It's Wednesday and I have comments on a few items today. I haven't been able…
I am working on a manifesto (‘White Paper’) linking Modern Monetary Theory (MMT) with a Green New Deal (GND) concept. I will announce an important strategic coalition I am forming to advance this agenda in the coming period and some great events to present the framework. As part of that process, I have been sketching some of the important guiding principles that I consider to be essential if a massive socio-economic transformation like the Green New Deal (or whatever we want to call the strategy) is to be successful. Lessons from history are a good starting point to understand why things go awry. In that respect, the largest national infrastructure project that Australia has embarked on for decades – the National Broadband Network (NBN) – is a object lesson in how not to conduct government policy when nation building. The Green New Deal is about nation building – creating a framework of infrastructure, education, skills development, employment, distributive mechanisms and more to take nations into the next century while reversing the environmental degradation that industrialisation and mass consumerism has wrought. The central role of the government as the currency issuer will be paramount. The whole transformation will not be successful while policy makers hang onto mainstream macroeconomic views about government financial capacities, which manifests into obsessions about achieving fiscal surpluses. This is why an understanding of MMT is central to any proposal to advance a GND. Without that understanding, we will always encounter the nonsensical issues that have plagued the NBN development and left it in a state of chaos and near-redundancy, when it should have underpinned our technological network for decades to come.
For international readers, the NBN refers to the development of a fibre-based national broadband network to replace the archaic, slow network that exists now based on dated technology (copper wire).
It was touted as offering high-speed broadband access to all Australians whereas at present many regional areas do not have any access.
We were told that the NBN would be a grand nation building piece of infrastructure that would ensure Australia was at the forefront of network technology for decades to come.
What we were told and what has emerged are two vastly different things.
Recently, the boss of the public body administering the development of Australia’s new broadband network – the NBN – argued that a ‘Netflix’ tax was desirable to discourage people from streaming video at nights because the system could no longer cope (Source).
While the network was promised to deliver 100Mbps connectivity (download) but users report that speeds they are getting in the evening are worse, in many cases, than what they were able to get under the previous ADSL network, which the fibre NBN network replaced.
Many people are also arguing that the fibre NBN network is already being superseded in performance by the pending 5G Wireless offerings from the major telecommunications companies.
So how did we get to this point and what lessons does the NBN fiasco hold for countries envisaging large infrastructure shifts associated with a GND transformation?
I have written about this topic before:
1. The neo-liberal infestation – Australia’s broadband fiasco gets worse (August 2, 2017).
2. Australia’s crawling Internet speed signifies wider fiscal failure (September 9, 2015).
3. Public infrastructure does not have to earn commercial returns (December 20, 2010).
4. Free public broadband is required (April 20, 2009).
The irrationality surrounding fiscal policy and government finance statistics led to a series of poor decisions about the development of the NBN – Australia’s most important nation-building infrastructure in recent decades.
From day one, the debate focused on ‘how much it would cost’ rather than what was required to allow the nation to build the best technological solution which would remain relevant for as long as possible into the future.
The facts are well-known.
The first mistake occurred in the lead-up to the 1996 federal election, when the conservative opposition argued it would partially privatise the national telecommunications firm, Telstra.
Once in government, they proceeded accordingly, arguing, in part, that privatisation would generate funds to give carriage to the Natural Heritage Trust of Australia Bill 1997.
That Act recognised “the need for urgent action to redress the current decline, and to prevent further decline, in the quality of Australia’s natural environment”.
The summary states that:
The main source of money for the Reserve will be $1.1 billion from the partial privatisation of Telstra.
So already, the Government was misleading the voting public by claiming that it needed to sell off a vital national asset in order to fund environmental initiatives that it knew the public were increasingly eager to progress.
But it went further than that. The privatisation was botched. The Government could not entertain anything less than solid interest in the shares and sold the asset for well below market value in addition to handing out millions in consulting fees to lawyers and ‘market makers’.
It also left the newly privatised monopoly in total control of the Public switched telephone network (PSTN) which was a fixed-line copper wire network that had first been introduced in Australia in the late C19th.
The network was significantly degraded and unsuited for a modern broadband system.
But in leaving the network in the hands of the private monopoly, any move to competition was compromised by the fact that the wholesale prices and access arrangements would be largely dictated by the monopoly.
What we ended up was ridiculous prices being forced on consumers for early Internet access (dial-up then ASDL) as competing firms were trying to extract profits while at the same time being screwed by the privatised monopoly.
In 2007, the newly elected Labor government decided to change this situation and proposed the construction of a new optic fibre network to underpin a national broadband network (NBN).
The problem was that all the infrastructure necessary to implement the new fibre was ‘owned’ by the private monopoly and so the Government agreed with Telstra to buy the old network (all the tunnels etc) from it for some exorbitant fee ($A9 billion, subsequently negotiated upwards to $A11 billion).
Again a negative outcome of the initial flawed decision to privatise an essential service being provided by a public body.
The newly created NBN Company, charged with building the fibre network, was also hamstrung from the start as a result of the mindless obsession with fiscal surpluses and user-pays service delivery.
The Labor government demanded that NBN Co deliver a commercial return to the Government as well as pay back the $A11 billion plus some other ‘loans’ that the Government has provided the infrastructure firm.
Result: NBN then set ridiculously high connection charges to ‘earn’ a return to the Treasury.
This meant that consumers were being hit excessive connectivity and download prices – Australia has very expensive Internet compared to best-practice nations and ranks well down on average speeds.
But there was an additional factor. The creation of the independent NBN Co meant the outlays from the Treasury would be recorded outside the normal fiscal accounting process – that is, not push out the fiscal deficit – a smokescreen type of strategy.
The next big mistake was when the Labor government lost office in 2013 and the Conservatives returned to government on the back of a massive fiscal deficit scare campaign.
In the previous period, the fiscal deficit had risen because the Labor stimulus program in the face of the GFC saved Australia from recession.
But once the fears surrounding the GFC eased, both sides of politics became obsessed with pushing for a fiscal surplus (and at that point growth slowed and the unemployment rate stopped falling and remains, today, well above the level it was before the GFC ensued.
The point here though is that the fiscal hysteria translated into a disastrous decision in technological terms to revise the original fibre to home design for the NBN and replace it with a stitched-up hybrid system where fibre would, at best, go to the curb or node, and then connect into the old, defunct copper-wire system.
The claim at the time was that it could be built more quickly but would also be much ‘cheaper’ in dollar terms.
All claims were false.
The investment needed rose – because of the technical challenges in trying to patch together the old (copper wire) with the new (optic fibre).
It has taken longer to build due to these challenges.
And as more people are moved over to the NBN system, it is clear that the stitched-up system cannot cope with the demands that modern consumerism is placing on it.
We were all told that we would be able to stream video (movies etc) on the NBN. The fact is that the system comes to a screaming halt in many high population density areas (like our cities) in the evening when everyone sits down after work to watch TV.
An academic who is considered to be a telecommunications expert concluded (Source):
The NBN is obsolete. On simple evidence it’s not able to meet the demands of Australians today, let alone in 10, 20 and 30 years, and we’ve spent $51 billion on it,
The ABC published an article by Ian Verrender (August 5, 2019) – NBN fix involves a $20 billion write-down of the project that would hurt Morrison Government surplus goal – which once again discloses the ridiculous state of government policy in Australia with respect to the NBN.
He claims that the best solution would be for:
… the Government write down the value of the NBN by around $20 billion.
If it did this, the NBN wouldn’t need to charge as much and everyone would be better off.
There’s just one problem. Given it represents a loss, that $20 billion write-off would be very much on-budget, which essentially means taxpayers rather than NBN users would foot the bill.
It also would hit the budget bottom line, which explains why the Morrison Government, already facing a slowing economy, will be reluctant to do anything that endangers its promised surplus.
While a write-down will not improve the flawed choice of hybrid technology, it would reduce the prices that consumers pay.
But more a likely to take up the service and the download speeds would grind further towards zero. On many nights, people already report that the streaming services just end up in infinite ‘buffering cycles’ as the network traffic congestion rises.
Focusing on write-downs really diverts our attention from the intrinsic problems:
1. The NBN should never have been considered to be a commercial entity that would have to deliver a ‘corporate’ rate of return.
We need to take the NBN out of the ‘[free market rhetoric’ and see it as an essential public good that is best constructed as a “natural monopoly” by the national government which faces no financing constraints.
Then you have a different perspective altogether and most of the debate that is going on at present falls away as irrelevant and its ideological basis becomes immediately obvious.
2. The government investment should only be on best-practice technology and be guided by those considerations. Worrying about the fiscal impact is only relevant if the resource demands of the NBN project place resource pressures on other sectors in the economy that have to be attenuated by offsetting government policy.
The natural monopoly concept
In economics, there is a concept called the Natural monopoly – which relates to a sector where the lowest cost (resource usage) provision can be achieved with only a single provider.
In this situation, trying to set up competitors only pushes up the costs of production.
The typical situation is where there are large infrastructure investments required to enter the sector relative to the size of the ‘market’.
The stand-out examples are public utilities such as electricity, gas and water services and telecommunications.
The neoliberals argue that a privatised public entity which is forced to compete against newcomers becomes more efficient and costs drop even if a profit element enters the scene.
It is argued that even if the monopoly remains, the new private firm will be more efficient and just needs to be properly regulated (remember Margaret Thatcher’s famous CPI-X rule developed by Stephen Littlechild?).
The problem is that history shows us that the the ideology that leads to the privatisation in the first place also establishes weak regulators who become captive of the sector (firm) and the oversight breaks down.
If there was a serious regulative intent then the operation could remain in the public sector without any performance loss anyway.
Think about the banking sector in Australia or the water utilities in Britain.
Another neoliberal aspect of the way we now treat natural monopolies is to force public corporations that provide essential services to generate ‘commercial’ returns in a user pays environment.
All these shifts in practice have resulted in inferior outcomes.
A natural monopoly that delivers essential services should remain in the public hands and be appropriately managed to meet indicators relating to community well-being rather than some conception of ‘commercial’ return.
If the aim of the service is service rather than delivering return to shareholders then the usual ‘corporate’ arithmetic becomes irrelevant.
When the NBN put out its mission statement – see the blog post – Public infrastructure does not have to earn commercial returns (December 20, 2010) – it stated that:
The expected rate of return should, at a minimum, be in excess of current public debt rates.
This objective told us how entrenched the neo-liberal ideology was in government. It clearly has distorted the investment decision-making framework being used by the Government.
We were told by the Government that “taxpayers will get all their funds back with interest” as a sort of mollifying claim even though, intrinsically, no taxpayer funds were actually invested in the project.
All that this ‘commercial’ return requirement ensured was that prices would be much higher than necessary – a real loss to the community.
Applicable fundamental principles arising from MMT concerning national infrastructure development
My contention is that in progressing debate towards a Green New Deal, an understanding of MMT will be required to ensure the GND developments are not derailled by spurious macroeconomic reasoning.
The NBN fiasco teaches us a number of things.
1. Government infrastructure investment is about nation building and is not ‘commercial’ in nature – in the sense that should be assessed in terms of how it advances national well-being.
The currency-issuing government is not financially constrained and investments are not made with the aim of financial return.
3. Technological considerations should guide government infrastructure investments not financial ratios that are inapplicable to a currency-issuing government.
4. There is no necessary trade-off between one infrastructure development and the provision of other public services.
Increased provision of one service (say, hospital care) and some infrastructure service (NBN) is entirely dependent on the availability of real resources and has nothing to do with financial capacity.
5. Privatisation of natural monopolies is a failed strategy and undermines the capacity of those activities to advance well-being and utilise productive resources effectively.
Natural monopolies can be regulated to ensure they are managed in accordance with government aims.
It is not inevitable that public monopolies will waste resources and be unresponsive to the consumers of the services they provide. That is all down to how they are managed.
Further, there is a good case that many natural monopolies – such as national public transport systems – should be provided free of charge to the public as a right of citizenship.
This is just an extension of the infrastructure for well-being versus treating it as a commercial asset.
Whether free public transport achieves advances in well-being and in the GND context reduces private car use is a research issue. But as I indicated in my two-part series – Modest (insipid) Green New Deal proposals miss the point – Part 1 (July 25, 2019) and Modest (insipid) Green New Deal proposals miss the point – Part 2 (July 29, 2019) – it is likely that regulative restrictions on car use will be required anyway so that free mass transit then provides a beneficial social option to offset to some degree the loss of private amenity from restrictive use of our cars.
The point is that public purpose is not a commercial concept.
A currency issuing government can provide infrastructure services for free without undermining its ability to provide other services now or into the future.
Great public infrastructure projects generate massive social returns.
In the Post WWII period up until the mid-1970s, the Australian Government realised that it had to develop infrastructure so as to provide for the disadvantaged who had no ‘market power’.
In particular, communications were provided on a needs-basis rather than on strict capacity to pay criteria because it was recognised that access to information and connectivity was central for a growing and fair society.
It would never have been ‘economic’ (by which I mean profitable for private capitalist firms) to provide even the copper wired telephony that links our country.
So if we use the same arguments then as we are using now then we would never have built any public infrastructure.
6. Governments should seek advice from independent researchers and practitioners and avoid taking advice and becoming captured by profit-seeking corporations with vested interests.
7. Consideration of the ‘cost’ of a new infrastructure project should not be made in terms of the dollar outlays.
The relevant questions relate to what real resources are going to be deployed and what alternative uses these resources may have been or could be used for. Then we can consider the true costs against the social benefits forthcoming.
The general principle is that if the real goods and services that are required to construct it are available then the currency-issuing government will be able bring them into productive use through increased spending without any ‘offsetting’ fiscal shifts (such as, increased taxes).
No debt issuance is required. The only reason that debt might be issued coincidently with the spending incurred to construct the network is if the Federal government considered there was too much liquidity in the private economy which was thwarting its overall economic management (most notably monetary policy).
A 2003 Op Ed I wrote – Divisions over public debt – for the self-styled progressive organisation the Evatt Foundation, remains relevant today.
I was criticising fellow progressives who were arguing that governments must incur higher debt to fund spending and the deterioration in public infrastructure – in the quality of ‘public goods’ in general – is a direct consequence of the commitment to debt reduction.
That is only so if we play along with the mainstream, neoliberal myths about government ‘finances’.
An MMT understanding shows that arguments about how the government will pay for the infrastructure (and the “costs”) are largely irrelevant.
Governments pay for infrastructure in the same way it pays for anything else by signing cheques and crediting private bank accounts.
Government always has to monitor the general state of the economy to assess inflation risk.
Educating the public to achieve that understanding is, in my opinion, an essential starting point for GND type initiatives.
The Green New Deal will require a massive transformation of our socio-economic systems if it is to be successful.
I believe that while it will have commercial impacts, at its heart, will be a renewed focus by government on nation-building which should be non-commercial in nature.
The lessons of history tell us that the advanced nations did not become wealthy with high material standards of living through the application of neoliberal principles.
Those principles have generated stagnation and unacceptable levels of inequality.
The GND must begin with a break from that recent past.
And the starting point will have to be the promotion of an understanding of MMT. Without that understanding all manner of dead-ends and poor decisions will be made.
Australia’s NBN infrastructure chaos is a great example of what happens when neoliberal thinking is applied to nation-building.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.