I’ve read a few articles over the last few days that discuss full employment and how we voluntarily keep hundreds of thousands unemployed. It is a welcome change to the doom and gloom messages we have paraded about debts burdening our grandchild or insolvency if we spend too much. That narrative should be well and truly dead! I recall asking myself questions on what government debt is and why does a government need to borrow if it issues the currency in my senior years of school as I stared outside the window wishing I could be doing something more exciting.

This article from the ABC has Ross Garnaut plugging his latest book. The article details what economist call the Natural Accelerating Inflation Rate of Unemployment (NAIRU) Apart from being completely useless as a metric to measure against because you can never know what it is until you get there, it is still being used as a framework amongst the mainstream.

“Professor Garnaut says Australia’s policymakers have repeatedly miscalculated the NAIRU in recent years, meaning they have often suspected the economy is getting close to full employment when it is far from that point.”

So the fallacy that our economic superiors have just made a horrible mistake and needlessly left hundreds of thousands without jobs is paraded over the more accurate description that Unemployment is a political choice. Currency issuing governments can always purchase what is for sale, including idle labour. When economist think about costs (actual economist, not the frauds you read in the mainstream media) They are refereeing to real resources. People, raw materials, physical infrastructure, social impacts etc…And the cost of unemployment always far outweighs the cost of inflation. There are serious consequences as a result of involuntary unemployment. Loss of income, social exclusion, physical and mental health impacts, relationship breakdowns, poverty.

The mainstream narratives of deficits being a negative continue…

“At current levels of economic activity, having several hundred thousand people unnecessarily unemployed holds annual gross domestic product [GDP] down about $50 billion below what it could be, and, all other things being equal, raises Australia’s public deficits by nearly $20 billion each year.”

The deficit itself is irrelevant in determining a governments ability to spend. It is the residual number and accounts for the savings desires of the non-government sector. As an accounting rule it has to equal the non-government sectors savings. The question we should be asking is whether the fiscal balance is enough in achieving full employment and whether we have organised ourselves in a way that serves a public purpose. That is how much of the labour force do want engaged in public provision, what are the services we want delivered and what do we leave to private enterprise?

The article then continues to describe bond issuance and whether the Government should allow ‘the market’ to ‘fund’ deficits or whether The Reserve Bank should ‘fund’ the deficit spend. I wrote why that thinking was wrong here. I’ll reiterate parts of it below.

The Australian Government spends via an appropriation bill (through the parliament) and the finance minister then approves the transaction and someone within the Department of Treasury uses a computer to mark up the relevant exchange settlement account (ESA). These are accounts that financial institutes hold with the RBA. The smokes and mirrors of issuing bonds is irrelevant to the spending operation.

Intrinsically for a financial institution to purchase a bond the ESA’s have to be marked up first. So the act of issuing a bond changes the portfolio mix within the RBA’s system. ESAs are drained and dollars are added to a securities account. (The latter earns interest)

Now that the RBA is purchasing bonds it effectively owns the ‘debt’ that the Treasury is issuing so the Treasury can pay the RBA (via an appropriation bill) who then pays it to the Treasury. *eye roll* The whole operation is a charade to confuse the masses that all this somehow matters and great minds are at work pondering over these dilemmas to help save humanity.

Garnaut does state “I’d say, let’s take away their free lunch.” Huzzah! stopping the issuance of government debt is sensible. It is an unneeded operation that has its origins under a gold standard and necessary within the Bretton-Woods system. (a discussion for another time)

However Garnaut shoots himself in the foot and shows his interest in maintain the current class structures.

“The circumstances call for an Economic Stability Board, with power to constrain demand by fiscal as well as monetary means — to place a surcharge on major taxes if that serves better than raising interest rates.”

‘Independent boards’ are usually a mechanism to depoliticise a process the minister would rather not be responsible for and take away democratic accountability.

Under Garnaut’s thinking this operates under a NAIRU paradigm. The ‘independent’ board would have the power to raise and lower taxes (as well as interest rates) if it felt the employment rate and wages growth was too high or low and it would force the unemployed onto a substance payment in their pursuit of a desired rate of inflation.

“Professor Garnaut has also thrown his support behind the idea of a guaranteed basic income for practically all adults, paid at the same level as the dole“

Basic incomes should not be part of a progressive agenda. (Though we need a welfare system that cares for those in need)

We are more than just consumption units and there is value in contributing within our abilities. We should be aiming to eliminate involuntary unemployment and underemployment.

A Job Guarantee scheme forms a replacement for the NAIRU and replaces it with a Non Accelerating Buffer Employment Ratio (NAIBER). The social policy manifestation of the NAIBER is the JG.

It serves the purpose of disciplining an inflation rate to a politically acceptable rate (Would you be bothered if inflation was 4% and you had less people in a JG over a 3% inflation rate?)- It isn’t ideal but it is a hell of a lot better than using an unemployed buffer stock. It isn’t there to create masses of minimum wage jobs.

It is the role of Government to use their spending capacity to create career public service jobs and act as competition to the private sector; eliminating lousy employers by ensuring enough high paid career positions matching people’s skillset are on offer.

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The linked to article above and Garnaut’s mention of an independent fiscal and monetary board reminded be of the 1924 amendments to the Commonwealth Bank Act. A friend told me not everybody reads various pieces of banking legislation and their amendments from a century ago, so I will describe it here.

By 1923 under the Bruce Government (Nationalist), the responsibility for note issuance was transferred to the Commonwealth Bank (previously under Treasury) and maintained in the note issuance department. Changes were made to the Commonwealth Bank Act in respect to note issuance in 1924  ‘(1) The Bank shall be managed by a Board of Directors composed of the Governor and seven other Directors. (2.)   Subject to this Act, the seven other Directors shall consist of— (a) the Secretary to the Treasury ; and (b) six other persons who are or have been actively engaged in agriculture, commerce, finance or industry.’

The Governor of the board was a banker by the name of Sir Robert Gibson. A staunch deflationarist (wage cuts, cut deficits) and was responsible for inviting another banker Sir Otto Niemeyer to Australia over the Great Depression. The Sydney Morning Herald reported regarding the changes to the board ‘ …the board, although permitted to decide all other questions by a majority of votes, will not be allowed to determine questions relating to the note issue unless the determining majority includes two of the following, namely the Governor, the secretary to the Treasury, and the two directors appointed because of their knowledge of the currency’ (SMH, 14/ 6 /1924:15-16) The Governor wasn’t required be answerable to the Government of the day unless legislation compelled them. (Which didn’t exist) And unless the ‘radical’ Labour Party was in Government and controlled both houses this was an improbability. A constraint that we will witness over the depression when the Scullin Government tries to spend and lower the unemployment rate.

At the request of Gibson to observe the current Australian economic situation, Otto Niemyer, an official from the Bank of England along with Professor T.E. Gregory of the London from the School of Economics arrive in Australia on 14 July, 1930. Niemeyer  had tabled the below plan that was rejected by most Australian economists across the political spectrum.   

The Niemeyer plan (Parliamentary Papers 1929-31, vol.2, No. 81, p. 45) called for 1. Budgets to be balanced at any cost in human suffering. 2. Cessation of overseas borrowing until the then short-term  indebtedness had been dealt with. 3. No public works, which would not pay for interest and  sinking funds on loans, to be put in hand. 4. All interest payments to be credited to a special account  in the Commonwealth Bank, to be used only in favor of  the bond-holders. 5. Monthly accounts to be published in Australia and overseas, showing summaries of revenue and expenditure, also state of short-term debt and loan account.  

As the Labour Government of Scullin was wrestling with The Depression the note issuance board was denying the Government additional expenditure. In March of 1931, the Treasurer presented to The House a bill relating to the issue of a fiduciary currency. 

These fiduciary notes were to be called Treasury Notes as opposed to an Australian Note (notes issued under the Commonwealth bank act 1920 in pursuance of the Australian Notes Act 1910-1914) and differed in that there was no need to hold gold reserves in relation to their note issue. The Bill specially stated ‘Treasury Notes shall not be deemed to be Bank notes within the meaning of the Bank Notes Tax Act 1910’

The bill also made provision for Treasury Note issuance of £18million, six million of which was for the purposes of the Wheat Act 1931 and the remaining twelve million on providing employment for reproductive works.  These ‘reproductive works’ would be made by appropriations of any Acts or by means of loans to the States, local governments or other corporations approved by the Governor General.

During the second reading of the bill Australian Labor Party member for Bendigo, Richard Keane stated ‘This Government has made endeavours to obtain money, but has been thwarted in its attempt by the Commonwealth Bank and other authorities’ (House of Representative Hansard, No.13, p.577, 1931)

The Commonwealth Bank Act in 1924, as described above, had put in place approval of note issuance (and thus the ability for Treasury to spend without borrowing) to a seven member board.

With The Depression and many unemployed the Labor Government was looking for a means to directly decrease unemployment.

‘In this country we have an army of unemployed totalling about 300,000; loan expenditure has been reduced from £43,000,000 to £14,000,000, and the Government last year made a grant of £1,000,000 for the relief of unemployment.’ (House of Representative Hansard, No.13, p.578, 1931)  Keane makes mention ‘We on this side of the House take the view that, orthodox methods having failed, it is necessary to adopt what may be regarded as unorthodox proposals.’ and points to ‘…the fact that for many years Great Britain has had Fiduciary issue of £260,000,000’ (House of Representative Hansard, No.13, p.577, 1931) 

Theodore’s efforts on a Fiduciary Note failed in the Senate. Economist in Australia, despite the rejection of the Niemeyer Plan still necessitated wage cuts were necessary. Yet at the February 1931 Premier’s conference there was such disagreement amongst economist who were in charge of tabling a report it was never released to the public.

The Treasurer E. G. Theodore and Scullin repudiated the report: they would not have it signed by their public servants. Gibson then refused to sign it. The report was never issued. (Coleman, 1959, p.119) [Gibson was an economist within the Australian Government that would come round to the emerging Keynesian consensus rested by his collegaues]

With Theodore’s Fiduciary Notes bill thwarted, The Copland Plan was devised.  The Plan though proved unpopular with the electorate. 

It recommended a reduction in the deficit from £39m to £11m, to be secured by a £13m reduction in outlays, £12m increase in taxes, and £3m from reduced interest. There was to be a 20 per cent cut in expenditure, and a 15 per cent reduction in interest payments.….

…a deal specifying how the pain would be shared out; it sought to establish agreement by observing measures of equality of sacrifice. Australian bond holders, public servants and pensioners were all to take a cut. (Bond holders experienced the heaviest proportionate contraction in incomes: legislative fiat reduced interest on government debt by 22.5 per cent.) This universal sharing of the pain made it universally unpopular. (Coleman, 1959 p.120)

Figures within the ALP such as Curtin argued Labor should surrender Government rather than implement The Copland Plan. Though the plan was adopted. The Labor Party split and delivered a majority Government to Joseph Lyons United Australia Party (UAP), a key figure responsible for orchestrating the failed bills, leaking information to London financial interests, and leaving the ALP to assist in forming the UAP. 

The events of the economic malpractice continued and the Australian population was forced to endure the 1930’s with unnecassary levels of unemployment. As economist argued over how much to cut spending and wages by or whether to increase public expenditure masses of people needlessly suffered.

The ‘independent’ board under Gibson responsible for the note issuance desired real wage cuts and had no concern for the well being of the population! That is very well articulated in the Niemeyer Plan and we needn’t experience anything that atrocious again!

Read Chapter 6 of Giblin’s Platoon by Coleman et al., for an account of the economic disagreements that ensured over the 1930’s

Conclusion

So as the mainstream economist try to stay relevant by saying ‘Oh hey turns out there isn’t a need to issue debt’ despite the messages they’ve been pushing on balanced budget nonsense for decades. They’re trying to maintain current pools of unemployment and using them in a fight against inflation by offering them meagre subsistence living instead of what we desire, a job that is meaningful and allows us to contribute to society. All while attempting to ensure we have depoliticised technocratic bodies instead of democratic accountability. That doesn’t work for the EU and it won’t work here.

This article was on edited on 29/03/21 to fix a grammatical error.