Paying for public services: Dr Steven Hail's solution

By | | comments |
Professor Steven Hail has taught financial economics at a number of UK universities and is now lecturing at the University of Adelaide.

Campaigning for greater public understanding of our monetary and taxation systems, Colin Cook checks out Dr Steven Hail’s article, ‘Paying for public services, in a monetary sovereign state’.

THE FEDERAL Government is “not an ATM” declared Prime Minister Turnbull at the COAG meeting of last December, “it is more like a magic pudding” he told stunned reporters. After the meeting, the PM confirmed the Federal Government was committed to stronger infrastructure investment.

The reporters overlooked the "magic pudding" reference because they know the Treasury is like an ATM (or household or business), as the prime minister and treasurer constantly assure everyone. Recall, you can only get spending money out of an ATM if someone has put it there beforehand. The Government’s conventional view – the accepted wisdom – is that “we” cannot spend unless “you” pay taxes.

In actual fact, the prime minister did not mention any magic pudding — but it would have been close to the truth if he had, according to Dr Steven Hail, lecturer, with special interest in macroeconomics, at the University of Adelaide.

Dr Hail, in his article (‘Paying for public services in a monetary sovereign state’) published in the ERA Review, Journal of Economic Reform Australia, states that the conventional view is wrong, and is known to be wrong by ‘many highly credentialed economists’ who justify their public acceptance of it ‘as a mechanism for imposing some restraints on politicians’ — to stop them spending like drunken sailors.

Writes Dr Hail:

‘I want to share the truth for I don’t believe there is ever a good reason for remaining in ignorance about something this important, and we have other ways of restricting what politicians do than telling blatant lies….

This truth is firmly based on two laws of public finance, says Dr Hail:

  1. A government with its own currency, its own central bank, a floating exchange rate and no foreign currency debt, faces no financial constraint at all.
  2. Such a government faces real and ecological constraints but no financial constraints.

We have such a government and so does USA, Japan, UK and many others; Greece does not.

Here are the unmentionable facts, elaborated by Dr Hail:

‘Every time the Australian Government spends a dollar, it does so by crediting the reserve of a commercial bank held at the RBA (Australia’s central bank) by that dollar and having the commercial bank credit the bank account of whoever is the beneficiary of that spending. Not some of the time, but every time the government spends, it creates money.’

And with his usual clarity:

‘All of the government’s spending creates money, and all this money is created using the equivalent of keystrokes on a computer.’

Thus the Federal Government does not need our taxes before it spends and, anyway, where would the money come from for us to pay taxes? We have no magic pudding!

So if we wish to increase the spending on health care, just “do it”. Spend the money into existence in the same way that we pay for all public spending.

That accords with the first law.

But the second law applies inexorably: a monetary sovereign government can produce money unlimited by any one thing but it is limited by real and ecological capacities of the country. Break this limit and hyper-inflation will strike. This happened in Germany after WWI, where the capacity of the nation had been devastated by the massive loss of men of working age and the destruction of infrastructure. Making things worse, huge reparations payable in gold were demanded by the victors.

More recently, in Zimbabwe, the vital agricultural industry was almost wiped out by a violent land-reform program. The food supply failed and sanctions were put in place. The IMF would not restructure their defaulted loans. The Government literally printed more and more money to buy non-existent food supplies and to keep the army and friends on side.

One may ask: if government money is so freely available, then why are we taxed and in so many ways? Quite simply: to keep the total spending power of the nation (private sector plus public sector) within the limits of the capacity of the economy. Taxes help control inflation and, so, maintain our confidence in the value of our money. In the grand scheme of things, it matters not where the taxes come from but, from a social viewpoint, it matters greatly. Inflation can develop in different sectors of the economy because the tax arrangements are allowing too much money to impact that sector — for example, land and housing.

In a similar vein, why do governments borrow money by issuing bonds? Why indeed?

As Dr Hail says:

We have learned in recent years that there is no genuinely good reason for selling bonds at all, if you are a monetary sovereign government and yet ….

.... the old practice of each government selling its bonds goes on. It is rather ridiculous at the moment because as the governments concerned are selling new government bonds – in a conventional view to raise money – their own central banks (which they own) are kept busy buying government bonds second hand from the private sector, in order to increase the amount of money in bank reserve accounts. It is very strange and anachronistic. Economists like me view it as something of a muddle.

Iain Dooley, co-founder of the Australian Employment Party, describes well, even clarifies, this muddle in an excellent video. Iain is a strong supporter of Modern Monetary Theory, MMT.

Budget deficits are a major feature of our current political discourse. They deserve a closer examination. As an economy expands and the citizens wish to build up their savings, annual deficits are essential.

Dr Hail argues that governments do not need to balance the budget

‘... or should ever attempt to limit its deficit to a specific proportion of GDP. In fact, most governments (including Australia) have hardly ever run balanced budgets or budget surpluses in modern times, and when they occurred they tended to be just prior to economic downturns.’

In Australia, our political class and their media mouth pieces have made a fetish of government debt, and use it as an excuse to limit worthwhile government expenditure such as investment in education, health, communications, transport, research and so on. It is as though the government’s prime task is to balance the budget and everything else is of secondary importance.

Personally, I think our political class should aim to build the “best and fairest”, most vibrant and sustainable ecological society with all the means at our disposal; and one of those “means” is the facility to create as much money as we need to build such a country.

Dr Hail summarises his paper thus:

  1. When the government spends it creates money.
  2. When the government taxes it destroys money.
  3. Government “debt” should not be thought of as “debt” in the conventional sense at all. It is better thought of as a form of money.
  4. The government cannot run out of money, and as long as it doesn’t guarantee to convert its money at a fixed rate into anything it could run out of, it faces no financial constraints at all.
  5. However it faces real and ecological constraints, because we can run out of people, skills, technology, equipment, infrastructure, natural resources, and ecological space.
  6. The government is NOT a household and NOT a business, and has nothing at all in common with a household or a business, where financial matters are concerned.

‘Understand all of this and I think it will change your perspective on many things.’ offers Dr Hail.

Hopefully, it will change our perspective on the wisdom and ethics of prime ministers and treasurers — those in the limelight or their shadows! This writer believes it is important for citizens to get a greater understanding of our monetary system. Dr Hail’s paper is an excellent place to start, because it is now such a major feature of our lives and politics. Indeed, continuing public ignorance will allow our politicians and their friendly interviewers and compliant journalists to browbeat us into accepting needless austerity and cuts to important services.

Thomas Picketty, superstar economist and author of best selling economics treatise Capital in the Twenty-First Century, in his closing remarks of ABC Lateline interview last October said that economic understanding by the public – the democratising of economic knowledge – can lead to better politics.

Thomas Piketty on TedTalk: New thoughts on capital in the Twenty First Century

You can follow Colin Cook on his blog Sour Dough

You can also follow Dr Steven Hail at erablogdotcom, on Twitter @StevenHailAus, as well as on FB at the Green Modern Monetary Theory and Practice.

Creative Commons Licence
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License

Monthly Donation


Single Donation


Get real news! Subscribe to IA for just $5.

Recent articles by Colin Cook
Broad-based taxes drive economic inequality

Broad-based taxes are often designed to guarantee wealth concentration, not to ...  
This 'democracy' thing: China and Australia compared

Many Australians are very proud of our "democracy", but how much more democrati ...  
Paying for public services: Dr Steven Hail's solution

Here's a solution to paying for public services: stop worrying about the deficit ...  
Join the conversation
comments powered by Disqus

Support Fearless Journalism

If you got something from this article, please consider making a one-off donation to support fearless journalism.

Single Donation


Support IAIndependent Australia

Subscribe to IA and investigate Australia today.

Close Subscribe Donate