Changes to RBA Act will further entrench the depoliticisation of economic policy and reduce democratic accountability
Today, I consider the latest development in the entrenchment of neoliberalism in the Australian policy…
In Tuesday’s fiscal statement, the Australian government made a lot of noise about dealing with the climate emergency that the nation faces but in terms of hard fiscal outlays or initiatives it did very little, deferring action again, while ‘the place burns’. The Climate Council assessment was that the government “still seems to be on a warm-up lap when it comes to investing in climate action” (Source) and recommended the nation moves from a “slow job” to a “sprint”. I have previously written about the myopic nature of neoliberalism. There are countless examples of governments penny pinching and then having to outlay dollars to fix the problem they create by the austerity. The climate emergency is of another scale again though. And penny pinching now will cause immeasurable damage to humanity. Food security will be threatened. Urban environments will become unliveable. Pandemics will increase if we don’t stop clearing and if we release viruses stored in permafrost. And all the rest that awaits us. Now is the time to reset our understanding of fiscal capacity. It is already, probably, too late.
There were some outlays targetted at increasing the efficiency of our homes (which are typically very inefficient) including substituting electricity for gas energy use.
However, the nation is still transfixed on the creation of extensive margin housing developments that deliver massive profits to the property developers but leave places covered in roofs and concrete with the poorly designed and ‘cheaply built’ housing leaking energy at every corner.
While property matters are state and local government responsibilites, the federal government has the currency capacity to provide funding to ensure we move beyond the 6-star energy rating threshold for housing designs and stop the mindless laying of concrete everywhere.
The Government also announced relatively small investments in renewable hydrogen, which will not be sufficient to replace coal and gas any time soon.
Much more is needed on that front.
We will also get a new ‘National Net Zero Authority’ that sounds grand but we will see how much it can do given the lack of action generally in this space.
The Government failed to abandon the Fuel Tax Credit system which effectively subsidise the use of fossil fuels.
It also failed to take on the foreign-owned gas companies that have been making massive profits as they create false domestic shortages (because they are diverting local production to exports to take advantage of the war situation in the Ukraine).
While we should be fast-tracking investment in abandoning gas altogether in our homes and factories – and that is just a matter of the scale of outlays the Government is prepared to make – in the short-run (like now) we should be forcing the gas companies to make our gas available to the domestic market at low prices.
In short, the scale of the problem before us is massive and the fiscal strategy announced on Tuesday throws pennies at it.
Which brings me to an interesting ECB Occasional Paper (No 315) – The climate change challenge and fiscal instruments and policies in the EU (published April 20, 2023).
The researchers sought to examine the fiscal policy implications in terms of “climate change mitigation and adaptation”.
They argued that the rising incidence of “extreme weather events” has significant fiscal dimensions and challenge the current approaches to fiscal policy.
I couldn’t agree more although the ECB researchers fall back into mainstream macroeconomic fictions about ‘debt sustainability’ which have reduced our willingness to use the fiscal capacity available to government to make meaningful interventions in dealing with the climate emergency.
I note, though, that the focus of the ECB research is on the EU, where 20 of the 27 governments are using a foreign currency (the euro) and under the current monetary architecture have less fiscal space than say the nations that issue their own currency.
But that is just another reason why the Eurozone should be disbanded and more flexibility restored to the 20 nation states to deal with the challenges ahead.
The point here is that governments all around the world are locked into a dangerous and counterproductive circularity in their reasoning.
1. They voluntarily and artificially constrain the fiscal space available to them using all sorts of spurious arguments about not having enough money, about worrying that public debt will become unsustainable, about not wanting to ‘crowd out’ private investment through increasing their call on debt markets (savings), about not wanting to burden our future generations with higher taxes to pay off the debt, not wnating to put pressure on inflation, and all the rest of it.
2. As a result, they are not investing enough in climate mitigation.
3. As a result, the worsening environmental situation, causes weather havoc (floods, bushfires, landslides, starvation, etc), which then requires immediate fiscal responses, which drive up fiscal deficits and worsen the cost-of-living crisis.
4. As a result, we go back to 1. and the government starts cutting expenditure on welfare, employment, education, health etc – because the ‘deficits are too high’.
5. And on we go, as the climate problem worsens through lack of fiscal action.
The only way out of this circularity is to start by abandoning the logic in 1.
That is, recognising that the mainstream macroeconomics framework, which makes all these negative predictions about rising fiscal deficits, is erroneous and not fit for the task.
Once we understand how the currency actually works – along the lines of Modern Monetary Theory (MMT) – then the fiscal space available to us opens up widely.
We will no longer accept the answers that politicians constrained by the mainstream logic prattle out as automatons.
We will then be asking different questions about why the government is not using its currency capacity to really attack the climate problem and we will much more clearly understand the counter-productive circularity that links fiscal policy with the climate emergency.
In part, that is what the ECB Paper is about.
The authors recognise that:
The fiscal climate policies currently in place in EU countries are not ambitious enough to reach the target of “net zero” emissions. First, there is a carbon price gap between the current policies and the price needed to substantially reduce greenhouse gas (GHG) emissions. Second, green investment is below the level required to fulfil the target.
That is the problem everywhere.
Governments have two broad tools to deal with the problem:
1. Fiscal policy – taxing and expenditure.
2. Rules-based regulation – or as the ECB puts it “command-and-control regulation, such as setting emissions standards”.
One of the problems that is characteristic of this neoliberal era is that governments (and even progressives) see the solutions through the lens of the ‘private market system’.
So they advocate policies that will tinker with prices in the hope that consumers will use less energy because the goods and services produced by fossil fuel-based products will become relatively more expensive.
This is the basis of emission trading schemes such as the EU Emissions Trading System (EU ETS).
In general, reliance on the private profit-based price mechanism will not get us to where we need to reach – neither in scale or time.
Systems like the EU ETS where ‘offsets’ are traded are basically failing to deliver and allow large corporations to continue polluting while the offset schemes undermine sustainable communities in poorer nations, among other maladies.
Corporations find ways to cheat the system and the vested interests are continually seeking to sequester activities from those that are included.
Rules-based approaches – such as telling the coal export industry that it has to close in 10 years or so (for example) – are the only reliable way to stop damaging activity.
The ECB paper documents the sort of economic impacts that are likely to accompany the worsening climate situation:
1. Reduced GDP growth – which means increased unemployment, lost incomes and increased poverty – under the current approach of governments.
2. Increased pressure on food supply and prices – as more land turns to desert as a result of the flora failing to keep biological pace with the warming.
3. “Extreme weather events may place a direct and indirect burden on public finances” – because of “relief measures, repairs and maintenance of infrastructure” and more.
If economic activity is compromised then the ECB argues that there will be an erosion of the “revenue base as a result of output loss or higher public expenditure on social payments owing to lower incomes.”
You can sense the ECB is moving the argument here into the conventional ‘we will run out of money’ territory.
Research indicates that in the event of “an increase of 3oC in global temperatures above pre-industrial levels, the EU would face annual GDP losses of at least €170 billion (around 1.4% of EU GDP)”.
The problem of the ECB approach is that they are locked in a mainstream mindset.
They consider a major issue relating to climate change is that it:
… can affect public debt sustainability through various transmission channels, including (1) through its impact on output and the productive capacity of the economy, which could translate into lower government revenue and/or the need for higher spending; (2) through the direct budgetary costs associated with climate change; (3) through the price channel; and (4) through interest rates.
They claim that the current debt sustainability framework can incorporate these impacts although quantifying the scale of the impacts “is subject to great uncertainty”.
While it is useful to seek an understanding and quantification of the nature and size of the various ways that fiscal policy will be challenged by climate deterioration, it is counterproductive to construct the problem as ‘pushing public debt too high’ and causing governments to run out of money and default on their debt.
This is an example of how an erroneous starting point – that the government is financially constrained – leads to a logic train that takes us down the path of inaction and destruction.
In the specific case of the Eurozone, it is true that the governments are financially constrained, which suggests that it is useful to focus on debt sustainability.
But the same counterproductive policy path will be followed in that case.
So for that monetary system, a better starting point is to recognise that in practical terms the ECB has been funding Member State deficits since the GFC via the various public bond-buying programs (QE) and can continue to do that forever (given its currency capacity), which means the focus should be on what fiscal outlays are necessary to deal with the climate challenge.
That sort of starting point might be anathema to the ideological wishes of the elites in Europe, which conspired to create the dysfunctional system they imposed on the Member States, but it is the only way they will be able to adequately deal with the climate emergency.
Sure enough, they could dissolve the EMU, which would be preferable.
But that is not likely to happen any time soon.
Given they cannot easily amend the Treaties, then the ‘work around’ that the ECB has used since the GFC should continue and the European Commission should maintain its position regarding the Excessive Deficit Mechanism, that is, maintain the relaxation of the fiscal rules that were suspended during the pandemic.
For countries that issue their own currency the question of debt sustainability is moot.
The starting point for those nations should be – what real resources will have to be garnered, moved in use, trained, etc – to deal with the climate emergency.
Then the scale of the fiscal intervention will be easier to understand.
Tax measures will be required to help divert resources from their current use.
But starting off by worrying about the scale of the public debt that will accompany the fiscal shifts will waylay necessary action.
And, the confronting nature of the climate emergency should be used to dispel the public ignorance about what public debt really is.
Just as we are going to have to shift towards a new ‘energy use’ paradigm, now is the appropriate time to stop issuing public debt altogether.
It is a hang over from past times when the monetary system was different and under a fiat currency system it becomes totally unnecessary.
It doesn’t provide the government with the funds necessary to execute its spending plans and only serves as an elaborate form of corporate welfare.
I discussed those issues in the following blog posts (among others):
1. Will we really pay higher interest rates? (April 8, 2009).
2. Will we really pay higher taxes? (April 7, 2009).
The ECB is worried about the impacts of climate change on “government borrowing costs” while knowing that they can always control borrowing costs within the EMU system.
So we get this on-going constrained thinking that says governments cannot act because of A even though they know the central bank effectively controls A.
Why don’t they just admit that?
If they did that then the whole ideological control over the Member States lapses and the citizens would then demand action from their own governments and the neoliberal Eurozone would collapse.
The question that will have to be faced in the emerging future is whether hanging on the neoliberal constraints that favour the elites are worth more than the damage that the climate emergency will create.
Both are existential matters.
In the first case, the position of the elites is threatened.
In the second, the well-being of everyone.
I know which one I choose to deal with.
I have previously written about the myopic nature of neoliberalism.
Thatcher’s austerity in Britain, for example, led to collapses of the water infrastructure in several cities, which ended up requiring much larger fiscal responses than were required to simply maintain the systems.
There are countless examples of governments penny pinching and then having to outlay dollars to fix the problem they create by the austerity.
The climate emergency is of another scale again though.
And penny pinching now will cause immeasurable damage to humanity.
Food security will be threatened.
Urban environments will become unliveable.
Pandemics will increase if we don’t stop clearing and if we release viruses stored in permafrost.
And all the rest that awaits us.
Now is the time to reset our understanding of fiscal capacity.
It is already, probably, too late.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.