With the pandemic, governments around the world have been spending huge amounts to support citizens forced to stay at home and to prop up economies that threaten to collapse.
The Australian Government’s coronavirus stimulus package totals about $200 billion so far, or about a third of total government debt before the pandemic.
This may sound dry, but it has huge implications.
If you’re in your twenties, paying off the national debt incurred through COVID welfare could define a large part of your life. It could mean less government spending, which would mean worse public transport, fewer government jobs, less welfare or government assistance for buying a first home, and more expensive course fees.
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Or it may not. The pandemic is overturning long-standing economic theories, including the idea that responsible government means reducing the national debt.
If central banks can print money like they’re doing now, why don’t they just print more of the stuff to pay off national debts that are denominated in the national currency?
If we have a magic money tree, why haven’t we been using it all along?
How to make money out of nothing
About three weeks ago, on March 19, the Reserve Bank of Australia (RBA) announced it would commence a type of emergency monetary policy action it had never attempted before – ‘quantitative easing’ or QE.
The US and European central banks had successfully used QE during the Global Financial Crisis that began in 2008. In September 2019 — way before the pandemic — the US Federal Reserve (like our RBA) started up the QE machine again, in response to sluggish growth and general fears of an economic downturn.
Here’s how it works. A government bond is a type of IOU — the government promises to buy it back from the buyer after a fixed period, plus pay interest.
It’s a bit like the government taking out a loan.
Central banks like the RBA are special kinds of public institutions tasked with managing the supply of money in an economy.
By buying government bonds from banks and pension funds the RBA is increasing that supply of money — effectively pumping cash into the economy. When banks have more money, they can lend more readily to businesses and consumers, which in turns lead to greater spending, and ultimately more economic activity.
This leads to the question, where does the RBA get its money?
As part of managing the supply of money, central banks have a very special ability. They can issue legal tender — aka ‘print money’.
To buy the government bonds, the RBA issued itself billions of new Australian dollars.
This money is essentially unlimited. In mid-March, for example, the US Federal Reserve unveiled AUD$1.19 trillion in QE, using money it had created out of nothing.
Eight days later, it went even further: it announced it was buying unlimited amounts of government bonds, a step some called “going nuclear”.
A major central bank has never done this before.
Do we even have to pay back the debt?
The Government will have to pay back these bonds (or ‘debt’) at some point, but since the interest rate is so low right now, this money is essentially free.
Free money? In March, the Government took out a 12-year loan worth $1.2bn dollars, at an interest rate of 0.8185 per cent. Given the current inflation rate (the rate at which money loses its value) is around 1.8 per cent, when 2032 rolls around the Government will effectively being pay less than $1.2bn it originally borrowed to pay off the debt.
This is hard to grasp. For years we have been told the debt is a threat to the national economy. One of the government’s main aims has been to pay it off.
That no longer makes sense, at least according to several prominent economists, including Nobel-winner Paul Krugman.
For the Australian public, this could mean a new era of cashed-up government services rather than the opposite — penny-pinching measures like cuts to health and education.
Some economists go even further. Ultimately, they say, governments could just pay off their own debt (which is in their own currency) through printing more money.
That may sound absurd — like shifting $5 from your left pocket to your right and claiming you’re $5 richer — but it’s an idea that’s suddenly shot to prominence as governments have taken on huge amounts of COVID debt.
Broadly, this is known as Modern Monetary Theory (MMT).
For decades now Western governments have operated on the idea that governments and the public they serve have to ‘live within their means’.
This means that governments should only spend as much as they have, which is what they receive from taxation and some other sources (like income from selling public assets).
If we imagine a government budget is like a household one, this appears to make sense.
MMT is based on a simple idea — countries are not like households.
Because they can issue their own currency, they can never run out of money in the same way a business or a person can. Australia can’t default on a debt that’s in Australian dollars, MMT supporters say.
To break this down into very simple terms, Hack enlisted Emma Dawson, executive director of the Per Capita think tank.
“A mortgage is a debt taken out against an asset. If you don’t pay you lose the house,” she said.
“A country also takes a debt out against its asset, which is the Australian people and their productive capacity as a nation.
“But Australia will always be here producing goods and services, unlike a car or a house which can be taken away.
We never have to pay it back?
This is where it gets interesting.
Under MMT, a government can create any amount of money it wants.
Won’t this cause hyperinflation, like in Germany in the 1920s when a wheelbarrow of cash bought a loaf of bread? Or Zimbabwe, where inflation is at 500 per cent (meaning the cost of goods will increase by five times in a year)?
The MTT response to this is that a government may have infinite piles of cash, but it shouldn’t always spend them freely.
In other words, the limit on government spending shouldn’t be the budget, but inflation.
Here’s that idea in more detail: MMT says inflation will only happen when aggregate demand (all the purchasing being done in the economy) outstrips the goods and services available for purchase (the supply). If there are a lot of dollars trying to purchase stuff, and not enough stuff to purchase, that stuff becomes more expensive.
So long as the economy keeps producing enough goods and services, the theory goes, it won’t have too much inflation.
For this reason, MMT advocates say, governments shouldn’t spend freely during periods of high employment, as the economy can’t increase production to meet the extra demand and would therefore be at risk of inflation.
With so many Australians unemployed, this isn’t a current issue.
So long as inflation is not an issue, governments can spend what they want.
If a government wants to pay for universal healthcare and free university, it can do that.
If it wants to build huge amounts of public housing that would allow young people to get into the market, it can do that.
If it wants to keep the Jobseeker allowance above $1000 a fortnight (the boosted amount for the COVID-19 stimulus), instead of dropping it back down to around $550, it can do that too – at least according to advocates of MMT.
The reason it can do this — and this is the brain-melting part of MMT — is that taxes do not pay for government spending but are just a way of managing inflation.
Instead, the government creates money whenever it spends.
Too good to be true?
Admittedly, unlimited money does sound a bit too good to be true.
There are many who say MMT is “voodoo economics”.
However, in the last few weeks the criticism has died down and MMT has suddenly become a respectable economic idea.
Conservative financial news outlets are running articles like “Here’s Hoping the MMT Crowd Is Correct” and “We’re all Modern Monetarists Now”.
In Australia it’s created less of a splash, but there are signs the 40-year economic orthodoxy of only spending tax dollars has begun to falter.
Shadow Treasurer Jim Chalmers last week wrote an opinion piece for The Guardian declaring “Neoliberalism has failed.”
Per Capita’s Emma Dawson, who was once a senior policy adviser in the Rudd and Gillard governments, told Hack she’s convinced the pandemic is forcing a change in thinking about government spending and debt.
Alan Kohler — who is a well-respected business journalist with The Australian and the ABC — says that “all bets are off” on whether MMT will become the new orthodoxy.
“Capitalism has to close for a while and the state has to step up,” he wrote recently.
“Do governments just keep doing what they’ve always done, which is to scrimp and borrow, or do they try something new?”
Why haven’t we been doing it all along?
Perhaps because it doesn’t work. Maybe MMT is a bad theory.
Another reason may be that neoliberal ideas are just as arbitrary and ‘voodoo’ as MMT, but they have the advantage of suiting the powerful.
Emma Dawson from Per Capita told Hack she saw the pandemic stimulus and quantitative easing as proof the old rigid economic doctrines are made-up — a way of keeping people working hard with lower expectations.
“We’ve been told there’s no magic money tree,” she said.
“Well there is and they’ve just used it.”
Having shown that it can create money when needed, it may be hard for the Government to justify cutting spending again, she said.
The big question is whether Australia will resort to austerity measures — slashing government spending and selling off the few remaining national industries, like Australia Post — after the pandemic has passed.
“After the pandemic the Government will want to return to business as usual,” Emma said.
“The increase to the Jobseeker payment will be hard for them to reverse.
“They’ll be looking to cut other services. I’d be worried about money for ABC, SBS, NDIS and other government programs.”
MMT may offer a way out of what may be needless economic misery.