The Australian government has just introduced harsh new measures against the unemployed. The government is exploiting the popular view that the unemployed on income support benefits live off the hard work of those who pay taxes. The popular view has validity.
Answer: True
The answer is True.
Dispensing with the emotional trappings that this sort of claim might invoke (that is, judging individual motivation etc), this question explores the true relevance of the dependency ratio, which will rise as demographic changes age our populations. It also aims to disabuse the reader of the notion that the income support benefits are paid for by taxes that those in employment (and other income generating activities) might pay.
Initially, we have to be very clear as to what "living off the hard work of those who pay taxes" means. In this sense, it is not a focus on the "income" that the non-workers receive but the command over real good and services that that income provides them with. We will come back to the "funds" issue soon.
So the focus has to be on the real side of the economy because that is, ultimately, the only way our material living standards can be expressed. Nominal aggregates mean very little by themselves.
Income support recipients (who do not work - for whatever reason) clearly command real resources that they have not themselves produced. These real goods and services are produced by those who do work (and the presumption is that most workers pay taxes of some sort or another).
The use of the emotive term "live off the hard work" was deliberate and designed, as a foil, to invoke the idea that governments have created welfare states which provide unsustainable benefits to the poor and marginalised at the expense of those who are materially successful - the classic conservative argument against government welfare provision.
But it doesn't alter the truth of the statement.
A slight complicating factor is that the income support recipients also pay taxes if there are indirect tax systems in place but that doesn't alter the story about the provision of real goods and services.
Now the second part of the answer relates to the question of funding. In terms of where the funds come from to provide the income support for those who do not work the answer is simple: no-where.
While taxation raises revenue for national governments it doesn't "fund" its spending. Currency-issuing governments can spend without revenue should they wish to.
Abba Lerner's 1951 book The Economics of Employment was really a rewritten version of the 1941 article The Economic Steering Wheel where he elaborated his version of Keynesian thinking. He conceptualised macroeconomic policy as being about "steering" the fluctuations in the economy. Fiscal policy was the steering wheel and should be applied for functional purposes. Laissez-faire (free market) was akin to letting the car zigzag all over the road and if you wanted the economy to develop in a stable way you had to control its movement.
This led to the concept of functional finance and the differentiation from what he called sound finance (that proposed by the free market lobby). Sound finance was all about fiscal rules - the type you read about every day in the mainstream financial press. Sound finance is about balancing the fiscal balance over the course of the business cycle and only increasing the money supply in line with the real rate of output growth; etc - noting the approach erroneously assumes the central bank can control the money supply.
Lerner thought that these rules were based more in conservative morality than being well founded ways to achieve the goals of economic behaviour - full employment and price stability.
He said that once you understood the monetary system you would always employ functional finance - that is, fiscal and monetary policy decisions should be functional - advance public purpose and eschew the moralising concepts that public deficits were profligate and dangerous.
Lerner thought that the government should always use its capacity to achieve full employment and price stability. In Modern Monetary Theory (MMT) we express this responsibility as "advancing public purpose". In his 1943 book (page 354) we read:
The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance ...
Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, "printing money," etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability ...
Mainstream advocacy of fiscal rules that are divorced from a functional context clearly do not make much sense even though their use dominates public policy these days. It may be that a fiscal surplus is necessary at some point in time - for example, if net exports are very strong and fiscal policy has to contract spending to take the inflationary pressures out of the economy. This will be a rare situation but in those cases I would as a proponent of MMT advocate fiscal surpluses.
Lerner outlined three fundamental rules of functional finance in his 1941 (and later 1951) works.
So in an operational sense, taxation serves to reduce the spending capacity of the non-government sector to ensure that there is non-inflationary space for government to deliver public services. It doesn't fund anything.
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