British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
Last week, there were some rather significant shifts in the public discourse surrounding macroeconomic policy and challenges made to the orthodox economics taboos that have been used to prevent governments from acting in the best interest of the citizens. First, the Australian treasurer broke away from the government’s previous obsession with fiscal surplus pursuit to announce that for the foreseeable future it was only going to concentrate on jobs and growth. In his statement, he basically refuted all the mainstream macroeconomic claims about fiscal deficits – higher interest rates, lower private investment, lower growth, lower private sector confidence etc. There is really nothing left of the mainstream position now and any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period. And, if that was not enough, a former Federal treasurer attacked the ‘high priests’ of the central bank, demanding they buy up government bonds and help the government run “Mountainous” deficits to achieve full employment. The flood gates opened just a bit more after those interventions along the way to jettisoning all the mainstream nonsense that should have been abandoned decades ago.
I saw this headline last week in the UK Guardian (September 24, 2020) and tweeted accordingly.
We haven’t seen anything like this for years.
And remember this is a conservative Liberal government in Australia that is now abandoning the ‘deficit and debt hysteria’.
On September 24, 2020, the Federal Treasurer said in a – Speech to the Australian Chamber of Commerce – in Canberra that:
Under the previous strategy our plan was to deliver budget surpluses of sufficient size to significantly reduce gross debt and eliminate net debt by the end of the medium term.
Unfortunately, in the face of this shock, this is no longer the prudent or appropriate course of action.
It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates – given what this would require us to do in terms of significant increases in taxes and large cuts to essential services.
This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position.
It is getting Australians back to work and having profitable businesses hiring and investing that offers the greatest leverage in repairing the budget …
The first phase of our revised fiscal strategy is focused sharply on boosting business and consumer confidence and promoting jobs and growth throughout the economy …
… we will maintain our central focus on jobs and growth, combined with structural reforms that increase our economy’s potential …
Only through repairing the economy can we repair the Budget.
While the terminology is marginally problematic (for example, ‘repair’), this signals the end of the narratives we heard during, for example, the GFC.
The import of what the Treasurer is now saying:
1. Spending growth equals real output growth when there is idle capacity.
The IMF narratives of the ‘fiscal contraction expansion’ and ‘growth friendly austerity’ is categorically rejected by the Treasurer’s framing.
You cannot get growth without spending increasing.
2. When non-government spending is insufficient to maintain employment growth then there is only one game left in town – increased government spending.
3. The neoliberal lie that governments do not create jobs only markets do – is categorically rejected.
The Treasurer now admits that increasing the deficit is essential to “bring hundreds of thousands more Australians back to work”.
4. The mainstream economics claim that rising fiscal deficits drive up interest rates and ‘crowd out’ private investment is categorically rejected.
The Treasurer now admits the rising deficits are essential to “having profitable businesses hiring and investing”. In other words, rising deficits can crowd in private spending including business investment.
A far cry from the sort of rubbish that is taught in most undergraduate economics programs about loanable funds and crowding out.
Any time that you hear or read an economist say or write that fiscal deficits drive up interest rates and damage private investment you can conclude they are lying – deliberately or through ignorance.
5. The mainstream claims, characterised by the Ricardian equivalence proposition, that private firms and households undermine the expansionary impact of fiscal deficits by increasing saving to ensure they can pay for so-called future tax increases, is categorically rejected.
The Treasurer has acknowledged that one the positive impacts of abandoning the obsession with fiscal surpluses – “our revised fiscal strategy” – is to boost “business and consumer confidence”, which will promote jobs and private spending growth.
The exact opposite of what the mainstream try to claim is the reality.
6. The mainstream claims that you have to indulge in fiscal contraction/austerity first to provide for the conditions that improve the economic performance is categorically rejected.
The Treasurer notes that you get the economy right and the fiscal position will then take care of itself and withdrawing stimulus initiatives are appropriate.
The goal of fiscal policy is not to achieve some particular number but to support the non-government sector spending and saving decisions.
The Treasurer has finally conceded that context matters. The only way we can make sense of any particular fiscal position is to understand the strength of the non-government sector (including the external sector) and overall spending strength that is required to maintain full employment.
The fiscal position should be whatever is necessary in that context.
The neoliberal period has perverted that essential understanding, and, instead, diverted our focus to meaningless obsessions with particular fiscal outcomes, for which the government really cannot control anyway.
Remember, that the final fiscal outcome in any period is the product of the discretionary fiscal choices made by government (spending and tax parameters) and the spending and saving decisions of the non-government sector.
The latter drive overall activity and influence the fiscal outcome via the cyclical impacts on tax revenue and welfare spending
So, after the Treasurers concessions, what is left of the mainstream treatment of government fiscal policy?
Any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period.
They simply will be looked on with curiosity.
Because people will be observing as time passes and the very substantial fiscal deficits persist that all the dread outcomes predicted by my profession do not materialise or come to pass.
They will start to appreciate what we have observed in Japan for 3 decades. That even when fiscal policy parameters are pushed to previously considered limits and beyond the mainstream predictions fail.
We also saw last week another major brick in the neoliberal dam break.
The former Treasurer who became our Prime Minister, Paul Keating issued a letter last week which attacked the RBA for “indolence” and failing its responsibilities.
He was responding to a speech to the AI Group, given by the Deputy Governor of the RBA last Tuesday – The Australian Economy and Monetary Policy.
The AI (Australian Industry) Group is the peak employer organisation for large business in Australia.
Paul Keating – was the Labor Treasurer between 1983 and 1991 (whereupon he usurped Bob Hawke and became Prime Minister).
As Treasurer, he embraced the neoliberal obsessions with privatisation, outsourcing and fiscal austerity. His government ran fiscal surpluses in 1988, 1989 and 1990, before the economy crashed in the early 1990s on the back of the fiscal drag and the high interest rate environment that was pursued as the government and RBA embraced the mainstream monetarist ‘inflation first’ strategy.
When the government admitted the economy was in recession in 1990, after promising a ‘soft landing’, Keating claimed that it was the “recession we had to have”, thereby abandoning all empathy with the workers who had voted for his government.
His track record is thus questionable (in the extreme) and he now appears to be singing from a different song book.
After the Deputy Governor’s speech last week, Keating issued a press statement, which was a scathing attack on the mentality of the central bank – its conservative leanings and failure to use its currency capacity to generate generalised well-being.
The RBA like many central banks around the world has overseen inflation rates well below their lower-bound target range (2 to 3 per cent). So even in their own terms of meeting their inflation targets they have consistently failed over the many years now.
Defenders of the bank are thus on shaky ground if they suggest the RBA is meeting its legislative responsibilities.
And I remind everyone that the Reserve Bank Act 1959, Section 8 empowers the central bank “to buy and sell securities issued by the Commonwealth and other securities”, “to establish credits and give guarantees” and more.
Note also that under Section 10 Functions of the Reserve Bank Board, Clause (2):
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act and any other Act, other than the Payment Systems (Regulation) Act 1998, the Payment Systems and Netting Act 1998 and Part 7.3 of the Corporations Act 2001, are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
In other words, the RBA is required by legislation to maintain full employment with price stability so that all people in Australia are prosperous and secure.
However, the RBA has been significantly influenced by the NAIRU concept and it conducts monetary policy in Australia to meet an openly published inflation target. The persistently high unemployment in Australia over the last 30 years, would suggest that the RBA is not working within its legal charter.
This was more or less the point that Paul Keating made in his press release following the Deputy Governor’s speech, which outlined what the RBA was doing.
But in doing so he went to the heart of one of the mainstream taboos – central bank purchase of government bonds and fiscal deficits.
He seemed to reject all his previous economic rhetoric by writing:
Knowing full well that monetary policy can now no longer add to nominal demand – something that now, only fiscal policy is capable of doing – the Reserve Bank is way behind the curve in supporting the government in its budgetary funding measures …
This is in the context of near zero nominal interest rates.
For a moment, it showed some unlikely form in pursuing its 0.25 per cent bond yield target for three-year Treasury bonds and a low-interest facility for banks. But now, after 600,000 superannuation accounts were cleared and closed down, with 500,000 of those belonging to people under 35 – a withdrawal of $35 billion in personal savings, and further demands arising from the employment hiatus in Victoria – the deputy governor of the bank, Guy Debelle, yesterday strolled out with debating points about what further RBA action might be contemplated.
As history has shown, when a real crisis is upon us the RBA is invariably late to the party. And so it is again …
The problem about central banks, and this is true of the Reserve Bank of Australia, it has become a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large …
The only difference between the deity and those to be governed is that the governor and his deputies do not wear clerical collars and black suits. But that is the only difference in their comport and attitude.
Deputy governor Guy Debelle’s meandering thoughts yesterday about the bank and monetary policy is way not good enough. Not good enough for those likely to be unemployed.
Not good enough for those who have already lost their retirement savings. Not good enough for a government trying to fund a massive support program for an economy in distress.
And the RBA should “help the government meet the task of full employment”.
And this is a major turning point in our public discourse:
The bank should be explicitly supporting the government so the country does not experience a massive fall in employment – impacting particularly on younger workers – those who have already been obliged to wipe out their superannuation savings to support themselves …
But instead of that, in funding a level of government outlays by buying appropriate levels of government debt and locking it away on its balance sheet, thereby making the government’s funding task much easier and support for the country better, the deputy governor conducts a guessing competition on what incremental step the bank might take to help.
It has to be remembered, these are the high priests of the incremental. Making absolutely certain that not a bank toe will be put across the line of central bank orthodoxy.
Certainly not buying bonds directly from Treasury – wash your mouth out on that one – what would they say about us at the annual Bank for International Settlements meeting in Basel?
Not even ambitiously buying sufficient bonds in the secondary market, like the European Central Bank or the Bank of Japan …
The Reserve Bank might do as it was set up to do – help the Government. Be a utility. Shoulder the load. And in a super-low inflationary world, that load is funding fiscal policy. Mountainous sums of it.
He was thus calling on the RBA to directly fund “mountainous sums” of government spending that will be necessary while capitalism is on state life-support systems.
He advocated the RBA buying all the debt that would be issued to match the large fiscal deficits that will be required to achieve full employment.
He also paid the RBA out over their reluctance to reduce interest rates in 1989 as Australia was heading into recession and said “The Reserve Bank is now having another one of its dalliances with indolence”.
The ABC article (September 24, 2020) – Paul Keating says the RBA is not doing what is needed to stop the COVID recession worsening – said that Paul Keating “appears to be siding with proponents of a school of economic thought called Modern Monetary Theory who have been arguing there is no need for the RBA to buy bonds from the secondary market to fund government spending measures.”
There is absolutely no need for the RBA to buy bonds indirectly in the secondary markets.
There is absolutely no need for the Treasury, via the Australian Office of Financial Management, a division of Treasury, to issue any debt to match the net public spending (deficits).
The charade the government and the bond markets play, pretending that the non-government sector provides the financial wherewithal to allow government to run deficits, is just an elaborate form of corporate welfare.
The funds that are used to buy the government bonds come, ultimately, from past government spending anyway.
Paul Keating is another person among many that are now crossing the line and calling out these neoliberal charades, that are buttressed by the ‘fictional world’ that mainstream economists create to give justification to what is an unnecessary sop to investment banks.
It is another sign that the paradigm shift in macroeconomics is underway.
The ‘high priests’ are hanging on for dear life but the challengers to the orthodoxy are increasing in number and profile.
Paul Keating’s intervention demonstrates that the inner camp is breaking up.
The – Australian Quarterly – was established in 1929 and is “Australia’s longest running political science journal”. It has been a staple in my life and has always published progressive articles that providing challenging insights into the issues of the day.
I contributed to the latest edition that is just out.
Here is the front cover and the title is taken from my article. I urge people to support this journal.
I have been doing a lot of Zoom workshops lately – mostly for private groups.
Last night, I did a Q&A with Dr Phil Armstrong which was organised by the Gower Initiative For Modern Money Studies (GIMMS) – in the UK.
The video will be available in the coming days but Christian Reilly and Patricia Pino took an audio stream and have made it available on their podcast.
We covered a lot of topics in the 100 odd minutes.
It was a late night for me but I am very thankful for the GIMMS team and Christian and Patricia for making these types of interactions possible in this era of no travel.
I must say, though, that I miss the face-to-face interaction.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.