Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I wrote last week in this blog post – We have a new federal government – finally some decency will hopefully return (May 23, 2022) – that Australia had finally rid itself of the disastrous conservative government that had violated our nation for the last 9 or so years. It was a moment to celebrate, given that we could not have fallen much further in the eyes of the world and that our society was falling apart from the neglect and inaction of that government and the favours it did for the cronies in business that supported it. But I stress the temporality of ‘a moment’. The new Ministers were sworn in yesterday and have hit the road running with all sorts of press conferences and statements. Some of the things I am hearing sound like an improvement. But the statements from the new Treasurer suggest that nothing much has been learned from the GFC, the pandemic and the period in between. And unless he changes his tack, we won’t see anything ambitious achieved in the next 3 years.
The Treasury lies continue
During the GFC, I wrongly thought that the economics profession would become so discredited for all the wild and erroneous predictions they were making about the solvency of governments, about bond yields and inflation that we might see some material change.
There was some change but the mainstream troops quickly regrouped, took over some of the new insights that Modern Monetary Theory (MMT) provides as if they had come up with them themselves, and moved back into dominant mode.
No careers were jettisoned.
Then the pandemic came and the same thought crossed my mind.
In 2020 and 2021, as fiscal deficits rose to relatively high levels historically and even the Reserve Bank of Australia started buying Australian government bonds, such that they hold around 90 per cent of the new debt issued since the onset of the pandemic, I thought well it would be hard to go back to the old narratives about fiscal balances and fiscal space.
It seems that I might be wrong again.
Central banks are all moving back into the inflation targetting mindset – well the Bank of Japan hasn’t caught the fever yet – and treasury officials and their political masters are resuming all this talk about how times are tough with the energy crisis and inflation is accelerating (because Covid is still a problem despite our attempts to deny that) but that the scope for fiscal policy interventions has gone because of the build-up of public debt from the pandemic.
It seems that we didn’t change the record, it is still stuck and we have had the volume on the hi-fi down for a few years.
Our new Labor government in Australia is ridden with ‘factions’ – left and right. There is nothing worse, I can tell you, than a Labour politician that identifies with the Right faction.
For UK readers think Blairite.
For US readers think blue democrats.
For others you can fill in your own context.
The new Australian Treasurer, who is in charge of fiscal policy is from the Labor Right faction and claims to be a ‘fiscal conservative’.
I hate that term.
For a start it means they don’t actually understand what fiscal policy is about – they talk in terms of ‘$A1 trillion of debt’ – which is the new mantra in Australia, without mentioning that the change in the level since 2020 has almost all been bought by the central bank – which is part of government anyway.
Government buying its own debt (Treasury -> RBA), paying itself interest (Treasury -> RBA), then paying itself to redeem the debt on maturity (Treasury -> RBA), then, to top it all off, paying that redemption cash and income flow back to itself (RBA -> Treasury) and calling it ‘dividends’.
But the art of fiscal policy has nothing much to do with financial ratios. They just reflect what is being done in the economy with the policy interventions.
The correct appraisal of whether fiscal policy is responsible, imaginative and sound is whether the functional outcomes that are the target of government policy interventions are achieved.
Do we have full employment (properly defined)?
Do we have a coherent climate response?
Are we providing good quality (energy efficient) homes to low income earners?
Are our hospitals effective?
Is public education delivering on its ambit?
If we answer yes to that and we are operating within the real resource space that is available to government (which means we are at full employment with the correct distribution of resource usage between public and private to achieve the aspirations of society) then the number that is accounted for at the end of each financial year as the fiscal deficit or surplus is just a passing curiosity.
Those financial numbers should never be the target of policy makers.
The aspirations are the targets and the numbers will be whatever it takes to achieve the targets for societal well-being.
Fiscal conservatives don’t understand that, which is why the Labor Right are unqualified to be in charge of fiscal policy.
Cue to the first few press conferences that the new Treasurer has given in the last few days.
The new Treasurer published an Op Ed today (June 2, 2022) in the Murdoch press – with the headline “There’s no use mincing words: our challenges are dire”.
I won’t link to it because I don’t want that masthead to get any traffic.
The new Treasurer claimed that there were three challenges:
1. Inflation – Yes.
2. Declining real wages – Definitely.
3. “a budget heaving with more than $1 trillion in debt” – This is where we get depressed.
He traced these challenges:
… to before the pandemic – debt had already doubled, growth was below trend, productivity and business investment were weak, wages were already stagnant before Covid – and so it will take some time to turn things around.
He claimed that “No government, new or otherwise, can flick a switch and make $1 trillion in debt.”
They could start by announcing that they are no longer issuing debt to match their fiscal deficits.
Ending that ‘corporate welfare’ source would be a very good thing to do (note I am talking about this at the upcoming Levy Summer School – see below).
On May 25, 2022, just after the election, the new Treasurer and Finance Ministers gave a – Joint press conference, Parliament House, Canberra
All the weasel words of a fiscal conservative are there:
1. A declining ‘budget’ deficit is “a Budget improvement”.
2. Increasing tax revenue represent “improvements in the Budget”.
3. “there are more good ideas than there is room, in a Budget heaving with Liberal Party debt, to do everything” – when he should have said there are not enough available real resources to do everything!
These sorts of statements are meaningless really when one really understands what fiscal policy is about.
There is no sense that a ‘budget’ can improve or deteriorate.
The labour market can do those things but not a fiscal balance.
But the point is that when the new Treasurer says the state of the finances in Australia are in dire state, what really is the case is that his understanding of his brief is so deficient as to be dire.
The record is stuck.
Let’s move on to the music segment!
The so-called gas trigger
At present gas prices are rising quite sharply as we enter winter and this will hurt low income families particularly.
There is also a threat that supply will run short in Australia over the coming period.
You might ask how that is possible given that Australia is one of the largest gas exporters in the world and produces much more than we use domestically.
Well blame the power of the energy companies for that.
The rising gas prices are all due to external factors – the war in Ukraine has created an increase in world demand for non-Russian gas sources, which has provided local gas suppliers windfall profits through the export markets.
Our energy terms of trade are booming and as I reported yesterday company profits are reflecting that.
The only thing trickling down to workers is higher domestic prices rather than being able to share in the bounty that had nothing to do with smart investment decisions ny the local exporters.
It was pure luck for them that Putin went rogue.
There are other factors involved too – for example, the local energy companies have not invested in maintaining their old coal fire power stations because they preferred to gouge out profits after the privatisations and those generators are becoming less reliable and there is a shift to gas-fired electricity generation.
That is also increasing the demand for gas.
The energy companies (many of which are foreign owned) lobbied (perhaps blackmailed is a better word) previous Australian governments into allowing them to price locally on world prices rather than the local cost of production.
They also received undertakings from past governments that they would not be subject to any reservation schemes which would force them to supply the domestic market first up to local demand, before they could export the surplus.
They claimed if those guarantees were not met then they would not invest in exploration and would take their ‘bat and ball’ and go elsewhere.
The government should have told them to get on their bike.
There would be no shortage of other investors who would have filled the breach given the domestic market would still be profitable – just not as bountiful as supplying spot into the world market at times like this.
So that is why we are one of the world’s largest gas exporting nations but cannot ensure our domestic needs are met at reasonable prices..
Only one state forced a reservation scheme (Western Australia) and they are not having to endure the price hikes at present.
The new government has an out – there is the so-called emergency scheme called the ‘gas trigger’ but formally known as the – Australian Domestic Gas Reservation Mechanism (ADGSM) – which was legislated into being on July 1, 2017 to counter any domestic gas shortfalls in the future.
The mechanism allows the government to divert LNG exports back into the domestic market should the domestic market face supply issues.
It is not a price regulation scheme.
It can only divert uncontracted gas supplies and much of the gas market is supplied on long-term contracts so there is some limitation on how much diversion can take place within the current legislative framework.
The current legislation is in fact flawed and even if the government decided to trigger their legal rights, the law says that nothing would happen until next January.
So hardly a fix for the out-of-control domestic gas price rises.
What the Government can do though is the enact new legislation and scrap the ADGSM.
The new law could require domestic markets have to always be fully satisfied first and that rule would have to be built into new contracts.
The companies are all claiming – as they would – that if their capacity to supply world markets is impeded our reputation as a reliable nation will decline.
Which is bunk.
They have been diverting supply into the burgeoning markets as circumstances change in order to maximise profits.
Everyone can see that.
The changes I think are necessary would just mean that their contracted supply for the rest of the world would be less – rather than less reliable.
It is crazy that low-income families are suffering while the foreign owned energy companies are pocketing booming profits.
Interview with the team at Radio Cultura
I did an interview recently with the team at – FM Radio Cultura – which is a radio station in Argentina.
They are running a series of podcasts on Modern Monetary Theory (MMT) through the aegis of Lola Books publisher Carlos Garcia and others.
I thank the team of Alejandra Piaggo, Cesar Crocitta and Carlos for their tireless work in promoting our MMT ideas.
I am talking about whether it is sensible to have an central bank that is institutionally separate from the rest of the economic policy making machinery in government.
There is a Spanish version available – HERE.
Levy Summer School
As I have previously mentioned, I will be presenting four sessions at the upcoming Levy Summer School in the US.
The school runs between June 10-18, 2022 and there are some sessions that will be streamed live via Zoom.
You can download the full program – HERE.
The highlighted sessions will be offered to the public via Zoom using the following link
and Pass-code 083828
You will be able to view my sessions as follows (the times are New York State times):
Monday, June 13 14:45-16:00 – MMT and ZIRP: What Happens If Treasury Stops Issuing Debt?
Monday, June 13 16:15-18:00 – Breakout Discussion: MMT and Policy Design
Thursday, June 16 10:30-12:00 – The Buffer Stock Approach
Friday, June 17 15:15-16:15 – Thirlwall’s Law (this is about the balance-of-payments-constrained growth theory).
Music – Oscar Peterson Trio
This is what I have been listening to while working this morning.
Three people can make great music.
This is a song I love to play on piano and no-one played it better than Oscar Peterson.
The was on his 1963 album – Night Train (Verve) – which is in my view one of the best all-round jazz albums ever released.
You can read about the song (written by Oscar Peterson) – Oscar Peterson – “Hymn to Freedom” – and learn that it was written for the Civil Rights Movement in the US.
This version was recorded live at the Tivoli Gardens Concert Hall, Copenhagen, Denmark in 1964.
The Trio at that time was:
1. Oscar Peterson – Piano
2. Ray Brown – Double Bass, who played in the Trio from 1951 to 1965.
3. Ed Thigpen – Drums, who joined the trio in 1959, after Oscar Peterson dropped the guitarist in the line-up.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.