Of course governments will be fiscally stretched if they define large surpluses as the norm

Wednesday and a short blog post. I regularly work for unions as an expert analyst/witness in their struggles to achieve wage justice with employers who are intent on paying as little as possible. Often these are private employers but at the moment I am helping a union with their campaign to win a reasonable wage increase against a state government. The logic deployed by the government in relation to their fiscal affairs and their wage setting behaviour is a classic demonstration of how neoliberalism has distorted any sense of reason and created self-fulfilling problems. So today, I will just introduce this issue – given how fascinating it is.

Wage caps and fiscal sustainability

I mentioned in Monday’s blog post – We are approaching a period of fiscal dominance (August 12, 2019) – how the Reserve Bank of Australia governor, in his annual appearance before the House of Representatives Standing Committee on Economics last week, had called out the wage caps that state governments have imposed as one of the major reasons wages growth is near zero and households are struggling to maintain consumption expenditure.

He told the Committee that he “would like to see stronger wage growth in the country” and that aspiration was being thwarted by the
government wage guidelines (around 2 to 2.5 per cent per annum increase maximum).

So the public sector “wage caps are cementing low wage norms across the country”.

Dr Lowe continued:

In the medium term, I think wages in Australia should be increasing at three point something. The reason I say that is that we are trying to deliver an average rate of inflation of 21⁄2 per cent. I’m hoping labour productivity growth is at least one per cent-and I’m hoping we can do better than that-but 21⁄2 plus one equals 31⁄2. I think that’s a reasonable medium-term aspiration; I think we can do better, but I think we should be able to do that. So I would like to see the system return to wage growth starting with three …

what is really important is the wage norms in the country … And the public sector wage norm I think is to some degree influencing private sector outcomes as well-because, after all, a third of the workforce work directly or indirectly for the public sector … But I hope that, over time, that balance could shift in a way that would allow wage increases, right across the Australian community, of three point something.

The union I am working for, by the way, is claiming a 3.5 per cent wage norm.

I don’t see anything controversial about the claim, which is certainly consistent with lower end productivity growth estimates – that is, non-inflationary wage increases are possible if any nominal wage increase above the inflation rate are within the productivity growth space.

The problem is that these wage caps have become dominant across all the state and territory jurisdictions.

What is their motivation?

The claim is that they allow the governments to achieve what they state is a fiscally sustainable position.

In the case I am working on at present this sort of logic produces some classic self-reinforcing impasses.

The logic goes like this:

1. The state government is facing a very difficult fiscal environment as revenue growth slows in the wake of a slowing economy.

2. The wage caps are essential in this environment to allow the state government to manage this difficult environment and keep public service costs under control.

But accompanying this logic are fiscal principles including that the government will pursue “net operating surpluses that ensure any new capital investment in the General Government sector is funded primarily through recurrent revenues rather than borrowing”.

This is extreme neoliberal ‘sound finance’.

Think about it – it means that the gap between recurrent spending and recurrent revenue has to be such that all new capital spending by the government can be paid for.

And think about that rule in the context of claims that they cannot pay a wage increase above the low wage cap because of the difficult fiscal environment.

Trying to achieve a net operating surplus big enough to provide funds for the state’s capital investment program is a very challenging aspiration.

And what it leads to is a squeeze on recurrent spending, which is primarily (in the context of the Australian constitution and sharing of powers between the states and the federal governments) the way in which public services are provided in Australia.

Most of the large social policy responsibilities – education, health, environment, transport, police, etc – are held by the states not the federal government in our system.

Trying to achieve net operating surpluses of sufficient size to also fund the capital investment program also means revenue has to be prioritised and usually means capital infrastructure programs are starved of funds.

However, this fiscal principle is not supported by any reasonable application of economic theory or distributive justice.

It unreasonably stifles economic activity in the present and places an inequitable burden on current taxpayers for benefits arising from the infrastructure investment (new capital investment) that will be enjoyed by generations into the distant future.

At the state government level (where the state is a user of the national government’s currency), most public finance experts would hold out that recurrent spending should be matched by recurrent revenue and capital expenditure should be funded by debt issuance to ensure that the funding burden of the capital infrastructure, which provides services over many years, is borne progressively by the generations that enjoy those services.

State government borrowing costs are reduced because they are influenced by the impact of risk-free debt issuance by the federal government.

But the point is that any state government that adopts a rule like this is operating at odds with standard public finance practice.

And, in doing so, it conditions the concept of a “challenging fiscal environment” to become an assessment based on ideology (an extreme version of ‘sound finance’) rather than the result of a reasonable and broadly accepted economic logic.

Of course, the fiscal outlook becomes challenging when the government adopts such an extreme benchmark for defining what is to be the norm.

Further, the wage caps that the states have put in place bias growth in wages throughout the economy downwards, which then has the effect that economic growth has to rely on either increased government deficits, private business investment or household credit growth in the wake of external deficits.

With private investment faltering and governments pursuing austerity targets, the only other source of growth is household consumption spending.

The major component of total expenditure is household consumption and private business investment is linked to that (via accelerator processes), such that, if household consumption expenditure drags, business investment is likely to be slow as well because the existing capital stock can more than cope with the production demands.

It is now obvious that with household debt at record levels, growth will not come from credit-fuelled consumption expenditure. The national accounts data is showing that clearly.

That means the flat wages growth, exacerbated by the low wage caps, stifle overall growth, which, in turn, damages state revenue receipts.

In other words, a vicious cycle emerges and the so-called ‘challenging fiscal environment’ is a product of the very policies (wage caps) and net recurrent surpluses that the government has put in place to address what they think is a challenging outlook.

That is how crazy this neoliberal period has become.

Sydney Modern Monetary Theory (MMT) Event

The Modern Money Australia NSW Branch is organising their first major event on August 24, 2019 in Sydney.

Details of the event are available – HERE.

I will be speaking as will Rohan Grey.

Tickets to the event are free – which doesn’t tell you anything about the quality of the speakers (-:

It will be held between 14:00 and 16:00 at:

Theatre 203, Pioneer House, Notre Dame University Broadway Campus
128-140 Broadway
Chippendale, NSW 2008

Please support this group as they become part of the national MMT network – joining the excellent work being done by the Melbourne Chapter of Modern Money Australia.

Call for financial assistance to make the MMT University project a reality

The – Foundation for Monetary Studies Inc. – aka The MMT Foundation serves as a legal vehicle to raise funds and provide financial resources for educational projects as resources permit and the need arises.

The Foundation is a non-profit corporation registered in the State of Delaware as a Section 501(c)(3) company. I am the President of the company.

Its legal structure allows people can make donations without their identity being revealed publicly.

The first project it will support is – MMTed (aka MMT University) – which will provide formal courses to students in all nations to advance their understanding of Modern Monetary Theory.

At present this is the priority and we need some solid financial commitments to make this project possible and sustainable.

Some sponsors have already offered their generous assistance.

We need significantly more funds to get the operations off the ground.

In order for FMS to solicit tax-exempt donations while our application to the IRS is being processed, the Modern Money Network, Ltd. (“MMN”) has agreed to serve as a fiscal sponsor, and to receive funds on FMS’s behalf.

MMN is a non-profit corporation registered in the State of Delaware, and is a federal tax-exempt public charity under Section 501(c)(3) of the Internal Revenue Code.

Donations made to MMN on behalf of FMS are not disclosed to the public.

Furthermore, all donations made to MMN on behalf of FMS will be used exclusively for FMS projects.

Please help if you can.

We cannot make the MMTed project viable without funding support.

And finally, some music …

I was listening to this today. Hubert Sumlin is one of my favourite guitar players. He was Howlin’ Wolf’s lead guitarist and recorded several of his own albums.

Rolling Stone magazine ranked him 43rd of its 100 Greatest Guitarists of All Time.

Another fact of interest is that Mick Jagger and Keith Richards paid his funeral expenses when he died in 2011. See the story – HERE,

His playing was staccato in nature, short sharp, trebly phrases – but some really classic ones that everyone who wanted to play this style of guitar learned even if they were unaware that Hubert Sumlin was the author.

This is the entire album from 1990 – Healing Feeling – with Track 1 the title track.

A great way to think about economics and public policy.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 12 Comments

  1. It’s really a vicious cycle.

    Less activity, less revenue, less investment. Then it goes back to step 1.

  2. The interesting part of your recent comments about Reserve Bank of Australia governor Dr Lowe’s comments is that you acknowledge his superior MMT appraisal over the neoliberalism of the elected politicians.

    I think I am correct in interpreting your usual approach over Central Bank influence as being a contradiction of the democratic process – where political policy is the preserve of elected politicians.

    It seems in this instance you are pleased to have the superior intellect of Dr Lowe override that of elected representatives of the population. This has always seemed to be something you are reluctant to accept, and a contradiction of your Marxist philosophy.

    Let us hope therefore that Dr Lowe’s viewpoint soon becomes the basis of widespread political thought, otherwise you may have a fight on with your conscience.

    Or is that already happening, because if I remember correctly you made a recent comment about a Boris Johnson policy approach that amounted to a (backhanded) compliment – I am discounting it arose out of an epileptic incident.

  3. Gigs,

    Central banks are only independent in what comes out of their mouths (with the risk of being replaced).
    Policy-wise, their hands are pretty tied up by laws.

  4. Christopher Herbert,
    That is an interesting article. However, I think the author fell into the same error that he accused MS economists of doing.
    In his graph of Gini he compared the productivity of workers doing the same thing to the productivity of all the people in a nation. Obviously the people in a nation are not doing the same thing.
    Now, it seems to me that here he is comparing apples and cars. IStM that it is perfectly possible for the productivity of people doing different things to be different and that this difference can lead to the wide nature of the blue curve.
    He should have found a different way to prove his case. Maybe looking at the ‘patent trolls’ vs workers.
    The rest of his article convinces me that MS economists are in fact cheating here, just as he says. They often assume something and then define it as true. It is their standard method. College students who balk at this are encouraged to change their major. The ones who don’t change their major are almost all the ones who are too dumb to see the error in the MS economists method, or maybe selfish enough to not care so long as their pay/income is large.
    Also, the author leaves out the Profits part of he 1st diagram during his discussion of the diagram. I suspect that if a comparison was made over time in the US for the ratios of wages to sales and of profits to sales (of all comp. in the US over time) from 1946 to 2019 we would see a change at about 1978 +/- 3 years. We would have created a graph with 2 lines, 1 line for wages / sales and the other line for profits / sales. At about 1978 the line for profits / sales would turn up and the line for wages / sale would turn down.
    Also, on the same diagram just where does he put the CEO’s income? To me it should be included in the profit, it certainly should *not* be included in wages. It and other top management’s incomes might also be a separate “cost” [i.e., wages, profits, management pay, & all other non-wage costs].

  5. @Steve_American

    I think the main point of the graph is to remind that humans are usually roughly normally distributed in “productive” characteristics, intelligence, strength, speed, … work output.

    Income distributions are nothing like normal distributions, they instead reflect social hierarchies.

  6. Brendanm,
    i strongly disagree.
    The curve under the blue line certainly can be, simply, the sum or aggregate of a huge number of different jobs, each having a different attached income or Gini.

  7. Steve_American

    I believe that the premise is that the different jobs have “different attached income” as a function of social power relations rather than as a function of their productivity.

  8. eg,

    That was not the premise, that was his conclusion.

    My point was that, that graph didn’t prove anything. That there are a lot of different ways that graph could result from.

    One of which is that there are a huge number of tall thin “sub-graphs” that are all added together to form the final one.

    Also, the author ignored the 2nd hump in the red part of the graph. That 2nd hump shows that there is more than just productivity influencing the income/Gini of some of the workers. He ought to have talked about that some, but he didn’t.

  9. @Steve_American

    One of which is that there are a huge number of tall thin “sub-graphs” that are all added together to form the final one.

    No that is not a reasonable explanation of the graphs. It contradicts the central limit theorem.

    Any experiment involving the averaging of a large number of independent events should exhibit a normal distribution (regardless of the nature of the underlying distribution!!!!!). The fact that the right hand graph is nothing like normally distributed is clear evidence of structural relationships between remuneration events; ie that this is not a free or fair market.

    The left hand graph merely reminds us that, as expected mathematically, the central limit theorem usually applies when aggregating independent productivity events.

    The right hand graph is a product of societal structure, not of the “nature” of markets.

  10. Brendanm,
    It’s been 45 years since I left college. My Math is a little rusty.
    You pointed me to — Central limit theorem, From Wikipedia, the free encyclopedia.
    “In probability theory, the central limit theorem (CLT) establishes that, in some situations, when independent random variables are added, their properly normalized sum tends toward a normal distribution (informally a “bell curve”) even if the original variables themselves are not normally distributed.”

    The red graph or line is not a normal distribution. It has 2 peaks.

    The sentence above only says that in some situations it “tends toward a normal distribution”, not that it will always create one. So, in some situations and tends is 2 qualifiers.
    Maybe this is not one of those “situations”. Certainly the 2nd graph or line is more of a normal distribution, it only has 1 peak. But, it isn’t bell shaped.

    Anyway it didn’t seem like proof of what he wanted to prove to me, YMMV.

  11. Was that a young Stevie Ray Vaughn showing up in the Hubert Sumlin video montage? That would explain so much.

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