“While there will be a significant increase in government debt which will take many years to repay, our measures have been designed in a way that [protects] the structural integrity of the budget,” Treasurer Frydenberg said bluntly last week. “Australians know there is no money tree. What we borrow today, we must repay in the future.”
But an increasingly vocal group of economists says he is dead wrong.
While not magic in any way, there is a source most governments can tap anytime they like to deliver all the money they need. It’s called the computer, and with a few keystrokes any government spending account can be marked up with funds to meet any spending program, be that JobSeeker, JobKeeper or routine education and health spending.
The only question is how many zeros to add, as former US Federal Reserve chairman Ben Bernanke admitted in 2009 during the multi-billion dollar bailout of the banks. “It’s not tax money,” Bernanke told US 60 Minutes. “We simply use the computer to mark up the size of the account.”
As to the crushing debt that we are warned awaits future generations as fallout from the coronavirus pandemic crisis – well, say Modern Monetary Theory economists, that is a political question. Governments don’t need to go into debt unless they want to.
Modern Monetary Theory, or MMT, is the first serious challenge to orthodox macroeconomics since the 1930s, with the University of Adelaide one of the key centres of thinking on the subject in Australia.
Early this year they hosted Professor Stephanie Kelton as the Geoff Harcourt Visiting Professor of Economics. Professor Kelton is the former chief economist for the Democrats on the US Senate Budget Committee and was an advisor to Bernie Sanders’ 2016 campaign.
“The federal government… can never run out of money,” Kelton says. “It cannot face a solvency problem, bills coming due that it can’t afford to pay. It never has to worry about finding the money in order to be able to spend.”
The very first myth to bust, she says, is that national accounts operate in the same way as a household budget. The crucial difference is that households – and, for that matter, companies – are currency users. Countries that have full control of their currency, no fixed exchange rates and limited foreign debt – like the US and Australia, but not individual eurozone nations in the EU – are currency issuers. Not one dollar exists that they did not create.
“The federal government gets to behave differently from a household or a private business,” says Kelton. “The risks that a private business faces when it takes on too much debt are entirely different than the risks facing the federal government.”
That is not to say creating currency willy-nilly is risk free. Although MMT economists baulk at the phrase “printing money”, it is true that the creation of too much currency can lead to inflation.
But that only arises, they say, by creating more currency than the economy can absorb.
Dr Steven Hail and Professor Stephanie Kelton
“The question is, then, should you expand fiscal policy, should you run bigger budget deficits in order to boost growth? What is the objective? What is their proper policy goal?
“I think the right policy goal is to maintain a balanced economy, where you’re at full employment, you’re guarding against an acceleration in inflation risk.”
And that risk can be handled successfully, as shown in Japan where the central bank owns most of the debt issued by the government for nearly 30 years.
“Japan’s debt is close to 240 per cent of GDP, almost a quadrillion… That’s a very big number… Yen. Long-term interest rates are fairly close to zero. There’s no inflation problem.”
As to the question of debt and deficit, University of Adelaide economics lecturer Dr Steven Hail says it is a matter of choice. Government bonds can be used for many reasons–as a benchmark for interest rates or a fixed-interest investment vehicle for superannuation funds to name just two – but they are wholly unnecessary for funding budget deficits.
“I would actually do away with bonds,” says Hail. “There are certainly uses for instruments like them, but call them ‘Reserve Bank term deposits’, because that’s what they are. But it is a complete misunderstanding that government expenditure is funded by tax and debt.”
As for deficits, he points out that the “surplus-good, deficit-bad” mantra is a very recent invention.
“It is easy to forget there were only deficits for almost all the Menzies years,” he says, a time when there was bipartisan commitment to stimulate “spending on goods and services to the extent necessary to sustain full employment”.
Kelton, whose new book,
The Deficit Myth, will be published in June, says the way we think about deficits and surpluses is wrong.
“When we talk about red ink and the government having all of this red ink, we have to remind ourselves that their red ink becomes our black ink and their deficits are our surpluses,” she told CNBC recently.
As we set about rebuilding the economy post-COVID crisis, deficit spending will be the norm for some time to come. And with inflationary pressure so small as to be insignificant for the foreseeable future, that shouldn’t worry us in the slightest.
Bill Mitchell, a professor of economics at the University of Newcastle who actually coined the term “Modern Monetary Theory”, says the only constraints on the government issuing currency to pay for any program is the production capacity of the economy.
“With two million unemployed … lots of businesses with unsold inventory and lots of factories with spare capacity, there’s not going to be too many resource constraints at the moment.”
Dr Steven Hail and the University of Adelaide are running an online Modern Monetary Theory course later this year. For more information, visit adelaide.edu.au
Bill Condie has been a journalist for more than 30 years, working as a writer and editor in Europe, Asia and Australia for newspapers including
The Guardian, The Observer and The Times. He is a former publisher of Cosmos magazine.
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