Christmas Eve

It is Christmas Eve and I’ve been playing around with the website design.
I lost my old theme playing with WordPress settings and it no longer seems to be available.

I am not entirely happy with the layout (particularly for viewing all blog posts) but I’ll improve it in time. I’ve always said I’d commit more time to this blog and I never seem to manage amongst all my other commitments. I guess it takes more discipline than I have. I hope to contribute more posts in 2023!

Not much else to report from me other than I found the Turkish Radio and Television streaming app, TRT Izle, that streams content entirely free all over the world! The Australian version called iView is restricted to streaming in Australia and is mostly foreign made content or content that is inexpensive to produce. e.g game shows, celebrity style talk shows. Anyway, I managed to record a song I recognised on TRT Muzik on my phone and send it to some family.


I’ve been meaning to write about the recent changes to Australia’s Industrial laws dubbed “Secure Jobs, Better Pay”
It makes a series of technical changes to bargaining laws but mostly undermines the ability of low paid workers to seek pay increases even further than already existed.

The ALP didn’t change our strike laws, which are against ILO standards nor have they changed their wages policy for the public service. The various state and territory governments have kept wages stagnant through their use of fiscal austerity and refusal to lift public sector wages. It is ironic that some see very technical changes as a means to lifting wages. It won’t happen!

More than that in the new year!

The ALP are not friends of the working class

I’ve been working on a project with UnionsNT strongertogethernt.com.au The last week has been foucsed on breaking down economic jargon and giving a decent analysis on the governments ‘budget’.

Anyone that has had some introduction to economics knows government budgets are not like households. MMT states the difference between a currency issuer and a currency user. The latter has to finance its expenditure while the former can always spend. That doesn’t mean it should always spend. Though its spending represents a socio-economic agenda.

MMT uses the sectoral balances as a tool to assess the context of the governmnets spending. The sectroal balances was developed by British post-keynesian economist Wynne Godley. The rule holds as a matter of accounting.

When assessing governmnet fiscal policy we need to look at whether spending in aggregate supports full employment and is meeting our desired social objectives. The image to the right shows the inflows (injections) into the private domestic sector and the outflows (leakages) that subtract from spending. Injections are Government Investment and Exports. Leakages are Taxes, Savings and Imports. If leakages are more than the injections the private domestic sector is in deficit.

Current Account

A nation like Australia commonly runs current account deficits. This is our exports – imports. Imports are foriegners saving Australian dollars. When we purchase a good from say the USA a currency exchange needs to happen first. An Australian entity changes an $AUD for a $USD and then hands over the $USD to purchase the desired good. The $AUD is then accounted for in the US Federal Reserves account at the Reserve Bank of Australia. That is why imports are foreigners desire to save $AUD. The process in the real world is vastly more complex but this is a simple explanation of how foreigners end up saving $AUD.

Government Spending

Governmnet deficit spending is the Australian government spending more than it taxes. Australia on average runs current account deficits of between 3-4% of GDP. If we in the private domestic sector desire to save overall the government deficit spending has to be larger than the current account deficit. That is just accounting.

Governmnet spending plays a significant role within our economy. (pictured above) It is the largest injection into the private domestic sector. As an issuer of the currency, it has the power to maintain spending in aggregate sufficient with full employment. Government deficits aren’t relevant in terms of future governments ability to spend. However, entities like businesses and households have to finance their expenditure. The fiscal position of the private domestic sector matters. I have graphed the sectoral balances based on treasury projections in their budget papers for the next 4 years.

The solid coloured lines are the results of the various sectors. The dotted lines are treasury projections. Except for the current account (red line) years, 24/25 and 25/26, which I have assumed the long term aveargage of 3.5%. Treasury does not predict those years. The red line is positive because a current account deficit is savings of Australian dollars non-residents (see above). The government deficit (green line) is an injection to the private domestic sector (blue line). While the media focuses on the governments fiscal position, which is irrelevant in terms of its ability to spend, it neglects what is happening with the balance of the private domestic sector.

In this neoliberal era it is ‘normal’ for the private domestic sector to be in deficit as the government pursues surplus. This policy objective is unsustainable as it deprives the non-governmnet sector of its ability to save and destroys the net financial assets, leaving the sector financially poorer. We can analyse the domestic sector further between the distribution of wages and profits. Though because we run current account deficits the Australian government needs to deficit spend if we want the private domestic sector to save overall. That is not a theory, it is a matter of accounting.

Further Analysis

I wrote a simple analysis of what is driving the inflationary pressures in the economy here. I’ll repeat the conclusion of what I said there.

Inflation is driven by price increases. Price increases are administered by those with enough power to raise prices. Take a simplistic economy where we have no new production. If corporations hike their prices by 6% and workers achieve a 6% wage increase there has been no change in the wage and profit share of the economy but prices have increased. What is currently happening is as production costs increase, those with enough power are able to pass on those costs.

What we are interested in is relativities between sectors. Inflation is redistributive. If someone is paying more, someone is receiving more. Our current inflation has nothing to do with wage rises or government spending. Our governments have enormous power (as currency issuers) to set domestic prices. It made childcare temporarily free over covid and we saw a fall in the consumer price index as a result of that decision.


Narratives that depoliticise current events that harm workers

Governments need to reduce deficit to save to build savings for the future.

This is one of the most recited points in relation to a governments budget. It is nonsensical. Savings are an act of forgoing current expenditure to spend at a later date. It does not apply to a currency issuer that can always spend. As shown above, as a matter of accounting, the government deficit equals the non-government sector income. We should question where it is spending and the distribution of that income but the notion it needs to save is irrelevant. It issues the currency!! Its fiscal policy should be determined as to whether it is meeting ouer desired socio-economic objectives and by how well the bottom of the income spectum are doing. Discussion around taxes should be around how we should redistrute income and wealth more fairly. A progressive position would be to tax unearned income (capital gains, rent, dividends et ceterea) at higher rate than waged labour. These are what we call economic rents and are extractive. The recipients of unearned income have not contributed to the output of that product and thus it is referred to as unearned income. i.e. They have not laboured to produce a good or service but still derive a financial benefit.

Global economic slowdown

Another reason citied is because of changing global economic ‘headwinds’. This is a term used in the budget papers. ‘Changing headwinds’ is a sailing terminology that refers to a turn in the weather for the worst. The current global circumstances of the war in the Ukraine has led to increased prices for

Petroleum refining and petroleum fuel manufacturing (+31.5%) due to a decrease in global crude oil supplies and increased demand in response to easing COVID19 restrictions. abs import price index – June 2022

That has now eased. The September import price index notes

The main offsetting contributor was:
Petroleum, petroleum products and related materials (-2.6%), reflecting an easing in global oil demand.

The increased prices for imported necessities has labour and capital fight over who should take the real income losses. The data shows for the trade price index Petroleum, petroleum products and related materials reflected an easing in global oil demand.

The current global slowdown does not change the domestic capacity of the local economy.

World gas prices are high because of Ukraine war.

The largest increases to prices for the trade price index – exports are

Through the year, the Export Price Index rose 25.9%. The main contributors were: Coal, coke and briquettes (+134.8%), and Gas, natural and manufactured (+98.6%)

These rises reflect a rising world spot price because of the war in the Ukraine. The gas companies are charging the domestic market world spot price which in the Consumer Price Index has led to an increase of Gas and other household fuels (+10.9%) for the September quarter 2022.

The Australian government could set a reservation policy and price cap for the domestic market of gas but it has chosen to allow the gas corporations to extort citizens. We are one of the worlds largest gas exporters. A government interested in getting inflation under control and mitigating against climate change would:

1. allow the expiration of long term gas contracts.
2. ban exports at the world spot price
3. mandate a domestic gas reservation and set a price cap.

Narratives on persistent inflation being something the government can not do much depoliticise falling real wages and blame ‘global’ factors outside our governments control.

Supply-Chain Disruptions

The latest consumer price index notes

Strong price rises were seen across all food and non-food grocery products in the September quarter. These increases reflected a range of price pressures including supply chain disruptions, weather-related events, such as flooding, and increased transport and input costs. In the 12 months to the September quarter fruit and vegetables prices rose 16.2% and dairy products increased 12.1%.

While supply side constraints and severe weather is indeed a problem, what are we doing to mitigate against these types of disruptions (e.g. more locally based production, climate change mitigation) The government can target income to lower income households to ease cost of living pressures.

Interest rates need to rise to ‘tame’ inflation

The use of interest rates to control spending in aggregate is class warfare. The Reserve Banks role to maintain inflation within a particular range is a development that started from 1993

In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of the role of monetary policy.

The latest irritation of targeting an inflation band in the belief that rises in interest rates dampen demand holds no empirical evidence. We do not know the outcomes in aggregate as businesses pass on costs to service loans used to invest in capital equipment and borrowers are forced to pay more in interest. There is also the outgoing payments on the interest of government bonds that needs to be factored in.

The only way monetary policy would work to lower inflation is if enough people were to becoming unemployed and businesses would be forced to concede profit margins as they lost sales. Then because the current dynamic on inflation is driven by climate related weather disasters and unregulated gas prices – I doubt the current profit share for these corporations would decline.

The Marxist economist Pat Devine describes it as below.

The attribution of the cause of inflation to asocial abstractions like the money supply,-” or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “”cured”” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses. Of course, if these things were possible there would be no problem of inflation to cure in the first place. It makes no sense to propose “”technical”‘ cures for inflation which depend for their implementation on the absence of the very socio-political pressures which cause the inflation they are supposed to cure; no sense, that is, except as a means of mystifying the nature of social reality and holding out the forlorn hope that it is possible to control inflation without fundamental changes in that reality.

Inflation and Marxist Theory, Marxist Today, 1974, p.87

Conclusion

Our government is using a depoliticisation strategy and avoiding any discussion on policy that would help stabilise prices and bring about real wages growth.

The current fiscal policy settings will see a return of the private domestic sector in deficit. It is sold as a neccisitty and ‘good’ economic management. A lack of investment in climate change and rising unemployment is not my definition of ‘good’.

The war in the Ukraine and broader global economic factors are being used as cover to avoid having policy that stabilises current gas prices and the need to reduce government spending (aka surplus). The Australian government has the power to regulate gas prices. Meanwhile the faux progressives are out calling for taxes on ‘excessive’ profits. I am not sure how that would bring about price stability. These things would.

1. Allow the expiration of long term gas contracts.
2. Ban exports at the world spot price
3. Mandate a domestic gas reservation and set a price cap.

The government needs to stop working within the interest of gas corporations and control domestic prices. Further, slowdowns of growth in other countries do not affect the Australian governments ability to spend and invest in our domestic economy.

The paradigm of rate rises depoliticise policy to be the decision of ‘expert’ technocrats so our elected representatives can shift blame to unelected officials. Rate rises will do nothing to address currently inflationary pressures.

What we need now is targeted income payments to lower income households to assist with the rise to food prices resulting from climate related weather disasters.

The ALP is currently using a strategy of shifting blame to external factors it has no control over (or pretends it has no control over. i.e. interest rates) as it presides over the largest fall to real wages, and a dramatic drop in the wage share of national income, to their lowest levels in our history.

The NT Government lost in neoliberal spin

I’ve been active writing the stronger together campaign blog. The positions our elected representatives take are increasingly more and more to the advantage of capital. When you are so close to elected representatives (as I am here by virtue of my work and a small population in the NT) you can see the sitting members are bereft of an intellect and blindly follow advice given to them by treasury. Even if an elected representative hoped to say increase the deficit, they would be mocked by those within the department and ostracised by cabinet. Why would an elected members do this? Because they have career prospects to think about. Michael Gunner, the previous chief minister resigned from parliament and six months later had a highly paid role with the ‘green arm’ of the fortesque metals group. Apparently they are planning some ammonium export business. The public benefit to such a project is practically nil. Let alone looking at the environmental impact such a project will have.

The legislation in the NT says a retired politician has six months before they can be appointed to a position within the private sector. The federal legislation is 18 months. Not that extending the waiting period would make much of a difference of the movement from sitting member to receiving political favours. You’d put an outright ban on it if it is something you wanted to stop.

You can bet things are similar if not worse when you get to more powerful and larger state and federal government. Worse in terms of the political favours that advance capitalist interest, and the ‘deals’ done with ‘jobs for mates’.

I said in the linked blog post how the Northern Territory Government is essentially a marketing arm for capital. It has the NT News publishing propaganda on achieving a $40billion dollar economy. How it will achieve this is unknown. What it will produce to do this is also unknown. Why has it chosen this number. It was plucked out of the air.

I said this in my linked post but I will repeat it here

Achieving a goal of $40bn GSP doesn’t account for our public well-being. GDP(GSP) is a measure of aggregate production. Producing $15billion in mining, military and other private sector for-profit investments is the same as investing $15bn in education, health and indigenous communities. It is measuring what we output. It is a quantitive and not qualitative. It is a residual number. We shouldn’t target it or look at it without context!

Achieving a goal of $40bn GSP doesn’t account for our public well-being. GDP(GSP) is a measure of aggregate production. Producing $15billion in mining, military and other private sector for-profit investments is the same as investing $15bn in education, health and indigenous communities. It is measuring what we output. It is a quantitive and not qualitative. It is a residual number. We shouldn’t target it or look at it without context!

We need to be targeting fair wages, housing for all, universal public services, (free childcare anyone?), investments in our health and education systems, guaranteed work, the list is endless on what we need to be doing. Things like ensuring our communities are using sustainable energy and developing agricultural systems that are local is a start. Rather than focusing on GDP(GSP) we need to focus on social and ecological indicators.

https://www.strongertogethernt.com.au/blog/towards-a-40bn-economy-what-for

With a bit of time I should be able to delve deeper into the GSP data set and see what is driving GSP and look at detail and provide evidence of neglect within the public sector. That is what I suspect I will find. This is what every state treasury department should be doing and advocating for greater spending on public goods and our communities well-being. Instead we have a nasty ideology that controls the purse strings. An ideology that uses an economic framework that has no evidence to support it and leaves working people worse off in material terms. And that’s before I even start talking about the impacts of climate change!!

That’s all from me.

And that’s a wrap!

Well it has been a busy few weeks and I have managed to launch an MMT informed campaign for a union peak body and commence work on a workers journal. I’ve developed some decent graphic design and website building skills. Canva is unbelievable. I can take ideas and turn them into simple pictures. I’m most proud of the below image describing inflation as a conflict. If someone is paying more, someone else is receiving more.

As much as things change though, things stay the same. I read this in the guardian on an article advocating why we should scrap the stage 3 tax cuts.

Australia is one of the richest countries in the world; we are in the middle of an energy price boom; we have enormous opportunities in renewable energy; but decades of tax cuts have trained us to feel poor, that we can’t have nice things, and that the future is something to fear rather than embrace.

https://www.theguardian.com/australia-news/commentisfree/2022/oct/06/australians-on-120k-are-not-middle-income-earners-we-must-remake-australia-not-spend-243bn-on-the-rich

And I agree we should scrap those cuts from an equity perspective. Though insinuating ‘tax cuts’ have trained us to feel poor is illogical. More dollars in people’s pockets actually makes you wealthier in financial terms. We can argue about how that income has been distributed and I certainly would’ve liked to see more dollars flow to the bottom of the income spectrum. To bring about greater equity we need to be spending at the bottom, delivering universal public services and I’d argue guaranteeing a right to work.

None of that is possible without breaking the myths we hold around debt and deficits. Deficits are merely an outcome of the saving desires of the non-government sector. Where the government spends is important in terms of the society we’d like to live in. But it never has a revenue constraint.

I listened to some nonsense about needing tax Woodside because it’s profits increased by 44%. Woodside’s profits increased because we have been enduring years of wage suppression. Woodside’s profits increased because we allow the export of things we should be keeping in the ground. I don’t want to tax them. I want that industry to be shut down.

It’s pathetic the alleged progressives in Australia seem to be nothing but. Where is their advocacy of raising the unemployment benefit? Where is the advocacy for raising the aged pension? We’ve one of the highest rates of pensioner poverty in the OECD. Why are they not fighting for a guaranteed right to work? It is what the early labour movements fought for!


Anyway hopefully some of what I am working on will help change the narrative on economics. The message is out there and I feel regular everyday people grasp the basics. We needn’t worry about running out of dollars, inflation is about power. Now we need our collective voices saying that. I am in talks with some other organisations about getting them on board with the stronger together campaign and spreading the message on flawed economic frameworks – and how using a decent lens can have us enact on climate change. Hopefully, that will come to fruition. I’ve got a lot of writing to do between now and the end of the year.

It’s time to develop decent working class material

In an earlier post We need to organise and attack current fiscal policy I wrote about a project I was working on to take a different perspective on what the economy is and our view of government deficits. That framework would then take place for acting on climate change, alleviating poverty and creating a better world for ordinary people. That campaign has now launched as strongertogethernt.com.au. It is early days still but I hope to build the site and campaign to give small social organisations resources to fight back against the economic orthodoxy that dominates treasury departments.

While most of us ignore economics and the technical detail. Flawed social policy whether we realise it or not is a result of a dud economic framework.

me – jengis

The other small project I’ve been working on is one through a small social club The Darwin Workers Club. We have the capacity to begin publishing a quality journal that allows working class voice to permeate. Currently media bias is so strong and dictated by a group of elite, any debate is done within a framework that ensures working people lose. For example the merry-go round we need to tax the rich to fund public services. We know we need to tax the rich for equity purposes. But for public services and public expenditure we need governments to be commanding real resources (mostly labour) to begin delivering public goods (like childcare) and enacting on climate change. Instead ‘the left’ lay blame on multi-nationals not paying tax. The reason we don’t have decent public services isn’t because multi-national doesn’t pay tax, it is because our governments have not provided those services. In any case for fossil fuels companies a progressive agenda shouldn’t want them to pay more tax, it should want to eliminate them so we are don’t releasing carbon into the atmosphere. That’s one example of how the public debate is constrained. We are laying blame on the wrong entities.

In the days prior to the union merges during the 1980’s we had hundreds of unions that were local and grassroots producing material and disseminating information from a working class perspective. I won’t detail how I think the union merges over the neoliberal period broke solidarity from grassroots members here.

The journal will detail struggles of working class and aim to be an educative tool on economics. Economics itself is a broad term that applies to microeconomics, macroeconomics, political economics and multiple other forms and I think it is important we start making that distinction amongst the membership base of trade unions. The first issue will look something like the image below and I am hoping have quarterly issues. I’d note we are using terminology of tropical seasons for when the issues are released.

There are six seasons in Australia’s tropical north. Each indigenous tribe has different names for the seasons, depending on their location and language. The Bininj and Munnguy from Kakadu use the following.

Gudjewg | Monsoon season | Dec-Mar

Banggerreng | Knock ’em down storm season | April

Yegge | Cooler but still humid season | May-mid Jun

Wurrgeng | Cold weather season | mid Jun-mid Aug

Gurrung | Hot dry weather | mid Aug-mid Oct

Gunumeleng | Pre-monsoon storm season | mid Oct-late Dec

Conclusion

I’ve got a lot of writing to do and a lot of things to co-ordinate to make these things happen. If you or you know anyone that’d like to contribute get in touch. darwinworkers@gmail.com

Productivity Commission ties itself in knots

I seldom follow the mainstream news. Most of the time it is discussion around a pressing issue and the analysis tends to amount to what we should be doing about it. The conclusion is usually ‘we (the Australian nation) have no money?’ So we need to rely on the charity of private investment. That plays into a framework of how wonderful it is to have private enterprise supporting our communities. At the opposite end of the debate you have leftists that argue ‘if only those corporations paid taxes’. Which when you understand the Australian government issues currency and must spend first – you see how pointless the debate is. We go round and round in circles and our education, healthcare, care services and public utilities get neglected and as a society we end up poorer for it.

An article in the AFR ‘Gonski reforms to improve teaching never implemented’ takes issue with the declining educational results of Australian students. I’ve always found the Gonski report flawed. David Gonski the chair of the paper on educational reform has no experience or qualifications in education. He is a businessman that sits on countless boards including ANZ bank, Ingeus (one of those private firms that make money by punishing the unemployed), Swiss Re (An insurance company) and multiple other firms that collect billions of dollars in unearned income. The fact the allegedly left ALP Gillard Government chose him to write a report into how to solve issues in Australian public education just shows how closely affiliated capital is with the Australian Government.

The Productivity Commission report into the Gonski reforms says

The Productivity Commission says each year, between 5 per cent and 9 per cent of students fail to pass the minimum NAPLAN reading and maths standards for their age, and that one-third of the children who have fallen behind as eight-year olds are staying behind as 15-year olds.

I work in education and I can tell you that there are many students that are required to take these standardised tests knowing they are going to fail. In a disadvantaged indigenous community I know of students that moved from a level 3 to a level 4 reading level in a year were still required to undergo a standardised test far higher than their ability!! I had a meeting with an education minister in regards to this issue (plus numerous others) and I can tell you it is nods and smiles and honestly I don’t think they could care less. I doubt they were even listening to the words coming out of my mouth.

The focus of the report is on what is wrong and why we have declining standards is thrown onto the teaching profession

“But persistent barriers, including ineffective teacher education in universities and a lack of ongoing monitoring and professional development of the existing teacher workforce, were hindering progress.”

And to some degree that is true. However, teachers are overworked, paid well below other professions (architects, engineers etc…) and have unnecessary administrative duties placed on them that they don’t have time to plan classes. Most of these administrative duties are to do with collection of data, that teachers know of their students, but it needs to satisfy some bureaucratic funding requirement. None of that tends to come into the minds of the powers that be at the Productivity Commission.

And yet nothing in respect to the broader social environment of students is considered. In yesterdays post I citied Eisenberg, P., & Lazarsfeld, P. F. (1938), a study on the psychological effects of unemployment. The study looked at the psychological affects on the children of unemployed adults. It found

One of the effects of unemployment on personality is shown in school work. Busemann and Bahr (13) found that in an elementary school in the poor district of Breslau the children of the unemployed fall from an average grade of 2.80 to 3.15 (1—very good, 5—failing). This bad effect is found more frequently in children of unemployed who previously had good marks than in those who had average and inferior grades. The decline sets in immediately after loss of work, and is to be explained by the lowering of the standards of living. In a better controlled study by Busemann and Harders (14), in which 473 children of unemployed parents were compared with 1,154 children of employed, it was found that there appeared without exception a decrease in the average grades of the former group.

Eisenberg, P., & Lazarsfeld, P. F. (1938). The psychological effects of unemployment. Psychological Bulletin, 35(6), 358–390. https://doi.org/10.1037/h0063426

This is where the economic orthodoxy fails us. An article from a year ago by a typical neoliberal fear monger, Shane Wright ‘Dark clouds ahead’: PC warns about budget debt and protectionism complains of PC warning against debt and deficits.

One of the federal government’s most senior independent economic advisers has warned against accepting large budget deficits and the drive for the country to become self-sufficient across key industries, saying they will leave future generations poorer.

Yet we know a deficit is merely the difference of what a government spends (which as an issuer it must do first) and what it taxes. The result is the fiscal balance. The result is meaningless without a context. On one hand you have the PC stating we need to lift educational outcomes so we can prosper in the future and on the other they demonise government spending by spreading myths of debt and deficits that mean our governments allow unemployment, which leads to children having lower educational outcomes!

Unless we are pushing for economic reform within the frameworks our governments use, we will continue to advance the interest of capital and as a society our public infrastructure degrades, our health systems can’t manage and our educational outcomes decline. This leaves us poorer as a society!

Then debate happens around education funding. Each school has a Student Resourcing Score (SRS) that should be met to ensure schools are resourced appropriately. There are loadings for disadvantage, students with special needs et cetera.

The federal government committed to funding 20% of the SRS for public schools while the states and territories provided the rest. It is reversed for private education with the feds funding 80%. No jurisdiction has met the 100% funding for public schools.

The loadings that are meant to assist in closing educational gaps between rich and poor aren’t enough to cover the labour of someone needed to assist in the classroom. So casual work is offered and employees are left in precarious situations while there isn’t the funding to deliver what students actually need in extra assistance.

The appropriation bills are written in such a way that rather than deliver funding for the required skilled labour, a hypothetical amount of money is ‘put aside’ and the funding flows to ensure it doesn’t exceed that limit. Complete and utter nonsense when you issue a currency.

When you have students with disadvantage that need extra assistance and you have underemployed workers that want more work, as a society we should be able to ensure we lift hours for those workers to help the students that need help. That is logic.

But instead of that frame taking the forefront of public debate we get nonsense that the federal government should lift its funding commitment 5% (to 25%) of the SRS.

Well, why wouldn’t the federal government fund a 100% of the SRS? Why not write appropriation bills that ensures funding flows to meet the needs of the required labour and other resources needed? Why limit ourselves by a hypothetical amount of money? We face serious challenges in terms of a labour force that is exiting education, a lack of skills development given to those that need to assist in the classroom, and chromic underemployment issues.

Unless we seriously begin looking at the real resources needed to rectify the issues, that is things like teacher:student ratios, the additional support for disadvantaged and students with special needs, looking at the broader social environments students live and ending the dysfunction and poverty that unemployment brings, our public education system will continue its decline.

We need to be designing the funding structures to co-ordinate the resources we need instead of placing limits on amounts of dollars to spend. Otherwise we will go round and round in circles and achieve nothing.

Work is Intrinsic to our Identity

As people start to grasp the power of a currency issuer thoughts lead to the idea of a universal basic income. Rejections against it are based on ‘not wanting to give money to millionaires’. Then there are those that advocate for a basic income. An income for people that choose not to work.

The first step in understanding why currency has ‘value’ (why we use it) is because of the coercive nature our governments use demanding the currency they issue back in taxes. In order of operations a tax liability comes first, then the spending, then the taxes.

In helping to understand that concept I use the story of ‘the hut tax’. When the British colonised Malawi, to create labourers they needed a mechanism to coerce the locals into needing to accept the colonisers currency. They placed a hut tax on the dwellings and if the tax wasn’t paid they were removed by force. (source) There are other examples of tax liabilities to drive a currency. The colony of New South Wales had liquor licensing to quell the unruly behaviour that stemmed from the production of spirits (the rum trade) In 1824 an act was set up introducing the ‘Spanish dollar’ as a currency and liquor licensing brought in to drive its acceptance. note: the early colony didn’t have a means to mint their own coins. Spanish pesos with holes drilled through the middle were used.

The first reason why I disagree with basic incomes, universal or otherwise, is it undermines the coercive nature of the tax liability. This is a contrived example but it is to emphasis a point. Imagine a society where most people chose to remain on a basic income but we are short of nurses. What coercive mechanism would we use to drive people off basic income into work. The payment of an unconditional income after the tax liability undermines the reason for the tax liability in the first place. That is an error many people make.

The second reason is that ‘work’ however defined is intrinsic to our own identity.

When we try to formulate the psychological effects of unemployment, we lose the full, poignant, emotional feeling that this word brings to people.

Eisenberg, P., & Lazarsfeld, P. F. (1938). The psychological effects of unemployment. Psychological Bulletin, 35(6), 358–390. https://doi.org/10.1037/h0063426

The study cited above is from 1938. I chose that study to demonstrate that the effects of unemployment have been studied for quite a while now. The paper discusses unemployment leading to an increased instability and lowering an individuals moral. We create social networks through work, use it to develop and improve skills and create a sense of purpose for ourselves. Not only in terms of a self-identity but through social networks we develop and the sense of contributing to something bigger than ourselves. There are also issues with respect to children and youth growing up in unemployed households. You witness lower self-esteem and declining grades amongst children in unemployed households and of course poverty as a result of insufficient income.

Redefining Work

Another point basic income advocates miss is the idea we need to redefine the definition of productive work. The definition of what constitutes productive work was part of the debates happening around the 1930s. It was deemed anyone working and creating a profit was ‘productive’.

Overtime we’ve advocated for social services and provisioning of education, healthcare and utilities to be provided as public goods. This is often seen as a ‘cost’ to society under flawed framing of ‘tax and spend’. Though we would say that workers in those sectors are productive. However, overall ‘work’ as we define it today is viewed as needing to be earning a profit or it is otherwise ‘subsidised’ by taxes.

Work can be defined as something much broader. We can include parenting, the arts, cultural and indigenous knowledge, community work. The list is endless. Basic income advocates use arguments that ‘someone should be allowed to create and develop their art’ and I am all for that. Though there is an idea of reciprocity. We could develop a Job Guarantee where someone can choose a job to develop their artistic skills, undertake courses and provide work of community benefit. They may be required to assist in designing the artwork for a community festival and working with others to discuss ideas and theory. Art isn’t created in a vacuum. There is a social context and artworks often reflect social upheavals and social movements from the era they were created.

Work is about giving back

I chuckle at the idea that if someone chooses not to work we should support them in that endeavour. There are various migrant communities were work is essential in terms of defining their place within their communities and contributing to the survival of those community.

I am a generation removed from subsistence living. My grandparents with their children grew up in a rural village with no electricity. They produced most produce themselves. They would make the bricks to build their houses, locals (usually family) taught in the school and each family took turns in producing various agricultural products. Fruit trees, vegetables, chickens, goats, cheese, olives were all part of the mix.

My grandmother tells me her street, which was made up of her brothers, would take turns in milking the goats to make the cheese. One week it was her turn and it would move up and down the street until it came back to her house. Imagine within that setting you refused to make a contribution. You would be ostracised by the community and not allowed to share in the rest of the produce that was grown.

Conclusion

The basic income undermines the coercive nature of the tax liability that is implemented to create workers in the first instance. That is just a technical fact.

Work is responsible for more than just an income. It allows for social mobility, a setting that allows personal and skill development, it gives us a social standing within our communities, it assist in the development of social networks, and allows for children to grow up in households were they see value in what their parents create in a broader community. This stuff is immeasurable.

There is an idea of reciprocity. I find it difficult to comprehend that someone that expects a high level of social services and public goods feels that they can choose to opt-out of work and be provided with a subsistence living. That wouldn’t fly in a small rural village and I don’t see why it is a valid argument in our modern societies.

The idea should be to redefine productive work and include things that have public purpose and enhance our communities making them better places to live.

If you demand a high level of public services and want our government to ensure enough work for all the other end of that bargain is contributing to your potential to make our communities desirable places to live.

We Need to Organise and Attack Current Fiscal Policy

I’ve been busy working on a project that tries to bring progressive organisations together and critique Governments fiscal policy from an MMT perspective. It focuses on two key points. The first is the Australian Government issues currency. It spends with an appropriation bill and the RBA uses a computer to mark up the size of the relevant account. There is no ‘printing’.

Printing money is one of those divisive terms that gets used to invoke a fear of inflation. The reality is there is no alteration to the way the government spends. Whether it runs a deficit or a surplus; Or the conduct of any operation by its central bank. The issuance of bonds and taxes by matter of logic needs to come after the fact the currency issuer has spent! There is a history lesson on monetary operations I wrote about in this post.

The second part of attempting to change the narrative is too redefine how we view the economy. One of the most idiotic questions that has always bothered me is which party is better for the economy and which is better for society? One of the most successful aspects of the neoliberal era has been to have the masses believe ‘the economy’ is something that sits above us and we are reliant on profits and taxes to fund our public infrastructure.

So I’ve developed my graphic design skills to try and redefine that.

It is obvious to many people we now face a poly-crisis. Climate change, rising inequality, a housing crisis, job insecurity and a lack of enough work for many. We look at our aged-care, disability and child care systems and see that they’re directed toward profit over doing what is best to help those in need.

We really need to be breaking the orthodox economic framework by attacking our elected representatives and treasury departments for targeting balanced budgets which avoid funding and skilling people in the areas we need to prosper into the future! Surely at some point in the future we will look back at the 2020’s at think ‘how could people be so stupid to think government insolvency was a risk’ That is the aim of what I have been working on.

The project will have two components;
1. what is fair? and;
2. why it is possible.

The fair will start looking at ecological sustainability and working within our ecological limits as well as a strong focus on worker rights and falling real wages. The issues of climate change and workers rights are intertwined. To build a sustainable future we need drastic action and we need well paid workers to do it!

Why it is possible will be the MMT aspect with a slogan ‘People Go Broke! Governments Don’t.’

Then of course you always get arguments regarding inflation. This has been the most difficult to come with simple explainers to help redefine. I don’t think within the general public inflation is very well understood at all. I’ve settled on describing it as a conflict.

The project will attempt to redefine how we talk about fiscal policy.

We need to view fiscal policy in respect to what it is doing to mitigate against climate change and restoring greater equity. We shouldn’t be targeting balanced budgets!

Government’s and capitalist institutions use the fear of debt and deficit and nonsense about inflation as excuses to stop public expenditure. It has led to privatisation of previous public goods. The nonsensical neoliberal economic framework is so set in that we see what should be public goods set up for profit! Think the unemployment industry, childcare, aged care and disability services. These are set up as industries that allow vulnerable to suffer all while a few make handsome profits from government spending.

Then we’ve the nonsensical framework applied to renewable energy. There is this madness where I live about building a sun cable to export renewable energy to Singapore. Solar panels will be built in Tenant Creek and energy moved along a cable several thousand kilometres to export to Singapore. It is framed with the belief the Northern Territory Government needs to reduce its dependancy on the Federal Government for its source of revenue. These arguments can be dispelled with an understanding the Australian Government issues the currency! Taxes aren’t a funding mechanism.

That’s all from me!

Union Advocates for Real Wages Cuts!

I’ve been enjoying a period of annual leave but today I got word the Queensland Teachers Union (QTU) was advocating for real wages cuts! (source)

Wage increases in Australia are determined by varying methods. Award wages determine the minimum wage and increases are made on an annual basis by the Fair Work Commission after considering the submissions by interested parties and making a decision based on the framework determined by the Fair Work Act. In practice it is a political process with an ideological bent in favouring capital but I’ll stop there because that is a deep deep rabbit hole we don’t need to go down.

The other method wages are set is via enterprise agreements. These are negotiated between employers and employees (usually represented by a trade union) and voted on by all staff. Though an employee can choose to represent themselves (non-sensical under a collective agreement) or employees can choose to appoint any other party. Often workers unions are sidelined from the process and sometimes not even informed negotiations have begun! The move from awards setting market conditions to enterprise bargaining where employees have to negotiate by employer rather than negotiate via profession was a move that helped break solidarity amongst the working classes and is far more resource intensive. Instead of say negotiating one agreement that covers a profession, trade unions need to negotiate agreements with each individual employer.

Although Australia has moved to a national legislative framework for wage determination. The States still have jurisdiction and a legislative framework with their state industrial bodies. These only apply to state or local government employees. So Queensland state teachers use a different (though similar) framework to Queensland Catholic school teachers.


Real vs Nominal

Compensating for increases in ‘cost of living’ can be complicated. Employees and employers negotiate nominal wages. Nominal are the numbers we see and use everyday.

Rises in the cost of living and productivity increases are an unknown variable – so employees and employers need to make assumptions about what these may be.

There is then a conflictual nature over who receives the increased productivity. Rises in the CPI can be attributed to the conflict between labour and capital as the groups seek to battle over the productivity increases.

To adjust for movements in price indexes (in this case CPI) economist choose a reference point and convert the dollars into that year. The purpose of tracking prices with this index is to try and account for whether our economy is increasing output. Is GDP rising because of price increases or is it rising because we are producing more? Adjusting figures from nominal to real allows us to answer that question.


The Queensland public sector is currently negotiating with its public sector employees. Public sector employees had a 2.5% pay increase on 1 July 2020, however had a pay freeze in 2021 (with the Queensland government citing covid as the reason) and the increases resumed at the beginning 2022 and a ‘catch-up’ payment in July 2022. You can see below the ‘catch-up’ payment in real terms failed to match 2019/20 rates.

The QTU memo to members states the offer as follows:

Increases to wages and existing allowances (normally adjusted in accordance with wage increases) as follows: 4% payable from 1 July 2022; 4% payable from 1 July 2023; and 3% payable from 1 July 2024.

A cost of living adjustment: (COLA)
In each year of the agreement, if annual inflation (at March Quarter, Brisbane Consumer Price Index (CPI)) exceeds the base wage increase, a one-off lump sum payment equal to the difference between the CPI increase and the base wage increase (up to 3 per cent) will be paid to all employees at the end of that year of the agreement.

In the first graph I adjusted teacher wages into 2019/20 dollars. To do this I hade to make some assumptions about future CPI increases. I assumed 5.1% for June quarter 2022 – 2025 (note: June quarter 2022 data isn’t released until later this month)

I gave the 2019/20 real figure a score of 100 and tracked the movement in wages. There are two aspects to wage increases one is the percentage increased negotiated for each year and the other is increases in an individuals step based on experience. This analysis tracks the percentage increases and doesn’t account for movement in steps.

In 2021 the Queensland government initiated their wages freeze, there was a nominal increase at the beginning of 2022 though it failed to maintain the real value of wages. The second increase or ‘catch-up’ payment was delivered on 1 July 2022 and the real value of wages rose though it failed to reach the level in 2019/20. From that point on the real value of the Queensland governments offer has wages falling.

The next graph accounts for the Cost of Living Allowance (COLA) payment. Because the COLA doesn’t add to wages you can see the COLA in real terms diminishes as real wages fall.

The QTU wrote to members advising them

Executive was clear that the offer is substantial and includes initiatives that respond to the Union’s priorities as determined by members. It therefore recommends acceptance of the offer to members.

A real wages cut doesn’t sound like a ‘substantial’ offer to me. This decision was made by the union executive who are

The Executive, which is the Union’s decision-making body between meetings of State Council, is made up of the six senior officers and 14 rank and file activists elected by Council, from across the state.

In my experience with union bodies the paid executive have little to no understanding of accounting for real wages and often accept government arguments of needing to reduce deficits! These lousy offers (and Queensland is a more ‘generous’ offer than other states) are driven by ideology of treasury departments that think real wages need cutting to keep inflation in check and reduce deficits. (Which I covered why they don’t in my last blogs)

Members should reject these lousy offers and push for representatives to put forward CPI increases as a minimum toward wage increases! If the paid executive disagree they should be replaced.

We Treat the Unemployed with Disdain

It’s Thursday and I have decided I will write three posts a week. Tuesday, Wednesday and Thursday. Today’s post continues on from yesterdays Unemployment is a Political Choice which described when, why, and how we started counting the unemployed. How it began in an era of Full Employment where the Australian Government aimed for spending in aggregate to target more jobs advertised than demanded. I described some detail around what was involved in aggregate spending and finally why unemployment is a political choice. Governments with their monopoly on the currency can always purchase what is for sale, including idle labour.


In yesterday’s post I mentioned the recently elected labour governments decision to maintain below poverty unemployment benefits and maintain the pernicious system of ‘mutual obligations’ that penalises those on the unemployment benefit if they fail to complete certain tasks. This ABC article gives you an overview of what is happening with the changes to the system. The system is summarised

….more than 750,000 people will be placed into one of two Workforce Australia streams: an online portal for self-managing job searches, or into the management of a new job provider for face-to-face appointments.

Significantly, those who will be required to complete mutual obligations will also transition to a process where they will earn points for activities in return for income support.

Which may seem ‘fair’. Absolutely we should aim to have those that can work into work. That includes creating workplaces and designing work for people with disabilities so they too can feel a sense of belonging, a sense of contributing to their communities and an ability to feel in control of their lives with enough income to be able to do that. However, our unemployment system doesn’t do any of that. Some of the nastiness pieces of the system are being retained by the ALP. (emphasis mine)

ACOSS acting chief executive Edwina MacDonald said her organisation welcomed some of the changes outlined by Mr Burke, but voiced concern about the continuation of the “punitive” work-for-the-dole program and automated payment suspensions.

The system automates payment suspensions and we require some people to work for their unemployment benefit while they look for work to receive their below poverty line payment.

I decided to look at the number of people seeking work and the number of jobs advertised. This relationship is known as the Beveridge curve named after a conservative member of the House of Lords in the UK, William Beveridge. You can read why the conservatives decided to deal with the rising levels of unemployment in my post Advocating a Right to Work.

Anyway back to the Beveridge Curve. Wikipedia tells us The curve is a graphical representation of the relationship between unemployment and the job vacancy rate which is the number of unfilled jobs expressed as a proportion of the labour force. The ABS says more less the same thing. The Beveridge Curve is widely used to depict the relationship between the unemployment rate and the job vacancy rate. Economists will study this curve and hope that as vacancy rate increases, unemployment decreases. i.e the higher the vacancy rate, the lower the unemployment.

Beveridge Curve – ABS

When you grasp that as a monopolist of the currency – the government chooses the level of unemployment the Beveridge curve becomes somewhat pointless, unless you wanted to measure how much the private sector is contributing to economic activity.

I ran some numbers on the number of job vacancies v the number of unemployed and underemployed workers. As of the March quarter 2022 there is 0.88 jobs for every unemployed worker. This doesn’t take into account skills mismatches or location.

The ABS gives the quarterly figures for job vacancies at a different quarter to the unemployment figures to make comparisons a pain in the arse. Anyway I did it!

The first image is a table of job vacancies and numbers of people who are seeking work. The last column is the number of jobs advertised relative to the number of unemployed people.

The graph is a visual depiction of the table. The blue columns are the number of advertised jobs and the grey and yellow lines are the number of unemployed and underemployed people in the quarter.

To calculate quarterly figures for those two groups I found the monthly data and calculated an average. The data then matched the ABS job vacancy figures. The orange line is the underutilisation rate – which is the unemployment + underemployment rate.

Sadly, our Government thinks it is fine to force people to seek work that does not exist in sufficient quantity for all those that desire it and punish them for not jumping through bureaucratic hoops to receive a below poverty level payment. In some cases asking them to work for it!

Conclusion

Policy positions a progressive party should be taking;

  • Immediately lift the unemployment (and other support payments) to $88 a day. 
  • Stop mutual obligations 
  • Transition the unemployment benefit (not other benefits) into a voluntary living wage Job Guarantee run under a nationalised unemployment agency.  
  • The new national unemployment agency would form a ‘key pillar’ in a newly established full employment policy – helping those in the JG with education and training and seek employment in the public service or private sector. 
  • Establish a full employment policy with things like expansion of the public sector (childcare, better resourced heath and education etc…)

The labour movement has a history of fighting for ‘the right to work’. I believe this should be at the forefront of any labour movement. The ALP like the Liberal Party are protecting the unemployment industry in Australia – a series of privately owned companies paid to punish those without employment under a system that ensures there is insufficient work.

That is all from me!

*Update: there were minor errors in my spreadsheet and graph. I corrected these and updated accordingly. Update II graph is fixed now. Administrative spreadsheet error.

Unemployment is a Political Choice

I read this article on SBS news today. It is to do with our pernicious system of ‘mutual obligations’ needed to be performed in order to receive the below poverty line unemployment benefit of $46 a day. The ALP is ‘wiping’ the demerits accrued under the previous government and ‘tweaking’ the points based system. The advocacy of the Australian Unemployed Workers Union (AUWU) is highlighted in the article.

But Unemployed Workers Union spokesperson Jeremy Poxon said it was “incredibly disappointing” the new government had maintained its support for mutual obligations, and not removed them completely. ***
“The problem is this new system will just immediately start forcing people to accrue demerits again in huge numbers.” 

The commentary from the AUWU is juxtaposed against the Australian Council of Trade Unions who said

ACTU assistant secretary Scott Connolly said the union welcomed the Albanese government’s new approach to “helping people get back to work.”

The commentary from the ACTU is more than disappointing. It ignores the frame that unemployment is systemic, a political choice and chosen by the government of the day and places the fault of the unemployment onto the individual who needs ‘help to get back to work’

I don’t deny there are those who need assistance in getting back to work. However, a system that cuts people from a below poverty line payment for not seeking work that doesn’t exist in enough numbers is a sad reflection on how we treat some of the most vulnerable people in society. There is little change in the new governments attitude to the unemployed.

Counting the Unemployed under a Policy of Full Employment

I’ve ordered a copy of Inventing Unemployment by Anthony O’Donnell. Unemployment as we know it is a relatively new concept. In his conversation piece he says;

As I outline in my book, Inventing Unemployment, before the second world war censuses tended to divide the population differently – into breadwinners and dependants. 

A breadwinner who wasn’t employed would be recorded as a breadwinner rather than unemployed (with their usual occupation noted). 

That’s probably because until the 20th century, irregular work was the norm.

https://theconversation.com/how-we-invented-unemployment-and-why-were-outgrowing-it-183545

The way we conceive unemployment and count it started in 1947 in Australia and a quarterly survey counting a labour force and dividing it into ’employed’ and ‘unemployed’ started in the September quarter 1959.

It was the post war consensus that gave rise to full employment policies, and albeit under a ‘male breadwinner’ model aimed to ensure

This policy for full employment will maintain such a pressure of demand on resources that for the economy as a whole there will be a tendency towards a shortage of men instead of a shortage of jobs.

http://www.billmitchell.org/White_Paper_1945/index.html

The quote above is from the Australian 1945 tax white paper written by H.C Coombs who would later become Governor of the Commonwealth Bank and serve a variety of roles within the Australian public service. His essay From Curtin to Keating is well worth a read to see his views on the demise of full employment policies.

The way the framework for counting the unemployed was devised operated under different policy settings where the Government would ensure spending in aggregate would aim to ensure there were more jobs than needed to match the workforce preferences. Menzies in 1961 match the then opposition ALP promise to increase the deficit and bring the unemployment rate back below two percent.

I have included a historical graph of the participation rate going back to August 1966. The participation rate rate is the number of people employed or seeking work. You can see under full employment policies (and male breadwinner model) the participation rate for males was higher. The rise in female participation rate is a result of changing social attitudes towards women in the workforce. It used to be the case for instance women were no longer allowed to work once they were married. That is why the female rate is lower in August 1966 than 2022.

https://www.abs.gov.au/articles/historical-charts-august-1966-may-2022

The way we count the unemployed hasn’t changed but a policy of ensuring more hours of work available than those seeking work isn’t in place today. That change of policy has to do with the way economists view the role of fiscal policy. Within the public discourse today you will hear aims of ‘reducing the deficit’ and needing to ‘pay down debt’. Over the full employment era government ‘budgets’ were referred to as full employment or high employment budgets. The fiscal position was not an aim of itself. I’ve wrote what fiscal policy *should* be about in the below posts and the demise of Full Employment here.
Budgets Should Target Socioeconomic Well-Being.
What is the purpose of fiscal policy?

What Causes Unemployment?

When economist speak about spending needing to increase they are referring to several aggregates that make up Gross Domestic Product. These are Government Spending (G), Investment (I), Consumption (C), and Exports (X). Reasons are given for why one sector can/ can not increase or what incentives should be made to increase one aggregate over another. However, spending in aggregate is the aggregate of G, I, C, and X and whether it is sufficient with Full Employment.

Depending on your theory of macroeconomics there are different ways of thinking about Government Spending. These are a bit like religions and economists pick and choose different aspects from different schools of thoughts.

Keynesians/Post Keynesians – budget deficit are warranted to maintain full employment but should be balanced over the business cycle. Governments invest in productive infrastructure and grow GDP to shrink debt:GDP ratio over time.

Monetarist/New Keynesians – aims for budget surpluses, strong incentives for private enterprises, governments should eliminate debt, remove fiscal policy as primary tool of economic management, focus on monetary policy.

Modern Monetary Theorist – Governments that issue their own currency face no insolvency constraint. They can purchase whatever is for sale. Fiscal positions are outcomes and shouldn’t be targets. Monetary policy is a poor tool for controlling aggregate spending.

While there is different thinking with the role of government spending and the definition of what constitutes full employment, there is consensus unemployment arises as a lack of insufficient spending.

Enter the MMT Money Story

MMT places the tax liability as the foremost thing a currency issuing government needs to do to have its currency accepted. The tax liability causes unemployment and government spending alleviates the unemployment. It is always within the governments power to increase its spending and purchase what is for sale, including idle labour. Thus unemployment is a political choice.

That is what is meant by ‘tax liability’ creating a demand for a governments unit of account. It is a coercive mechanism.

(2002) where she describes Colonial Africa as an illustration of a tax driven currency.

“Historians of the African colonial experience have often remarked on the manner in which the European colonizers were able to establish new currencies, to give those currencies value, and to compel Africans to provide goods and services in exchange for those currencies.”

Tcherneva cites Sticher (1985) [In Malawi there was an] imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings].

Tcherneva, P., Monopoly Money: The State as a Price Setter, Oeconomics Volume V, winter 2002

Further evidence of taxation driving a currency can be found during the colonisation of Nyasaland.

It is sometimes forgotten that the plantation sector in Nyasaland dates from as early as the 1890s. During the early years of colonial occupation, most officials shared the opinion of Sir Harry Johnston, the first Commissioner and Consul General, that “the one hope of this, country lies in plantation work and in the cultivation of coffee, tobacco, sugar, etc., for which cheap labour is necessary”.3 Some 800,000 acres were alienated to settlers in the Shire Highlands, the most fertile and densely populated area in the country; hut tax was introduced from 1891 as a means of introducing “the native labourer to the European capitalist”4 and coffee was grown with such success that in 1900 a thousand to exported worth 62,00 making Nyasaland the centre of European agricultural enterprise in Central Africa”

McCracken, J.,Peasants Planters and The Colonial State: The Case of Malawi, 1905-1940; Journal of Eastern African Research & Development, Vol. 12, 1982, pp. 21-35

Conclusion

Unemployment is caused by a lack of spending in aggregate. Currency issuing governments can always hire the unemployed, thus making unemployment a political choice. If the vast majority of the population understood that we could begin to dismantle pernicious unemployment system that punishes people for a failure of our governments to create enough work for all.

Comments from ACTU on ‘helping people get back to work’ are not helpful unless they are backed by a call to abandon targeting of fiscal positions and have a full employment policy. There seems to be little understanding from the ACTU leadership unemployment and underemployment is one of the largest factors that act as wage suppression. As there are more people seeking work, employers have their pick of employees. It is a disservice to the workers they represent. Though workers have come harder to find for some sectors, there are still just under 1.4million under-utilised workers in Australia.

Solidarity with under-utilised workers would call for an end to mutual obligations, an abandoning of fiscal targets, lifting the unemployment rate to at least $88 a day, a full employment policy that guaranteed more hours of work available than demanded and the implementation of a Job Guarantee.

Economists are as Trustworthy as Astrologists

Every economists and his dog has written something on inflation and wages. Opinion on what *should* happen is as colourful and as mixed as a fruit and nut mixture and tends to reflect an ideological preference for either workers or capitalists.

I’ve documented my understanding of inflation as a conflict between labour and capital over national income in my last three blog posts.

Capital Rule: Interest Rates, Inflation and The RBA
Inflation is a Conflict
The Flawed ‘Logic’ of Capital

The increasing costs that result from a rise in fuel prices have capital pass on those costs rather than reduce profit margins.

Today unlike the 1970s, the legislative and institutional arrangements leave labour unions without much of an avenue to effectively ‘fight back’ and gain real wage rises.

I think it is important to recall from an MMT perspective to remember the source of the price level

With the state the sole supplier of that which it demands for payment of taxes, the economy needs the state’s currency and therefore state spending sets the terms of exchange; the price level is a function of prices paid by the state when it spends. 

There are two primary dynamics involved in the determination of the price level. The first is the introduction of absolute value of the state’s numeraire, which takes place by the prices the state pays when it spends. Moreover, the only information with regard to absolute value as measured in units of the state’s currency is the information transmitted by state spending. Therefore, all nominal prices can necessarily be traced back to prices the state pays when spending its currency. 

The second dynamic is the transmission of this information by markets allocating by price as they express indifference levels between buyers and sellers, and all in the context of the state’s institutional structure. 

The price level, therefore, consists of prices dictated by government spending policy along with all other prices subsequently derived by market forces operating within government institutional structure.

https://docs.google.com/document/d/1sySbx6EHOAYpAjE4FGnYApdZNyY6rh79KzajZxSU884/mobilebasic

From the above perspective and understanding the Government through its regulatory powers has a lot of non-monetary tools to administer prices. That train of thought seems to be absent amongst the public intelligentsia that comment within the mainstream media. The public discourse is as simplistic as wages can and should rise by inflation, or real wages need to be cut because it is/isn’t inflationary.

However little comment is made to the understanding Inflation is distributional. If someone is paying more, someone receives more. The question should be focused on who is benefiting.

Then there’s the discussion on interest rates. I haven’t read a mainstream commentator dismiss monetary policy as useless. I summarised the effect of interest rate in my post Capital Rule: Interest Rates, Inflation and The RBA

The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means; 

1. Increased income for asset (bond) holders; 
2. Rewards markets that have placed bets on rates rising;. 
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits; 
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

https://jengis.org/2022/06/09/capital-rule-interest-rates-inflation-and-the-rba/

Monetary Policy is a blunt and flawed policy Instrument

The flawed framework of using monetary policy continues to hurt the working class. The ALP Government has now conceded that wages will need to be cut in real terms, (source) agreeing with the Governor of the RBA.

“Three-and-a-half per cent is kind of the anchoring point that I want people to keep in mind,” he says. In other words, it’s a continued real wage cut for most workers in the short term — if we’re to stay on Lowe’s preferred path.

https://www.abc.net.au/news/2022-06-23/rba-boss-philip-lowes-plan-out-of-economic-trouble/101175018

The way we use monetary policy is effectively a threat to The Australian working class. Accept real wage cuts or we raise rates on your mortgages and take your income via another means. It is the most perverse framework and anti-working class.

Though Capital isn’t terribly clever. Their cuts to real wages undermine pushing increasing debt onto households. Australians have enjoyed real wages growth (despite failing to match productivity increases) – The difference between real wages and productivity growth has gone to profits. To maintain sales and realise that profit (as workers haven’t earned enough to purchase that output) Capital has deregulated financial markets and placed increasing debt onto households. Australians are amongst the highest indebted households in the world. Pushing debt onto households becomes harder in an environment of wages falling in real terms. That may manifest as a recession.

Deficit Myth Prevails

In this article Brakes on spending: Albanese warns of budget cuts it seems our newly elected Government falls into the same trap as the previous Government that it’s spending needs to be constrained by revenue. The word revenue is derived from the latin ‘re’ meaning back and ‘venire’ meaning come; Revenire literally means come back. That is your taxes come back to the monopolist of the currency that had to spend it in the first place.

With budget deficits forecast to reach $261.4 billion over the four years to 2025, the incoming government is rejecting some spending options despite pressure from state leaders and community groups for long-term boosts to outlays on health and social services such as Newstart.

https://www.smh.com.au/politics/federal/brakes-on-spending-albanese-warns-of-budget-cuts-20220623-p5aw7s.html?utm_medium=Social&utm_source=Facebook&fbclid=IwAR1pF6_ay8xqU3FSM50VEnNOWSumIG3WpvxAhWc3aRC_fJsbPxppunatd5A#Echobox=1656013729

Under the guise the government needs to ‘save’ money by reducing it ‘s spending and the need to cut spending because of inflation are excuses made that ensure the most vulnerable people in our society continue to suffer and are left poorer in real terms! The Government can engage in providing universal services like free childcare which have a deflationary impact!

Conclusion

It looks like workers (including me) are set for real wage cuts. It is likely this will manifest as increasing unemployment, increasing rates of home foreclosures and all the social impacts these things bring. The Governments fiscal policy of spending cuts make things worse!!

That is all from me!

The Flawed ‘Logic’ of Capital

My last two posts, Capital Rule: Interest Rates, Inflation and The RBA ,and Inflation is a Conflict looked at how inflation is a conflict over national income (GDP) and the tools used to ameloriate the conflict (monetary policy) between labour and capital benefit capitalist. The labouring class over the neoliberal era are almost powerless to protect their real earnings. I used the excellent article Inflation and Marxist Theory by Pat Devine published by the British Communist Party in Marxism Today, 1974 that analysed this dynamic from an understanding that inflation isn’t a monetary phenomenon but a result of conflict.

I’m not a formally trained economist but with enough ‘self study’ you can easily see the nonsense paraded by our political elite that use language to frame inflation as some external phenomena and how they are working tirelessly to ‘fight’ it.

If our governments were concerned about rising prices, why didn’t our governments keep (or restore) free childcare, that had a negative impact on the consumer price index as it removed that costs from households, why hasn’t the government decided to keep gas for domestic purposes for our short term energy problems on the east coast and claimed ‘sovereign risk’ as a reason why it can’t.

CHRIS BOWEN: Well, those contracts are private, and the mechanism is about uncontracted gas by and large. And you know, you do have to be careful about sovereign risk and you can’t create sovereign risk. That’s a challenge.

https://www.abc.net.au/7.30/energy-minister-chris-bowen-speaks-to-7.30/13922844

Sovereign Risk is a term used to describe the risk of governments defaulting on their own debt. A nonsensical proposition when you understand the difference between the currency issuer and currency user. When you can grasp that, you can see the governments decision is about protecting the profits of a corporation over meeting the energy needs of our population.


Lowe’s Woeful Interview

The Governor of the Reserve Bank of Australia was interviewed on our public broadcaster recently.
I think the dynamics of the class conflict can be highlighted by the framework and commentary made by the RBA Governor.

“Well I think Australians need to prepare for higher interest rates. We had emergency settings during the pandemic – that was the right thing to do – but the emergency is over and it’s time to remove the emergency settings and move to more normal settings for monetary policy. “

This is a statement of intent. The RBA chooses the cash rate and can set the yields on government bonds. It is literally the decision of the monetary policy committee at the RBA which is chaired by Lowe. So if Lowe thinks rates need to be higher, they will be higher.

The question remains as to whether higher rates will bring down the current rate of inflation (see previous posts). And I remain doubtful that they will. The Governor himself admitted there are households that will struggle.

“We certainly are and we spend a lot of time looking at the disaggregated data because we know that even the increases in interest rates so far are putting pressure on some families’ budgets. They’re coping with higher interest rates, higher fuel prices, higher food prices, so we know already for some households they are finding it difficult.”

As a unionist and someone that feels we need to empower the working class, why would we use a framework that places real pressures on individuals and families to help bring down a general price level. The RBA strategy of hiking rates will cause unemployment in the hope it curtails enough demand off our energy usage it drives prices down!

There are regulatory tools we can be using to control prices. A cut to real wages (via bargaining processes and increasing mortgage rates) causes a multitude of social costs. This method (real wages cuts) was tried over the 1930’s with disastrous results. Have a read of The Struggles of the Unemployed published in the UK’s ‘The Labour Monthly’ in 1932!

Real Wage Cuts For the Working Class

This is the first time since the post war boom Australian workers have experienced real wage cuts.(wages adjusted for movements in the CPI) It will be interesting to see what happens. Over this neoliberal era ad wages failed to rise with productivity (but maintained real growth) Capital maintained sales growth (and profits) by deregulating the financial markets and foisting more debt onto workers. That becomes more difficult in an environment where your real wage is falling.

https://www.theguardian.com/australia-news/2022/feb/09/we-just-get-nothing-why-australias-falling-jobless-rate-isnt-translating-into-higher-pay

Conclusion

Sometimes people speak of inflation as an abstract phenomena. It is important to remember the current inflationary pressures are caused by Capitalists able to pass on increasing costs. Inflation is a redistribution of purchasing power. If I am paying more, someone is getting more. It isn’t necessarily because there is ‘too much’ spending. If anything, we need more public expenditure as we are well below full employment.

I am supportive for the responsibility of full employment (more hours of work available than demanded) to be given to Treasury (with a Job Guarantee in place) and removing it from the responsibility of the RBA. I’d then have a zero interest rate policy and for the RBA to monitor inflationary pressures in supply chains, labour underutilisation, and to manage the payments system because our current institutional arrangements are benefiting the wealthy!

Inflation is a Conflict

I’ve seen texts written by progressive economist on the sources of inflation being driven by supply side issues and not because of demand-pull (wages). They’d be correct!

Their articles detail how rises in rates won’t assist with prices rising from supply side issues. However, one ended by stating the RBA needs to be clear why it is hiking rates and it is for financial system stability. There are issues with the way they are thinking about inflation and the role interest rates play in our society.

Inflation is viewed in terms of rising prices and economic instability. The raising of rates is supposed to ‘cool’ down the rate of inflation. It is often juxtaposed within a context of rising housing costs as the commercial banks often increase their mortgage rates by the same amount. Rising rates are supposed to mean subdued house price growth. Low rates over the last decade have been seen as abnormal which has sometimes been interpreted as one reason for our current high housing costs and a contribution to our inflationary problem. The reality (I think) is very different. The fact that the cost of housing is so entrenched in the public discourse and tied to the cash rate rises makes it difficult for regular people to seperate the two concepts and seek alternate policy for what can be done about rising prices (and housing). There isn’t a level of ‘normal’ rates that needs returning to; nor is there a particular cash rate needed to create some sort of ‘system stability’.

Inflation needs to be viewed by more than just rising prices. It is a conflict between labour and capital over national income. Pat Devine penned Inflation and Marxist Theory, in Marxist Today, 1974 describing inflation as a conflict over competition resources.

Competing Claims on Real Resources
Thus, whether through trade price effects on the real wage, through the influence of international competition on the extent to which cost increases can be passed on or through international influences on aspirations for higher real wages, the international character of the capitalist system impinges on the struggle between capital and labour—the fundamental cause in post-war conditions of chronic inflation.

Inflation and Marxist Theory, Marxist Today, 1974, p.84

I stated in my previous post that we couldn’t know what the net outcomes of the distributional changes of a rise in the cash rate would be. Businesses who have borrowed to fund capital may pass on increasing cost to consumers, we also see an increase to those holders of government debt, as consumers cutback to service increase mortgage costs. So as to whether an increase is deflationary is circumspect.


Today we discuss inflation within a framework where it is the responsibility of the Central Bank to target a particular inflation range.(2-3%) The tool used to do that is monetary policy (interest rates). Historically central banks have not targeted an inflation rate.

In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of monetary policy

  • the fixed exchange rate period, which lasted until the early 1970s;
  • a period of monetary targeting between 1976 and 1985;
  • a transitional period which followed the demise of monetary targeting and lasted until the early 1990s; and
  • the inflation targeting regime, in place since around 1993.

The first point shows the first regime was to ensure an exchange rate parity

“As was the case for most other countries, the Bretton Woods System of ‘fixed but adjustable’ exchange rates was operated in practice in Australia in the 1950s and 1960s as a firm commitment to fixed parities. The fixed exchange rate was effectively the linchpin of the monetary policy regime.”

https://www.rba.gov.au/speeches/1997/sp-gov-290997.html

The rate wasn’t altered because inflation was deemed ‘excessive’ rather there was a concrete goal that the exchange rate between the $AUD and $USD should remain at a particular parity. The particular ‘inflation targeting’ we see today evolved from the 1970s oil shocks that sent inflation and unemployment to high levels as the Post-Keynesian framework couldn’t offer a solution.

Devine summaries the monetarist theories that would eventually gain hold of the economics profession.

Monetarist Theories
“Most recently at the theoretical level there has been a vigorous offensive by some neo-classicals in the form of monetarism, receiving its impetus from the self-evident demise of the stable short-run
Phillips Curve relationship. An attempt has been unconsciously and influenced by what has become made to salvage the role of excess demand, in the traditional form of a long-run vertical “Phillips Curve” at a “natural” rate of unemployment, by introducing expectations, with the policy implication of the need to stabilise expectations by pursuing strictly a widely-publicised course of expanding the money supply at a rate equal to that of estimated long-run productivity growth. The ideological function of bourgeois economic theory, especially neo-classical theory, is seen here at its clearest.
***
The attribution of the cause of inflation to asocial abstractions like the money supply, or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “cured” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses.”

Inflation and Marxist Theory, Marxist Today, 1974, p.87

Devine was discussing the idea that monetarist believe it is the money supply that caused inflation and their solutions ignored that rising prices also meant a rising income of those charging higher prices. If the costs of goods and services increase, the labouring class would use their power to combat the rise in those prices. Monetarism was successful in its approach in taking over the profession and using its methodology to combat inflation, rising unemployment. The NZ film In a Land of Plenty provides what happened when the NZ government abandoned its role in providing full employment and targeted inflation as a goal.

Those same flawed arguments rare used today. It is assumed the raising rates will ‘cool’ spending, despite the issues not arising as a result of wage pressures (and despite commentary to the contrary) Arguments today ignore tend to ignore social conflict taking place. It is the price setting power that firms hold that sees increasing costs being able to be passed on. Today the labouring class doesn’t hold the power to ‘fight back’ as union laws have been constructed to limit bargains power and densities are at their lowest points since the post-war boom.


I am in day four of my covid isolation, trapped in a hotel room. I came across this tune I’d forgotten about. I’ve always been a fan of 1950s Jazz and the wonderfull Ella Fitzgerald. I was watching a film (that isn’t worth mentioning in) but it had a remake of the song ‘They all Laughed’ and I was reminded of the Ella and Louis version.

Capital Rule: Interest Rates, Inflation and The RBA

I’ve been absent from my blog for a while. Sometimes your intentions don’t get realised and life gets in the way! I’ve decided to recommence posting as I learn more about macroeconomics and political economy (a lot of self study) and throw my thoughts out into the public. I find it infuriating that the media has economist spouting bullshit and it just seems to be taken as gospel. If any behavioural scientist out there can explain why orthodox economics hasn’t been delegated to the bin after covid (debt and deficit fears, inflation fear mongering etc..) please share your thoughts. Plus I am trapped in a hotel room with covid. The last few days I’ve been knocked out with sore joints and muscles, a sore chest, coughing, fevers, runny nose, headaches. It’s the worst I’ve ever felt from a virus. Nothing has been ‘mild’ (as some like to make out) and I am triple vaccinated – with my last jab some 5.5 months ago.

It’s not all bad. I took this lovely shot from my room of the sunset.

Anyway…. to our topic at hand!

There is a lot of who-ha on interest rates in the media. Economists that think they should go up (or they’ve gone up too fast/slow) endless talk of inflation, printing money, government spending being too much blah blah blah…. It is safe to toss anything paraded by an economist in the media into the bin with the understanding they are full of trash.

Let us take a deep breath and look at what these decisions mean and whether they will have the desired results. First we need to understand the interest rate discussed in the media is – and how we define inflation.

What is the Interest Rate?

The interest rate referred to is known as the cash rate – and the rate the RBA targets that banks loan to each other. That is the 0.85% figure. In the same way you have an account with a financial institute your financial institute has an account at the RBA. These accounts (known as exchange settlement accounts) need to be positive at the end of each day and account holders who are short need to borrow from account holders who have surplus reserves.

The RBA has started publishing the interest rate it pays on exchange settlement accounts. This is 10 basis points below the target rate. Banks with surplus reserves won’t loan below that rate (currently 0.75%) and they attract a higher interest rate 10basis points above the target to borrow from the penalty window (directly from the RBA) This has banks loaning to each other at around the RBA’s target.

What is Inflation and why is it here?

This is a complex question. There is lots of debate, though most of it not worth listening to, about what causes inflation. I detailed some of that in the mythology of printing money part II and you can see more about inflation here and here. Simply inflation is a rise in the general price level. That in itself is an abstract concept however it’s purpose is to try and eliminate price rises so economists can determine whether real output is growing.

Orthodox economist will usually come out with nonsense around the money supply growth and ‘printing money’ being inflationary. The first thing to acknowledge is that any spending can be inflationary irrespective of who is spending it. Second ‘printing money’ is nomenclature that doesn’t apply to any spending operation in our economies today. The term has its origins when governments started banning private note issuance on notes issued by private banks and started issuing their own treasury notes. You need only look at the hansards from The Australian parliament from 1910 and the introduction of the Australian Notes Act to see the nonsense paraded how it would end the economy and be destructive! Currency is a public monopoly issued by the state. It spends by marking up bank accounts. Once you’ve disabused notions of the nonsense of printing money we can look more seriously at what is causing prices to rise.

The ABS last released CPI results on 27/04/2022

  • Fuel prices caused by easing of covid restrictions and war in Ukraine
  • Rental markets reflecting historically low vacancy rates
  • Grocery products because of transport costs
  • Rising construction costs mostly because the removal of government construction grants that had the effect of reducing out of pocket expenses for consumers.

We can see quite clearly the price increases are a result of supply side issues, due to fires and floods we’ve had, the oil companies cartel behaviour and even the removal of government spending. When you hear politicians or economist say the government should’ve spent less that is simplistic. Government spending can be deflationary – you only need to see my post on the effect of childcare being made free to see what effect that had on the CPI.

Once you break the myth of deficits accumulating debt and it needing to be paid back by our currency issuing government here are some things that can decrease our cost of living.

  • Publicly owned renewable energy infrastructure with a free quota delivered to every household
  • Universal free childcare
  • Parental leave paid at minimum wage until youngest turns 5
  • Free public transport and investment in mass public transit systems
  • Legislated work from home rights
  • Social housing for the masses with buildings built to suit location and strict environmental standards.
  • Expansion of public services to include building local communities and paying people to work in things we currently volunteer for (e.g community gardens, surf life safety, arts etc..)
  • Free Universal Broadband
  • Public Bank to regulate credit markets

My above list reflective of my value system. Our currency issuing government always has the capacity to finance those services, it is a question of whether we have the labour skill and other resources in sufficient quantities to provide them.

What does the Interest Rate have to do with Inflation?

By now the layperson is usually grappling with why the Reserve Bank would be hiking rates to bring inflation down. The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means;

1. Increased income for asset (bond) holders;
2. Rewards markets that have placed bets on rates rising;.
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits;
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

How we should think about Inflation

Inflation is a conflict between labour and capital. The labouring class has little power to negotiate higher wages because of neoliberal governments that have suppressed abilities to bargain (including striking) and abandonment of full employment where as a society we targeted more hours of work than demanded. Currently, capital has the ability to pass on cost increases (or blindly profit gouge) and workers have little legal recourse to fight for higher wages.

And to make things worse for the working class, our governments claim false fiscal constraints about needing to ‘balance books’ claiming it is too expensive to provide universal social services and allows corporations to profit the services we need!

Conclusion

I’ll let you draw your own conclusions on the RBAs decision to hike rates. I think increasing mortgage costs on heavily indebted households is not a great way to reduce inflationary pressures. Monetary policy is a blunt tool that should be tossed into the bin. Any increase in unemployment will be caused by the contraction in spending and may have a negative impact on the CPI, but it hardly solves any of the supply issues and creates more jobless!

We need a populist left agenda around a public bank option with low to zero interest rates on our homes and heavy regulated credit rules (to keep land affordable). I would also merge the current tasks of the central bank into treasury and create a government body in charge of monitoring supply bottlenecks and preparing the best ways to mitigate them and dare I say it use price controls to keep our essential items affordable.

What is the purpose of fiscal policy?

In my understanding of what Modern Monetary Theory is and observing the public discourse as journalist attempt to explain MMT, I am encountering the narratives and metaphors I had to break in order to appreciate how MMT helps transform the political debate.

This article by Ross Gittins is a good example. The article starts out as follows

Many people are alarmed by “modern monetary theory”, the seemingly radical idea that the government should cover its budget deficit simply by creating money. But in his new book, Reset, Professor Ross Garnaut, one of our most respected economists, has joined the young turks.

I wrote in How the Mainstream are Trying to Stay Relevant how Ross Garnaut still discusses ‘budgets’ in terms of needing to be funded.

With an understanding of the difference between a currency issuer and a currency user and the institutionalised arrangements of how government spending works – it should lead an economist to understand fiscal deficits are residual. That is they are an outcome and shouldn’t be the target of a particular fiscal position.

The currency issuer spends via an appropriation bill and marks up exchange settlement accounts. These are the accounts Authorised Deposit Taking Institutes (Financial Institutions) hold with the Reserve Bank of Australia. Given that logic, spending has to precede taxation and bond issuance.

When treasury who is authorised to use fiscal policy (spending and taxes) deficit spends (spends more than it collects in taxes) it leads to increasing reserves in the exchange settlement accounts. It is then a choice to issue Australian Government Securities (what we refer to as government debt). This drains the exchange settlement accounts and creates a ‘securities account’. These can be traded and earn an interest paid for via appropriation bills created through parliament. There is no reason (other than political) the Australian government will default on any payment denominated in Australian dollars.

This varied under a gold standard or fixed exchange rate where spending required governments to fix the money supply in relation to a quantum of a precious metal. In Australia Prior to 1945 note issuance required gold reserves or British sovereign of 25 percent of the note issue. Then under the Bretton-Woods system of fixed exchange rates (Post 1945) a governments priority was to defend its currency in relation to a particular exchange rate. Usually the US dollar which was then exchangeable for gold.

Policy settings may have required governments to cut spending as imports rose to reduce imports and avoid using their foreign currency reserves to defend the agreed exchange parity. The cut to government spending creates unemployment and this led to increasing politically instability and the demise of the Bretton-Woods system. You can read about the shift in this article in Vol. 91, No. 4, A Cause for Celebration: A Paradigm Shift in Macroeconomics is Underway (OCT–DEC 2020), pp. 18-29 (12 pages)

By now we should be grasping The Australian Government is a monopolist of the Australian dollar. It can always spend in Australian dollars. Irrespective of past fiscal positions or levels of ‘debt’ (which is really just corporate welfare as it is akin to a savings account for rich people) does not impede it spending now or in the future. Never.

The idea that somehow deficits are dangerous or ‘debt’ will need to be paid back rely on a myth that a government is like a household that must finance its expenditure by taxing, borrowing. Neither taxes nor issuance of bonds finances the Australian governments ability to spend. Rather under our current fiat system of monetary operations the spending creates the reserves that enables citizens to pay taxes.

All of that describes the intrinsic nature of how the Australian Government spends. There shouldn’t be any controversy about that. There are no values anybody holds by understanding the spending operations of the Australian government.


For reason that remain oblivious to me discussing the above has rooms full of awkward silence such as what happened on the latest episode of QandA where Luke McGregor articulated what I described above.

There will usually be an ‘economist’ that interrupts and admits ‘yes, governments don’t face insolvency but…’ and they bring out stories of;

  • printing money and hyperinflation.
  • rising interest rates and increasing cost of servicing government debt
  • limited pools of funds for private investment as government spending ‘crowds out’ the available pool.
  • Inflation if levels of unemployment are to fall below the natural accelerating inflation rate of unemployment (NAIRU)

When you grasp the functions of how government spending works under a fiat currency and the shift that happened from gold standard/fixed exchange rate – you can appreciate the term ‘printing money’ doesn’t apply to any spending operation. This used to refer to the operation where governments literally ‘printed’ notes in excess of the legislated gold reserves and ‘devalued’ the currency in respect to the amount of gold they would exchange for their own currencies. I describe in more detail in The Mythology of Printing Money Part II

Rising interest rate arguments links to what is called the Quantity Theory of Money. It is assumed there are a limited pool of funds and as governments deficit spend and compete for these funds it leaves less available funds for the private sector and drives up the interest rate and cost of servicing government debt.

That is nonsense. Central Banks all over the world now acknowledge bank loans create deposits. There are no limited ‘pools’ of funds that are competed for. The second part of the argument is that interest rates begin to rise and costs are passed on to households and businesses creating inflationary pressures.

What should be obvious to everybody is that the interest rate is a policy decision. The monetary policy committee of the Reserve Bank of Australia makes a decision on what the overnight cash rate (the rate banks pay each other) is. More recently they have been targeting the yields of Australian Government Securities and State and Territory bonds. The yield is rate of return on a financial investment – in this case government bonds. As the Reserve Bank as been purchasing bonds it increases the demand (and cost of the bond) and thus lowers the yield (interest earned over the life of the bond)

The financial markets have no power over central banks when they decide to do this. None. We’ve seen interest rates being held low since the financial crisis in Europe and the USA (and Japan for much longer) as well as more recently in Australia. Remember the issuance of these bonds for an entity that issues a currency is entirely voluntary. The issuer has to spend first and sell bonds that financial institutes obtain from deficit spending.

I won’t repeat NAIRU logic here but will direct you to how a Job Guarantee is a replacement for the NAIRU framework. We do not need unemployed people to be used to discipline the inflation rate.


If fiscal policy doesn’t have to balance and target a particular fiscal balance or debt to GDP ratio as there is no need to issue public debt, what should it target?

Once we break the myths of intergenerational debt, governments needing to borrow to invest and all the usual nonsense that assumes governments need to find revenue sources we ask what real goals should we as a society be targeting?

A starting point is understanding differences between non-monetary base and monetary based societies. In non-monetary based societies we have neither employment or unemployment. If you take an economics class propaganda shoved down you is that money evolved from barter

‘Money’ wasn’t created and injected into some well functioning ‘market’ rather it is a creature of the state. That is it is created via legislative capacity of the state. Taxes then have to serve a purpose other than funding.

“Historians of the African colonial experience have often remarked on the manner in which the European colonizers were able to establish new currencies, to give those currencies value, and to compel Africans to provide goods and services in exchange for those currencies.”

Tcherneva, P., Monopoly Money: The State as a Price Setter, Oeconomics Volume V, winter 2002

Tcherneva cites Sticher (1985)

[In Malawi there was an] imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings].

Further evidence of taxation driving a currency can be found during the colonisation of Nyasaland.

“It is sometimes forgotten that the plantation sector in Nyasaland dates from as early as the 1890s. During the early years of colonial occupation, most officials shared the opinion of Sir Harry Johnston, the first Commissioner and Consul General, that “the one hope of this, country lies in plantation work and in the cultivation of coffee, tobacco, sugar, etc., for which cheap labour is necessary”.3 Some 800,000 acres were alienated to settlers in the Shire Highlands, the most fertile and densely populated area in the country; hut tax was introduced from 1891 as a means of introducing “the native labourer to the European capitalist”4 and coffee was grown with such success that in 1900 a thousand to exported worth 62,00 making Nyasaland the centre of European agricultural enterprise in Central Africa” (McCracken, 1982)

McCracken, J.,Peasants Planters and The Colonial State: The Case of Malawi, 1905-1940; Journal of Eastern African Research & Development, Vol. 12, 1982, pp. 21-35

A simple way to think about the purpose of taxes is that the tax liability forces citizens to seek the currency to redeem the tax obligation. Thus anyone that has nothing of use to sell to the currency issuer is unemployed. The issuer then must employ those citizens so they can earn the currency to pay the tax. So unemployment is a political choice caused through insufficient government spending.

Conclusion

To summarise government spending happens first and intrinsically must be done before citizens are able to obtain the currency to pay the tax. One purpose of taxes is to ensure labourers as they seek employment to fulfil their tax obligations.

The many myths used to demonise public spending range from insolvency myths and fear mongering about rising interest rates (which are a policy choice) devalued currency (devalued in relation to what? $1 credit will always redeem $ tax liability) and fears of massive debts that future generations will need to pay off.

What really matters is our own well being. Ensuring everyone as access to healthcare and an education. Ensuring secure work for all and the ability to partake in our communities. We need to create work with meaning. We need to ensure affordable housing for all. We need to mitigate against climate change.

Government ‘budgets’ are statements about values. Our values determine how we should organise our societies and the institutions we create. These institutions with our labour set about to create the public services we desire.

Our wealth isn’t a series of abstract numbers in computers recorded in spreadsheets. It is our labour and what we are able to produce. That is our material well being.

As a nation we have enough real goods and services to provide for all. We need to ensure that everyone in our society as an opportunity to contribute. We should not be using a flawed paradigm of assuming we need to find money when we have millions of people with insufficient and exploitative work.

Budgets Should Target Socioeconomic Well-Being.

It is custom in Australia to make an event around the various state/territory and federal budgets. In the past achieving some fiscal ratio has been seen as ‘responsible’ In 2016 Economics professor Ross Garnaut stated (source)

These measures should be backed by moderate and gradual cuts in spending, and moderate and gradual tax increases to repair the budget.

Post COVID, the framing when discussing a budget, has moved from achieving a fiscal outcome (balanced/surplus) to targeting a particular employment rate within a framework called the ‘natural accelerating inflation rate of unemployment’ (NAIRU)

I wrote a little more on this in my post The Mainstream are Trying to Stay Relevant and Modern Monetary Theory and The Job Guarantee. I have rejected the NAIRU as a nonsense concept. It effectively uses the unemployed to discipline the rate of inflation, to which you can use a ‘buffer stock of employed’ to achieve the same end.

As a society we literally leave masses unemployed because economists believe unemployment must not fall below this NAIRU rate. Costs of unemployment are huge:

  • loss of current output
  • social exclusion and the loss of freedom
  • skill loss
  • psychological harm, including increased suicide rate;
  • ill health and reduced life expectancy
  • loss of motivation
  • the undermining of human relations and family life;
  • racial and gender inequality
  • loss of social values and responsibility.

Even ‘the left’ have changed the framing for how they think about governments fiscal positions.

In 2019 the ACTU was concerned with excessive debt levels. I wrote a critique Solving inequality requires getting macro right!

“Globally most respected economic institutions believe the risk of recession has increased and some pundits fear “winter is coming”.……Stimulus measures by the Chinese authorities will exacerbate already excessive debt levels and add to vulnerabilities

The report continued to discuss Australia and the ‘limited’ tools in response to the ‘economic challenges’ we face.

Economic fear is mounting and because of very high debt levels and limited scope for expansive monetary policy governments have limited tools in responding to these challenges

Post COVID ‘we are no longer discussing ‘fiscal repair’ and the treasurer wants an unemployment rate ‘comfortably under 6 percent’ (source) Further articles are stating the unemployment rate could’ve been much lower with headlines like ‘Reserve Bank and Treasury admit ‘full employment’ is not what they thought it was. And it’s held the country back’

Although the NAIRU framing is still incorrect. And the left still talk about currency issuing governments as ‘borrowing’ to invest!

The ACTU report on the upcoming federal budget still says

The government has ample fiscal capacity to manage those deficits moving forward, thanks to record-low interest rates and the actions of the Reserve Bank (whose bond purchase program has supported low interest rates and facilitated the government’s fiscal response to the pandemic).



“Borrowing to finance long-lived, productive investments is the exact same rationale that leads other parts of our economy – notably businesses and households – to also take on debt.”

For a Stronger, Balanced and Inclusive Recovery, April 2021, p36-37

The report suffers as a result of that illogic. The Federal Government issues the Australian dollar. It must spend first (that is logic101). It is nothing like a household or business that must borrow to finance expenditure in excess of what it earns. The fiscal position is residual. It needs to satisfy the savings desires of the non-government sector if we desire full employment (more jobs advertised than demanded)

I gather that I am a nobody but when I was discussing modern monetary theory with ‘progressive’ institutes such as the Australia Institute (affiliated to the organisation that helped prepare the ACTU report) or PerCapita, I would cop hostility from people within those institutes for articulating

  • Government debt was an after the fact operation and a tool of monetary policy (interest rates) (there is no need to issue it) It doesn’t fund a currency issuing governments ability to spend.
  • The unemployment rate is a political choice; Governments can always purchase idle labour. They issue the currency and;
  • A Job Guarantee is a replacement of the NAIRU framework

I have been called ‘simplistic and naive’ and accused of being ‘anti-tax’ because I stress the purpose of taxation (or bonds) are not a funding mechanism. Which I wrote about here and in various other places throughout this blog.

I have some people write to me now asking for further explanation and I can direct them to appropriate sources. The blog is not intended as an education resource but to document my own understandings of macroeconomics and the impacts how a flawed framework leaves us materially poorer as a society.


I recently attended a Northern Territory budget briefing with Treasury officials. I was disappointed to the whole approach that the government was taking to the budget. The reality is the NT Government is a currency user (the largest source of its revenue being the GST)

Though the framework it is taking to the budget process and the policies of wage freezes and cuts too spending will ensure the most vulnerable in our society suffer.

The spending measures taken in the budget are aimed at subsidising private investment (tourist vouchers, local jobs fund) and not at direct job creation. The public sector has a wages freeze and staffing caps.

Budget paper two says (source)

The 2021‐22 Budget includes investment aimed at accelerating economic recovery through a $120 million expansion of the Local Jobs Fund and additional funding to support growth and development of new and existing industries recommended by the Territory Economic Reconstruction Commission. 

When I pressed the treasury officials for more detail on that programs, they were described as measures that subsidised businesses to employ people. When I asked why there were no direct job creation programs the answer was because The Government doesn’t want to do that and that they were more interested in subsidising private investment.

I prodded with further questions on debt, the RBAs Quantitative Easing program (which means the states/territories owe dollars to the RBA) and the inadequacy of relying on a consumption tax to fund the majority of our public expenditure. Treasury agreed the GST was not fit for purpose though insisted the largest priority must be getting rid of public debt (according to treasury that means wage freezes, staffing caps and subsidies to private business)

The GST is a consumption tax (at a federal level) that then is hypothecated amongst the states/territories. It is a terrible way to determine funding to these jurisdictions who are required to have the revenues to deliver healthcare and educational systems because of the structure of how we are federated and the responsibilities within the constitution. States and Territories have the responsibility for those services while the federal government issues the currency.

By using a consumption tax to hypothecate the revenue allocated that is then used to deliver the above services is what requires the states/territories to issue bonds (and thus make interest payments)

If the non-government sector desires to save more and thus reduce consumption then the collection of GST falls (relative to GDP) and the states/territories have less to spend and either need to make up the shortfall by issuing bonds or raising taxes.

The states don’t have the power to impose income taxes and they’ve been reliant on increasing stamp duties and in some cases payroll taxes. (Two taxes that are not efficient and are not achieving much in terms of socioeconomic outcomes)

Conclusion

Discussion of government budgets has moved to needing to spend more but are still within a framework that Governments must tax, borrow or print in order to spend. At a federal level that is false. In terms of the states/territories we need to be questioning just how fit for purpose the funding mechanisms to deliver public services are.

While it is pleasing to see the public discourse move to discussing employment levels this is still operating under a NAIRU framework. A mythical number that is not known by anybody. This has been the definition used for full employment for the past 40 or so years and any progressive should reject it.

Full employment is a society as one in which there are more jobs on offer than people seeking them, so that work providing a secure dignified existence may be easily obtained by all.  

(Beveridge, 1944, Full Employment in a Free Society)

Why Universal Free Childcare is Possible

This is a thing that has dropped off radar. How quickly the public discourse moves. On Thursday 2 April, 2021 The Australian Government announced (temporary) free childcare for the covid pandemic.

It is no secret the spending of governments lifted by hundreds of billions of dollars and yet no extra taxes were raised and our central bank, the Reserve Bank began purchasing treasury securities (bonds). Effectively what we call government debt is now owned by the RBA instead of private financial interest. I’ve written about spending operations and money here, here, here and here. I make no secret that this understanding derives from Modern Monetary Theory which is a lens that allows you to understand the way our monetary system operates and requires you to implement a values system on top of that understanding.

How did the government provide the funding to make childcare free?

There are some technical arrangements in how the Federal Government funded the temporary free childcare.

First we need to make a distinction between types of appropriation bills. We have annual appropriations or special appropriations. The annual appropriations provided funding for specific purposes and are bills presented in the budget papers (usually in May each year) Special appropriations are funding mechanism within acts to provide funding for specific things. Usually using a spending on a rule principle rather than having a specified amount (e.g unemployment benefits – if you meet the criteria set out in the legislation you are eligible to receive payment) You can read more about the detail here

The Parliament of Australia (source) reported that

“Until 6 April 2020, the Australian Government provided both child care fee assistance to families and direct assistance to services. Most of the assistance was delivered through a fee assistance payment: the Child Care Subsidy (CCS). 

The CCS was means tested with rates of payment based on family income, hours of care used, type of care used, and parents’/carers’ level of work, training or study. Families received a percentage of the fees charged or the hourly fee cap (an amount set by the government)—whichever was lower. The percentage received was determined by the family’s income and the hours subsidised determined by the parents’/carers’ level of work, training or study. 

The payment was paid directly to providers to be delivered to families in the form of a fee reduction”

The Australian Government then passed the Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020. The Parliament of Australia reported (source)

Under the new funding arrangements, the CCS system is suspended and child care services will receive a weekly ‘business continuity payment’ equivalent to 50 per cent of fees charged (up to the CCS hourly fee cap) for sessions of care in the fortnight preceding 2 March 2020 (17 February 2020 to 28 February 2020). The payment for vacation care services will be based on the first fortnight of revenue in the school holidays between Term 3 and 4 of 2019. This will mean services can receive a payment worth up to half of their pre-pandemic fee revenue.

The amendment is complex to read without context of the act it amendments but in brief the Child Care Subsidy amendment amends section 205A(1) for the ‘circumstances in which a continuity payment can be made’ and 205A(2) ‘the method to determine a payment amount’ of the New Tax System (Family Assistance) Act 1999.

Childcare services also had access to the JobKeeker payment, an additional stream of funding in the form of a wage subsidy.

“While the new funding arrangements will only cover a portion of child care providers’ previous earnings, other government support may be available, particularly the proposed JobKeeper Payment. The JobKeeper Payment will help to cover eligible child care providers’ wage costs.”

We can see in the Family Assistance Act 1999, there are special appropriations that ‘appropriate’ funding for a specific purpose. The Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020 made changes to the rules so instead of paying providers a fee subsidy (reducing the amount parents made) they implemented a ‘business continuity payment’ forgoing the need for user pays charges.

How The Australian Government makes a payment

It is important to note that the appropriation doesn’t allow the funding to be spent. That comes from 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. 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)

The Reserve Bank of Australia holds Offical Public Accounts (OPA) with numbers in them but they do not form part of the money supply. You can think of the OPA as a record of what has been taxed and spent. The RBA statistics on monetary aggregates do not count government holdings as part of the money supply. In table D3 the notes state; (source)

The sum of currency and transaction deposits does not add exactly to M1, which is due to a small portion of currency which is estimated to be held by non-residents and/or the government (these sectors are not included in the monetary aggregates). This estimate is based on those sectors’ relative shares of transaction deposits in all transaction deposits


What About Inflation?

The ABS tells us ‘the Consumer Price Index (CPI) is a measure of household inflation and includes statistics about price change for categories of household expenditure’

The graph below shows the inflation rate per quarter from Dec 2011 to Dec 2020. (source)

The ABS data for the reference period ending June 2020 said under it’s key statistics

  • The Consumer Price Index (CPI) fell 1.9% this quarter.
  • Over the twelve months to the June 2020 quarter the CPI fell 0.3%.
  • Most significant price fall was Child care at-95.0%.
  • Most significant price rise was tobacco at +2.7%.

Childcare falls under furnishings, household equipment and services group. A further analysis of that group says

The impact of making childcare free, in terms of not charging user pays fee is what caused the CPI to record a negative result. That period also sustained mass job losses (which had deflationary pressure on wages) – we shouldn’t think of inflation as good or bad. It is more complex than a rise being good or a fall being bad.


Conclusion

Now if we put all this together we can begin to understand the statement ‘taxes don’t fund expenditure’ (the currency issuer spends first) The idea that public provisioning is a ‘cost‘ then is erroneous. The government needs no prior funds before it spends. Free childcare benefited thousands of Australians. It was made possible by a legislative change in how funding was determined and paid out.

We can question the composition of childcare services by which I mean who owns the centres – we can look at the low pay in childcare services and the why these services should be run for profit. I would determine that it is best to run childcare services as a public good and attach a service to every primary school in the country. You would then hire workers in low paid private for profit centres and lift pay.

Once you break the myth that governments need to find tax dollars – a retort is usually ‘printing money’ is inflationary. Take a deep breath and appreciate that printing money doesn’t apply to any spending operation. You can see above that the government spends in the same way irrespective of revenue or bond issuance.

It is better to think of inflation as a conflict. As firms hike their prices – workers look to increase wages – something has to ameliorate that conflict. Nationalisation of industries are part of ending that conflict. It removes a financial cost from the individual and it marshals real resources (in this case labour) for a public benefit – the provisioning of childcare.

Word War II and Post War Reconstruction

As part of a project into the history and development of Australian currency I have written a little more of the events that took place over WWII that led to Australia’s post war reconstruction. The events start at the end of the thirties and go through to just before the Commonwealth Bank was created and a Central Bank in 1945.

The Commonwealth Bank Act 1945 repealed the previous Commonwealth Bank Act 1911-1943 and recreated it as a central bank. A well known public servant H.C Coombs was largely responsible for the rationing system over the war and the creation of Australia’s post war reconstruction. He trained as a secondary teacher but over the 1930’s received his PhD in economics and went on to work in various capacities for the Commonwealth Government.

If you can obtain a copy of his book Trial Balance (now out of print) he details these extraordinary events and the shift in thinking not only of a defunct economic paradigm that was used over the 1930’s but also in society more broadly.

The finished paper will be a more coherent narrative some of which feature in the following posts and more!

Currency Issuing Governments Finance Themselves
A History of Australian Coinage and Note Issuance- Part 1
History of Australian Currency – More Detail
Let’s have a rational debate on government spending.
The Mainstream are Trying to Stay Relevant

Preparations for WWII and War Rationing

Various financial statements and budget speeches in 1939 and 1940 were stating that with a given workforce and existing pattern of technology and industrial organisation there was a maximum real Gross National Product (GNP) which would for practical purposes be reached when available labour was fully employed. 

(Insert EXAMPLES OF THESE SPEECHES)

The National Security Act 1939 had given powers to The Governor General to make regulations for securing the public safety and the defence of the Commonwealth and the Territories of the Commonwealth, and in particular— (h) for preventing money or goods being sent out of the Commonwealth except under conditions approved by any Minister of State; as well as other mechanisms to make provision for the Safety and Defence of the Commonwealth and its Territories during the present state of War. 

This act in conjunction with the changes to the Commonwealth Bank amendments 1929, in effect abandoning a gold standard allowed for the Commonwealth to implement a system of rationing.  There was contention within the Fadden Government. 

By 1941 preparations were being made for a wartime economy. Chairman of the Financial and Economic Committee Lyndhurst Giblin had been in contact with Keynes regarding propositions that if the war effort was to be accomplished an additional transfer of resources amounting to 10 per cent of the total available would from civil to war purposes had to be achieved. 

In a response to Giblin, Keynes had replied

to deprive the economic system of the freedom represented by uncontrolled prices through rigorous price control supplemented necessary by rationing and by strong propaganda in favour of increased saving out of the margins of income preserved in favour of individuals by price fixing policy.  (Coombs, 1981 p.11)

In a statement submitted to cabinet Fadden regarding his budget proposal submitted

There is a physical limit to our resources of manpower, equipment and materials and…the new programme will impose a severe strain on those resources. Last year (40/41) 15% of National Income was devoted to the war effort; this year (41/42) it would be 23%. The transfer of resources to achieve this must mean a substantial fall in civil production. The financial measures chosen must be designed to effect the necessary transfer. (Coombs, 1981 p.12)

In terms of an economic strategy the Finance and Economic Committee was preparing for a system of rationing as per the correspondence between Giblin and Keynes.  There was awareness that rationing as a result of trade restrictions and production would need to occur. As a result of this Keynes had pointed out to Giblin ‘fairness of distribution social security would necessitate rationing’ In February of 1941 the Committee advised ‘Direct rationing or restriction of supplies of specific goods or services, chosen because the resources they use are most adaptable to war purposes.’ (Coombs, 1981 p.12) 

‘There was a view within the Committee that direct rationing to consumers appeared inevitable and that plans to introduce and organise it should be prepared in secret by the Department of Customs’ (Combs, 1981 p.13)

The ABS 1301.0 Year Book Australia No. 35 1942-43 Commonwealth Food Control (1939-49 WAR) notes; 

‘Australia began in 1938 to prepare for food control in the event of war, not only to safeguard her economy, in which exports have always occupied an important place, and to protect primary producers against market collapse, but also to ensure that essential supplies moved quickly to the United Kingdom. Plans were laid then for mass marketing to replace individual enterprise, and understandings were reached that as far as shipping was available, the United Kingdom would take the export surpluses of most of our principal foods.’

The Year Book Australia 1944-45 notes the reasoning for rationing. 

‘War conditions necessitated civilian rationing of clothing and certain foodstuffs in Australia. The main reasons for clothing rationing were the serious falling off in imports, increased Service demands, and reduced labour for local production of textiles and making up of garments. The supply to the United Kingdom and the Australian and Allied Services of maximum quantities of foodstuffs necessitated the rationing of sugar. butter and meat, while reduction in imports, consequent upon enemy occupation of Java, necessitated the rationing of tea. In addition to the controls exercised by the Rationing Commission, rationing of certain other commodities is directed by other departments, e.g., petrol, tobacco, liquor, etc.’ (ABS 1301.0 Year Book Australia,Clothing and Food Rationing, 1944-45)

As the concern built within the Committee around the Fadden Government’s failure to implement rationing measures onto the civilian population and the political constraints within the Parliament, the Fadden Government’s 1941/42 budget failed to pass the House of Representatives. Two independent members of the House, Alexander Wilson and Arthur Coles crossed the floor.  Fadden resigned from office and the support of the two independent members of the house gave support to John Curtin and Ben Chifley delivering  the ALP under Curtin and Chifley Government. 

By 8 May 1942 Prime Minister Curtin had announced Australia would enter a system of rationing and by 17 May 1942 a Rationing Committee was formed. It was decided that a coupon system be introduced with interim arrangements being proposed before clothing supplies were depleted. (Coombs, 1981 p.20-21) 

A coupon system was devised in respect of Clothing, Food and Petrol. 

‘Coupon Rationing. After examination of the systems of rationing operating in other countries, it was considered that coupon rationing was preferable to a system of consumer registration, since it allows consumers to purchase from any retailer and also provides a comparatively simple control of traders’ replenishment of stocks by means of the passage of coupons to their suppliers. Food coupons are provided in the general Food Ration Book issued each year.’  (ABS 1301.0  Year Book Australia,Clothing and Food Rationing, 1944-45)

This coupon system would last throughout the war and was the means by which Australian citizens would obtain essential goods and services. The Food Ration Book provided each year per household negated the need to spend currency that was earned. 

Australia’s Post-War Reconstruction

Following the end of the war the Government was seeking a means to continue it’s control over the economy with similar wartime powers.  A failed 1944 referendum sought an insertion of a Chapter 1A in the constitution 

“CHAPTER IA.—TEMPORARY PROVISIONS.
POWER TO MAKE LAWS, FOB A LIMITED PERIOD, WITH RESPECT TO CERTAIN MATTERS.
6oA.—(i.) The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to—
(i) the reinstatement and advancement of those who have been members of the fighting services of the Commonwealth during any war, and the advancement of the dependants of those members who have died or been disabled as a consequence of any war ;
(ii) employment and unemployment;
(iii) organized marketing of commodities ; etc…  (ABS 1301.0 Year Book Australia No.35 1942-43 p.65-66)

The failed referendum required another means to continue the Full Employment achieved over the war. 

There was a shift in thinking as a new economic paradigm emerged. The collective conscience within our society was driven largely by remembrance of what was experienced over The Depression, what was possible as seen over the war and a desire to maintain the same level of production during peacetime. Within academia, elected representatives and a new generation of public servants – Keynes’ General Theory gave them the authority to implement what only a decade prior was seen as ‘radical’.

These events led through to the 1945 Tax White Paper on Full Employment and The Commonwealth Bank Act 1945 which created the Commonwealth as a central bank. Coombs in his text Trial Balance writes

‘Generally the functions of a central bank are: to print and control the issue of legal tender notes; to hold the country’s international reserves of gold and foriegn currencies; to act as banker to other banks, holding deposits from them; to exercise control over banks’ lending policies; to act as banker for governments and their major agencies, and frequently to arrange their borrowing; and to influence the policies of non-bank financial intermediaries which make loans.’ (Coombs, 1981 p.142)

A position that was resisted by capital for decades was finally defeated and our elected representatives had more discretion on controlling an interest rate and fiscal policy (having been subject to various impediments prior) to achieve their socio-economic outcomes.

The Mainstream are Trying to Stay Relevant

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.


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.