Money Printing Is No Solution

It is the break in the political consensus on fiscal policy that threatens to make our current level of government spending the new normal, even in the good times. By Nick Cater.

For a man who had just announced the biggest deficit in the commonwealth Treasury’s history, Josh Frydenberg appeared to be getting off lightly.

Four minutes of ABC interview under his belt and just one interruption from Leigh Sales. It was hardly a light saute, let alone a grilling. At the mention of tax cuts, however, Sales cranked up the heat.

“But, Treasurer, on that point, sorry to cut you off there …”

“You’re not really sorry,” sighed Frydenberg. “But that’s okay.”

If the ABC were a local shire council, Sales would have been obliged to leave the room at that point, so great is her conflict of interest. So too would have the camera operator, and the bloke with the clipboard and the makeup woman, since all of them draw their wages from the public purse.

An $87bn deficit is not everything they would wish for, but at least it’s a start. A government focused on spending rather than saving might leave the ABC’s budget intact.

Sales, of course, is not foolish enough to frame her fiscal narrative like that. Her complaint about tax cuts is that they favour the wealthy. Instead, she told the Treasurer, he should target “the most disadvantaged”. “You’re forgoing income to the government at a time when you need to spend more,” she said.

If a family on the median income in a rented house in Rockdale is rich, then Sales may be right. Under the changes promised for 2022, workers earning between $43 and $57 an hour will be removed from the top tax bracket.

If targeted assistance is the way to go, our imagined middle-income family in Rockdale, a tree-starved suburb unfashionably close to Sydney Airport, would be a good place to start.

Not even the most brilliant government is able to spend with the precision of a household on a tight budget.

In the course of a grouchy interview with the Prime Minister the previous evening, Sales nominated sectors where government spending might be directed. The universities, perhaps, or the arts, where JobKeeper, JobSeeker, a special injection of $250m plus $400m in assistance for the film industry clearly wasn’t enough.

Did the Prime Minister accept that the government spending would have to remain high for some time? Did he accept that there is no urgency to pay down debt? Would the government’s spending commitments remain high and would he rule out slashing government spending in the short to medium term?

Crisis or no crisis, the conviction that governments spend more wisely than the citizens they serve is superglued to the consciousness of the utopian left. Margaret Thatcher’s projection that socialism would be exhausted when it ran out of other people’s money proved to be a fallacy.

Once its citizens’ pockets had been emptied, governments started borrowing on their behalf expecting them to pay the interest.

The left’s new fiscal fancy takes this one step further. Modern Monetary Theory postulates that governments don’t even have to borrow the money they spend. They just have to print it.

MMT began on the fringes of Australian universities as a critique of Peter Costello’s effort to pay down public debt. It found new life with the arrival of quantitative easing in the wake of the 2008 financial crisis.

Now the principles of MMT have been embraced at the ABC as the start of a new dawn.

“We may be on the cusp of a revolution,” wrote business reporter Gareth Hutchens earlier this month.

“What if everything we thought we knew about public finance over the past 40 years has been wrong?”

Australia’s political elite could afford to spend far more on public health and education, social housing, scientific research and green energy schemes, while eliminating unemployment, the credulous Hutchens continued.

“And yet they’re not — either from a misunderstanding of government finances or because they don’t want to.”

MMT holds that any nation with a sovereign currency and a floating exchange rate, like Australia, can print all the money the government needs to spend. The ready supply of currency will keep interest rates low.

Inflation would be kept in check by raising taxes, rather than increasing the cost of borrowing.

Coupled to MMT is a Job Guarantee program underwritten by the federal government. Community improvement schemes and other worthy public objects would act as a buffer against unemployment.

The reinterpretation of permanent public debt as a sign of good government is troubling. A Job Guarantee scheme, however well intentioned, would quickly drain the nation of its enterprising spirit and its people of ambition. It would lead us towards the dystopia described by Robert Menzies in 1942: “ … an all-powerful state on whose benevolence we shall live, spineless and effortless … where we shall all have our dividend without subscribing our capital.”

As Henry Ergas explained eloquently on these pages last Friday, the Menzies decision to harness personal ambition as the motive-power of progress, rather than state spending, was the key to Australia’s post-war achievements.

The inevitable consequence of MMT would be the expansion of the public sector at the expense of the productive private sector. Conventional economics suggests that controlling inflation by raising taxes and funding make-work schemes would put the brakes on business investment, reduce workforce participation, undermine productivity and send jobs offshore, hardly the recipe for success in a post-COVID-19 world.

Yet conventional economics, or “the neoliberal orthodoxy” as the ABC calls it, has become old hat. The tried and tested macro-economic theory that turned the fortunes of almost every industrial nation in the final decades of the 20th century is just another stone monument awaiting the sledgehammer.

The truly eye-watering thing right now is not the projection for debt or deficit, the likely need to extend emergency assistance or the Victorian government’s incompetence.

It is the break in the political consensus on fiscal policy that threatens to make our current level of government spending the new normal, even in the good times.

Public debt is heading from the billions to the trillions. But what the heck? Let’s chuck another boondoggle on the barbie.

“Gov debt is manageable & affordable,” tweeted Emma Alberici last week. “Maybe time for high speed rail?”