October 2020

Essays

Richard Denniss

Fear of spending

Illustration by Jeff Fisher

So what is MMT and why should you care?

Would Galileo’s theory that the Earth orbits the Sun pass the pub test? Would Darwin’s theory of evolution survive the scrutiny of the Sky News commentariat? And as for Einstein’s theory of relativity… forget it. Nothing defies common sense more than Einstein. But how we accept the world works does not always relate to how it really works.

In an age where science has become deeply politicised and the role of experts has been fundamentally challenged by those in power, it has become much harder to have esoteric debates about theory. Yet here we are, in the middle of the biggest economic crisis in modern history, having a relatively polite debate about the theoretical definition of money: where it comes from and what we can do with it. Who’d have thought?

After 25 years of academic debate, so called Modern Monetary Theory (MMT) has burst free from its ivory-tower confines and onto the bestseller list. Stephanie Kelton’s The Deficit Myth spells out, in plain English, why the pursuit of a budget surplus is unrelated to the pursuit of a strong economy. Her evidence and arguments haven’t just been taken seriously by respected journalists such as Alan Kohler and Ross Gittins. Even The Australian has editorialised in favour of the need to grapple with the issues that Kelton raises.

But can an Australian body politic that systematically accuses climate scientists of being in it for the grant money, and platforms anti-vaxxers on the basis that they “ask interesting questions”, really have a constructive conversation about the fundamental limits of government spending? Can people who can’t even agree whether or not the ABC has had a budget cut really have a sensible debate about the theoretical underpinnings of the entire federal budget?

Well, the signs are more optimistic than you might have thought. So what is MMT and why should you care?

Some advocates of MMT argue that it is an economic and political panacea. Governments that issue their own currency can’t possibly go bankrupt, they say, so there is no budgetary necessity to limit public spending or to increase taxes. And if governments can boost spending without having to increase taxes, budget deficits become irrelevant. So why not cut taxes for the rich, boost welfare spending on the poor and we can all live happily ever after? You can see the appeal.

Critics of MMT see it as a simplistic form of populism that makes Donald Trump seem like a steady-handed leader. After decades of fear about “debt and deficits”, along come proponents of MMT to sell a magic pudding to the masses. The most common critique is to remind people that Germany and Zimbabwe tried printing money to pay their bills, and neither effort ended well.


A theory isn’t a fantasy. It’s a coherent set of ideas intended to explain something. What’s more, it’s possible to have multiple theories to explain the same, or overlapping, things. But these overlaps often cause the most confusion. Take physics, for example.

The Newtonian physics we teach in high school is great for explaining how far a cannon ball will travel when you know the angle of the cannon and the speed of the cannon ball. But it is terrible at predicting how far a paper plane will fly.

The complete inability of Newton’s 400-year-old laws of motion and gravity to explain the flight of paper planes doesn’t mean Newton was wrong. It simply means that his theory is the wrong choice if you need to solve problems where turbulence around complex shapes is more important than gravity and launch speed.

While bad theories can be debunked and discarded, even the best theories have their limits, and finding the limits of a theory’s usefulness is in no way the same as proving that a theory is wrong or useless. The hardest part about economic policy is deciding which abstract theory is most useful when trying to solve new and rapidly evolving problems in the real world.

So that’s the “T” in MMT, now let’s talk about the “M”, for Monetary: money.

The definition of money is more complicated than most people think. Everyone knows that if they have $1000 cash in their wallet they have some money, but that is just one of many forms of money. (Strap in – this is going to get weird.)

If you deposit $1000 in the bank, you probably think that you still “have” $1000. But what if the bank then lends me “your” $1000? Now I have $1000 in my wallet and you think that you have $1000 in the bank. The bank just “created” money.

And it’s not just banks that create money out of thin air. Not only can governments print and mint as much currency as they want, they can deposit money straight into my bank account, your bank account or Westpac bank’s bank account whenever they want. And there is literally no limit to how many zeros the federal government can deposit into our bank accounts. None.

So the Australian Commonwealth government can’t possibly “run out of money”. No economist disagrees with that statement. The government can print notes and mint coins, and, in addition to borrowing money from the private sector by selling government bonds, the Treasury can also sell as many bonds as it wants to the publicly owned Reserve Bank of Australia (which, by the way, already purchases government bonds from time to time). And when the government pays the interest on government bonds held by the RBA, it’s paying interest to itself. And then the RBA pays dividends to the government. This isn’t new. It’s already happening. It’s just that we have spent years talking about “budget emergencies” instead of having an honest conversation about how public debt really works.

One of the central concerns of MMT advocates is that so many people think governments need to collect tax in order to fund spending when, actually, because the government has access to an infinite number of zeros, it can transfer as much money as it wants, to as many people as it wants, whenever it wants. To be clear, the federal government doesn’t, in any literal sense, need to collect any tax before they embark on any public spending. None. Ever. But if governments do decide to spend like the proverbial drunken sailor, if they do print way too much money, then they will drive inflation up and the exchange rate down, and cause all sorts of investment uncertainty. It would be a bad idea for the government to spend way too much money, but what MMT helps to highlight is that there is no clear definition of “way too much”. Obsessing about running a budget surplus is one way to ensure governments don’t overspend, but obsessing about the budget deficit can lead to governments underspending and causing unnecessary unemployment.

The governor of the RBA knows that there is no hard limit on the number of dollars a government can spend, and so does the secretary to the Australian Treasury.
And they both know that there is no clear definition of when governments are spending too much. But what has made MMT politically both interesting and dangerous is that it has forced Treasury and the RBA to admit some inconvenient truths about the reality of debt, right in the middle of a public debate about how much stimulus Australia can “afford”. The answer is as economically simple as it is politically inconvenient: with high unemployment and no risk of inflation on the horizon, the Australian government, like Donald Trump’s administration, and any country that issues its own currency, can literally spend as much as it wants right now.

Just as old maps had dragons at the edge of the “known world” to scare the adventurous into staying within safe territory, conservative economists have long told scary stories about governments going “bankrupt” and “running out of money”, to deter Australian voters from asking hard questions about why, despite being one of the richest countries in the world, we have so little to spend on unemployment benefits, public housing and protecting the environment. For decades it has been easier for those in power to say “we can’t afford to spend more” than to simply admit “we don’t want to spend more”.

But now that Trump is running a $1 trillion-per-year budget deficit and Prime Minister Scott Morrison just found an extra $200 billion behind his couch, it has become impossibly difficult to maintain the pretence that if a government spends more than it collects in tax then calamity will ensue. The United States government has been spending more than it collects in tax since 2001. Despite Tony Abbott’s declaration that Australia was suffering from a “debt and deficit emergency” back when he was prime minister in 2014, the Coalition has never once delivered a budget surplus… and it doesn’t matter.

Just as gravity doesn’t care if you believe in it, economics doesn’t either. The reason that budget deficits in the US and Australia haven’t ruined the economy is simple: budget deficits are no big deal. Being afraid of them doesn’t make them economically important.

MMT isn’t the first school of economic thought to acknowledge the truth about deficits, and it won’t be the last. John Maynard Keynes popularised the benefits of well-timed budget deficits back in the 1930s, and the 40 years that followed are generally seen as “the golden age” of economic growth. Robert Menzies ran budget deficits for every one of his last nine years in power, and even boasted about the size of them.

Yet for decades Australians have been told that it’s “common sense” that governments can’t “live beyond their means”, and that, in turn, they need to spend less on services than they collect in tax revenue if they are to be “fiscally responsible”. There are so many problems with this common sense that it’s hard to know where to start debunking it.

Every young person in Australia who goes to university is encouraged to “live beyond their means” and borrow tens of thousands of dollars to pay for their education. Indeed, the federal government is so unconcerned with kids “living beyond their means” that it’s the government itself lending them the money.

Likewise, first-home buyers borrow hundreds of thousands of dollars more than they earn each year to buy property. And, again, governments offer cash grants and tax concessions to encourage them to do so.

And then there’s companies. BHP is the world’s largest listed mining company and it has been in debt for 100 years. It has absolutely no plans to repay all of its debts, now or at any point in the future, for the simple reason that its shareholders are relying on the fact that the management of BHP can invest in new mines that deliver significantly higher returns than the interest it’s paying on its debt.

So what have students, home buyers and BHP got in common? All of them think that it’s okay to “live beyond their means” when borrowing to invest in things that deliver future benefits. Like the Morrison and Trump governments, none of them is too worried about debt and deficit. Most individuals like the idea of paying off their debts before they retire, but when is Australia planning to retire? What date should our country stop investing for the future and start preparing for its dotage?


Old-fashioned Keynesian economists (such as yours truly) have never believed there was any fundamental reason to pursue budget surpluses. For Keynesians, borrowing to invest in things that create value down the track (including education, public housing, public health and infrastructure) doesn’t leave a “burden” for future generations, it generates demand in the short term and creates human and physical assets in the long term. And running big budget deficits during a recession is the very definition of Keynesian economics.

While conservatives talk endlessly about the “need” for governments to spend less than they collect in tax, if you ignore what they say and look instead at what they do, it’s clear that they have no fear of budget deficits at all. The self-described fiscally conservative Coalition governments have between them racked up more than $670 billion in the eight years they have been in office. In reality, every time it looks like the Coalition is getting close to running a budget surplus they voluntarily cut taxes.

The Morrison government went to the last election promising $300 billion worth of tax cuts on the basis that this would be funded by a rapidly growing economy. Then after the economy collapsed as a result of COVID-19, the government announced it was sticking to the enormous tax cuts. It’s almost as if they don’t really care about the deficit at all.

The disagreement now isn’t about what we should do, but why we should do it and who should get the benefits. Advocates of MMT and self-described fiscal conservatives have little in common in terms of theory, but in practice both agree with old-fashioned Keynesians that now is a great time to spend far more money than the government collects in tax. And while academic economists will squabble for decades about whether MMT’s observations are new, what is certain is that, after decades of feigning concern with the need for a budget surplus, the Treasury and RBA now publicly admit that taxes don’t limit spending power and even that warnings from the once-deified “ratings agencies” can be safely ignored.

But while MMT advocates have done much to enliven the public debate about government spending and borrowing, their enthusiasm for reminding people that governments can create an infinite amount of money has created a lot of fear and confusion as well.

For even though there is no limit to the amount of money a government can create, there are obviously limits to how many things there are for governments to buy. Virtually all economists, including advocates of MMT, agree that if governments spend too much money they will drive up the price of things and in turn cause inflation. The hard part is defining what constitutes too much.

So instead of focusing on the need to balance the budget, MMT focuses on the need to balance the labour market. Like Keynesians before them, MMT economists typically emphasise the economic costs of mass unemployment and the enormous benefits of creating jobs for hundreds of thousands (or, at the moment, millions) of people without enough work. For MMT and Keynesian economists, the existence of mass unemployment and low inflation is proof that the government isn’t spending enough.

When there is mass unemployment, the risk that too much government spending will cause inflation is trivial. While in theory it’s possible that government spending can drive the kinds of inflation witnessed in Germany and Zimbabwe, in practice the enormous deficits racked up in the US and Japan, for example, provide clear evidence that there is nothing inevitable about deficits driving inflation.

But just because big deficits haven’t caused inflation in recent years doesn’t mean that they never could. Those arguing against the big-spending agenda of MMT advocates typically say that the problem isn’t starting the spending today, it’s turning it off down the track.

Think about that. The admission that turning off the tap in the future is the problem proves that “the deficit problem” isn’t an economic one but a political one. Deficits have been used to scare people away from demanding governments spend too much, but the result is that we now struggle to have a sensible conversation about the fact that the government clearly isn’t spending enough.

Just as it’s easy for me to avoid spending money on my kids by telling them I can’t afford to buy the things they would like, it’s become easy in Australia for governments to tell their voters that the country can’t afford to spend money on the things that voters like. The reality of course is that parents, and governments, can usually afford to spend more on something, but pretending you can’t afford to is just a lot easier than explaining that you don’t want to.

Forcing Treasury, the RBA and even The Australian to admit that there is no shortage of money could well be the most important thing that MMT has done.


Theories aren’t judged for their rightness but for their usefulness. Newtonian physics is great for predicting what will happen if you jump from a plane, and fluid dynamics is great for helping you design a parachute.

And parliaments don’t vote on theories.

Similarly, budgets are about politics, not economics. The stories Australians have been told about debt and deficits are nonsense. Borrowing money to invest in the future is a good idea. Running big budget deficits when unemployment is rising is a good idea. Rather than endlessly debating where we should cut spending, we need to realise that economic theories – all of them – say we should be debating how to spend more. Virtually every economist agrees with those two propositions.

But once it’s accepted that we not only can, but should, spend a lot more money, Australian politics tilts radically. What scares the so-called fiscal conservatives isn’t a big increase in debt, but a big increase in the Australian public appetite for free childcare, better aged care, better schools and better public transport.

Conservatives know that once Australians get a taste of high-quality services it will be hard, if not impossible, to wind those services back. And after the pandemic has passed, and a big increase in public spending has driven unemployment back down, the fight about inflation will eventually return. And when people are asked if they would prefer to keep their better services or pursue bigger tax cuts, even conservatives know what the answer will be.

Conservatives are never afraid of the impact of defence spending, tax cuts or subsidies for private schools on the budget deficit, yet they live in a contrived state of fear that the aged pension and unemployment benefit will send the country broke. It’s a pantomime, but it has made for highly effective politics. Modern Monetary Theory has helped expose the absurdity of the conservatives’ plot, but Scott Morrison is still betting that progressives can’t come up with a better one. Time will tell.

Richard Denniss
Richard Denniss is the chief economist at the Australia Institute.

October 2020

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