Here's a different kind of stretch of the imagination. One of the perennial political debates around the world is the question of budget deficits. In every election we see politicians vying to present themselves as the more financially responsible alternative, meaning that they will balance the budget, that government spending will match government income and extra borrowing will not be required.
Although this appears to be a partisan debate, it is based on assumptions which all mainstream politicians share - that government money is limited and that they can't perpetually spend beyond their means, that the money governments borrow needs to be paid back with interest in the future. The partisan debate then focuses on how to do that. Progressive politicians will favour increased taxes on the rich to pay for more generous social programs, conservative politicians will favour budget cuts and if possible tax cuts. In budget terms they have the same aim - to balance the budget - but different strategies for doing so.
Over the holidays I read something which calls this whole debate into question, a book called The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy by US economist Stephanie Kelton. I've been hearing about Modern Monetary Theory (MMT) over the past couple of years and Kelton is one of its leading exponents, so an ideal person to give a more detailed explanation.
Stephanie Kelton is a long-time economics professor at the University of Kansas, and served a stint from 2015 as an economic advisor to the minority Democratic senators on the US Senate Budget Committee, the senior member of whom was Bernie Sanders. There she attempted, largely unsuccessfully, to get the senators to understand and accept MMT and use its insights in framing US budgets. The Deficit Myth combines her reflections on this experience with her theoretical work (and that of various colleagues) which lays the foundations of MMT.
Most of us are familiar with how to budget for our families or for our moderate-sized businesses. We know that the books need to balance - that we need to ensure our spending doesn't exceed our income over the long run. This doesn't mean we never borrow - most of us take out mortgages to buy a home, and businesses will borrow to set up or expand - but we do so carefully, ensuring that we will will always have the income to meet debt payments as they become due. We know that if we make a mistake, we will wind up broke.
Most of us, and most politicians, apply this same reasoning to government finances. We just see government as a larger and more complex version of a household or a business, needing to ultimately be able to meet its expenses from its income (essentially, its taxes and charges). According to MMT, this way of viewing the budgets of national governments is a mistake.
The insight that sits at the foundation of MMT is so simple that you wonder if it's even real - governments with sovereign currencies and diverse economies can never run out of money because they can always create more. A sovereign government will never be unable pay its debts, or afford to pay pensions or public service wages, because it just needs to create some money and use this to pay the bill. The debates about how to pay for ambitious initiatives, which have particularly stymied progressive politicians over the years (including the Australian Labor Party at our most recent election) are wholly unnecessary. A deficit is just an artefact of monetary policy, a decision to borrow money at interest by selling government bonds instead of simply creating it and spending it.
This applies to any nation which has sovereignty over its own currency - such as the USA, China, India, Japan, the UK and Australia - but not, for instance, Eurozone countries like Greece which share a common currency with centralised rules, or poor nations which rely on external trade and aid denominated in foreign currencies. Nor does it apply to local or regional governments which depend on their central government for their supply of money. Hence in the US the City of Detroit could go bankrupt after the collapse of the US car industry, but the same could never happen to the US government.
This situation came out of the changes in global finance since World War 2, and particularly since the 1970s. Prior to this, money was ultimately related to gold - the dollars, pounds, yen etc. that you held in your hand represented a certain amount of gold that was held in a bank vault somewhere. Under the post-war Bretton Woods agreement, this gold was held in the US and denominated in US dollars. Countries agreed to keep their currencies at roughly equivalent values relative to the $US to guarantee stability in this system, while the US guaranteed to keep enough gold on hand to guarantee the currencies of the world.
The oil shocks of the 1970s killed this off and led to countries decoupling their currencies from both the US dollar and gold, allowing them to float in relation to each other depending on the relative values currency traders placed on them. Your dollars no longer represented an amount of gold, they simply represented a value that could be traded for goods and services, or for other currencies. This system is less stable than the Bretton Woods system - currencies can rapidly lose or gain value relative to each other depending on a range of factors. Some of these factors are related to real economic events - if the price of oil drops, so will the value of the currencies of oil producing countries - but others can be related to psychology - if a major investor feels nervous and sells out of a currency, others are likely to follow their lead and create a stampede which takes on its own momentum. On the other hand, a country with a relatively strong and diverse economy (like both the US and Australia) is likely to also have a relatively stable currency and a lot of autonomy on how it manages that currency. Such countries can create as much money as they choose and no-one can prevent this.
This might seem a little like the Magic Pudding but of course it is not that simple. Governments can create as much money as they like, but this has consequences in the real world. If you create more money you create more demand for goods and services which the community needs to be able to produce. Where there are under-used resources in the economy (unemployed or under-employed people, machines not used to capacity etc) extra money stimulates the economy and makes people better off. Where these resources are fully used they will be unable to produce the extra and the result will be inflation as the price of goods and services increases to absorb the extra money. In this situation there is no benefit and those who have savings are harmed, with the effects rippling through the economy and causing hardship and instability.
The point is that money is not a real thing - it is a set of numbers on a computer or, decreasingly, symbols on metal, plastic or paper. But there are real things - people, machines and of course natural resources - and these impose real limits on what we can do with this money. The real point of fiscal responsibility is not to balance the government's books but to balance the economy so that resources are fully used but not over-used. This, not 'paying for government services', is the economic point of taxation - it regulates the amount of money in the economy by drawing some of it back into the government, either redistributing it to poorer people if some have excess, or absorbing it to contain inflation.
The focus on balanced books has led to Western governments consistently under-using their nation's economic resources, particularly in the past decade following the global financial crisis. This hasn't impacted on the wealthy, who have benefited from tax cuts which have increased their share. The stock markets have continued to climb. But unemployment and underemployment have stayed high and wages low even before the current pandemic, even as governments have felt the need to cut services and benefits to balance the books. The result is that the rich are getting richer as the poor get poorer. This may be deliberate, or it may be an unintended consequence of outdated economics, or perhaps a bit of both. In any case, at the moment no Western country needs to worry about deficits causing inflation.
What can we do with this insight? Like the household model, it is not strictly linked to ideology. You could use the increased availability of money to build a bigger military and police force, build a wall along your border to keep out poor foreigners, or simply hand millions of dollars to people who are already rich.
Stephanie Kelton, however, is of a more progressive persuasion and she would like to see money used to address what she calls 'the deficits that matter' - deficits in employment, health care, public infrastructure, emissions reduction and social support. The cornerstone of this is what she calls a Federal Jobs Guarantee. Under this proposal the Federal Government would guarantee a job, with reasonable pay and conditions, to anyone who was unemployed. This would serve a number of purposes. For the workers themselves it would effectively eliminate unemployment and its associated poverty, set a floor on wages and prevent the loss of skills. For the community the resulting workforce could build what she calls a 'care economy', rebuilding degraded infrastructure and providing care services for children, older people and people with disabilities, responding to whatever was needed in local communities. Economically, it would provide an effective stabilising mechanism, pouring government resources into the community during a downturn, then automatically drawing back the stimulus as the economy recovered and other jobs kicked in.
Nor does she stop there. There is no reason why government can't afford to pay for genuinely universal health-care, fund the transition to a zero-carbon economy, fix crumbling roads, railways and bridges, address social inequality. We need not ask 'can we afford it?', only 'do we want to do it?'.
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There have been two major paradigm shifts in economics so far in the past 100 years. Following the Great Depression Keynes led the revolution which led to governments using government spending in a counter-cyclical way, spending less in a boom and more in a bust rather than cutting back during a bust and worsening it as happened in the Depression. Then in the 1970s and 1980s much of this was undone with the emergence of the neoliberal consensus which resulted in independent central banks, floating currencies, deregulated markets, a more minimalist welfare state and a focus on 'balanced budgets'.
We are now seeing the results of neo-liberalism in chronic unemployment, depressed wages growth and increasing inequality in the West, along with an ongoing failure to address greenhouse gas emissions. MMT offers us the opportunity for a reset, a third paradigm shift, which can address these problems But it will not be easy.
Paradigm shifts are always hard because the previous paradigm has become 'common sense'. We see this in Kelton's stories of her encounters with politicians. Many just don't get it, like the former shoe salesman who served as Republican chair of the Budget Committee and applied the principles of running a shoe sales business to the national budget. Others did get it, like the newly elected Kansas representative who she visited as a university lecturer whose eyes lit up when he got it, only to sober up again as he realised how hard it would be for him, a newbie Congressman, to argue against the accepted wisdom.
The other reason is that there are plenty of people who benefit from the current consensus. You can predict the outcry from business groups if a government tried to introduce a Jobs Guarantee at Kelton's recommended minimum of $15 per hour when they are paying people as little as $7 per hour. Imagine the outcry from private insurers if the US Government moved to universal public health care. The political task is difficult and long-term, as US progressives have found.
Yet as I write the US Presidential Election has wound to its tortuous conclusion, complete with Trump egging his supporters on to storm the Congress and shut down the session which took the final, formal step in endorsing Biden's election. The conspiracy theories and rampant lying that have led to this are foolish but the discontent they tap into is real and deeply connected to the failure of neoliberalism. If this is not the moment to change, then when is?
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