E is for Effort

Alan Kohler wrote his first piece for The New Daily. It’s a rather optimistic piece where he says thankfully we haven’t entered a long depression as many feared. Irrespective of labels and what you define 2020 as, it has demonstrated that currency issuing governments always have financial capacity to deal with a collapse in spending.

First, 2020 wasn’t the beginning of another Great (Long) Depression, as understandably feared in March.

Why not? Because after the GFC, monetary authorities (central banks) decided to do whatever it takes to combat recessions.

Central Banks (The Reserve Bank in Australia) have the powers to deal with monetary policy. That is interest rates. They choose a ‘target rate’ for banks to loan to each other. In the same way you have an account with a bank, that financial institute has an account at the central bank (these are called exchange settlement accounts [ES]). These accounts need to be positive at the end of each day. If a bank is short it will borrow from another bank with surplus reserves. This is the rate the central bank aims to set. Currently the offical rate is 0.1% in Australia. Though the actual rate is much lower because of the banks QE program (more on that below)

What is Quantitate Easing?

As described above financial institutes hold exchange settlement accounts with the Reserve Bank of Australia. I’ve describe detail of various operations here, here and here. The RBA not only is able to set the rate of interest banks loan to each other (Cash rate) it can also set the yield on any Government bond. It currently has a target of 0.1 percent on 3 year Australian Government Securities (bonds)

What does this mean? As treasury spends via fiscal policy it adds reserve to the system by marking up these exchange settlement accounts. It is then a choice to issue a bond. These are offered for various lengths 1, 3, 5 year etc…by The Australian Office of Financial Management. The RBA has purchasing these bonds on the secondary market. So the steps are

  1. Treasury spends by marking up accounts at the RBA
  2. AOFM issues bonds – in Australia they are called Australian Government Securities (AGS). Financial Institutes purchase these from currency in their ES Accounts
  3. This operation drains ES Accounts and adds them to securities accounts
  4. The RBA has then been buying AGS to lower their yields and ensure the target rate on a 3 year AGS is 0.1 percent. You can read about it here

It is important to note that when the RBA is purchasing bonds it is switching the asset portfolio. More reserves in ES Accounts as it purchases back AGS that have been issued by the AOFM and it now ‘owns’ bonds that were issued by treasury.

This is usually called ‘money printing’ however by definition all spending by treasury is ‘new’ money entering the financial system.

Treasury spends via appropriation bills and the central banks use a computer to mark up the relevant bank account. This process is the same irrespective of past fiscal positions. It’s ‘cost’ in terms of the real resources used is the same irrespective of the interest rates. 

Bond issuance (govt debt) is an after the fact operation. It switches currency in reserve accounts (that financial institutes hold with the reserve bank) to securities accounts (which earns interest).

There isn’t a need to issue debt. Ask yourself where financial institutes obtain currency to purchase bonds? 

Treasury departments hold public accounts with the central bank. These are purely there to record the transactions that take place. The balance in that account is irrelevant to the governments ability to spend.

Seeing the powers that central banks have is to target an interest rate and NOT direct fiscal policy, there is very little they can do to deal with collapses in spending. The mainstream parade that interest rate movements will encourage or discourage spending. That is ridiculous. The manipulation of a rate banks loan to each other or a yield on a bond in no way encourages or discourages investment. The power lies with fiscal policy and that is held by treasury.

So, massive fiscal stimulus (which should really be called compensation) followed massive monetary stimulus from central banks – that is, money printing and rate cuts to zero and below.

It is true treasury engaged in spending to a level most of us haven’t seen before. None of this was financed by central bank operations. None. Bond issuance intrinsically has to work after the fact the issuer has spent. The fact interest rates are 0 or the RBA is purchasing bonds via QE program is irrelevant in treasury’s ability to spend.

Businesses are getting ready to catch that money and transfer it to their own bank accounts: Private sector job vacancies in Australia rose 24.2 per cent between August and November to a record high of 228,800.

That’s only a quarter of the 942,100 people still unemployed – but even in good times there are usually three unemployed people for every vacancy.

Obviously you are going to have a large increase in job vacancies when you emerge from a lockdown. That figure isn’t telling us much. It’s just a big number. The reality is there are still millions of under and unemployed. This is a policy setting by the government of the day. The Australian Government as a monopolist of The Australian dollar can always purchase idle labour. It chooses the unemployment rate.

The savings ratio is the inverse of consumption expenditure. Obviously when the lockdown happened people couldn’t spend and that caused the unemployment in the tourism, hospitality, arts sectors etc…It doesn’t tell us much more than that.

Meanwhile, the Reserve Bank is still pumping cash into the system.

In December it bought $20 billion worth of government bonds, bringing the total bought in 2020 to more than $100 billion, using freshly created money. That’s about half what the government actually issued.

Central banks pumping money into the system is, as descried above, switching currency in accounts at the Reserve Bank of Australia. It’s a smokescreen. QE has had The RBA purchasing bonds that are issued by the AOFM. Now treasury ‘owes’ money to the RBA. Yet within the mainstream media there is no acknowledgment that all spending has to originate from treasury as it marks up an account at the central bank. That is what the banks use to then purchase bonds!

Australia is only half pregnant with MMT because the RBA governor Philip Lowe insists that there is no such thing as a free lunch. Meanwhile governments elsewhere are munching on cost-free cash for lunch.

This is one of those myths that gets paraded around to invoke a fear of inflation. If we keep spending and if we continue to ‘fund’ treasury, eventually we will impoverish future generations and there will be inflation.

News flash: We have literally seen the Australian Government spend billions of dollars from nothing – we have seen the RBA engage in bond buybacks (QE) to expand the balance sheets of the banks and we had deflation.

Kohler gets that correct

Maybe the bill will be presented later in the form of inflation, as Dr Lowe confidently predicts, maybe not. But central banks have been printing money for 10 years so far and inflation hasn’t stirred.

I don’t describe it as ‘printing money’ but his comment that what central banks told us, that inflation will stir as a result, is spot on.

Conclusion

The policy prescriptions that you can advocate are thus different by viewing government spending through the lens that issuers spend first and tax and issue bonds after the fact.

The policy positions we need to wind down support measures (unemployment benefits) are shown to be purely spiteful. They ignore that governments choose the unemployment rate and can always purchase idle labour. We thus force people into poverty and punish them as a result of failed government policy to ensure enough jobs.

The positions taken by the mainstream economics that we should ‘spend now because rates are low’ are wrong too. Watch as they begin to attack government spending again at the first chance they can. We should spend as much as is politically desired on public infrastructure and full employment. Removing the lens that taxes fund our expenditure (rather than government spending funding our ability to pay tax) and ending the nonsense that states ‘bond issuance (government debt) ‘funds’ the government’ allows us to have better, more truthful discourse on the public services we should be providing.

Solving inequality requires getting macro right!

The ACTU last year in April released this report into inequality in Australia. It starts with the statement “Extreme inequality – which is what we are now experiencing in Australia – slows economic growth, creates social havoc and undermines faith in our political institutions.” Which I wholeheartedly agree with. In this post I aim to show why the report is flawed and how that can lead to flawed policy proposals.

The report in its summary recommends policy reform:

  1. Ensuring that real wages rise in line with national productivity improvements through the introduction of a new Living Wage, tackling insecure work, restoring penalty rates for 700,000 low paid workers, raising public sector wages and reform the collective bargaining system so it can deliver rising living standards;
  2. Making sure everyone pays their fair share of tax including corporations and the wealthiest members of our society. This includes reforms to capital gains, negative gearing and family trusts;
  3. Lifting the very poorest Australians out of dire poverty including through an increase in Newstart and an increase in the aged pension for those without adequate superannuation;
  4. Increased expenditure on health and education;
  5. A comprehensive Jobs Plan to reduce underemployment and unemployment; and,
  6. Measures to tackle excessive corporate power. The Banking Royal Commission has shown the extent of corporate excess and law breaking. Australia is also littered by firms with oligopoly power in certain sectors. Stronger competition policy is required to ensure people are not being ripped off by excessive prices.

Point 1 is what used to happen through institutionalised arrangements in Australia. I quoted in this post that the attack to decouple this arrangement began in the mid seventies were The Age newspaper quoted Friedman as saying .”….led the professor to opine that our long cherished arbitration system ‘seems to be highly unfortunate’ in the way it sets wages…”

Productivity is output level per hour worked. So for every hour, if you output $X, you need $X in wages in order to purchase that output. Real wages (wages adjusted for inflation) need to rise in line in productivity increases in order for the wages share of national income (GDP) to increase. Real wages can continue to grow below productivity but it means a growing share of the output we produce with our labour goes to profits. Arrangements that make bargaining difficult, make wage rises harder to negotiate and Government policy to cut spending and therefore public sector wages and employment (surplus) contribute to this.

http://bilbo.economicoutlook.net/blog/?p=2723.

The above graph is what has happened with the real wage and productivity levels since 1980 to 2009. There hasn’t been substantial change over the past decade to 2020 and share of wages is at historic lows.

http://bilbo.economicoutlook.net/blog/?p=43621

When wages fail to grow with rising productivity levels it means we need credit to purchase the output our labour produces and in Australia we have seen record levels of rising household debt. One of the highest in the OECD.

https://www.rba.gov.au/speeches/2019/sp-ag-2019-03-20.html

Pre 1980s capitals dilemma was how do you ensure workers can still purchase what they produce and suppress wages. Thus began a process of breaking institutionalised arrangements around wages growth with productivity, ending full employment policies and allowing a reserve army of labour, deregulating and privatising financial services (e.g the commonwealth and various state banks), and what I think is the key contributing factor, leaving fiscal policy out as a tool and using the analogy that a government is like a household and a surplus obsession and fear mongering around debt and deficit.


One of the analogies used to ensure public spending remains low is the household metaphor, which assumes the currency issuing Governments face the same constraints as a household and a ‘surplus’ is desirable.

Under a fiat currency, that is clearly non-sensical. A currency issuing government promises nothing in return for the currency it issues (not in gold or a foreign currency) and it can spend regardless of past deficits or surpluses. As a monopolist over the currency it can always purchase whatever is for sale in the currency it issues.

When we look at sector balances, assessing the macroeconomy as a relationship between three sectors (Government, private domestic and Foreign sector), accounting wise the total sum has to add to zero. For example if the government spends 100 and taxes 30 we record that as a deficit of -70 though that +70 has to sit somewhere. All deficits go somewhere but the question that should be asked is where and for whom?

Looking at the data for sectoral balances in Australia we get the below picture.

Image from this lecture:

The period of government surpluses in Australia was a result of private sector deficits. The hallmark of ‘good’ fiscal policy isn’t whether a particular fiscal outcome is reached. It is a meaningless irrelevant statistical artefact. It is whether we have our resources, including labour all in use, whether we a meeting our objectives in terms of ecological limits, and we should judge fiscal policy based on how well the bottom of the income spectrum are doing.


Point 3 relates to increasing Newstart and the aged pension for those without adequate superannuation.

Increases to the unemployment benefit need us to assess why unemployment exists in the first place.

Unemployment is a systemic issue that can ALWAYS be resolved by the government of the day. Involuntary unemployment is not an issue that is beyond us to solve. The Government of the day chooses the level of unemployment because it can always purchase whatever is for sale in the currency it issues. We can still have generous unemployment benefits, a welfare system that ensures for those unable to work are provided with living wages, guaranteed housing, and other public provisioning.

Keynes noted in his General Theory of Money, Employment and Interest, that it was aggregate spending levels that determined economic activity, and that inadequate spending levels could lead to high periods of unemployment. 

From a national accounting perspective at the macro level the sources of income are Government Spending (G), Investment (I), Consumption (C) and Exports (X). Are all these sources of expenditure sufficient to full employment?

Modern Monetary Theory will note that as a monopolist of the currency, the federal government can always purchase whatever is for sale in the currency it issues and thus can always employ any idle labour. It is a political choice. The Government of the day chooses the unemployment rate.

Unless we ensure more job vacancies advertised than demanded, we will not have enough work for all those that desire to work. As a society we can not achieve equality, fairness and a public purpose unless that is what we set out to do.

Precarious work conditions exist because we have laws in place that allow such conditions to exist. People don’t have enough to retire on because we have a system that places retirement on the onus of the individual and leave retirement up to the speculations and abstractions of ‘the market’.

It is often overlooked that a Governments spending is representative of a socio-economic agenda. For as long as a society has the real resources to implement its desired policy objectives, these objectives are achievable.

Rather than ‘force’ people to save for retirement, we need to acknowledge the superannuation was set up under the false premise that currency issuing governments need to save. Saving is the act of forgoing current expenditure to spend at a later date. It applies to a user of a currency. A public pension doesn’t have to be a minimal subsistence living. The impacts of the spending whether from a public pension or a private super account are exactly the same. It is a question of whether we have the available real resources to purchase when that spending occurs.

The challenge with providing for an ageing population is not financial, it is rising dependency ratios as a larger percentage of the population exits the workforce and we need to ensure our productivity levels increase to maintain our same standard of material well-being. Current policy that seeks to cut government spending (surplus) and leave youth underemployed or unemployed jeopardises increases in future productivity. That is lost skills, trades and professions we have by leaving youth idle. These will be people we need to provide for elder Australians as they age; In terms of the services they will need to ensure they are cared for in their homes, in terms of services they will need to feel included within the communities they live, the services they will need to maintain their residences, the services they will need in terms of their health, services they will need in the event they are no longer able to stay at home and need greater care. These are the challenges we face with an ageing population not some non-issue finding the ‘money’ nonsense. Obsessions with fiscal balances undermine the very issue we are supposed to be solving. And we are the poorer for it. (In terms of real resources)

A system of subsistence public pensions leaves those that have been out of the workforce at a disadvantage, particularly women, those on low incomes usually in precarious work, and those vested in the system to speculations and the expectations of unearned income.

The early classical economists distinguished between the use of earned and unearned income. From Michael Hudson’s Killing the Host

The guiding principle was that everyone deserves to receive the fruits of their own labor, but not that of others. Classical value and price theory provided the analytic tool to define and measure unearned income as overhead classical economics. It aimed to distinguish the necessary costs of production – value – from the unnecessary (and hence, parasitic) excess of price over and above these costs. This monopoly rent, along with land rent or credit over intrinsic worth came to be called economic rent, the source of rentier income. An efficient economy should minimize economic rent in order to prevent dissipation and exploitation by the rentier classes. For the past eight centuries the political aim of value theory has been to liberate nations from the three legacies of feudal Europe’s military and financial conquests: land rent, monopoly pricing and interest.



Distinguishing the return to labor from that to special privilege (headed by monopolies) became part of the Enlightenment’s reform program to make economies more fair, and also lower-cost and more industrially competitive. But the rent-receiving classes – rentiers – argue that their charges do not add to the cost of living and doing business. Claiming that their gains are invested productively (not to acquire more assets or luxuries or extend more loans), their supporters seek to distract attention from how excessive charges polarize and impoverish economies.

Australia’s superannuation plays into the concept of deriving rentier income, a concept that was thought as immoral and landed power in the hands of a ruling feudalist class during the enlightenment era. A system that was discussed in Moral Philosophy classes during the 19th century. (Moral Philosophy is what encompassed economics).

Today in economics courses concepts of rentier income and earned and unearned income are not discussed or their use in amassing political power for a financial services sector and the bankers and CEOs of major corporations. Why should we be ‘forced’ to guarantee an unending flow of dollars to a sector that is immoral, bloated and seeks to extract the value of our labour in order to engage in speculative activity on share markets, currency exchanges, housing and anything else our society financialises.

This brings me to another criticism within the ACTU report;

The ACTU also supports the right of all Australians to derive income from investments and accumulate wealth. These are fundamental and desirable attributes of a market based economy.”

This fails to define a difference between types of income. Earned and unearned income. You should not, in any moral society, be able to derive an income and amass wealth because of monopoly rents.

Joesph Stiglitz describes economic rents as;

The term ‘rent’ was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his or his ownership and not because of anything he or she does. The term was then extended to include monopoly profits (or monopoly rents)— the income that one receives simply from control of a monopoly— and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production.

https://evonomics.com/joseph-stiglitz-inequality-unearned-income/

It is obscene that a ACTU report into worker inequality would not make a distinction between these two types of income and outright say we need to tax; rents, capital gains, share dividends at a higher rate than that of wages if we are serious about delivering wealth to the labouring class and reducing our levels of inequality.


The report states other incorrect information such as;

“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

How can a stimulus measure exacerbate debt levels? The Chinese Government issues its own currency. A simple understanding of double entry book keeping will show dollar for dollar the Chinese government deficit is equal to the non-government sector surplus which would reduce private sector debt levels, all other things equal.

The idea that somehow the Chinese Government ‘borrows’ its own currency is nonsensical. It offers investors a bond and moves money from a reserve account at the central bank to a securities account at the central bank. The latter pays interest. It is an entirely voluntary choice.  Where do financial institutes obtain Chinese yuan from to buy government debt? 

Any government that issues its own currency can always deal with any financial crisis no matter what the size.

The below statement is in relation to Australia.

“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.”

The statement above discusses monetary policy (interest rates) The evidence is clear. Monetary policy is an ineffective way to stimulate aggregate demand. It is blunt, you can’t control where the spending goes and you are relying on already indebted households to go further into debt to spend.  

The report ignores fiscal policy (spending and taxation decisions) For a currency issuing government it is a tool that is unlimited. It is constrained by what is available for sale. What limited tools is the report referring to? Monetary policy has a limit, which is zero. Then it is a useless way to try and direct spending where you need it to go.

Conclusion

I’ve run out of time to discuss all the points above but I’ve given an overview of why I think the report is flawed.

An incorrect understanding of macro leads to incorrect policy prescriptions and the non-sensical idea that somehow a currency issuing government is constrained by revenue. It is never nor can it ever be short of the currency it issues. We have a series of analogies and metaphors in place that are there to ensure, despite the real resources exisiting we can’t deploy them for a public purpose.  This includes the government is like a household, mortgaging our future and leaving our children in debt, budget black holes that need to be filled, deficit spending / government spending is inflationary, pulling out a credit card from the bank of China etc…I hope to write a post on each of these analogies and state why they are wrong.