Michael West investigates Modern Monetary Theory (MMT) and the false assumption that the national Budget is like the household budget, or a business. They are already creating new money while denying the proposition that creating new money will expand the economy; preferring to punish casual workers and Arts students, and pursue austerity instead.
Mathias Cormann: “What I would say though is that the Labor Party and the Greens right now want the Australian Government to keep borrowing from our children and grandchildren to fund consumption today”
Scott Morrison: “The period of this term could well prove to be the tipping point on the trajectory of debt our children and grandchildren will be saddled with”.
Josh Frydenberg: “Future generations should not be forced to pick up the tab for the last”.
We hear a lot from our politicians about grandchildren and how grandchildren will be lumped with horrendous debts unless the Budget is balanced. Never mind that the politicians cited above have presided over an astronomical rise in Australia’s debt. Balancing the Budget sounds eminently sensible to the shopkeeper from Liberal Party base.
Yet the problem with the grandchildren assertion is that it is a half sentence. If our grandchildren are to be paying off the debt, whom will they be paying? Will Josh Frydenberg’s grandchildren be paying Mathias Cormann’s grandchildren?
It is a question of enormous importance as Australia is in deep recession and, come September, two million people will be coming off JobKeeper perhaps straight onto JobSeeker, underemployment is through the roof; and the Morrison government’s plan to fix all this appears to be cutting corporate taxes, wages and red tape and pursuing austerity rather than expansion.
Amid the looming spectre of the “September Cliff”, there’s a debate. On one side, there are those who look at what central banks worldwide (including the Reserve Bank of Australia) are doing – the banks which are now creating new money, effectively implementing MMT (Modern Monetary Theory) – and, on the other side, the adherents of conventional economic theory. In very crude terms, conventional economists accuse MMT proponents and the central banks of “printing money” with impunity, as part of their effort to minimise deflation, bankruptcies and the unemployment that comes along with recessions.
The MMT brigade accuses the old guard of not understanding that it’s the Reserve Bank which creates new money, not the government, and that any new money should only be spent to the extent that there is unused capacity in the economy. And that there’s a limit on how much stimulus any new money can provide – the limit kicks in when the RBA’s target 2-3% inflation is in sight – and, according to the RBA Governor, there’s still a long way to go before that limit is reached.
And no, it’s not any country that can do this. Only countries which borrow exclusively in their own currency and tax in their own currency, like Japan, the UK, the US and Australia (and not Italy, Spain or Denmark which use the Euro) or NSW, Victoria or Queensland, California, Arizona or Florida (which don’t have their own currency).
The reality is that MMT is poorly named. It is not a theory and should be called Modern Monetary Practice (MMP) because, at its core, its central proposition is that it describes what central banks do.
Is it true that MMT means governments don’t need to tax? No. Tax is central to the way the economy works, in taking money out of the private sector and redistributing it as government spending, whether to build submarines, pay JobKeeper to businesses or pay doctors their Medicare money. Is it true that MMT means that the government does not need to borrow? No. Government bonds (borrowing) are central to what the RBA does. It needs to buy and sell government bonds to keep its 0.25% target interest rate under control. And it has has bought around $50 billion in 3-year government bonds over the last few months. How did it pay for the bonds? By digitally crediting the banks’ Exchange Settlement Accounts.
By getting the private banks involved in this Quantitative Easing (QE), it is effectively privatising the creating of new money, or at least a part of the process.
Looking at the actual practise of creating new money, let’s say to finance an infrastructure project such as a railway, there are elements of the PPP (Public Private Partnership). The Government issues bonds. The banks buy the bonds. Meanwhile, the RBA stands in the market ready to buy the bonds from the banks. When the RBA buys the bonds, new money is created.
It could issue $5 billion worth of bonds. The banks and other investors would buy them. Then the Reserve Bank would create $5 billion in new currency by crediting their accounts when it buys the bonds from the banks.
The upshot? The Government has raised $5 billion worth of funds from the banks for its infrastructure project and the RBA has created another $5 billion which the banks can now lend to the private sector, perhaps to finance their contribution to the railway PPP.
And what about the grandchildren and the debt the RBA does not buy? If Josh Frydenberg’s grandchildren inherit the debt (the bonds) and Mathias Cormann’s grandchildren pay tax, then the obligation to pay out the bonds out becomes a “zero sum grandchildren game”. One lot of grandchildren pay and another lot of grandchildren receive.
To complete the circle, if we assume the Reserve Bank has bought some of the bonds and held them to maturity, then Mathias Cormann’s grandchildren will pay their tax and the money will go to the bondholder, this time the Reserve Bank.
It then pays the money back to the Government, this time as a dividend, ergo more money for infrastructure, or maybe to help future grandchildren receiving JobSeeker in 2060.
This may be too much to expect from and Morrison, Cormann and Frydenberg who, with their sponsors in big business, seem quite determined to pursue a path of austerity. This is a deflationary path, as has been Treasurer Josh Frydenberg’s attempt to create a Budget surplus (where the government, by definition, takes more out of the economy than it puts back).
The question then becomes, why? Why would they make the greatest accounting error in Australian history and budget for $130 billion in JobKeeper subsidies only to find they were spending $70 billion then claimed the humungous error was a victory because they’d saved $60 billion? That’s half a dozen Brisbane to Melbourne railway corridors passing through National Party seats.
This why is the far more complex question. Partly, the answer lies in a slavish adherence to neo-liberal dogma. Wilful blindness if you like. Perhaps more insidious though is the idea that, because they espouse the notion of small government and are largely funded by big business, the Liberals simply don’t like the social implications that government can fix things itself. It might crowd out the private sector’s eagerness for profit and direct the national infrastructure towards enduring economic benefits for everybody’s grandchildren.
The grand irony in all this is that the failure of the Government’s economic management was clear well before the coronavirus.
Australia’s performance on a number of key metrics had been sliding for six years. The RBA had been consistently prodding the Government to start stimulating the economy throughout 2019, but the Treasurer wanted to save a few more billion dollars to get the Budget in the black. Now a spend of $200 billion plus seems to be no problem, as long as casual employees or pesky Arts students don’t get it.
This fixation with balancing the Budget – the very thing which they deemed so critical in managing the economy – was the very thing which has been damaging the economy.
There are two ways to balance a budget: cut spending or raise taxes. The latter ran counter to party ideology, so Josh Frydenberg cut spending. Cutting spending withdraws money from the community. It is deflationary. So it was that lower spending meant lower economic activity. Growth drifted lower, so did inflation, so did interest rates. Lending criteria got tighter. Then the housing market got an attack of the wobbles.
The Libs are fond of talking about their Shopkeeper Theory; that is, that every shopkeeper must balance the books. Or they go out of business. So it is that the Government too must balance its books, they say, and the idea of balanced budgets is deployed as a weapon to bash political opponents.
The fact is that shopkeepers don’t issue their own currency. Shopkeepers don’t have a banking system to buy their bonds. Shopkeepers can’t create money.
The consummate paradox is that while they deny the efficacy of what central banks are doing, what MMT describes – and espouse ShopKeeper Theory, the world’s central banks are creating new money via QE. They are watching it happen while denying they can see it.