Time for the Green New Deal

Classical economics would prescribe decades of austerity to pay off the levels of government spending seen in the COVID-19 pandemic. But there’s another way, says modern monetary theorist, Dr Steven Hail, Research Scholar at the Global Institute for Sustainable Prosperity and Economics Lecturer at Australia’s University of Adelaide. Via Struggles from Below:

A recent New York Times Best Seller, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, by Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a senior economic adviser to Bernie Sanders, suggests that a new approach to economics provides the foundation for building a better economy for the post-COVID era.

The policy responses to the pandemic from the world’s governments have already confirmed many of the things modern monetary theorists like Kelton have been saying about the economy for years, and have helped to bring their work to prominence and promoted debates about its significance.

Monetary sovereigns

Take Australia, for example. In March, when the scale of the crisis first became clear, the Morrison Government quickly announced a set of proposals to support the economy costed at well over $200 billion Australian dollars (A$). Not the sort of thing anyone would have expected from a government that had spent years talking about the need to return its budget to surplus (ie bringing in more than it’s spending). But clearly the only way to avoid economic catastrophe was to spend, and spend big, forgetting yesterday’s rhetoric.

You might imagine the government would have to look to financial markets, or to foreign investors, before it could start spending such a sum of money. This, however, is not the case. Government debt, when it’s issued, can only be purchased with Australian dollars in private banks’ accounts at the country’s central bank, The Reserve Bank of Australia (RBA). The same thing is true, incidentally, of taxes: they can only be paid using money in bank reserve accounts. In early March, there was only about A$30 billion in total sitting in these accounts. It would have been impossible for the government to borrow the dollars it was planning to spend from the private sector before going ahead with its spending—those dollars didn’t exist.

It’s important to understand that, where money is concerned, the government and central bank are in a completely different position to the rest of us. You and I are currency users: we need to earn or borrow dollars before we can spend them. If we borrow too heavily we can get into trouble, and even end up bankrupt. But, in the way our monetary system works, the government can’t go bankrupt as it’s the monopoly issuer of our currency.

Before the pandemic, the government was spending about A$1.5 billion a day, and every one of those dollars was a new dollar. So the government doesn’t actually need our money; we need the government’s money (for a variety of purposes, including the payment of taxes). But taxes don’t pay for government spending, that’s not their function. The main role of federal taxes is to limit inflation (the rising price of goods and services). Taxes take dollars from the private sector, limiting our ability to spend; this instead creates space for the government to spend without risk of driving prices up.

If the government taxes less than it spends, we say it’s running a ‘budget deficit’. This is nothing to be alarmed about. All a government deficit represents is a contribution the government has made to private bank accounts. Funding the deficit, once it has been authorised by parliament, simply involves a few keystrokes on a computer. There’s nothing more to it than that.

Modern Monetary Theory (MMT) economists describe governments like Australia’s as ‘monetary sovereigns’. A monetary sovereign government issues its own currency, has a floating exchange rate, and has no foreign currency debt. Such governments can spend too much and push up inflation, as they face real constraints determined by the productive capacity of their economy, but they can never run out of their own currency—they face no purely financial constraints.

Understand this and you will see why the Japanese government had no problem paying for a stimulus package this year, despite having far more debt than the Australian government; and why the UK government also faces no financial constraint, despite the debt it already has and the country’s substantial trade deficit (ie when a country imports more than it exports). These are monetary sovereigns. You will also understand why Greece, which is not a currency issuer as it uses the euro, and countries like Argentina and Venezuela, with US dollar debts and a recent history of fixed exchange rates, are not monetary sovereigns. They can, and often have, got into difficulties. We have nothing in common with them, at least where government debt and deficits are concerned. However, that doesn’t mean that such countries can’t benefit from the MMT doctrine.

Deficits and surpluses explained

As for our government’s debt, it’s better thought of as the net supply of Australian dollars. All it represents is those dollars the currency issuer has spent into the economy and not yet taxed back out of circulation. It’s not something that ever has to be repaid. It’s not a burden on future generations. In so far as it’s owned domestically, it’s an asset sitting in people’s pension schemes, with the interest payments on the debt contributing towards their retirement incomes. Government bonds (the mechanism by which governments borrow from investors) do have their uses in our monetary system, which space does not permit me to go into here(1); but the government could decide to never issue another bond, and this wouldn’t limit its ability to spend.

There’s more.

Deficits and surpluses cancel out across the monetary system. This means a government deficit always shows up as someone else’s surplus. During periods of balanced trade or trade deficits with the rest of the world, a government surplus implies a private sector deficit. In Australia, this is what happened under the Howard Government between 1996 and 2007. The government ran surpluses, and the private sector ran large deficits. The extra debt to support the economy was taken on mainly by households, which is why in 2020, Australia has almost the world’s highest level of household debt—as well as a fragile financial system, and high levels of inequality and unaffordable housing. It turns out that in economies like Australia, it’s not government deficits that are unsustainable; it’s government surpluses.

household debt.jpg

A government should seek not to balance its budget, but to balance the economy. Balancing the economy means the pursuit of non-inflationary full employment—the highest proportion of a population in employment before prices start to rise. This was what governments aimed to do during the Keynesian era, between 1945 and the mid-1970s. It’s easy to forget just how successful those decades were. In Australia, the unemployment rate hardly ever rose above 2%, with virtually no under-employment or insecure employment. There was no significant inflation problem until the oil crisis, which was temporary and not something the government could control. The economy grew quicker than ever before or since and there was far less inequality than there had been in the 1920s or is now.

We can’t return to the 1960s, and we wouldn’t want to. The economy, technology, institutions, and society itself have changed in a multitude of ways. There is a different monetary system today, providing governments like our own with much more freedom of action than that Australia’s post-War Prime Minister, Robert Menzies. The labour market is completely different. MMT economists recommend the use of a federal jobs guarantee—where the state promises, as an employer of last resort, to hire unemployed workers to achieve and sustain full employment—rather than a return to a broad Keynesian stimulus, because the old approach wouldn’t work today.

The second Keynesian revolution

There are many other differences between traditional Keynesian economics and Modern Monetary Theory. And yet there are enough similarities for us to regard MMT as, essentially, a second Keynesian revolution. Much that was taken for granted about economic management 100 years ago was challenged by Keynes in the 1930s. Something similar is happening now. The idea that central banks should be left to manage the economy is up for debate. The notion that governments in countries like Australia should balance their budgets or seek to run surpluses is rejected by today’s revolutionaries.

If the second Keynesian revolution is successful, journalists and economists will focus on inflation risk when discussing federal budgets, and will cease talking about budget ‘black holes’ or debts they claim future generations will have to repay. If a deficit is not inflationary, and if it supports the economy at full employment, its size won’t matter. The economic narrative will shift to the deficits that really matter, particularly the jobs deficit and the climate deficit. Then we can focus on what it will take to build a better and more sustainable economy after COVID-19 than the one that preceded it.

The pandemic has brought our economies to their knees; it’s through stimulating investment, as opposed to austerity-fueled starvation, that we’re going to get them fighting fit again—and a Green New Deal may well be the perfect mechanism by which to do that.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. Shame that Australia does not have a Green party that has ‘sustainability’ as its core driver – committed to evidence based policy and a new vision of the future. Such a party might offer economic policies befitting of a sustainable population and a reduced ecological footprint coupled with an economics that drives an industry of technologies to suit. It would need a Green party that is brave enough to suggest that a shift in values and measures of life quality that would have to replace old notions. It would mean compromise for all, as some people would have to give up things that they cherish. That would entail a pragmatism – that we can only manage our nation’s resources and future as Australians with that common vision that is forward looking and optimistic, not divisive and harping. Because, such a Green party must build bridges not burn them to warm their virtuous hands. That means the glue of nationhood coupled to reasoned policy, not the acid of identity politics, victimhood and blame.

    Alternatively… the ALP could become a labour party again and the ACTU about unionism without the lapdogs, bells and whistles. In fact, maybe even the LNP could find another Fraser?

    But the economics of neoliberalism is dead and this nightmare in purgatory goes on until we find someone with smarts enough to say it out loud three times. The stampede to them will be so great that the others will never catch up.

    Let the race begin.

      • Hewson – indeed. I raise you John Anderson. The LNP has had morally and intellectually commendable leaders that shine more outside of politics when their humanity is allowed to be on display and they have freed themselves from their Faustian pact.

        Interesting link. I’ll look into this.

        • @ clive
          John Hewson is the founder of the Commission for the Human Future. There are lot of good people on board.

          One of the main concerns is food security:

          “The coronavirus pandemic has highlighted the systemic fragility of just-in-time chains that are a feature of the world commodity food system –and the risk this poses to reliable food supplies in future……A widely neglected issue is that no major city, anywhere on Earth, can feed itself. All rely for their food from transport, processing, storage and supply chains extending for thousands of kilometres. This makes them highly susceptible to fragmentation, oil shocks, transport failures, supply shortages, climate and weather impacts, conflicts, trade disputes, industrial strikes, health lockdowns and other forms of disruption.

          Nate Hagens is an American with a good grasp of 21st C problems you may be interested in also:

          https://www.resilience.org/stories/2020-03-25/an-overview-of-the-systemic-implications-of-the-coronavirus/

          Here he is in an interview with a slightly annoying French interviewer:

          https://damnthematrix.wordpress.com/2020/07/23/where-are-we-going/

    • It is hilarious how much right-wing bullsh!t you guys try to hang off ‘they’re not anti-immigration’ and ‘they think discrimination is bad’.

      • Thanks for letting me know that sustainability has become a Right-wing concept from The Fake Green perspective. Good also to know that most of the top nations in social development index who put this into practice are Right-wing – even when most have Left-wing governments. It just goes to show the value of not allowing evidence to get in the way of ideology. Did you ever read Orwell?

        • Protip: Very few, if any of those countries and Governments you are claiming to hold in high regard, think the only (or even main) sustainability problem they have is immigration, and none of them think pursuing human rights and equality, and opposing discrimination (ie: your “identity politics”) are negatives.

          That is why they are “high on human development indexes”.

          You are peddling the feels, as conservatives always do.

          • drsmithyMEMBER

            “Population growth”

            LOL. Is that you, Rich ? Shuffling the goal posts again ?

            Stop trying to pretend your concern is about anything more than a figleaf for rants about how immigrants and lefties lie at the root of all our problems.

          • As usual you seem to be itchitng for a fight and to missunderstand the point made – that what matters is to find a leader with an understand d ing of the parlous ecological position we’re in and who can move the nation to a sustainable de-growth footing. It matters not one jot whether he/she is labour, LNP or Green.

            As I’ve pointed out previously, sustainability and de-growth can’t occur if the population is ever-increasing. Right or left, pro or anti immigrant are immaterial.

            It’s about using less, and fixing the mess which means a stable or declining population.

          • drsmithyMEMBER

            As usual you seem to be itchitng for a fight and to missunderstand the point made – that what matters is to find a leader with an understand d ing of the parlous ecological position we’re in and who can move the nation to a sustainable de-growth footing. It matters not one jot whether he/she is labour, LNP or Green.

            I’m not “itching for a fight”, I’m just sick and tired of the disingenuous bullsh!t.

            I don’t misunderstand the point, I disagree with it.

            As I’ve pointed out previously, sustainability and de-growth can’t occur if the population is ever-increasing.

            And as I have pointed out previously, you can’t “solve” population in any useful timeframe (especially on a global scale, where it really matters), and most serious environmental issues within the country are largely independent of it.

            Right or left, pro or anti immigrant are immaterial.

            They’re very material to you since you think the only environmental problem of note is population (ie: immigration), and they’re obviously very material to Clive given how he likes to blame immigration and the left for everything that he doesn’t like about the world.

            TL;DR: Neither of you are interested in anything if the first (if not only) priority is not reducing immigration. “Compromise for all” my arse.

            It’s about using less, and fixing the mess which means a stable or declining population.

            “Using less” requires addressing consumption and efficiency first and foremost, because “a stable or declining population” cannot be achieved in useful timeframes. (Reducing consumption probably can’t either, but at least it’s got a chance because technology can have such a big impact.)

            You cannot fix the world’s environmental problems focusing mostly on population any more than you can fix greenhouse emissions with “individual actions”.

  2. – I still like what Steve Keen has proposed. (Literally) Print A LOT OF money, give that to the consumers. Consumers who have debt must use that money to reduce their debts as much as possible. And that follows the ideas of MMT.
    – Kevin Rudd did the right thing during the GFC. He sent every person/taxpayer a check/money (to be spent).

  3. “How would MMT be implemented and what would be the economic implications? The process would be something like this: The Treasury would issue zero maturity and zero interest rate liabilities to the Fed, who in turn, would increase the Treasury’s balances at the Federal Reserve Banks. The Treasury, in turn, could spend these deposits directly to pay for programs, personnel, etc. Thus, the Fed, which is part of the government, would be funding its parent with a worthless IOU. In historical cases of money printing, the countries were not the reserve currency of the world, as the U.S. is today. Thus, the entire global system could be destabilized in very short order if this were to occur.
    There would be no real increase in services or money since very little time would lapse before people realized increasing inflation was not increasing real purchasing power. If the government responded by issuing more central bank legal tender, the inflationary process would become self-perpetuating, and as was the case in numerous historical instances this would lead to hyper-inflation. Moreover, the central bank would have no capability of reducing the money supply. All they could offer would be the zero maturity, zero interest liabilities of the government, but there would be no buyers. This would mean that hyper-inflation would be difficult to stop.”
    —-Van R. Hoisington & Lacey H.Hunt, Ph.D.
    Hoisington Quarterly Review, First Quarter 2019

    • Logically, printing money reduces its purchasing power which means that the citizens’ situation deteriorates (or stands still at best), so more money is printed to get ahead, but like a cat chasing its tail it never achieves its objective. You don’t even need to be educated at all for this to be immediately logical.

      Those that claim this will work do so on the basis that we have a system of floating currencies and, as long all the major countries print at roughly the same rate, no currency can fail. However, those same people are ignoring the price of gold as measured in fiat. Govts cannot control the price of gold whatever the lurking conspiracy theorists may think. The price of gold will shine a bright light and ring a shrill alarm bell as the damage to fiat increases.

      Having said all that, I personally don’t care as it’s been obvious for years that MMT is inevitable and thankfully had the resources to put in place the necessary safeguards – bring it on I say. And make it quick.

    • Moments like these you need a Minsky

      There would be no real increase in services or money since very little time would lapse before people realized increasing inflation was not increasing real purchasing power. If the government responded by issuing more central bank legal tender, the inflationary process would become self-perpetuating, and as was the case in numerous historical instances this would lead to hyper-inflation
      Moreover, the central bank would have no capability of reducing the money supply. All they could offer would be the zero maturity, zero interest liabilities of the government, but there would be no buyers. This would mean that hyper-inflation would be difficult to stop

      I find one of the many interesting theoretical upgrades to the orthodox economic software that MMT has forwarded is its revision of the Monetarist’s, Quantity Theory of Money.

      The equation MV=PQ.

      The misunderstanding of QTM relates to the flexibility of all portions of the equations. Many assume M increases and all other remain the same, this is not reality in a dynamic economy and the key part of the inflationary risk Hoisington, Hunt and a boat load of others don’t grasp. Not to mention many other drivers and stabilisers MMT forwards as methods to control inflation.

      A cursory glance at MMT would give a great deal of logic around the history of hyperinflation as it relates to a sovereign currency issuer with a floating exchange rate.

    • – Nonsense. Hyper-Inflation is EXTREMELY simple to stop. Just (literally) stop printing money. It’s what in Weimar Germany happened as well. In november of 1923 the german central bank just simply ordered to stop (literally) to stop the printing presses. And Hyper-Inflation was over within 2 weeks.

  4. I would also remind that there were no wild financial crisis during the Keynesian period, then some thought it better we – all – go back to the system that produces them as a feature and not a bug …

    • Keynes is alive and well, skip. He’s never been more prominent than he is now. Just saying …

    • Strewth Skippy, Keynes’ General Theory (1936) was a direct response to the Great Depression. The whole point was to understand financial crises and unemployment.
      The key difference between now and Keynes’ time is the monetary system – they’re completely different. If Keynes was writing today he would most certainly subscribe to MMT and his demand-side framework would remain in-tact – they are entirely compatible.

    • “If Keynes were alive today, he’d be turning in his grave” Jim Rickards, goldbug and conspiracy theorist, March 2017 interview with Jason Burack

    • Taxes have four very important roles/purposes and MMT is VERY CLEAR on the need for taxation, namely:
      – Underpins the value and integrity of the currency
      – Mechanism to control inflation
      – Addresses inequality and mechanism for wealth re-distribution
      – Mechanism to guide desired behaviour (eg., parking fines, alcohol tax, smoking tax, etc)

      Strongly recommend reading Ruml,B. (1946) Taxes for revenue are obsolete, American Affairs January 1946, Vol 3, No. 1.
      Beardsley Ruml was chairman of the federal Reserve of the Reserve Bank of New York at the time he wrote this article.

      PLUS, MMT is also VERY CLEAR Deficits do matter, just not in the way we have been told.

      • It is important that you had that last sentence because when money is created for whatever purpose, it must be paid back.
        People here appear to be looking for a financial panacea and think MMT is the answer.

        At least since 2007, everyone should understand that the world has a huge debt problem.
        Borrowing more money does not solve a debt problem.
        For this reason alone, MMT is not a good idea.

        Don’t forget that Keynes simplistically really said save for a rainy day and that governments should spend those savings and borrow during difficult times.
        Governments have been borrowing in good times as well as bad, especially the government holding the Reserve currency.
        The truth is the good times are over and we have to repay the debt while looking after the poor.

        • Just not true. Debt can be reduced via inflation as well as “paying it back”. The bigger point though is that you seem to be suggesting that MMT is equivalent to borrowing. It is not. The whole idea of government “borrowing” is just unnecessary. Governments can absolutely create money without it having to be paid back.

          • The world only goes forward because of those who oppose it.

            We can trade cliches all day. Or we can, you know, reason.

          • Reason is dastardly when emotion and spiritual pathways are the road one uses to arrive at a utopia – unseen.

        • As Babunda stated…fiat currency Govt’s don’t need to borrow from ANYONE to spend in their own currency, nor do they have “debt” in their own currency. Their is no “saving for a rainy day” or need to build up savings to spend later…indeed, the idea of “savings” in fiat currency systems very different to mainstream view.

          Utterly reject “truth good times over”…much of the current economic malaise is SELF-CREATED and unnecessary, driven by mismanagement, deep corruption by the wealthy for whom the current system works very well, and fact-less ideology. The key opportunity MMT brings to the table is to see the emperor has no clothes, we have been lied to and mismanaged for decades, but there is a way out.

          • So for the thick…. If MMT is the promoted way forward, what does it mean to the average punter? What are the short-term and medium-term likely outcomes? Not talking about trading. Get into debt? Get out of debt? Buy metals? Sell metals? What flation flavour are we talking about?

            Genuine questions. I get lost in the economic speak.

          • Max – I don’t know much about trading but I can tell you the macro consequences of MMT – if they do it carefully – will be wage growth, inflation, deleveraging, and currency depreciation. I imagine this will be good for equities and terrible for cash. In short the wealthy and asset-rich will benefit but so will wage slaves. Inequality should at least stop rising and maybe fall.

          • Babunda, thanks for that. So, if your theory holds, those with jobs would be able to inflate away debt. Go long government and near-government jobs, I guess.

      • Marcus gets it. You understand MMT, unlike most here.

        Why doesn’t the ABC do a TV program on MMT so the masses can catch up?