Modern Monetary Theory. Public Broadcasters put out economic misinformation – Bill Mitchell.

On May 1, 2018, the Australian Broadcasting Commission (ABC) published this travesty – Federal budget jargon buster: Work through the waffle – trying, no doubt, to give the impression that they are clever and the average citizen is dumb – read their introduction to see that.

Some of the entries are factual such as what ‘bracket creep’ is in a progressive tax structure.

Then you get to the “Jargon buster” entry for “Debt vs. deficit” and we read that:

Politicians of all stripes are fond of comparing the budget to a family’s finances, but this often leads to confusion.

Not confusion, plain and simple deception which creates a fictional world.

There is no comparison between the fiscal balance of a national, currency-issuing government and a household.

Households use the currency and must finance their spending. A sovereign government issues the currency and must spend first before it can subsequently tax or borrow.

A currency-issuing government can never be revenue-constrained in a technical sense and can sustain deficits indefinitely without solvency risk.

Our own personal budget experience generates no knowledge relevant to consideration of government matters.

This is related to the claims that governments have to ‘live within their means’.

Conservative politicians often claim the government will run out of money if it does not curb spending. They attempt to give this statement authority by appealing to our intuition and experience – that is, they draw on the household budget analogy, and claim that governments, like households, have to live within their means.

This analogy resonates strongly with voters because it easily relatable: we intuitively understand that as individuals, we cannot indefinitely live beyond our means.

A currency-issuing government has no intrinsic financial constraints: government will never run out of money to build a hospital or pay health professionals, but the materials to build the facility and the skilled workers to run it may not be available.

Fiscal space is thus more accurately defined as the available real goods and services available for sale in the currency of issue. These are the ‘means’ available to government to fulfil its socio-economic charter.

The currency-issuing government can always purchase whatever is for sale in its own currency.

The ABC then claim that:

When a politician says they are balancing the books and returning the budget to surplus, it gives the impression that they are clearing the government’s debt.

The reality is that the deficit is just the amount of money the government spends beyond what it receives in a financial year.

Just because you return the budget to surplus does not mean that the debt incurred by the previous deficits disappears.

Yes it does, as soon as the most-dated debt instrument reaches maturity it automatically disappears.

Public debt is issued at maturities (a certain time when it is paid back) irrespective of what happens to it after it is issued in the primary market.

Eventually the holder of the debt, at the time of maturity, will get their cash.

Public debt is the stock that relates to the flow of expenditure that is the deficit (the net outcome of two flows – spending and taxation).

If the government is running a fiscal surplus it is taking more out than it is putting in, which squeezes the non-government sector for liquidity, and forces that sector to shed financial wealth.

Of course, as I have previously noted that there is no sense that you can relate the debt issuance to increasing the spending capacity of the currency-issuing government.

The Australian public have probably forgotten by now but in 2002, the Federal government created a “Review of the Commonwealth Government Securities Market” as a result of the public debt market becoming very thin (not much for sale).

This situation arose because the Government had been retiring its net debt position as it was running fiscal surpluses. They came under pressure from the big financial market institutions (particularly the Sydney Futures Exchange) to continue issuing public debt despite the increasing surpluses.

The financial markets wanted the corporate welfare embodied in the public debt – it is risk free and a perfect vehicle to park funds in uncertain times and also as a benchmark to price private financial assets that do carry risk.

At the time, the federal government was continually claiming that it was financially constrained and had to issue debt to ‘finance’ itself.

But, given they were generating surpluses, then it was clear that according to this logic, the debt-issuance should have stopped.

The upshot was that the Government agreed to continue to issue debt even though it was running surpluses as a sop to the corrupt financial sector who needed their dose of corporate welfare.

The contradiction involved in this position was not evident in the debate although I did a lot of radio interviews trying to get the ridiculous nature of the discussion into the public arena.

The ABC article continued to ‘explain’ (not!) debt and deficits by citing current Australian government debt levels and claiming that:

… $317.2 billion sounds like (and is) a lot of money, by international standards Australia’s public debt is quite low, sitting at 18 per cent of GDP — which is the value of what Australia’s economy produces each year.

They could have said that it was irrelevant and just the record of non-government accumulation of net financial assets as a result of the government bestowing wealth on the non-government sector via their fiscal deficits.

But, no, they wanted us to believe it is “a lot of money” as a warning.

And then, we read:

While government debt can pose problems, it is not quite the same as personal debt and can often serve a purpose.

And the wheels have fallen off well and truly by this time.

They might have actually dared to articulate what “problems” government debt can pose rather than just assert it.

I presume they might have tried to rehearse the tedious conservative claim is that the sovereign issuer of currency is at risk of default if the public debt ratio rises above some threshold (often construed as 80 per cent).

But, the reality is clear, as long as the government only issues debt in its own currency and provides no assurances about convertibility into another currency, the default risk is zero. They might for political reasons decide not to pay up but that is a different matter altogether and highly unlikely.

And in their attempt to be ‘cute’ (“not quite the same”) the ABC journalists lie. Australian government debt (which carries no credit risk) is nothing like personal debt which carries credit risk.

And we know that government debt is non-government wealth whereas private debt reduces private wealth.

Further, while private debt allows the non-government sector to spend more than it earns for a time, public debt levels gives the government no extra spending capacity.

This brings us to the other side of spending more than one earns – saving.

We know that a currency-issuing government does not save in its own currency. Such a notion is nonsensical.

Fiscal surpluses do not represent ‘public saving’, which can be used to fund future public expenditure.

Saving is an act of foregoing current spending to enhance future spending possibilities and applies to a financially constrained non-government entity, such as a household.

Fiscal surpluses provide no greater capacity to governments to meet future needs, nor do fiscal deficits erode that capacity.

The constraints on government spending are not financial but are defined by the availability of real resources that are available for sale in the currency that the government issues.

The ABC journalists continue the downhill slide:

Governments take on debt by issuing bonds to investors who are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at very low rates, with investors trading profit for security.

Tell that to Japan who in the early 2000s had its credit rating downgraded to around junk and yields didn’t blip.

Ratings agencies are irrelevant. Investors know that debt from a currency-issuing government is risk free. And the government can always control yields on its debt at any maturity if it chooses.

Later, ABC journalists have an entry for “Structural deficit” and the readers are informed:

… structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses under normal economic conditions.

Or should I say ‘disinformed’.

A structural deficit has a very clear meaning – it is the fiscal position that would arise given the current policy parameters (tax and spending) if the economy was at full employment.

Full capacity or full employment is not the same thing as “normal economic conditions”.

You can see how language slips and concepts are lost.

In fact, the concept ‘structural balance’ was previously referred to as the ‘Full Employment or High Employment Budget’ balance.

The change in nomenclature is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.

So a ‘Full employment Budget’ would be balanced if total outlays and total revenue were equal when the economy was operating at total capacity. If the fiscal balance was in surplus at full capacity, then we would conclude that the discretionary structure of fiscal policy was contractionary and vice versa if the fiscal balance was in deficit at full capacity.

This is nothing like “under normal conditions”.

Further the use of the term “fail to cover” is ideologically loaded.

Finally, then ABC journalists claim that:

Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensuring services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit.

The history of Australia (since data was available) and other nations shows they, as a matter of norm, run fiscal deficits.

Fiscal surpluses have been very rare events in our history – abnormal – and have corresponded with rising non-government sector indebtedness and recession soon after.

To offer a history where governments actually oscillate between deficits and surpluses over a cycle is a revisionist exercise. They do not even though they talk about doing that.

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