30 Jul 2017

'There’s no such thing as fair austerity'

From Sunday Morning, 8:35 am on 30 July 2017

An emerging school of economics, modern monetary theory, says surpluses can be a bad thing, and a country with a fiat currency can never run out of money.

Bill Mitchell, professor of economics at the University of Newcastle, New South Wales is a leading proponent of the theory which he says, although growing in influence, is still fringe.

He has said economists have been: “torturing the minds of our youth with lies and ideology made to look like eternal truths.”

a homeless person sleep on the steps of a bank in new zealand in 2015.

Photo: 123RF

Prof Mitchell says it’s perfectly possible for governments to release money into the economy and spend without this being inflationary – so long as the economy is able to absorb the demand created by that fiscal influx.

“Any spending in the economy, whether it’s government or non-government, will cause inflation if it outstrips the capacity of the economy to respond in production.

“If spending growth is commensurate and proportional with the capacity of economy to produce and uses resources productively there won’t be inflation.”

He says government is the monopoly issuer of its own currency and so it has unlimited volumes of that currency.

“That’s not the same thing as saying it should be spending unlimited amounts. Anything that is for sale in New Zealand dollars it can buy with its own currency,” Prof Mitchell says.

He believes New Zealand would benefit from such an approach.

“When you’ve got a government that comes out and says, we’ve got to tolerate 8 or 9 percent unemployment or that one third of children in New Zealand live in poverty, when you’ve got a prime minister who then says ‘well, we can’t do anything about that now because we’ll run out of money’, that’s an insidious lie.”

He says governments found money pretty quickly when the banks looked like falling over in 2008.

“Billions of dollars of currency were instantly created to bail out those banks, governments didn’t even blink. When it suits the ideological agenda and the lobbies that fund and support the political parties there’s no shortage of money - but when you’ve got a third of your children in a so called advanced country living in poverty, they say we’ve run out of money.

“I don’t think there’s a shortage of food in New Zealand, it’s just a highly unequal distribution of access to that food and it’s an insidious lie supporting that.”

What he and other economists are talking about is not quantitative easing, he says. Which was a flawed experiment.

He says it was thought economies were languishing in the post GFC period, because banks weren’t lending money to borrowers – so they needed a cash injection.

“That’s what text books in economics of the mainstream variety indoctrinate their students to believe - that’s fake knowledge.”

He says with the banks’ reserves bolstered by billions of dollars of public money it was assumed they would then go and lend.

Economist Dr Bill Mitchell

Economist Dr Bill Mitchell Photo: RNZ/Jeremy Rose

“That didn’t happen at all …adding more reserves didn’t change the lending behaviour of the banks because nobody wanted to borrow. Firms were scared of borrowing with no sales and people weren’t borrowing because they were fearing unemployment … the real constraint was pessimism.”

He says that pessimism even outweighs the cost of borrowing which is historically low.

“We learned another lesson [from the post GFC era] people don’t necessarily borrow when the cost of borrowing is falling if their expectation of long term returns is pessimistic.”

He says modern monetary theory, or neo-chartalism, has a growing circle of adherents.

“There’s millions of people starting to understand it, and see it as a genuine future for economic thinking and for policy making in the context of the almost total failure of mainstream economics to understand the way the system works and to introduce policies that advance the well-being of the majority rather than the few.”

So what mainstream economic “lies” does he consider particularly egregious?

“The idea that you’ve got to hold unemployment at 5 percent to hold down wage inflation is preposterous.

If the labour market gets too hot and you have employers fighting over scarce labour you start to get prices bidding up - but we haven’t come close to that for decades.”

He was also scathing of the Labour Party and Green Party’s joint statement on ‘budget responsibility’ rules where they commit to running surpluses, restricting Crown debt to 20 percent of GDP and limiting spending to 30 percent of GDP.

“It’s the height of economic irresponsibility”, he says.

New Zealand has high unemployment and underemployment, high child poverty, record levels of household debt and an external sector draining spending through current account deficits, Prof Mitchell says.

“In that environment to run a fiscal surplus is irresponsible in the extreme.”

He says to address entrenched poverty and unemployment governments should be running “more or less continual deficits.”

He says New Zealand’s progressive parties are much the same as their counterparts abroad.   

“The Greens are neo-liberals on bikes and the Labour Party are neoliberal lite. They say ‘I’ll do austerity but I’ll do it fairer’.

“There’s no such thing as fair austerity when you’ve got a third of your children living in poverty.”