Led by Bernie Sanders in the U.S. and the UK's Jeremy Corbyn, a new socially democratic force is dawning, writes Dr Steven Hail.
That change has similar roots to what has happened in the British Labour Party since the initial election of Jeremy Corbyn as its leader, but of course, it is not identical. Britain is a very different place to the USA, with a different political history and very different political institutions.
Nonetheless, what is happening within the U.S. Democratic Party is, potentially, as radical as the changes on the Left in the UK and of far more significance to Australia.
The U.S. Democrats are shifting away from their recent Wall Street base and moving towards a form of social democracy, if not democratic socialism. This has been inspired by Bernie Sanders, but has outgrown him and may now be as unstoppable a force as the Tea Party movement, which indirectly led to the election of Donald Trump.
Democrats in Australia may also be moving to the left of the Labor Party and the Greens. Surely, this will inspire a reaction in those parties?
The international movement has made such progress that it is now almost a requirement for a serious contender for the Democratic nomination for president in 2020 to adopt some form of "job guarantee" as part of his or her policy platform.
The job guarantee proposal has been around for many years, with one of its early advocates being the economist Hyman Minsky, in the 1960s. In its modern form, it is associated with Professor Stephanie Kelton, who has been Sanders’ chief economic adviser and chief economist on the Democrat side for the Washington Senate Budget Committee.
Kelton is a member of what is a new school of thought in macroeconomics, albeit one with long historical roots — she is a modern monetary theorist. There have recently been a lot of articles – on Independent Australia and elsewhere, some written by economists and some not – about modern monetary theory (MMT). MMT is the new big idea in economics.
Modern monetary theorists explain that monetary sovereigns have far more flexibility in terms of economic management than other governments. To be a monetary sovereign, you have to have your own currency, a floating exchange rate and little or no foreign currency debt — like the USA, Japan, the UK, Canada … and Australia.
If you are a government with monetary sovereignty, you face no purely financial constraint on spending. You can, in principle, afford to purchase anything which is offered for sale in your currency. You issue the currency. You cannot run out of something which you issue. You do not need to balance your budget, or "return to surplus". There can be no "black hole" in your budget. The very notion is absurd.
You can, of course, run out of things to purchase with your currency, so that if you spend too much relative to what you tax, you will cause inflation. But the issue is always inflation and not the solvency of the currency issuer. A currency issuer with no foreign debt can never go bankrupt.
Taxes are not there to pay for government spending. They are there to limit total spending, to ensure that government and private sector spending is not so high as to be inflationary. They have other purposes too — to discourage some activities and encourage others, and to redistribute income and wealth. But their main purpose is to limit inflation and so to defend the value of the currency.
The government spends new money into existence and then taxes some of it back out of existence again, to limit inflation. The difference between the two is the government’s deficit, but the government’s deficit is everyone else’s surplus.
What people call the national debt, which is actually the government’s debt, is just money the government has spent into the economy which has not yet been taxed out of it again. Governments issue bonds to private investors, to provide savers with safe interest-bearing financial assets and to help central banks to manage interest rates, but they don’t need to do so. The government, via its central bank, is the monopoly currency issuer. It can’t run out of money.
Modern monetary theorists, like Professor Kelton, point out that the widespread view that government budgets can be equated to household budgets is misleading. It reflects a lack of understanding of the difference between a currency issuer and a currency user, and of the importance of monetary sovereignty.
Most governments normally run deficits. They have in the past and they will in the future. Without governments running deficits – spending money into existence – the rest of us collectively can’t net save (that is, save more than we borrow). If the government doesn’t run a deficit, then for some of us in the private sector to save, others in the private sector have to borrow. In Australia, during the years when the Howard Government was running a surplus, household debt trebled, leaving Australia with the second highest level of household debt, compared to the size of our economy, in the world, and, consequently, a fragile financial system and an inflated property market.
We have reached a point where the use of changes in interest rates to manage the economy doesn’t work anymore. Cut them and people don’t want to take on yet more debt; raise them and you risk a financial crisis.
The best way to manage the economy is to keep interest rates low and stable, to regulate the banks tightly to limit and influence the direction of their lending and to rely on changes in the government budget – fiscal policy – to do the heavy lifting.
But in a complex and uncertain economy, you might ask how we can know at what level the government deficit (or perhaps, rarely, even a surplus) ought to be set. This is where a Bernie Sanders-style job guarantee comes into the picture.
A job guarantee permanently eliminates involuntary unemployment and plays a major role in the elimination of involuntary poverty. It involves government spending where, when and on whom it is needed — a localised, bottom-up approach to fiscal policy. The size of the job guarantee automatically sets the government budget at the appropriate level, given what is happening in the rest of the economy. Spending on a job guarantee expands during recessions and contracts during an expansion, operating as a superior counter-cyclical stabiliser to anything in existence at the moment.
The size of the government remains a political issue. Bigger government means more taxes, to avoid government spending being inflationary. A smaller government sector would allow for lower taxes if that is what people wanted to vote for. But there is no reason for government spending and taxation to be equal to each other. They haven’t been in the past and they won’t be in the future. And there is no reason to fear government debt — it isn’t a "debt" in the conventional sense at all and is better thought of as the net money supply to the rest of us.
The government can’t run out of money. On that single issue, Donald J Trump was absolutely right and was just repeating what those ex-chairmen of the U.S. Federal Reserve, Alan Greenspan and Ben Bernanke, had said before him. What he ought not to have done was to use the freedom this gave him to cut taxes for the rich.
Economists like Stephanie Kelton and Australia's Bill Mitchell – who has been perhaps the most important advocate of a job guarantee internationally over the past 25 years – see a job guarantee as the key to making sure that government spending net of taxation is always at the right level to maintain equitable, non-inflationary full employment and to stabilise what is naturally an unstable economy.
In Australia, GetUp outlines a job guarantee for the centre-piece of its "A Future to Fight For" campaign. The ALP and the Greens are still examining the proposal. It is perhaps an idea for the 2020s, just as modern monetary theory is perhaps the new macroeconomic theory for that decade.
You can follow Dr Steven Hail on Twitter @StevenHailAus, as well as on Facebook at Green Modern Monetary Theory and Practice. His new book, 'Economics for Sustainable Prosperity', is due to be released by Palgrave Macmillan in July.
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