It was only a matter of time I suppose but the IMF is now focusing…
What is responsible government spending?
Today, I am fully engaged in work commitments and so we have a guest blogger in the guise of Professor Scott Baum from Griffith University, who has been one of my regular research colleagues over a long period of time. He indicated that he would like to contribute occasionally and that provides some diversity of voice although the focus remains on advancing our understanding of Modern Monetary Theory (MMT) and its applications. Today he is going to talk about what responsible government spending should look like. Anyway, over to Scott …
When is responsible government spending not responsible spending?
The government is keen to tell us that they are spending ‘our’ money responsibly.
We hear the phrase bandied about by politicians all the time.
Over the past week or so, Australian Treasurer Jim Chalmers has been sprouting off about the government’s latest cost of living relief plans.
He was reported by the UK Guardian article (March 14, 2024) – Don’t expect a ‘big cash splash’ in this year’s budget, Jim Chalmers tells taxpayers – as saying:
Any extra help will be targeted, responsible and affordable. There will not be big cash splashes in the budget, simple as that …
All this talk about responsible and affordable spending and resisting the urge to splash around cash willy-nilly make great sound bites for the media.
It makes the government sound like they really know what is going on and that they are great economic managers (another phrase politicians are fond of using).
The problem with these comments and the ideology that they derive from is that the notion of what is responsible is completely wrong.
They simply reinforce misguided mainstream economic thinking and play along with neo-liberal ideological beliefs.
MMTers know this.
And they know that far from being responsible such views are irresponsible and damaging to the broader social good.
The government’s misguided view of responsibility stems from their misunderstanding or ignorance of how the modern monetary system works.
They work under the assumption that sovereign currency issuing governments somehow, either through taxes or by borrowing, must raise money in order to spend and that like a household they need to be responsible and follow a carefully planned out budget so as not to run out of money.
And then because of this misunderstanding or ignorance they go on about how they are being responsible with ‘taxpayers’ money, only spending what the country can afford or not maxing out Australia’s credit card etc.
The mainstream media does little to help.
This Op Ed by a so-called expert economist n the Sydney Morning Herald (May 19, 2022) – Australia’s credit card is maxed out: why the nation needs to spend carefully – and creatively – exemplifies what I am talking about.
I wrote about this misguided palaver in this guest blog post –< a href="https://billmitchell.org/blog/?p=47955">Debate about the National Disability Insurance Scheme driven by the usual ‘taxpayer’s money’ arguments (July 22, 2021).
And Bill has written extensively about why this thinking is wrong – for example:
1. Taxpayers do not fund anything (April 19, 2010).
2. Government budgets bear no relation to household budgets (December 19, 2012).
3. Governments do not need the savings of the rich, nor their taxes! (August 17, 2015).
Some of the basic points, as regular readers will know, are that:
- Sovereign currency issuing government can spend what they see fit. Refusing to increase pensions or social welfare spending or providing basic services or anything else is a political/ ideological choice not a financial one.
- Taxes don’t pay for anything. They can be used to redistribute income or to discourage behaviour (i.e. smoking, pollution etc).
- Sovereign currency issuing governments do face real resource constraints (i.e. labour, raw materials etc), but not financial constraints.
- Governments can never run out of their own money.
Despite these facts, the responsibility spending puzzle goes deep.
There is obviously, in the government’s mind, some spending that requires them to be responsible to the ‘taxpayer’ and some spending that doesn’t.
Consider military spending.
Whenever there is a funding announcement we read about ‘strategic need’ or reported in this Reuters report (February 20, 2024) – Australia boosts defence spending, aims to double warships – Australia needs to:
… build its defence capabilities amid concerns about rising global geopolitical tensions
Strangely nothing about being responsible with taxpayer’s money or going to check the bank balance to see if it is affordable.
Apparently, there is a difference between providing cost-of-living relief or other assistance to our most disadvantaged citizens and buying a warship.
One apparently requires the government to demonstrate responsible spending, the other one doesn’t, the money is just available (which of course it is).
At the level of social spending the government’s responsible spending rhetoric flows into the whole realm of who is deserving and who is undeserving.
Spending on individuals or families who are deemed ‘deserving’ is seen as responsible, whereas spending on services or support for those deemed ‘undeserving’ is seen as the government wasting taxpayers’ money or throwing good money after bad at people, who because of some personal trait or characteristic, are at fault.
The blaming the victim/undeserving poor arguments have been prosecuted by the conservative side of the political spectrum, although others have done little to change the views that some are more deserving than others and that this distinction is important when it comes to responsible spending.
Views such as these are tied firmly in the neo-liberal project whereby governments shouldn’t be helping too much, especially those who make the personal decision to be poor, disadvantaged, unemployed or what-ever.
I recently came across this 2012 paper titled – On being Poor-by-Choice: A Philosophical Critique of the Neoliberal Poverty Perspective – written by an author who hails from – yes – the Kazakhstan Institute of Management.
It provides a good overview of the way the neo-liberal agenda treats some of society’s most vulnerable.
In the paper we read that according to the neo-liberal way of thinking poor people are consciously making the choice between being poor and not being poor:
Neoliberalism postulates that living in a state of poverty is an objectively knowable social phenomenon. It theorizes that causal explanation for people living in poverty is grounded in the inappropriateness of their intentional mental states — the content of their hopes, aspirations, and goals. It moralizes that the poor have an obligation to assess critically the consequences for themselves and others of them not working when employment is available, and that they should be held responsible for not so doing. It concludes that the work-shy poor-by- choice—the “undeserving poor” —c annot be trusted not to abuse tax-finance welfare support.
The article goes on to provide a lengthy critique and apart from the obvious incorrect reference to ‘tax-finance welfare support’ we can easily see how narrow the neo-liberal reality is.
Despite this, governments are happy to let us know that they are being responsible with our money by not spending too much of it on ‘dole-bludgers’ or members of the under-class who don’t deserve to benefit from our hard-earned and generous tax contributions to the governments bank balance.
Sadly, the government has the whole responsible spending thing wrong!
Government’s responsibility should be for a good society
Governments have lots of responsibilities.
One of the key responsibilities should be to ensure everyone can successfully engage in society. Spending should first and foremost have public purpose. It should lead to a good society.
During the post-war decades governments generally acted with this responsibility in mind and enacted policies accordingly.
There was once a strong notion of this social contract.
According to this Op Ed from social scientist Veronica Sheen (May 2, 2014) – The Commission of Audit wants to rip up Australia’s social contract – it is generally considered that this social contract is the:
the suite of policies, legislation, programs, health care and social services – has served to ensure that every Australian is able to have a basic but decent standard of living.
Like lots of things the neo-liberal period has gradually worn away these responsibilities replacing them instead with increasing individual responsibility.
The change is summed up in this Op Ed by Eva Cox (May 6, 2014) – The state of Australia: welfare and inequality – where we read how the:
… implicit social contract has been gradually undermined since then as neoliberal policy models of a minimalist state started to displace more socially driven policy priorities. The decreasing inequality of the post-war welfare state, pushed by the Whitlam government but generally retained by the Fraser government, was replaced, initially slowly, under Hawke but very clearly through the 1990s. The fair go/mateship goal became about individualised competitive opportunities and the focus shifted from social change to economic growth.
Some even think this shift is simply an inevitable outcome of the more ‘efficient market’ doing what it does best.
A one-time Conservative Australian Treasurer told the British Institute of Economic Affairs on April 17, 2012 that (Source):
Let me put it to you this way: The Age of Entitlement is over. We should not take this as cause for despair. It is our market based economies which have forced this change on unwilling participants.
A little over a decade on (October 24, 2023), he delivered a speech – The End of the Age of Entitlement: 10 Years On – in his role as a lobbyiest that demonstrated that he hasn’t really changed his mind:
The problem arises…when there is a belief that one person has a right to a good or service that someone else will pay for. It is this sense of entitlement that afflicts not only individuals but also entire societies.
Sadly, these types of views persist, to greater or lesser extent on both sides of the mainstream political divide.
Neoliberalism takes over and we end up in a mess.
If the government really wants to be responsible with its spending, then it needs to dump the misguided neo-liberal arguments about the responsible use of ‘taxpayers’ money and learn that they really can achieve all the social goals they want without the neo-liberal angst.
We saw during the pandemic that governments can free themselves from their ideological shackles.
In this blog post – The Australian government ignores the cost-of-living crisis impoverishing vulnerable citizens (November 10, 2022) – I commented on the situation during the early days of the COVID-19 pandemic, noting that:
We saw during the height of the initial COVID-19 wave governments provide supplements to low-income earners without any hand-wringing about where the money would come from or how it is fiscally irresponsible.
And we know that it made a difference to many individuals, families and communities without causing the government’s finances to collapse.
This is what responsible spending should look like.
Helping citizens out of dire situations, ensuring people can access high quality health care, providing high quality education, high level essential infrastructure.
In short, responsible spending should be working towards a good society.
Conclusion
Paraphrasing Bill from this Webinar – MMT & The New Social Contract- Lessons from Covid-19 with Bill Mitchell & Pavlina Tcherneva (published February 28, 2021):
There are no VIPs, only people. They are all important.
The Federal government should really start rethinking what they mean by responsible spending and not get side-tracked by neo-liberal angst and hand-wringing.
That is enough for today!
(c) Copyright 2024 William Mitchell. All Rights Reserved.
The government simply does whatever the lobbyists acting on behalf of the corporations instructs them to do.
In return the corporations and the lobbyists will program society to vote accordingly.
Until this mechanism is destroyed, I cannot see a way forward – regardless of how anyone votes.
After many years without success of attempting to educate my local Labor politicians on MMT fundamentals, I find I can no longer agree with the statement “The government’s misguided view of responsibility stems from their misunderstanding or ignorance of how the modern monetary system works.”
I now believe they know full well how the system works – it works very well for their lobbyists and sponsors the way it is and they have no intention of risking their re-election by changing it – they have vested interest in keeping the public in the dark. Corruption has a firm hold on our elected ‘representatives’ – they are very aware of who butters their bread.
The word socialism maybe be absent, but the idea of socialism should not be forgoten.
Not the stalinist version of socialism, but that of industrial capitalism, free from rent and exploitation from the parasitic financial capitalism.
One socialist state that provides services and infrastructure to all, so that industrial capitalism can have the lowest cost of production possible.
We have allowed the monster to grow, and now we watch how others are able to progress, while we regress into feudalism.
Thank you for wiring this blog post in a way that a layperson, such as myself, can understand.
As a long-time Labor supporter, I’ve been puzzled and troubled by their lack of support to the disadvantaged and vulnerable, particularly during a cost of living crisis.
This blog post, along with Bill Mitchell’s writing, has been the missing piece of the puzzle for me. I can now clearly see that it’s about the choices they’re making as a government in terms of government spending rather than budgetary constraints.
The government doesn’t have a “credit card”, it has a “printing press”. And that makes all the difference in the world. Sometimes the government “prints” bonds, but government bonds are nothing more or less than future money, created using the exact same machinery and out of the same thin air as current forms of government money. There are no bond vigilantes, there are no austerity fairies. There are only policy choices.
The important thing is not what is responsible spending, it’s who gets to decide.
Thank you for such an inspiring “short essay” . Everybody should learn from it.
The fact that an article like this could be written after decades of zealous MMT advocacy indicates to me that a totally new educational approach is needed. A large part of the problem, IMHO, is that MMT has continued to use the language of the old gold standard economics to explain the new fiat money economics. One striking example is the continued use of the term “government spending.” A money creator does not spend money, in the sense of the customary connotation of reducing its supply, but rather makes investment decisions; i.e., decides to direct an inexhaustible flow of funds into this or that area of the economy. Until MMT frames its truths in appropriate language, new fiat money language like government investment, instead of using inappropriate and misleading gold standard language like government spending (which it then must constantly qualify and correct), it will never achieve the breakthrough we so desperately need. New wine, as the old saying goes, requires new wine skins, and we ain’t got ’em yet.
MMT doesn’t need influencers who continually suggest it needs tweaking or improving. Why are they here?
Best I just focus on the great work here from Bill and his assistant/s.
Thank you Bill
A prominent NZ economist, Brian Easton, posted a blog at around the same time as this article was posted titled “Does A Fiscal Debt Target Make Sense? (https://www.pundit.co.nz/content/does-a-fiscal-debt-target-make-sense).
The first couple of sentences are:
“Do we treat the government finances with the common sense that household’s manage theirs? It is a commonly held view that we should treat the government as if it is a prudent household. We don’t when it comes to its debt.”
It is an article that locks government spending to financial constraints; “should we spend more than we earn?” in essence.
He later goes on to say “Let me passionately state a moral perspective. Public borrowing is a cost to future generations. I do not think one generation should borrow unless it can justify its debt servicing to those yet-to-be-born, even if deciding what they will value when they are adults may be difficult.”
He uses public education as an example: “education is an investment but (largely) an investment in the individual who may migrate taking their education with them. I am committed to providing every New Zealander with a decent education (and healthcare) but it should be funded from current revenue”
“Education should be funded from current revenue”. Eh???
I pointed out to him that governments in charge of a fiat currency, like the NZ government, are not like households and pointed him to this blog post. I further pointed out the NZ government debt is primarily denominated in NZD.
He replied to me: “like others who have dabbled in MMT, Darren still has not understood that it is a prescription for a closed economy. While the government borrows in the domestic currency it (and the economy) is still exposed to the external economy. The MMT theorists have still to write the chapter dealing with that.”
I was wondering how Scott and Bill—and anyone else here—would address that claim, that MMT is “a prescription for a closed economy” (using nice words please). I do not believe it to be true. All I have read about MMT does mention the external economy, including almost all of what Bill has written about Japan and how it deals with would-be speculators. In fact, I am not sure what he might mean by “the external economy” nor how that would relate at all to spending on investment in NZ.
I intend to engage with Brian on the substance of his post. Some help on how I might do so would be much appreciated.
For DArren there are no shortcuts you just have to put in the work to fully understand the possibilities with fiat currency operations. Obtain a copy of https://billmitchell.org/blog/?page_id=61 and get started together with interrogating Bill’s blog.