I read an article in the Financial Times earlier this week (September 23, 2023) -…
Australian Prime Minister Kevin Rudd has written an essay extolling the virtues of a new era in public policy which he calls “social capitalism” which is based on a strong guiding role for government and an abandonment of self-regulation by corporate interests which was the hallmark of the neo-liberal era. He sources the current global economic meltdown to the neo-liberal takeover which began more or less in the mid 1970s after the first OPEC oil price rise. The problem is that his new vision is still tainted with the worst elements of the neo-liberal era.
He is quoted in an article in the Sydney Morning Herald today as saying:
The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes.
Neo-liberalism and the free-market fundamentalism it has produced has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.
He goes on to say that the new order which has to extend traditional Keynesian thinking will consist of:
A system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate … [and require] … a new contract for the future that eschews the extremism of both the left and right.
Like many of us, Rudd sees the ultimate irony in the greed merchants who ran amok taking as much out of the trough as they could in the growth period now begging the state to keep them afloat. Overnight corporate welfare in the billions is now acceptable when just a short time ago, any pittance given to an unemployed person in the form of unemployment benefit was criticised and the person receiving it vilified as being lazy and unmotivated.
The problem is that further on in his essay, the PM begins to rehearse the familiar neo-liberal line relating to federal budgets. He claims that he is committed to maintaining surpluses over the business cycle such that any deficits will be temporary. He claims that any expansion now has to be “paid for” in the growth period. This is nonsensical reasoning and reflects a fundamental misunderstanding of the role of government spending. It also mimics the worst of the neo-liberal rhetoric which ultimately saw our federal government running surpluses of obscene amounts and representing them as sound and responsible government.
The reality is that if you want the private sector to save then the government sector has to run deficits. Federal budget deficits “finance” private saving and wealth accumulation. The only way the economy can grow without the private sector becoming increasingly indebted (as it is now) is for the government sector to run deficits. This is all a simple matter of national accounting. To understand this I offer some fundamental macroeconomic principles which have escaped Mr Rudd and which were eschewed by neo-liberals.
We need to understand what I term modern monetary theory to realise that typically a national government should always run deficits. A modern monetary system is characterised by a floating exchange rate (so monetary policy is freed from the need to defend foreign exchange reserves) and the monopoly provision of fiat currency. The monopolist is the national government. The consolidated government sector comprises the central bank and treasury. Their various operations – spending and taxing (treasury); open market operations, currency transactions etc (central bank) provide net injections (positive or negative) of fiat-currency to the non-government sector. Most countries now operate monetary systems that have these characteristics.
The following macroeconomic principles explain the fundamental flaws in the arguments used to justify abandoning full employment in the context of a modern monetary economy.
First, under a fiat currency system, the monetary unit defined by the government has no intrinsic worth. It cannot be legally converted by government, for example, into gold as it was under the gold standard. The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.
Second, the analogy neo-liberals draw between private household budgets and the government budget is false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save. Moreover, since government controls the provision of the fiat currency, it is not inherently revenue constrained.
Third, unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour unable to find a buyer at the current money wage. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending. Thus, unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
Fourth, as a matter of national accounting, the federal government deficit (surplus) equals the non-government surplus (deficit). The failure to recognise this relationship is the major oversight of neo-liberal analysis. In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The federal government via net spending (deficits) is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment. Additionally, and contrary to neo-liberal rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings.
Fifth, the decreasing levels of net private savings financing the government surplus increasingly leverage the private sector. The deteriorating debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity.
Sixth, while the federal government is not financially constrained it still issues debt to control its liquidity impacts on the private sector. Government spending and purchases of government bonds by the central bank add liquidity, while taxation and sales of government securities drain private liquidity. These transactions influence the cash position of the system on a daily basis and on any one day they can result in a system-wide liquidity surplus (deficit) due to the outflow of funds from the official sector being above (below) the funds inflow to the official sector. The system cash position has crucial implications for the central bank, since the central bank targets the level of short-term interest rates as its monetary policy position. Budget deficits result in system-wide surpluses (excess bank reserves). Competition between the commercial banks to create better earning opportunities on the surplus reserves then puts downward pressure on the cash rate. If the central bank desires to maintain the current target cash rate then it must drain this surplus liquidity by selling government debt. In other words, government debt functions as interest rate support via the maintenance of desired reserve levels in the commercial banking system and not as a source of funds to finance government spending.
We need to understand the operations of the modern monetary economy so that we can set out policy priorities which should always have full employment at the top of the list. Unemployment (and underemployment) is not only a waste of resources and a loss of national income which together restrained the growth of living standards, but it is also damaging to social and philosophical objectives pertaining to dignity, well-being and the quest for sophistication. The maintenance of full employment was the collective responsibility of society, expressed through the macroeconomic policy settings. Governments have to ensure that there are jobs available that are accessible to the most disadvantaged workers in the economy.
In my recent book with Joan Muysken (Full employment abandoned: shifting sands and policy failures, published by Edward Elgar) I call this collective enterprise the Full Employment framework. This framework has been systematically abandoned in most OECD countries over the last 30 years. The overriding priority of macroeconomic policy has shifted towards keeping inflation low and suppressing the stabilisation functions of fiscal policy. Concerted political campaigns by neo-liberal governments aided and abetted by a capitalist class intent on regaining total control of workplaces, have hectored communities into accepting that mass unemployment and rising underemployment is no longer the responsibility of government. As a consequence, the insights gained from the writings of Keynes, Marx and Kalecki into how deficient demand in macroeconomic systems constrains employment opportunities and forces some individuals into involuntary unemployment have been discarded.
The concept of systemic failure has been replaced by sheeting the responsibility for economic outcomes onto the individual. Accordingly, anyone who is unemployed has chosen to be in that state either because they didn’t invest in appropriate skills; haven’t searched for available opportunities with sufficient effort or rigour; or have become either “work shy” or too selective in the jobs they would accept. Governments are seen to have bolstered this individual lethargy through providing excessively generous income support payments and restrictive hiring and firing regulations.
The prevailing view held by economists and policy makers is that individuals should be willing to adapt to changing circumstances and individuals should not be prevented in doing so by outdated regulations and institutions. The role of government is then prescribed as one of ensuring individuals reach states where they are employable. This involves reducing the ease of access to income support payments via pernicious work tests and compliance programs; reducing or eliminating other “barriers” to employment (for example, unfair dismissal regulations); and forcing unemployed individuals into a relentless succession of training programs designed to address deficiencies in skills and character. We calll this new paradigm the Full Employability framework.
At present, after 30 years of public expenditure cutbacks and, more recently, increasing government bullying of the jobless, OECD economies generally are not close to achieving full employment. In the midst of the on-going debates about labour market deregulation, scrapping minimum wages, and the necessity of reforms to the taxation and welfare systems, the most salient, empirically robust fact of the last three decades – that actual GDP growth has rarely reached the rate required to maintain, let alone achieve, full employment.
The first step to creating a new social capitalism is to restore true full employment. In Full Employment in a Free Society William Beveridge’s (1944: 123-135) said
The ultimate responsibility for seeing that outlay as a whole … is sufficient to set up a demand for all the labour seeking employment, must be taken by the State.
The emphasis was on jobs. Beveridge defined full employment as an excess of vacancies at living wages over unemployed persons. Creating enough jobs in the economy was seen as the best form of social security. From 1945 until 1975, governments manipulated fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labour force growth. This was consistent with the view that mass unemployment reflected deficient aggregate demand which could be resolved through positive net government spending (budget deficits). Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending and were typically in deficit.
However, while both private and public employment growth was relatively strong during the Post War period up until the mid 1970s, the major reason that the economy was able to sustain full employment was that it maintained a buffer of jobs that were always available, and which provided easy employment access to the least skilled workers in the labour force. Some of these jobs, such as process work in factories, were available in the private sector. However, the public sector also offered many buffer jobs that sustained workers with a range of skills through hard times. In some cases, these jobs provided permanent work for the low skilled and otherwise disadvantaged workers.
Importantly, the economies that avoided the plunge into high unemployment in the 1970s maintained what Paul Ormerod (1994: 203) has described in his Death of Economics as a
…sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified.
Ormerod said that employment of this type may not satisfy narrow neoclassical efficiency benchmarks, but notes that societies with a high degree of social cohesion and a high valuation on collective will have been willing to broaden their concept of costs and benefits of resource usage to ensure everyone has access to paid employment opportunities.
I have long advocated the creation of such a buffer stock capacity in Australia through the introduction of a Job Guarantee. Mr Rudd is advised to consider this policy initiative as one of the basic starting points in abandoning the neo-liberal attack on widespread prosperity and inclusion.
As a postscript: the SMH editorial talks about a return to Keynesian economic management. That would also be fatal because Keynesian thinking was based on a fixed exchange rate system where countries like Australia continually came up against a Balance of Payments growth constraint as monetary policy was tied to maintaining the agreed parity. In this sort of world, fiscal policy has no real power.