It is a public holiday in Australia today – Queen’s Birthday, a reflection of our past as a colony. Not a lot has actually changed and we still cannot shed the monarchy. Anyway, not many people reflect on the monarchy today given it is deep winter and football matches are on as part of the holiday. But in keeping with the holiday spirit, I will only write a short blog today. The topic is why no-one should vote for the Australian Labor Party although the argument is applicable to all parties like it, who formerly represented the interests of workers and who are now dominated by politicians who have embraced the neo-liberal macroeconomic myths as if they are truths and, if that wasn’t bad enough, have become active proselytizers of this destructive religion. I might write a few words about the on-going Eurozone saga too, given the extraordinary comments by leading European politicians overnight. Then I will head like thousands of others to the football!
The ABC news report (June 6, 2015) – Budget 2015: Opposition backs Government bid to scrap $3b income tax cuts – reported that the conservative Federal government is scrapping “$3 billion worth of income tax cuts” promised as part of the compensation package associated with the previous Labor government’s introduction of a Carbon Tax.
The tax cuts were cuckoo-land stuff given that the Carbon Tax was meant to send a price signal that buying carbon-intensive products was bad for the environment and should be reduced. The tax cuts were the political sop which nullified the price signal to consumers. The Labor government wasn’t prepared to tell consumers that some things would become more expensive and that this was by design to reduce carbon use.
The conservative government that replaced them in September 2013 scrapped the Carbon Tax as a sop to their mates in the mining industry and as a reflection of their on-going denial that there is any climate change issues that governments should be addressing.
They then determined that the tax compensation (tax cuts) were redundant.
On May 6, 2015, the Federal Opposition Treasury Spokesperson, Chris Bown said that the – Economy can’t afford another budget that is not in the national interest.
Which is an admirable statement but the devil is in the detail.
He went on to say that:
We continue to see a flurry of surveys pointing to sluggish aggregate demand which is directly impacted by consumers and businesses not feeling confident about the future.
The lack of confidence about the future is strongly influenced by the rising unemployment rate, which, in turn, erodes the incentive to invest by firms as sales flag. This lack of spending, lack of confidence, rising unemployment feeds on itself, which is why economists such as John Maynard Keynes advocated an intervention by governments in the form of a spending boost to arrest the malaise.
But the important point was that he introduced “aggregate demand”, that is, total spending into the frame that the fiscal policy strategy outlined in the fiscal statement (aka “The Budget”) had to address or be mindful of.
After all it is the state of spending relative to the availibility of productive resources, including labour that fiscal policy adjustments aim to influence.
The goal is to ensure that total spending in the economy is growing in line with the productive capacity of the economy such that there are no idle productive resources, particularly labour.
But we started to get a better impression of what the Opposition Treasury spokesperson thought when he addressed the National Press Club in Canberra on May 20, 2015, following the release of the Government’s fiscal statement.
In his speech – Labor and the economy: owning the future – he said:
You won’t hear me make the ridiculous claim that my predecessor as Shadow Treasurer, the now Treasurer, made that you can magically fix the budget bottom line without revenue measures.
To put it another way: the budget has a revenue problem and a spending problem following the Abbott Government taking spending to GFC levels in this Budget …
We have made clear that our fiscal plan will contain more savings than spending over the decade …
There is no doubt that difficult decisions are and will be necessary to ensure long term budget health.
Anyone who knows anything about fiscal parameters in a modern monetary economy, knows that the fiscal balance cannot be ‘sick’ and that neo-liberal metaphors about “budget health” are inapplicable.
The fiscal balance is what it is – the difference between government spending and revenue. Whether that is an appropriate balance is not something that we can assess without further information.
A fiscal deficit of 10 per cent of GDP might be very appropriate in one circumstance and outrightly irresponsible in another circumstance, just as a 2 or 3 per cent deficit might be. The number, in itself, provides no relevant information.
His reference to the “revenue problem” is his claim that the revenue is insufficient and that explains, in his view, the excessively high fiscal deficit. That is why his party is proposing lifting taxes to reduce the deficit.
What other information would we need before we could conclude this was a responsible strategy? Obviously, knowledge of “aggregate demand”. Is there enough spending in the economy to fully employ the available workforce?
It is a simple question and one that should be asked always when discussing fiscal policy settings.
If the answer is No, then we would conclude that given the current private spending decisions, the government’s fiscal deficit is too small! The solution? Increase government net spending and/or seek ways to stimulate private spending. In the latter case, that might require further tax cuts, which would, initially, increase the fiscal deficit.
In this blog – What causes mass unemployment? – I explain why mass unemployment signifies that the fiscal deficit is too low.
Modern Monetary Theory (MMT) shows that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.
So taxation is a way that the government can elicit resources from the non-government sector because the latter have to get $s to pay their tax bills. Where else can they get the $s unless the government spends them on goods and services provided by the non-government sector?
The mainstream economists conceive of taxation as providing revenue to the government which it requires in order to spend. In fact, the reverse is the truth.
Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.
It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.
Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector.
The unemployed or idle non-government resources can then be utilised through government spending injections, which amount to a transfer of real goods and services from the non-government to the government sector.
In turn, this transfer facilitates the government’s socio-economic program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.
Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.
Mmass unemployment arises if total spending is insufficient to support output levels that are commensurate with jobs being provided for the available labour.
For aggregate output to be sold, total spending must equal the total income generated in production (whether actual income generated in production is fully spent or not in each period).
Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages). Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account through the offer of labour but doesn’t desire to spend all it earns, other things equal.
As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.
In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.
So we are now seeing that at a macroeconomic level, manipulating wage levels (or rates of growth) would not seem to be an effective strategy to solve mass unemployment. I will return to this soon.
MMT provides the insight that mass unemployment thus occurs when net government spending is too low, given the current spending plans and actions of the non-government sector.
To recap: The purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.
Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue.
To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed.
The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.
This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).
It is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.
Keynesians have used the term demand-deficient unemployment. In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.
Shift in private spending certainly lead to job losses but the persistent of these job losses is all down to inadequate net government spending.
This is the theoretical base that should inform the Opposition Treasury Spokesperson’s commentary on fiscal matters.
In his assessment of the fiscal position of the current government he makes no reference to these matters. He think a fiscal problem (excessive deficit) is to be understood with reference to the current $ value of the fiscal balance.
This becomes very evident in his latest statements in the ABC news report cited at the outset.
When the Government announced its decision to withdraw the tax cuts associated with the Carbon Tax, the ABC said that:
Shadow treasurer Chris Bowen said Labor had taken the “responsible view” that the tax cuts were no longer appropriate.
“For somebody on around $65,000 a year, it will mean a difference of $1.50 a week. But it is a saving or a boost to the budget bottom line of around $2.8 billion over four years,” he told reporters in Sydney.
“Of course, everybody wants to see tax lower rather than higher.
“But given this is the Government’s position not to have these tax cuts and given the state of the budget deficit, the responsible thing for Labor to do is to give its support.”
At that point, you realise that the Opposition’s understanding of macroeconomics is pitiful and, if elected in next year’s federal election, they would continue with the high unemployment path that has characterised their times in office since the early 1980s.
Question: is their sufficient spending in the economy at present? How would we assess that?
Answer: Easy, by looking at the unemployment and underemployment rate?
At present, the unemployment rate stands at 6.2 per cent and since February 2008 it has risen by 2.2 per cent.
Underemployment is at 8.6 per cent having risen by 2.7 per cent since February 2008.
Even at February 2008, which was the lowest unemployment reached in the last growth cycle, total labour underutilisation stood at 9.9 per cent, which could hardly be construed as a full employment state.
At present, there are more than 15 per cent of available labour resources underutilised if you add the unemployment rate to the underemployment rate and also recognise that the participation rate is well below it last peak as a result of the lack of employment opportunities.
We also know from last week, that retail sales declined in the last month and that investment growth was negative.
So, applying first principles tells me that the fiscal deficit is too small by some margin.
So “given the state of the budget”, the Opposition should be advocating retaining the tax cuts and/or rather significantly boosting government spending.
It is doing exactly the opposite, which means it is advocating fiscal positions that are contrary to the national interest.
The following graph shows the history of the Australian unemployment rate since the September-quarter 1959 to the March-quarter 2015. The blue segments are the periods that the Conservatives (the current government) ruled at the federal level, whereas the red segments are the periods that the Australian Labor Party (ALP) were in federal office.
The ALP can hardly claim to be a party of low unemployment.
Since 1959, the average unemployment during the conservative period’s of federal office is 4.57 per cent, whereas for the Australian Labor Party it has been 6.91 per cent.
If we take out the full employment years (in this sample – 1959 to 1974), the averages are 6.24 per cent (Conservatives) and 7.30 per cent (ALP).
When the ALP embraced neo-liberal economic thinking in the mid-1980s, it became a party of entrenched high unemployment.
Since the September-quarter 1959 to the March-quarter 2015, the average unemployment during the conservative period’s of federal office is 4.57 per cent, whereas for the Australian Labor Party it has been 6.91 per cent.
If we take out the full employment years (in this sample – 1959 to 1974 – the averages are 6.24 per cent (Conservatives) and 7.30 per cent (ALP).
In the EUobserver article (June 8, 2015) – Juncker rebukes Tsipras after parliament speech – which recounted how EU President Juncker refused to meet with the Greek Prime Minister on Saturday last because the latter had failed to engage with the negotiation process properly.
Juncker accused Tsipras of lying to the Greek Parliament about the nature of the negotiations and the position of the EU within them.
Obviously, things are getting to the pointy end.
Relatedly, today’s Reuter’s press article (June 8, 2015) – EU chief rebukes Greece, demands swift debt plan – reported a comment from the EU Council President Donald Tusk in relation to the negotiations.
He is quoted as saying:
If someone says I will lend you money but please give it back to me in the future, that person is not a ruthless robber, and it’s not true (that) debtors are always moral and creditors are always immoral.
He clearly misses the point. The immorality that the Greek government is suggesting relates to the deliberate impoverishment of a nation’s people by the Troika, who set terms and conditions for loans that could never be met but which would cause untold social and personal harship.
When lenders conspire to undermine the prosperity of an entire nation to advance their own political and ideological interests, it is fair to call that immoral.
When elites in Brussels, Frankfurt, and Washington, who are not even elected by nor accountable to any electorate, deliberately create unemployment rates in excess of 25 per cent and allow around 60 per cent of a nation’s youth who want to work remain jobless, then that is immoral.
As we noted above, there is no secret to mass unemployment. The austerity that the ideologues in the Troika have imposed on Greece has cause the mass unemployment.
It is immoral for any system to deliberately seek to do that and then insist that the austerity is intensified to make the situation worse.
Mr Tusk should have his pay and future pension inversely linked to the Greek unemployment rate. Then we would see what he advocated.
Reuters also quoted the Slovakian Finance Minister Peter Kazimir who is an austerity “hardliner” saying that Greece has to “surrender, to continue with the programme”.
Surrender – all the connotations of subservience and defeat rather than partnership of equals.
I remain convinced that Greece should exit the Eurozone immediately, redenominate all debts in their new currency, and introduce a Job Guarantee along with other stimulatory measures.
Within one quarter they would be growing strongly – and demonstrating to Spain, Italy, and other nations what life can be like outside the sociopathological straitjacket of the Eurozone.
1945 White Paper on Full Employment Workshop – Sydney, May 30, 2015
This is the edited video of the five presentations at the Workshop in Sydney on May 30, 2015. The audio at times is not optimal but you can adjust volumes accordingly.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.