An Orthodox Economic Lens Means Poor Policy

I’ve neglected this blog for a while. I guess life took hold and I’ve concentrated on work and maintaining my sanity. I work within the labour movement and the further you delve into the power structures the more you realise those that ‘run the show’ are captured in earning rentier (unearned) income for themselves and believe this is a system that can deliver financial wealth for the masses. Read my post on the challenges of an ageing population and solving inequality requires getting macro right! With an ageing population it isn’t about saving but ensuring productivity increases.

It is worth restating how I concluded that post;

Nobody truly self provisions. In terms of an income we are reliant on federal governments deficit spending. It is the non-government sectors surplus. Then in terms of the creation of real resources (which is our wealth); education and health services, transport infrastructure, agriculture, construction, the arts; we are all reliant on the contribution of others!

There is very little public commentary in terms of stating what matters. It is the provisioning of real resources and ensuring a system of full employment that will provide for our material wealth and well-being. Instead we have nonsensical public discourse on residual numbers (Government budgets) that don’t mean a thing without putting them into a context of our own well-being!

Taking this flawed logic further; that is ignoring the difference between issuers and users of a currency and having an incoherent framework on inflation, severely limits the policy choices we are able to choose.

Anything meaningful is taken to be ‘economically impossible/irresponsible’ Take this article in the conversation. HECS-HELP loans have become unfair for women but there is a way to fix this

The article discusses the inequity of the current HECS-HELP loan system. The disadvantage, particularly on women, the rising percentage of contributions being put onto students and the larger debts being accrued. Students now finish their degrees with about $50,000 – $60,000 in debt.

For example, for incomes between $48,000 and $100,000, a single parent with two children will lose on average 70 cents of every extra earned dollar due to reduced family benefits and increased tax, medicare and student loan payments.

The study citied by the author shows how a particular cohort does not derive a benefit from the current system and instead accrues high marginal tax rates while being employed. The author describes the system as punitive and undesirable. It definetly is an area that needs a policy to ensure a fairer more equitable system.

However, the authors misunderstanding regarding the purpose of taxation and how universities are ‘funded’, in my opinion, lead to poor policy. They suggest ‘the government should make sure that everyone who benefits significantly from the system is a potential contributor and that repayment arrangements are designed to take people’s different circumstances into account.’

They go as far as stating;

The option of reducing student contributions and increasing government subsidies is not likely to occur in the current economic environment. Making tertiary education free or extra cheap for some people makes it more expensive and less equitable for others. This is because the overall objective is to raise revenue to fund the tertiary education system, including universities and vocational education and training. 

I’d like to walk through each of the authors objections and demonstrate why they are possible.

The option of reducing student contributions and increasing government subsidies is not likely to occur in the current economic environment

The current economic environment I presume to mean the media statements around the declining economic fortunes of the government. The statements around ‘the deficit’ and increasing levels of public debt. It is common to hear media, and our current treasurer in Australia state ad nauseam the largest growing expense of the federal budget is the interest on outstanding debt.

Under the above framing the reduction in student contribution or free tertiary education is unlikely as it is deemed a cost on the federal budget. Costs that future generations will need to pay. I have come to turning off the television and putting on classical music rather than listening to that sort of bullshit.

Under an MMT frame – we know taxation serves the purpose of creating a demand for an otherwise useless accounting entry. It is the only currency the government accepts to eliminate your liability. Taxation is what gives currency value. The currency issuer needs to spend first in order for it to collect tax.

Under that framing, public education and its ‘value’ takes on a different meaning. We don’t assess it based by how much the government spends on it or the financial return it provides to the government budget. Rather it should be viewed as the real benefits it delivers to society. What skills is it delivering and for what purpose are those skills being used? Are we training environmentalist and engineers to be finding ways to reduce the impact of climate change? Are we training town planners and architects in the skills needed to adapt and design buildings to be as efficient as possible? Are we training nurses and aged care workers in the best practice to provide quality aged care and in assisting in developing meaning in these people’s lives? We have a rising portion of a population that will need aged care services. This is critical!

The reason a reduction in student contribution or free tertiary education isn’t likely is because of a misunderstanding of the purpose of taxation. It is not a mechanism to fund the government. Rather we should be asking will making tertiary education free increase the desire of people to enrol in higher education? What policies will be required to ensure we have adequate staff and other resources to deliver the education we need? The higher education sector is one of the most casualised in the country. There is an area that needs reform. We could be eliminating student debts. That will solve the issue of inequity and females paying 70c in tax out of every dollar they earn.

Making tertiary education free or extra cheap for some people makes it more expensive and less equitable for others. This is because the overall objective is to raise revenue to fund the tertiary education system, including universities and vocational education and training. 

This is the classic argument, if we make services free for one cohort it means someone else will pay more. That logic again stems from an incorrect understanding of the purpose of taxation. Currency issuing governments never need to find funds to provide income for public goods and services. You can read the mechanics of why this is possible in my post on ‘Why Universal Free Childcare is Possible’

The ‘funding’ for any expenditure comes from an appropriation bill. There are two different types of appropriations but I won’t detail that here.

The Public Governance, Performance and Accountability Act 2013 (which you can trace back to the Audit Act 1901) and section 51;

(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2)  However, the Finance Minister must make an amount available if:
(a)  a law requires the payment of the amount; and
(b)  the Finance Minister is satisfied that there is an available appropriation.

There is nothing within legislation that states prior funds need to be found. (In fact logically Australian dollars can’t be found until the issuer has spent them into existence) A consolidated revenue fund (CRF) exists as a ‘conceptual’ account under section 81 of the constitution (any ‘money’ held by a government entity is deemed to form part of the CRF) and thus required to adhere to the accountability laws passed by parliament.


There are a many other areas where an orthodox economic understandings leads to poor policy

Flawed banking policy that delivers income to the wealthiest in the belief banks need reserves to lend.

Climate Change that pursues ‘market based’ solutions under a guise of expense and the need for projects to be financially sustainable.

Education policy framed as needing to deliver a financial return over the life of an individual’s career. This has us pursue developing skill sets with already high incomes (and limiting those places to maintain a shortage) and neglecting areas we need to develop to meet future societal challenges.

Wages policies framed as being a cost and ignoring they also contribute to a demand.

I could go on and on…..but that is enough from me!

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