Effective response to emergencies and epidemics means we must first understand how modern financial systems actually work

GDP is a clumsy measure of economic activity, not economic welfare

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Where else should I look?

The Gross domestic product (GDP) of Australia is the total market value of goods and services produced in Australia after deducting the cost of goods and services used up (intermediate consumption) in the process of production, but before deducting allowances for the consumption of fixed capital  depreciation.

What’s not Included in the GDP

  • Sales of goods that were produced outside our domestic borders
  • Sales of used goods
  • Illegal sales of goods and services ( e.g. the GST aided cash economy for services in particular}
  • Transfer payments made by the government, including, particularly, unemployment benefits and social security payments 
  • Intermediate goods that are used to produce other final goods

Effective macroeconomic management means that  what matters most is how the resources of the economy are to be fully utilised –  not whether they are producing anything with just a dollar value.  The media and our politicians rabbit-on about GDP as a single measure about success in the economy, despite its widely acknowledged limits and distortions.

Is GDP a useful measure in a modern economy or society, particularly when there is a Coronavirus emergency or any other catastrophe? See Speech 1968 Robert F. Kennedy

“… we seemed to have surrendered personal excellence and community values in the mere accumulation of material things.  …counts air pollution and cigarette advertising…. counts napalm and counts nuclear warheads… does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include …the intelligence of our public debate or the integrity of our public officials.

 

Budget Surpluses, Government Borrowings and Debt and  muddled thinking

Mr Frydenberg’s statement, to be released jointly with Finance Minister Mathias Cormann. See ABC 12th May 2020

“Rebuilding consumer and business confidence will be key as the nation’s finances can only be sustained by a strong and growing market-led economy. Australians know there is no money tree. What we borrow today, we must pay back in the future… that national debt, which had risen more than $50bn to $618bn, would take “many years to repay”.

These statements of intent are totally at odds with the reality for a Sovereign Currency Nation’s public purpose. Australia’s Sovereign Currency Government issues the currency and it must first spend it by crediting private bank accounts before it can tax – by debiting bank accounts.

Claims that governments must tax or borrow to ‘finance’ its spending are not factual nor sensible. The only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A.  See – https://www.investopedia.com › Economy ›

Australia issues its own currency, $A. It can  run a pure deficit, without borrowings.

A budget surplus  drains savings from the private sector and that leads to loss of jobs and less work done. 

Governments world-wide have been using Quantitative Easing (QE) for decades. QE involves a Government or its Reserve Bank buying Bonds that it has itself issued at an earlier date. See RBA

One wonders how any government could seriously think that it was necessary to borrow its own currency from the private sector when it issues that currency in the first place. If you were running a sausage sizzle and ran out of cooked sausages and decided to borrow some from those who had not yet eaten them rather than cooking more, why should you not be deemed to be a ratbag?

A Sovereign Currency Nation’s government like Australia’s primary purpose is to improve the well-being of its population. Balancing budgets is an irrelevant and destructive blind alley. The real economy is what is relevant to well-being.

Dealing with emergencies such as the Coronavirus epidemic, bushfires and flood, unemployment, climate change, droughts,  defence, innovation and research, education, aged-care and employment (and so much more) is what is really relevant.

A currency-issuing government can, for example, mitigate the economic and social disaster caused by  unemployment by spending enough. Aboriginal and Islander Communities could see a Job Guarantee based around care-for-country and the public good rather than destructive handouts and associated misguided measures.

An on-going Job Guarantee program would see GDP improve!

Although GDP is a clumsy measure of economic activity, a Job Guarantee program would see GDP improve very substantially as the payments made would be included in the total market value of goods and services produced in Australia. 

The transfer payments made by the government for unemployment benefits and social security payments and temporary transfer payments like the jobseeker supplement or the jobkeeper payment would NOT enhance GST numbers!!

A job guarantee (JG) is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemployment. Its aim is to create full employment and price stability, by having the state hire unemployed workers as an employer of last resort 

The government should introduce a Job Guarantee that offers a job at a living (minimum) wage to anyone who wants to work but cannot find employment.

An on-going Job Guarantee program would permit quick and effective dealing with emergencies

Australia’s Sovereign Currency Government would be able to deal more effectively and quickly to deal with all kinds of emergencies from a pandemic such as  Coronavirus  as well as bushfires, floods and cyclones.

“Under the Job Guarantee policy, the government continuously absorbs workers displaced. from private sector employment. The Job Guarantee employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector. The approach generates full employment and price stability. The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure.”

Reference: W.F. Mitchell (1998). “The Buffer Stock Employment Model – Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-5. http://www.billmitchell.org/Job_Guarantee.php

See also:-, Bill Mitchell – Professor in Economics – University of Newcastle, NSW And Here

Training must be included, to ensure that the unemployed are equipped with skills that will be needed when the private economy starts again to employ more people.

Not a “work for the dole” proposal. This is voluntary, full time employment, guaranteed and managed by the government.  It is not intended to be compulsory: it’s there for people who want to work. How to deal sensibly and humanely with those who are able to work and refuse to do so should be examined and addressed – it is beyond the ambit of this Blog Post.

Those who cannot work because of drug or alcohol dependencies should be offered health care, training counselling and more to equip them for meaningful work.

Australia’s Local Governments and Community Councils should manage delivery of JG programs

Job Guarantee Programs should be managed and supervised  by appropriately qualified people at local area level or even neighbourhood levels – a well paid, sought-after job. (Including  perhaps some Centrelink staff, fewer of whom would be needed).

A Job Guarantee’s management and some of its day to day work allocation and supervision would require additional staffing at Local levels with staff engaged by the Local or Community Council or perhaps also by a Statutory Authority on an on-going basis.

The funding for these permanent or long-term jobs should be funded by the Australian Government as an essential element of a JG program.

Climate action solution – a perfect match – tree planting and job creation

Most workers would already have most of the skills necessary to undertake re-afforestation projects. See a UK Guardian article (July 4, 2019) – from its environmental editor – Tree planting ‘has mind-blowing potential’ to tackle climate crisis 

Examples of other ongoing Job Guarantee projects and jobs

  • Noxious Weed eradication – pests: graffiti – rubbish removal on beaches and in waterways 
  • Road Maintenance at low levels – small truck/4 or so workers- potholes, rubbish. Bike paths – many rural roads see cyclists at risk from traffic. Path enhancement is useful and ‘pick and shovel’ 
  • Enhanced care of National Parks, recreation areas, sporting facilities, school premises and streets and neighbourhoods generally. ( On-going management permanent – JGs supplement and augment) 
  • Indigenous health, nutrition, social and other problem areas: Gardens for fresh produce in remote areas, particularly Aboriginal and Islander Communities.  ( On-going management permanent – JGs supplement and augment}
  •  Care for Country and Indigenous Fire Management practices – ( On-going management permanent – JGs supplement and augment) 

Essential works and programs should not rely on Job Guarantee workers or initiatives

Aged Care and Disability (NDIS}, on-going Fire Management, Aboriginal “Care for Country”, Transmission Line and Road Maintenance, Education etc must be provided at all times by a responsible Government. JG provides ‘extras’ and  for the unexpected e.g. Epidemics, Fire, Flood – but not the primary delivery of day to day essentials.

 

We must understand how modern financial systems really work to deal with emergencies like Coronavirus

Introduction

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I want a proper flight plan before I fly!

Politicians of all kinds, Media, many Academics and those of us who have neither the time, backgrounds or knowledge to challenge the prevailing superstitions are still trapped in a commodity money mindset and haven’t progressed conceptually from the days when money was backed by gold.

If the Community and Governments understood what a currency issuing country was able to really fund , there is prospect for an Australia with a vibrant economy, affordable tertiary and vocational education, research, equitable pensions, health care, jobs, respect for the natural environment and much more.

An on-going Job Guarantee program would permit quick and effective dealing with emergencies

Australia’s Sovereign Currency Government would be able to deal more effectively and quickly to deal with all kinds of emergencies from a pandemic such as  Coronavirus  as well as bushfires, floods and cyclones.

“Under the Job Guarantee policy, the government continuously absorbs workers displaced. from private sector employment. The Job Guarantee employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector. The approach generates full employment and price stability. The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure.”

Reference: W.F. Mitchell (1998). “The Buffer Stock Employment Model – Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-5. http://www.billmitchell.org/Job_Guarantee.php

How this Blog Post is structured

This post draws attention to how a modern economy really works. It seeks to make these points:-

  1. A Sovereign Currency Country’s government issues its own currency and can therefore purchase anything that is available for sale in that currency.
  2. Taxes should be levied to advance  public purpose and not about raising revenue.
  3. Because Australia issues its own currency, $A. It can run a deficit without borrowing.

A fairly broad outline of what is considered relevant follows, leaving detailed more detailed discussion about taxes and Job Guarantee to other blog posts.

Links to scholarly and other material are given frequently – About links. (Click and click again on the link shown.)  A general on-line search quoting material in bold-face type will provide further material.

Australia is a Sovereign Currency Nation

The Australian Government uses its own currency, issued by the Reserve Bank of Australia (RBA). China, USA, Japan, United Kingdom and New Zealand and many others do the same.

A Sovereign Currency Government creates money at the computer keyboard. See also RBA is creating money out of thin air

Money enters the system when the government spends it into existence. The Australian Government requires that its taxes are paid only in $ Australian, ensuring acceptance of the currency  only it can issue.

When the Australian Government spends, it does so by crediting the reserves of a commercial bank which are held at the RBA (Australia’s central bank), and having the commercial bank credit the bank account of whoever has been the beneficiary of that spending.

The State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government as well as State and local taxes, stamp duties, rates, fines and fees, poker machine taxes etc.

A Sovereign Currency country:-

  • does not borrow in foreign currencies or peg its currency to any other;
  • only spends and taxes in its own currency;
  • it sets policy interest rate. and
  • the currency floats against other currencies.

A Sovereign Currency country’s government can purchase anything that is available for sale in that currency. The Australian Government has an unlimited capacity to pay for things, to make contracted future payments and it has an unlimited ability to provide funds to the other sectors.

Growth in the money supply is critical for economic growth, and there are only two ways that the money supply can grow in a fiat currency system – Government spends more than it collects – runs a deficit or by private credit growth.

Government spending is not constrained by inflation. It is constrained by the capacity of the real economy. When spending (either by the private sector and/or the government sector) exceeds the capacity of the real economy, inflation increases. The real economy is the output of the underlying economy itself. Real wealth is assets, savings, goods and services

Taxation supports demand for the currency.

The Australian Government requires that its taxes are paid only in $A, ensuring acceptance of its currency. Taxation supports demand for the currency. The Australian Government’s capacity to spend is independent of taxation revenue. Sovereign Currency Governments spend first and tax afterwards. Tax is all about the social consequences – the total impact of each tax on the real economy and on people’s well-being. In a modern economy, spending and taxing are economically separate activities.

Taxes can be levied to curb inflation or to advance economic issues or address social issues, stimulate research and local manufacture and much more. All taxation should be regarded from the point of view of social and economic consequences.

All money comes from government spending and circulates until governments tax the money out of existence. If a government spends and taxes equally, there will be no money left in the economy to be used by the community.

As long as the 1940’s or earlier, society’s myths about money and taxes were beginning to be challenged. An excellent ‘wake up’ was given in a speech given to the American Bar Association in 1943 by The Federal Reserve Bank of New York chair, Beardsley Ruml:-Taxes for Revenue are Obsolete. Australia and much of the rest of the world needs to get up-to-date (or at least into the 21st century). http://www.constitution.org/tax/us-ic/cmt/ruml_obsolete.pdf

Taxes should be all about public purpose and should never be about raising revenue.

A core principle of tax design is neutrality —- ensuring that taxes depend on behaviour as little as possible. Keeping tax as low as is necessary mitigates tax dodging. When the cost to avoid a big tax bill involves mobs of records, tax accountants, lawyers and even off-shore havens, then it will often be a better choice is to pay it, not dodge it.

Keep it simple and as small as necessary to achieve its fundamental purposes, which have nothing to do with raising revenue to spend.

Taxes should  be levied to curb inflation or to advance economic issues or address social issues, stimulate research and local manufacture and similar public good issues.

Some examples of many socially destructive and ill-considered taxes

  1. Excise on petrol is 41 cents per litre. GST adds 10%. This means we pay tax at around 54 cents a litre. Rationale seems to be to raise funds to support the transportation infrastructure.
  2. Goods and Services Tax (GST) – We pay GST on power bills and phone/ NBN bills! Abolition of the GST, which wastes an enormous amount of resources in small businesses and fosters a black economy would be sensible. The States should receive funding from the Australian Government without the GST distortion. It is easily avoided – anyone seeking repairs or maintenance to property or vehicles and other things are usually offered a cheaper price for cash, i.e. GST free.
  3. Corporate tax is a particularly misunderstood and misused. To  quote Beardsley Ruml:-Taxes for Revenue are Obsolete. “ Taxes on corporation profits have three principal consequences —- all of them bad. …the money which is taken from the corporation in taxes must from the people, in the higher prices they pay;… from the corporation’s own employees in wages… from the corporation’s stockholders, in lower rate of return …
  4. Superannuation, Future Funds and Sovereign Funds are effectively a tax on businesses and individuals with exorbitant management fees and offshore investment rife. Trillions in assets – billions a year in fees and wasted insurance premiums – value of the tax concessions far outweighs the reduction in Age Pension outlays.

Australia’s sovereign currency government can always fund medical research, care for the disabled and provide sensibly and adequately for Indigenous needs right now and an on-going basis in $A, when and where they are needed, many urgently right now.

Inequitable, socially destructive and counterproductive taxes

The State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government.

State taxes are mostly inequitable and counter-productive – eg , stamp duties , rates, fees, poker machine taxes, payroll tax/ etc. Supposed benefits from gaming taxes are far outweighed by the cost of trying to repair the damage they cause. Those who can least afford it are most affected.

The States should receive funding from the Australian Government, not by blighting the poor and gullible.

Deficits and Budget Surpluses

Australia issues its own currency, $A. It can run a pure deficit, without borrowings. Instead, it has been decided (politically) that … fund any budget deficit by issues of securities .. A Budget Surplus is essentially meaningless – it is just the amount by which the proposed receipts – taxes, excise etc – will exceed proposed expenditure in a particular year or time scale.

Debt is the amount owed at any point in time—what has been borrowed and not paid back. Australia issues its own currency, $A. It can run a pure deficit, without borrowings – so there is no “debt’. Bonds issued in the past are repayable only in $A and this is done at the stroke of a computer key,

Governments should generally run deficits. The Australian Government has run deficits about 75% of the time. The Howard Government’s surpluses had much to do with selling off almost $72 billion of Government assets. Dept of Finance website – Past Sales. See also Sale of public assets

Most of these assets were natural monopolies – airports, National Transmission Network, ADI Ltd – etc.   A natural monopoly must be held only by a government charged with advancing the public good. Privatisation undermines the capacity of those activities to advance well-being and utilise productive resources effectively.

Thales Australia (formerly ADI Limited) is a defence contractor for the Australian Defence Force, based in Australia. Thales Group is a French multinational company.

Surely a critically important defence industry should be based and controlled by the Australian Government (which may subcontract, when useful) ? It may be cheaper to have India or China supply Australia’s infantry regiments, but would that be sensible?

Governments have in the past have far too often mismanaged public monopolies. Dealing with this mismanagement to ensure that best practice is the norm rather than the exception will ensure that public monopolies don’t waste resources and be unresponsive to the needs of their customers.

 

All about a Budget Surplus

. Both Labor and Liberal/National Coalition are still making Policy decisions based upon  outdated ideas about how a modern economy really works. Governments, much of the media, some economists, academics and others are just as uninformed.  Most of the rest of us believe what we have been told without looking too hard at the substance of what we are told: economics is boring and we have our lives to live.

Related image
The Australian Budget 2017/2018 intended to-

  return to balance in 2020-21 and continuing projected surpluses ….will enable a reduction in debt. This will place Australia in a better position to withstand any future economic downturns. It will reduce the need to increase taxes or cut back on essential services ….by living within its means the Government will not burden future generations with debt from today’s everyday spending. From 2018-19, debt will not be required to fund recurrent spending for the first time since the GFC.

See  Australian Budget.

These statements of intent are totally at odds with the reality for a Sovereign Currency Nation’s public purpose. Australia issues its own currency, $A. It can  run a pure deficit, without borrowings. A budget surplus  drains savings from the private sector and that leads to loss of jobs and less work done. The Government has to spend money into existence. Without that there can be no tax. 

A Sovereign Currency Nation’s government like Australia’s primary purpose is to improve the well-being of its population. Balancing budgets is an irrelevant and destructive blind alley.

The real economy is what is relevant to well-being, care for the environment, defence, research education, aged-care and employment (and so much more).

A Sovereign Currency Government issues the currency and it must first spend it by crediting private bank accounts before it can tax – by debiting bank accounts. The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system. See – https://www.investopedia.com › Economy › Economics

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. The only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A.

A currency-issuing government can, for example, mitigate the economic and social disaster caused by mass unemployment by spending enough. Aboriginal and Islander Communities could see a Job Guarantee based around care-for-country and the public good rather than destructive handouts and associated misguided measures.

 

 

Deficits and Budget Surpluses

We must also balance the budget!

Both Labor and Liberal/National Coalition are still making Policy decisions based upon  outdated ideas about how a modern economy really works. Governments, much of the media, some economists, academics and others are just as uninformed.  Most of the rest of us believe what we have been told without looking too hard at the substance of what we are told: economics is boring and we have our lives to live.

The Australian Budget 2017/2018 intended to-

  return to balance in 2020-21 and continuing projected surpluses ….will enable a reduction in debt. This will place Australia in a better position to withstand any future economic downturns. It will reduce the need to increase taxes or cut back on essential services ….by living within its means the Government will not burden future generations with debt from today’s everyday spending. From 2018-19, debt will not be required to fund recurrent spending for the first time since the GFC. This will make Australia stronger and more resilient to the shocks that may come its way.

See  Australian Budget.

These statements of intent are totally at odds with the reality for a Sovereign Currency Nation’s public purpose. Australia issues its own currency, $A. It can  run a pure deficit, without borrowings. A budget surplus  drains savings from the private sector and that leads to loss of jobs and less work done. The Government has to spend money into existence. Without that there can be no tax. 

Nobel Prize winning economist William Vickrey wrote-

‘If a budget balancing program should actually be carried through …sooner or later a crash comparable to that of 1929 would almost certainly result. .. relinquish our unreasoned ideological obsession with reducing government deficits…the economy and not the government budget that needs balancing …-

Vickrey, William A Disquisition on Demand Side Economics William Vickrey October 5, 1996)

A Sovereign Currency Nation’s government like Australia’s primary purpose is to improve the well-being of its population. Balancing budgets is an irrelevant and destructive blind alley.
The real economy is what is relevant to well-being, care for the environment, defence, research education, aged-care and employment (and so much more).

A Sovereign Currency Government issues the currency and it must first spend it by crediting private bank accounts before it can tax – by debiting bank accounts. The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system. See – https://www.investopedia.com › Economy › Economics

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. The only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A.

A currency-issuing government can, for example, mitigate the economic and social disaster caused by mass unemployment by spending enough. Aboriginal and Islander Communities could see a Job Guarantee based around care-for-country and the public good rather than destructive handouts and associated misguided measures.