Beware Financial Journalists discussing Government Deficits – Steven Hail
When financial journalists write about fiscal policy, government deficits and what they often call the national debt, the results sometimes look like Year- 12 essays, from the days before critical thinking was much encouraged in our schools. They certainly check some appropriate websites and get institutional details broadly right. They look up standard definitions and they might check their old study notes from when they took first year economics back at uni. But they don’t do any critical thinking. And they almost never investigate ideas they haven’t taken for granted since they were teenagers. Alan Kohler is an honourable exception. [1]
Good luck if you are trying to encourage people to take an interest in the intrinsic realities of modern monetary systems and to challenge myths which have come to be taken for granted by many, including the journos, buttressed by misleading but attractive metaphors of governments as households, maxing out on their credit cards, at the mercy of lenders and credit ratings agencies.
It won’t be easy to break through, even amidst a global pandemic, when the mechanics of the system seem much more obvious than they are in normal times. Talk about Sisyphean task!
One such essay, by a prominent journalist, appeared in the Sydney Morning Herald on 3rd April. Apparently, “the federal government has a commitment, over the long run, to balance incoming money from tax collection with ongoing spending on welfare, health services, etc.” [2]
Well, it shouldn’t. It should be commit- ted to the pursuit of the public good, including among many other things non-inflationary full employment, a more equal distribution of income and wealth and ecological sustainability. The pursuit of full employment, in countries without large and persistent trade surpluses, requires governments to run deficits. This is because the private sector needs to add to its net financial assets as the economy grows, and in the absence of big trade surplus- es, the only place these can come from is government deficits.
Most governments run deficits most of the time, and this is essential if the economy is not to be driven into recess- ion and the private sector is not to be driven into debt. The Howard/Costello surpluses the article boats about were accompanied by a trebling of Australian household debt, relative to the size of our economy. This is not a responsible fiscal policy. It is the opposite of one. [3]
The article explains that whenever the government runs a surplus, it can pay back its debt. It does not state however that a federal government in a monetary system like Australia does not have a debt, in a meaningful sense of the term. Instead, the so-called net debt of the government should be described as the net money supply. It is no more or less than dollars the government has spent into our banking system and not yet deleted from the system yet, through taxation. If you know your modern monetary theory, you will know that, as Beardsley Ruml of the New York Fed explained many years ago, federal taxes do not pay for federal spending. Ruml understood this in the 1940s. It is a pity so many people don’t understand it today. It distorts policy making, feeds austerity in normal times, delays actions when we are beset by a crisis, and now fuels unfounded fears. [4]
The journalist above explains how the Australian Office of Financial Management auctions government bonds to match the difference between government spending and taxation, and that these bonds are often held by foreign residents. She omits to explain that the auction system was introduced in 1982, not because the government needs to raise dollars by borrowing before it can spend – it is a currency issuer, after all – but to drain dollars from the banking system to make it simpler for the RBA to control the cash rate. She also omits to explain that foreign investors buy Australian treasury securities as a port- folio decision, and that the government, in our modern monetary system, in no sense relies on them to do so. [5]
There is the suggestion in her essay that government borrowing in itself may lead to higher interest rates, with a potential burden on future generations to repay the debt. In practice, deficit spending with no bond issuance puts downward pressure on interest rates, because it floods the banking system with cash. Moreover, in recent years government bond issuance has increased considerably almost everywhere, due to higher deficit spending after 2008 than before, and in some countries interest rates are negative.
In Japan, the country with the highest government gross debt in the world, the interest rate on 10-year government debt has been zero for years. The central bank set it there. Just as the RBA has now chosen to set the interest rate on 3-year government debt in Australia. Central banks and governments are not at the mercy of private markets. They issue the currency. They can set the interest rate on government debt at wherever suits their macroeconomic policy stance. [6]
The article then asks about how we will pay the money back. Firstly, this money is government financial liabilities – it is not your and my debt. Secondly, half of it is owned by us, so we receive the interest payments and don’t make them – or our fund managers do. Thirdly, the interest payments are, like all government spending at the federal level, new dollars and are mildly stimulative. They are not taxpayers’ money. Fourthly, we should not aim to pay back the debt, because that would weaken private sector balance sheets. The only time it is appropriate to run a budget surplus, is when this is necessary to restrain aggregate demand and limit inflationary pressures. Fifthly, as part of its target for the 3-year bond rate, the RBA is now buying government bonds back in the second-hand market as fast as the AOFM is auctioning them in the primary market. Once the RBA has done this, it is as though the bonds had never been issued before. It amounts to the RBA just typing the money into the cell in our national spreadsheet which is federal Treasury’s account balance.
Government deficits are just a deposit made by the government in the banking system. Government debt is just the difference between all the dollars the government has ever spent into exist- ence and those it has deleted from the system. Governments can, and in most cases should, run deficits for ever. If the deficit is too large, there will be inflation. If it is too low, there will be unnecessary underemployment. But a deficit is never a problem in itself and no government should aim to balance its budget, in the short-term or long-term, at least at the federal level in our monetary system.
I’d prefer to see journalists engaging with modern monetary theory, rather than trying to ignore it or brush it off without careful consideration. Because right now this is an important issue.
Actually, it is always important. [7] And there are some signs that journalists are shifting their positions. [8]
- https://www.youtube.com/watch?v=9ldmpmVfSoM
- https://www.smh.com.au/business/the-economy/where-will-all-the-money-come-from-to- fundthe-stimulus-20200403p54goi.html
- https://www.youtube.com/watch?v=gcgDazSsyRw
- https://www.ironfistvelvetglove.com.au/2020/03/episode-246
- https://www.aofm.gov.au/publications/research/history-treasury-bond-tenders-and-performance
- https://www.afr.com/markets/debt-markets/bond-rate-falls-through-rba-target-20200401-p54g4r
- https://independentaustralia.net/politics/politics-display/modern-monetary-theory-covid-19- andthe-economy,13726
- https://www.smh.com.au/business/the-economy/don-t-add-government-debt-to-your-list-of-things-to-worry-about-20200408-p54ibp.html
