Slipping back into old ways of thinking

Steven Hail
Extracted from a Facebook posting on 9th May

Saul Eslake, on the radio recently (9th May), for the most part provided a good commentary on the 2021 federal government budget. Spoiled by two things – each of which are the reflex actions of neoclassical economists, but neither of which should any longer go unremarked.

Firstly, he explained that the budget deficit would be smaller than previously anticipated, but described this as the budget position being “better” than anticipated. A larger (or smaller) deficit cannot be said to be better or worse, taken out of context. It is misleading to say so.

Secondly, he said that the government is having ‘no difficulty’ at the moment ‘financing its budget’. A meaningless and misleading thing to say about a monetary sovereign, issuing money in its own currency. Again, we need to pick people up on this misleading language.

Were we to converse, he would say ‘I meant financing through bond sales rather than printing money’, I would reply that all federal spending is always done through currency creation. Every dollar the federal government spends is a new dollar.

They then delete some of those dollars via taxation, and offer the private sector the chance to convert other dollars into treasury securities, but those treasuries ought to be regarded as another form of government money, and their issuance is just an asset swap.

They do not ‘fund’ federal government spending, and the distinction between ‘printing money’ and selling bonds is misleading, and although widespread it is based on a misunderstanding of the monetary system.

The spending in Australia is ‘funded’ by being authorised through parliament.

Spending and tax revenues which are determined by the state of the economy mean that an economic recovery reduces the government deficit (or non-government surplus).

The economy is better than before, but the budget position is an outcome. It should not be a target. It should always be a tool. We do need better automatic stabilisers. More progressive taxes help. A job guarantee is better still.

But the fact that fiscal policy remains, as it has always been, a more effective and reliable tool of demand management than monetary policy, has been demonstrated once again by experience. That much I think is more widely understood.

But our best economists, and Saul Eslake is one of those, ought to stop using misleading language, which they do out of habit, because that misleading language biases the narrative, and means out of habit we will slip back into the old way of thinking, if we are not very careful.