concerns than just getting a good or service at the cheapest ‘market’ price.
There are more considerations but that is how we can understand this issue.
More on the John Mayall theme, although in this case, Mayall had little to do with the genius of this track.
I have listed this track before but it is on my frequent play list and never stops amazing me.
It is from one of my favourite guitar players – Peter Green – who recorded this after replacing Eric Clapton as the guitar player in John Mayall’s Bluesbreakers.
The whole album from John Mayall’s Bluesbreakers – A Hard Road – which was recorded in 1966 is exceptional, but this track – The Supernatural – is one of the best guitar tracks of all time.
The control he gets on his reverb and sustain is something else.
2:57 minutes of pure tone!
I will be speaking in Sydney tomorrow night (August 2, 2018) to launch the new edition of Sold Off Sold Out – which exposes the costs of privatisation in Australia.
The event will run from 18:30 to 20:00 and will be held at the Information and Cultural Exchange (ICE) centre located at 8 Victoria Road, Parramatta, NSW 2150.
The promotion page says:
Over the past 30 years, there has been a massive sell-off of public assets to private corporations right across Australia. For the public there is no upside. We have been robbed in multiple ways by privatisations.
You can find details – HERE.
I look forward to seeing Sydney readers at the event.
The second international MMT Conference will be held in New York between September 28-30, 2018.
I will be speaking and most (if not all) the founding MMT group will be in attendance, contributing in one way or another.
The Conference Home Page has been launched and you can register for the conference through that page.
It will be great to see as many of you as possible at that event.
In the two weeks following, I will be giving talks in:
1. Galway – Wednesday, October 3, 2018.
2. Dublin – Thursday, October 4, 2018.
3. London – Friday, October 5, 2018 – Launch of the new Gower Initiative for Monetary Studies.
4. Lisbon – Sunday, October 7, 2018.
5. Glasgow – Wednesday, October 10, 2018.
6. Wurzburg – Saturday, October 13, 2018.
I will have more details of that lecture tour in due course. More dates might be added once confirmations are made.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
This Post Has 31 Comments
NIESR is at it again Bill
Larry Elliot’s piece in the Guardian today. One last Hurrah to try and save the neoliberal globalists.
I continue to have a problem with the “nuances” associated with the idea that imports are a benefit and exports are a cost. For example, the decline in the exports of oil from Venezuela suggest that its costs are falling. But the shrinkage in exports means they have no oil related money to import other goods. So the lack of currency generated by shrinking exports penalizes the country’s ability to afford imports. Since Venezuela is an avowed socialist leaning country and has the ability to create its own currency and dictate employment for any who seek it, there seems to be some other problem that is creating explosive inflation and the potential for a meltdown in the Venezuelan economy. And it wasn’t an explosion in demand that caused that inflation, it seems to be a collapse of supply due to various government programs.
Yes, it is a collapse in supply but it is brought about 1%/Big Business in Venezuela, to destroy their democratically elected Government.
Hello Bill, can you tell me if this analogy of creator/issuer and user is correct. I apologise if it is way off the mark. (RL; the creator/maker of goods/anything, has different constraints than a user has. As long as there is a demand and a supply of resources the creator can continue creating millions of the goods. But the user of goods has limits because he has only so much income. The creator is receiving income with every sale BUT the user is paying out for every purchase. Every creation is INCOME to the CREATOR but every purchase is A LOSS of income to the USER.
Government money creation is followed by TAX INCOME for the government, and the creation is only limited by the demand for the money. Recipients of created money who then USE it only have the relatively small amount of money and cannot use more than this finite amount which is available to them.
All businesses or people are capable of creating something which is in demand. Sometimes it is labour and this has a limit. Sometimes it is a product that no-one else can legally make and can be recreated many millions of times over by the ISSUER, like a hit song for example or a book or specialist services. Again the creator and the user have separate constraints. The creator ISSUES each item and the USER pays money to the CREATOR. As long as people want the product there is virtually no limit to it being produced as it bring money back to the creator every time.)
Thank you Bill.
With no doubt the active assistance of the CIA.
There may well in addition be a certain amount of incompetence on the part of the Venezuelan government, of course. Cock-ups are at least as likely as conspiracies. On the other hand, the last thing the US wants is a successful socialist state in its back-yard.
I’ve just been re-reading the 2015 revised (second) edition of “Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems” by L Randall Wray. Among many other insights, he talks interestingly about the MMT view of exports and imports, and its relevance to poor countries. Although Venezuela is oil-rich, I’d think it would count as a poor country in this context.
‘as long as quality considerations are broadly met, ‘
I think that private indebtedness and wage stagnation broadens the sense of ‘broadly.’ In the case of Chinese goods (such as kitchen utensils) the financial strain people are under means they will buy cheap and poor quality. This means more throwaway purchases which last only months. China is fulfilling the austerity ridden ‘rich’ countries’ desire for ever cheaper products which is environmentally a costly outcome.
Is durability compatible with capitalism when it can no longer extract profit and surplus value easily enough?
Government is not a household and Venezuela is not socialist.
Another consideration for favoring domestic production is national security, although it certainly does not merit this administration’s bull in a China shop approach. Selective subsidy of key industries may be warranted, esp. the defense industry. Also, key goods like food should be promoted on the home front, even if that means promoting home aquaponics systems for fish and vegetable production. Venezuela knows the pain of having to import food when you lack means to do so.
Build it in Britain will deliver other benefits as well – an increased ability for Britain to actually do things for itself, likely accompanied by increasing R&D which itself often leads to valuable spin-offs.
Here in Australia, we continue to break our necks to do the opposite as fast as possible, to denude ourselves of ability, of knowledge, of specialised skilled labour and accelerate ever faster towards total dependence on those literally half a world away – to be replaced by making each other coffee and selling one another expensive real estate (the latter has been looking increasingly shaky of late). Similar procurement policies by federal and state governments would help stem the rot.
Hi Bill will be at your talk tonight. Will be following 2nd MMT conference I hope by You Tube.
My wife recently came back from south america, she said the coffee there was horrible, and yet they are the biggest exporters of it
when i worked in a meat factory, it was around the time australia made some deal with asia to export more of our beef and as soon as they did that the price of beef skyrocketed basically overnight
Big business likes profits. I don’t see how collapsing the government helps them.
Thomas Nugent, big business likes profits is true, but likes a few other things even more. As pointed out by Michal Kalecki in 1943 or so. https://www.jacobinmag.com/2018/05/political-aspects-of-full-employment-kalecki-job-guarantee
Yes. Imports are a benefit, and exports are a cost. And if you were wealthy and I could confine you to a chair by supplying all your needs: bringing your favorite food to you, wheeling you around in a chair, having entertainers come to the house, helping change your cloths, bathing you, feeding you like a baby, wiping your ass after a poop. All benefits. You don’t have to lift a finger. Of course I’m compensated for all this. But I am not actually doing the work, I have some illegal help from El Salvador to do the dirty work. I’m getting rich. Sometimes having people do things for you makes you weak and dependent. Sometimes having people do things for you promotes the exploitation of the weak and vulnerable.
A persistent, large trade deficit (or surplus) always means injustice and disease. The only time it can be justified is when a country does not have the capacity to meet investment opportunities with it’s own resources. The importation of capital goods, managerial expertise, technical knowledge will boost economic growth. A country like the United States should never be running large, persistent deficits. It means injustice and disease. It means people around the world aren’t being allowed to work for themselves.
The US always runs a trade deficit to bail out the rest of the world. What happens to employment in the exporting country if the US pulls the plug? The same with a strong dollar-an umbrella that protects domestic industries from US competition.
Dear Mr. Nugent, I sometimes get upset with what I consider (the occasional) reflexively anti-American sentiment on this blog, but even I would not call the US running trade deficits as ‘bailing out the rest of the world’ :). Send us your cars and oil- its for your own good that we will accept and use them? I doubt that’s going to fly very far…
To recap the MMT proposition, “imports are still a benefit” – people are still prone to greatly overthink the matter and see things that are not there, in this innocuous, indeed necessarily true by definition statement. A statement that one needs to understand to understand trade precisely.
Perhaps “Imports are an END. Exports are a MEANS.” is a more initially palatable way of expressing it. Nobody is saying imports are the only benefit or goal, that it is always the right thing to have a trade deficit; just that it can often be a right thing. A persistent, large trade deficit (or surplus) just doesn’t necessarily mean injustice and disease; saying that it bails others out may go too far the other way, but is not as big an error.
Came across another even more serendipitous find in an odd place that illustrates points very similar to Bill’s today.
David Cushman Coyle, The Beveridge Plan, Virginia Quarterly Review (Autumn 1943) shows the British used to understand “imports are a benefit” AND “Build it in Britain” very well.
By the way, Beveridge also edited a book “Tariffs: The Case Examined” in 1931, several contributors taking pains to explain the “MMT proposition” back then & noting the difficulty in getting the simple point across.
It may take a while to adjust to old ways of saying things, but it is striking how much more thoughtful (and funny) popular commenters like Coyle, whose pamphlets sold in the millions, are than the level of debate today. Let alone the thinkers like Beveridge (or Eveline Burns, the main author of the ill-fated “American Beveridge Report” that Coyle mentions.)
Don’t confuse intent with effect.
Thank you for bringing up Beveridge. I didn’t know about the 1931 book, but probably every Brit of my generation has heard of “The Beveridge Report” which paved the way for the National Health Service and the “Welfare State”, although the NHS was actually enacted by Labour MP and minister Aneurin Bevan, who usually gets most of the credit. I give praise and credit to both of them, especially as the NHS probably saved my life after I was struck down with a very serious illness in infancy.
I was only around for about two years of that post-war Labour government, although of course not politically aware. That didn’t happen (somewhat) until 1956 and the “Suez Crisis” and the invasion of Hungary by the USSR, by which time I was reading newspapers and listening to radio news.
So most of my knowledge of what happened in the UK in the immediate post-war period has to come from history books, or these days, online sources. I’ve read biographies of the important players of the time, like Bevan and Clement Attlee, and general histories of the post-war Labour government, but what I would really love to see is a study from an economics expert who is MMT-aware, of that period and how and why it went wrong, if indeed it did. (There is a question mark over whether it really did go wrong, because there is a strong suggestion that if Attlee had postponed the 1951 election (which he would have been in his rights to do, since the previous election had taken place in 1950), their position might have recovered and they might well have won, changing the course of history significantly.
I am not sure if @Bill has covered this period in any detail in his blogs, or if he has studied the period in any detail. It’s possible that a lot of the relevant data is hard to find nowadays, and fewer and fewer people who were alive at the time and knew what was going on remain alive to tell the tale.
But my understanding is that Britain suffered because it had to export as much as possible of what it produced in order to earn foreign currency to defend the pound. So consumer goods were hard to find and even basics sometimes. e.g. Bread was rationed (which it had not been, even during the war), and rationing was not fully lifted until 1954 (i.e. 3 years into the Conservative government which succeeded Attlee’s Labour government).
And the US government distrusted this new socialist government and didn’t cut it any slack.
“There are more considerations but that is how we can understand this issue.”
Indeed and surely national independence, military security and geopolitical balances should also be given due importance when considering manufacturing capacity and trade policy?
How would WW2 have ended if the US, UK and its empire had instead imported most of their manufactured goods from Germany or Japan over the preceding few decades?
I really like your sound bite.
Sorry Some Guy. I read the article by Beveridge you included. I didn’t see anything in it in conflict with me. Mr Ellwood had something to say regarding the context in which articles are written that has merit. I agree with “the place to make jobs is in the domestic industry and public services, that benefit the home folks.” I completely agree. BUT the frame or context out of which this would work, doesn’t exist. Hasn’t existed. And with human nature what it is, most likely will never exist. My grotesque little story is closer to the truth. What would make you think that countries are run, governed, with the objective of the greater good of the largest number of people. It’s just not true. That’s why we have the “7 deadly innocent frauds.” I take these frauds as pointing out to people the lies. There are always very wealthy and powerful groups that eagerly put their interests above others. What does the “Import- Export Fraud hide? Here it is. ALL OVER THE WORLD THE WEALTHY AND THE POWERFUL AND DRIVING DOWN WAGES SO THE PEOPLE OF THEIR COUNTRY CAN’T AFFORD TO BUY ALL THAT IT PRODUCES. THEY WANT THE SAVINGS SO THEY CAN BUILD UP CLAIMS AGAINST PEOPLE IN OTHER COUNTRIES. THE WEALTHY AND THE POWERFUL SEE NO ADVANTAGE TO SHARING. This is beggar thy neighbor. It’s simple. This is what’s going on. That’s the fraud. The big exporters are the big exporter cause the people of their country aren’t allowed to work for themselves. That’s where the surplus comes from – the subjugation and subordination. The wealthy and the powerful can’t consume any more. They see no reason to increase, promote domestic production for the stupid reason of improving domestic living standards. The wealthy and the powerful hate to share. AS a historical aside: somewhere in 1933 or 1934 the British abandoned their free trade policies, erected barriers to imports, and guess what – their economy improved. I thinks the Triffin Dilemma has some truth to it.
Some Guy said:
“To recap the MMT proposition, “imports are still a benefit”
Yeah, but over the long term, there are no sustainable imports without sustainable exports.
Back in the fray eh, Henry? Admirable. But the US at least, seems to have run trade deficits since around 1980 or so. If that isn’t long term then I don’t know what use that term is. At the present time it looks like my entire working lifetime will end up with the US importing more than it exports every year of it. Been benefitting the entire time no doubt, even though I don’t always realize how:) But there are those nuances, which might explain a few things that are not always apparent. I can live with that as long as I can argue just how important some of those nuances are. If they are important enough to redirect government spending policy, well then they are pretty important sometimes.
Seems like you are giving short shrift to the shoemakers in New England, the furniture makers in North Carolina, the steelworkers in Pennsylvania etc.
Not me Thomas. Not me at all. Ever. Although maybe the mild sarcasm intended in my last comment was not a good idea. Rarely is.
Jerry Brown. Was your sarcasm correction meant for me? I’m not gonna let it slow me down. LOL. Imports are a benefit. Yes. True. But for who? Not for the whole country. There are a lot of niches in this country. We’r not all in the same boat economically. Certainly not the people who lose their jobs in the trade-able goods sector. I mean, what would you rather have: a manufacturing job paying 50000 a year and no cheap imports, or, a 20000 year job where cheap trade-able goods are 20 percent below what they would be domestically, but only make up 20 percent of the household expenditures. It’s a no-brainer for those people. Right. Now let’s consider the general production or non-supervisory, non-professional portion of the country, roughly the bottom 60 to 70 of the income earners. These are the people who haven’t seen an improvement in their living standards in the last 40 years. And some of them, at the very bottom, are living less well than 40 years ago. All the while this country was a trade deficit country. If running deficits is good then why hasn’t it provided any benefit for the great majority of the people during this time? Funny how that works. That’s the type of thing I look for answers to. And at the same time the wealthy have gotten a great deal wealthier. I believe the two are linked – the one is the cause of the other. Yea. Free trade. Big Lie. If its so free then why is it negotiated in secret over many months and hundred or thousands of pages long, and then renegotiated 10, 15 years later? Wealth and power are fighting over their cut and the political agendas they are trying to impose.
No Yok, it wasn’t meant for you. It was because I continue to have a slight disagreement with MMT over trade theory. Sort of along the same lines as you do, I think. Which, in truth, has gotten much smaller as these different ‘nuances’ are recognized as being important sometimes. And because I enjoy sparring with Henry. I actually am very happy that Bill expressed his support for the Corbyn proposal. And happy he addressed what I considered a bit of a contradiction. I recommend reading the three blog posts on trade that are linked to in this post. And then, if you really want to understand my sarcasm, you could wade through the many, many comments on those posts. But I don’t recommend doing that.
@Thomas E. Nugent
Venezuela is a prime example of trade surpluses not being of any benefit whatsoever. They’ve been running them for decades, and what good does it do them now?
Is this really better Bill? Send it somewhere where labor is cheaper? That’s better? Cause sometimes it seems like you would agree with Alex Tabarrok. Well, you would never say something like “If foreign airplane maintenance is good enough for Delta then foreign human maintenance is good enough for me.” At least I hope.