DR TONY WEBB

Am I stupid or what? We are told we have a problem with inflation and that is why we have had intervention by the Reserve Bank raising interest rates as the remedy for this problem.

Now forgive me but along with most of the unwashed, uneducated non-economists (or at least those schooled in neoliberal economics of money management), privatisation of public assets and services in the name of efficiency (to which add austerity measures for the less well-off amongst us) my understanding of what ‘inflation’ means is that things we need to live cost more, and these costs keep rising1. In the extreme, the image of needing a wheelbarrow filled with cash to be able to shop for weekly groceries comes to mind.

Also, from the perspective of those unwashed, perhaps because we can’t afford to heat the water for a shower, is the idea that the ‘cost of living’ is not merely increasing but that our wages (or if we are unwaged our welfare benefits, pension payments, or other sources of income) are not rising to keep pace with the rise in prices.

The evidence suggests that the core problem is the way the corporate sector has used a legitimate concern around disruptions caused by a global health pandemic and wars in various parts of the world to jack up prices of goods and services — exceeding the actual increase in their costs.

Now please do forgive me if I’m missing a few essential brain cells with which to make sense of it but how the hell is increasing interest rates going to reduce or even limit price increases?

Much of business relies on having banking credit. Increasing the cost of this credit will require passing on the increase to consumers via increased prices.

Housing costs will increase, whether via cost of servicing mortgages for homeowners or the increased costs of servicing mortgages of property investors being passed on to renters. Similarly higher costs for investment in new technology, commercial or industrial development will be passed on. We are also facing unprecedented crises from climate change requiring massive investment in new technologies to replace those polluting the planet’s atmosphere — all costing more because of increased interest on the funds needed. Anyone or any agency in the private sector who can raise prices to cover increased costs will do so. Those who can’t, namely the rest of us, will bear the costs by either reducing what we spend or, more likely if the trend since the 1980s is followed, by increasing household debt — on which we will pay more interest. Put simply, it seems to me that the current inflation is price-driven at a time when many have difficulty finding funds for basic costs of living. Increasing prices by raising interest rates simply makes the problem (if it exists) worse.

Looked at from the other side of the neo-classical political economic equation, current inflation is definitely not caused by too much money sloshing around for which there is inadequate capacity to supply an excessive demand. If this was the problem classical economics suggests increasing taxation to reduce money supply. Instead, we are proposing tax cuts. Initially targeted to benefit those with the highest incomes, further widening the inequality gap between rich and poor, the current reset proposes redistributing these so that low and middle-income earners get more of this tax ‘relief ’. This is hardly the fiscal response the neo-liberal dogma suggests is necessary during times of inflation.

Even within my limited understanding of the way the all-seeing ‘invisible hand’ of ‘the market’ is supposed to work, there is supposed to be a self-correcting equilibrium point where supply balances demand and vice-versa. If, as the classical idea of inflation suggests, there is excess demand — effectively more demand than supply such that there is competition for limited goods and services that is pushing up prices — logic suggests the intervention that is needed to guide or assist market balancing should be measures either to increase supply or reduce demand. The current response seems to miss the point on both sides of the equation particularly when it applies to essential items like housing, fuel, transport, health, education and other items that are part of the basic costs-of-living. Higher interest rates and higher costs all round don’t reduce demand and definitely don’t encourage increased supply.

Now am I stupid, missing something essential that is inherent and essential in the world of economics that defies any such common-sense analysis, or could it just be that there is something fundamentally wrong with the political economy we are forced to live within? More to the point for those of us on the progressive left, if the current political economic theories are so bereft of any logical response to the crisis we face, is there scope for a different, more socially oriented political economy and, if so, what does this alternative look like?

Political economy — managing economics to meet human needs? 

Since the global financial crises of last century, social democracy and indeed large parts of the capitalist system have recognised the need to balance the twin concerns around issues of both inflation and employment. Keeping both inflation and un- and under-employment at relatively low levels has been the task of economic management given to governments. Of the two, having the bulk of the population in paid employment was, in past times, seen as the priority. In times where the economy was not operating at a level to provide full employment it was recognised that governments could and should provide economic stimulus. This was paid for either by borrowing — usually through issuing government bonds or increasing the money supply. The ‘cost to government’ of doing so was offset over time by increased tax revenue from taxes on personal and business income and by natural erosion of debt incurred through controlled inflation. Now, rather than this sustainable social-economic balance we have seen almost fanatical emphasis on restraining both inflation and government spending — treating the national economy as if it were equivalent to an individual household budget which it very definitely isn’t. On the other side, what was once seen as unacceptable levels of unemployment have become the norm.

The arguments used to justify this state of affairs too often seem to treat national budgets as though they operated like those of an individual or household. Families can run out of money and therefore become unable to repay debts, but governments that have their own sovereign currencies can’t. Their creditworthiness may be questioned, and the interest paid on government issued bonds and other ‘borrowing’ instruments may rise or fall, but their ability to repay isn’t in question. Funds can be raised from taxation, borrowing, or simply by printing more of the currency. Indeed, there are times when so-called government ‘debt’ is of immense value to the private financial sector, providing a pool for low-risk investment for those sectors that require having a proportion of such in their portfolios.

The whole idea of government having to have a ‘balanced budget’ where any spending is covered by income is nonsense. We don’t require banks to have sufficient income from their customers deposited as savings before they can make loans to other customers. Banks simply assess the capacity of the customer to repay any loan and, if approved, will write a line of credit in their accounts. Banks literally ‘print’ money as needed — with a few, not very many, regulatory constraints on what they do. And further these banks engage in a wide range of speculative financial dealings that contribute significantly to their profits (and senior executive salaries) way beyond the difference between what they pay as interest to depositors and what they charge for loans. Much of the instability we face in global finance is down to the changes last century that had kept banking separate from this kind of financial chicanery. Why then should governments with far more resources to guarantee payment of any ‘loans’ be regarded as less worthy for responsible borrowing or, if needed, creating funds for what are seen to be socially necessary investments?

Look this way . . .

Like any conjuror, or con-man the trick to deceiving people is to re-focus their attention so that the ‘magical’ sleight-of-hand isn’t noticed. While unravelling the social-democratic consensus that dominated the 50 years post the major wars and financial crises of last century, the vested interests in and beneficiaries of Capitalism have been hugely successful in controlling the language and the meaning of words we use in the current political conversation. Unemployment is no longer seen as the waste of human resources that it is. Instead, we have the obscene idea that ‘having a pool of unemployed people is necessary’. Having someone else needing the job that those in employment have is seen as a brake on workers making demands on employers over working conditions and particularly wages, and as such is ‘essential for controlling inflation’.

The idea that wages should rise to keep pace with inflation is portrayed as potentially damaging to the national economy. Heaven forbid that workers should receive a fair share of increased profits to maintain their standard of living in the face of rising prices. Surely this would lead employers to further raise prices to maintain profit levels, and lead to further demands for wage increases, and price rises ad infinitum. The threat of a ‘wage price spiral’ and the solution — a large enough pool of unemployment to keep wage demands from pushing up inflation has now been formalised in economics — the ‘non- accelerating inflation rate of unemployment’ (or NAIRU). In situations where we are concerned about wages chasing prices we never seem to consider scope for limiting price rises — measures that might benefit the majority, many of whom need relief from the inflationary spiral, rather than the few who have little or no need for further benefits.

Even more obscene is the way we stigmatise and humiliate those who are unemployed. If not actually labelling them ‘dole bludgers’ we require them to jump through a variety of hoops in the name of meeting ‘mutual obligations’ for the meagre pittance, below what is needed to meet even the inadequate ‘poverty-line’ income they receive as ‘benefits’. If their unemployment status is part of a system where they are needed to control inflation, then they have a socially useful job being ‘unemployed’ — and as such a right to be paid for it. This right is one aspect of the arguments for economic reforms that include the idea of a Universal Basic Income (UBI) — where all citizens, employed or unemployed, receive as of right the basic income needed to meet their costs of living — and those in employment or receiving unearned income from assets pay tax in a progressive system on anything above this baseline. This is an idea whose time is coming. Space here does not permit detailed elaboration other than to point out that the nation, like most others in the OECD, has never had more than half its population in employment.

You may be interested  in the Fabian event on a Universal Basic Income by Professor Guy Standing.

In addition to the small pool of those formally recognised as ‘unemployed’ there are many young, old, disabled, studying, or otherwise engaged in work but not ‘in the workforce’ whose needs could be met at less cost to government, and in a more dignified and equitable manner through a UBI. And if we wish to maintain the ‘job-ethic’ where having meaningful ‘work’ which contributes to community well-being and the need for money income to fund our living within that community, then let’s explore the idea of a job guarantee. This idea of employment for anyone ‘unemployed’ who wants to work in meeting community needs for an adequate living wage funded by government for as long as it takes for the private sector to create something better is a good one.

Unfortunately it doesn’t address a lot of the ‘work’ done in homes, raising children, caring for others’ needs, that doesn’t meet the criteria for a waged ‘job’ — hence the need for the UBI alongside and not as an alternative to the Job guarantee.

Your debt is my savings — and mine yours!

Perhaps the cutest trick of all in the manipulation of language around the economy is to frame government spending — especially where this has, as with all governments world-wide, routinely exceeded government incomes — as ‘debt’. Without a balanced budget, preferably one with a surplus to repay money ‘borrowed’ in previous years we and future generations are threatened with a need to repay these out of our future incomes as higher taxes. Actually, most probably not. Consider for a moment that in any financial transaction there is one who spends and one who receives. Any government spending which is financed by incurring ‘debt’ — usually by issuing ‘bonds’ or ‘securities’ the value of which it commits to repay with interest — is always balanced by those who purchase this debt, acquiring something that we call their ‘savings’. Indeed, these valuable savings can in turn be traded to increase their yield above the government guaranteed return. In Australia, the Labor government’s introduction of compulsory superannuation last century has resulted in much of these government-debt-spending-created-savings being owned by ordinary people, invested and earning significant compounded rates of return, and available to support incomes in their ‘retirement’ years.

Government ‘debt’ equals private ‘savings’. Conversely government ‘savings’ must just as surely translate into private debt. The austerity measures here, as in many other countries since the 1980s, have included: selling-off public assets, reducing effective welfare benefits, cutting government spending on social services, health and education. These cuts to the ‘social wage’ have been combined with reducing levels of taxation particularly on the middle and upper classes and failure to close the loopholes that allow the rich and many large corporations to avoid paying their share — often paying zero or below the rate paid by the working poor. All these measures have reduced government incomes and constrained government spending but have resulted in an explosion of private, particularly household, debt.

But, so common thinking driven by economic sleight-of-hand goes, this so-called government ‘debt’ implies that it is ‘borrowed’ from a pool of private wealth. Nothing could be further from the true reality. All ‘money’ is created first by government spending. Only governments can create money. When put into circulation, either by government’s spending or issuing government securities, it purchases services, finances investment in infrastructure, and in so doing puts money in the hands of businesses, workers and those receiving unearned incomes. These funds then circulate in the economy — held variously as savings, spendings, debts etc., with a portion of the funds being withdrawn from this private economic activity as taxes. Spending comes first; taxation follows — keeping the whole system in some degree of balance, with the key objective being maintaining something like an adequate level of employment. A level that creates incomes for consumption of the goods and services the economy can produce without exceeding this economic capacity would result in inflation.

Or is this too simple. Too stupid to have any use in a modern political economy?

A more functional economics — outcome driven common-sense? 

An old saying from my school days goes: if the only tool you have is a hammer, then every problem looks like a nail.

It seems that, in the absence of governments using the full range of tools for managing the economy for the benefit of the people we have the crude hammer of an ‘independent’ Reserve Bank pushing up interest rates that, usually after much pain all round except for the already rich, eventually reduce the nominal rate of inflation. And, often at the same time with similar effects, government fiscal and other policies reducing the social wage for the majority by privatising community assets, gutting health, education, welfare and other services (except for spending on military and prisons). In the name of tackling inflation and/or unemployment we adopt policies that are counterproductive on both fronts. They have social and economic consequences that are effectively hammering the economy and the most vulnerable sections of the population.

Time has come to consider alternatives.

This crude weapon of ‘monetary’ policy is controlled by central banks, often at arms-length from governments. Governments for their part have been wedded to an ideology that privileges private over public economic activity. What has been called ‘neo- liberalism’ is actually something neither particularly ‘new’ nor ‘liberal’. People have a right to expect something called ‘liberal’ to reflect the ambitions of a society with a social conscience — not the distorted view of how national economies manifest the kind of absurdities we face in the current debate. The alternative to this involves defining social objectives first and then using various ‘economic’ tools and techniques to achieve these. It is an art rather than a science in that we judge the effectiveness of the application of these tools by their outcome — not by whether or not they fit some pre-conceived theory about how the economy should work — and turn a blind eye when they don’t.

There are various ideas that are worth considering in this more common-sense approach with advocates for each in progressive thinking. For some it is a delicate shuffle back towards the kind of ‘Keynesian’ approach tried and tested last century — more as a way of saving capitalism from itself than any radical change. In this, there is acceptance that government intervention may be needed with increased injection of government funding for various purposes.

Sometimes this is needed merely when economies are not growing enough to maintain full employment, at other times, in the event of acute financial crisis.

We saw an internationally coordinated initiative in response to the Global Financial Crisis (GFC) in 2008 where, as a result of US institutions’ ‘sub-prime’ lending, confidence on which all financial lending relies effectively collapsed. Unfortunately, particularly in the USA, this government spending was focused largely on bailing out the banks rather than assisting the low-income mortgage holders. Unsurprisingly, money at the top didn’t ‘trickle down’ to those at the bottom. More importantly, there was little by way of new regulations, with a result that existing financial institutions have continued many of these dodgy practices. Effectively they are playing with other people’s money, leaving world-finance facing another potential meltdown and government bailout in the not-too-distant future.

Perhaps a bit more socially oriented and indicative of what can be done and may yet be needed was the response of some governments, particularly Australia, in the 2020 COVID pandemic. Initially advocated by the trade Unions but accepted as necessary by the right-wing federal Coalition, the government the response was massive spending designed to keep a large proportion of the population in work — well at least with a job they could return to when the pandemic eased. Many workers (unfortunately not all) were nominally kept in employment — paid wages even if not actually doing the work. The government provided ‘job-keeper’ benefits paid through employers to keep workers ‘on their books’ rather than on (enhanced) unemployment ‘job-seeker’ benefits. Abused by some employers (with as yet no requirement to repay benefits claimed inappropriately or outright fraudulently), this was an exercise in getting government money out quickly to where it was needed with a minimum of ‘red-tape’ or ‘means testing’. Sad, indeed shameful, to see the party then in government now pressuring their Labor successors over levels of ‘government debt’ they incurred as part of the pandemic response.

Investment in a just transition

Even more shameful has been the Coalition’s opposition to any government ‘pump-priming’ investments needed to stimulate private investment in energy, transport and other ‘just transition’ technologies or job training/job creation measures needed to meet the challenge of climate change.

Hardly less shameful is the inadequacy of Labor government measures to come to grips with the need for massive investment in a ‘just transition’ agency to achieve this economic transformation. There has been a gradual shuffle in the right direction but still far short of what is needed. In particular there needs to be a clear economic policy on redirecting the $11 billion currently given as government subsidies for coal oil and gas extraction and use into the essential development of renewable/sustainable technologies and with supporting jobs growth. In addition, we need a clear signal from the federal government, using foreign affairs powers to override state policies, that Australia will not licence any further fossil fuel exploration or extraction. As a major global supplier of coal and gas, Australia needs to signal to the rest of the world that it cannot rely on these exports in the future. It needs to commit to a review of all current and future export licenses for coal and gas with none being granted for exports to countries with less stringent carbon pollution reduction measures than our own. Anything less than this will be — excuse the phrase from my boyhood — pissing in the wind.

Such radical, but necessary, measures will have economic impacts on government incomes as well as on the existing climate polluters. They will require massive investment in alternative technologies and the workforce needed for the future. Heading off the challenge of ‘how will it all be paid for’ will require government to provide a clear, consistent and convincing story about how the economic as well as social and ecological outcomes will be achieved. This, I suggest, cannot be done using language reflecting the thinking and discredited ‘theories’ of the past; definitely not the neo-liberal scaremongering ‘government debt is bad — has to be paid for by future taxes’ approach! And likely something more than the neo-Keynesian approach of government pump- priming private investment driven by demands of the market and the ‘private sector’, an approach where market forces rule, even if modified by government setting the rules for the market.

Rethinking a modern approach to money

On the fringe of these options, we see various arguments for what has been labelled Modern Monetary Theory (MMT)6 — though I much prefer the formulation of Functional Finance (FF)7 which is more about the practical (not theoretical) application of the full range of economic measures available to governments to achieve democratically agreed socially and ecologically defined outcomes. Like the earlier approaches, this isn’t (yet) a democratic socialist program. Far from replacing capitalism it is at best Social Democratic — indeed something akin to Keynes’s approach to ‘saving capitalism from itself ’. But MMT and FF share a set of ideas that challenge the current distorted narrative that dominates economic thinking.

At its core is the idea, touched on above, that governments of countries with their own sovereign currency have within their suite of economic tools scope for printing money to pay for government spending on socially desired initiatives. It is not a licence to print money without limits as some neo- liberal and indeed progressive economic critics have suggested. There are limits, not least those imposed by the ecological environment, the available natural and human resources, and the challenge to achieve something sustainable long-term. There are also limits to what can be done physically with the labour skills, technology, and management capacity available at any given time.

The aim is to use economic policy levers available to government such as spending and taxing, borrowing and repaying of loans, issuing new money and withdrawing money through taxes to achieve the primary objective of a functional economy.

It gives primacy to the objective of keeping total spending in the economy at the level where it can purchase all goods and services that the economy can sustainably produce. Spending less than this will result in unemployment. Spending more will result in inflation. Government can increase total spending by spending more itself, or by reducing taxes so the public has more to spend. It can reduce the total spend by spending less itself or increasing taxation.

Drawing this together: some conclusions?

The national economy is in significant ways completely different from that of a household or a business, much less Thatcher’s handbag. This paper has explored some of the consequences flowing from current approaches to economic management. In the current situation, raising interest rates or reducing taxation are at best marginally effective tools for tackling inflation when the core problem is the capacity of capitalist enterprises to increase prices.

Of greater significance than the level of inflation is the employment under-utilisation rate of 15% (30% among the young). Targeting a 4-5% level of formally defined unemployment as the NAIRU is wasteful and quite frankly obscene when those kept unemployed are abused, stigmatised and humiliated by so-called ‘mutual obligations’ requirements for below poverty-wage ‘benefits’.

Future economic management needs to dramatically increase both government and private spending. Investment needs to be targeted to areas of ecological and social need. However, neither the currently dominant neo-classical monetarist theories nor the old Keynesian approaches seem capable of tackling the scale of this socio-economic-ecological crisis on the time frame that is essential. The key alternative message from Functional Finance and MMT is that governments can spend money if and as needed to sustain a full-employment economy and put these human resources to work tackling the wider crisis. Governments can finance a more just transition to a new economic order by providing jobs guarantees and universal basic incomes. Such financing needs to be seen as putting money needed into the economy, not as government ‘debt’. It needs to completely reject the current dogmatic demands for ‘balanced budgets’. Within any level of economic activity government spending is balanced by private savings. Conversely as we have seen over the past 30+ years, government austerity leads to a reduction in the social wage provided by public services and an increase in private, particularly household, debt.

Of critical importance is the terms of debate for an alternative approach that uses the full range of tools for effective economic management to achieve a new balance between public and private investments that meet broadly (politically) defined social and ecological objectives. As well as meeting the challenge of the current climate emergency it is critical that we tackle the obscene (and it seems ever increasing) levels of social inequality, the high levels of which have significant social (and resulting political- economic) consequences.8 Progressive taxation is a tool with limited value in balancing the public-private distribution of funds or the unemployment-inflation trade-off. It does, however, have a vital role to play when used progressively as a tool for combatting social inequality.

So, at the end of this wander through some of the conversations we are having about the current and alternative policy directions that might lead to a more socially, economically, and ecologically sustainable future: am I stupid or what?

The analysis of some of the current economic management absurdity I stand by. The solutions offered are but small steps towards what will remain for some time a capitalist, market-driven economy. These might be steps in the right direction but, I fear, still short of the mark needed in a world where the principle of ‘from each according to their abilities; to each according to their needs’ might hold sway.

A long-time community and environmental activist, Tony has an MSc in Energy Resources Management and a PhD in Humanities exploring how strong emotions aid or hinder personal and political change. A former ALP candidate in the 2018 SA election, he now lives in Melbourne working on a joint Fabian/LEAN food industry security/sustainability project and development of men’s emotional health and wellbeing groups through the Men’s Sheds network.