While “deficit fetishism” is unsurprising when championed by Liberal politicians or their counterparts in the centre-unity faction of the Labor Party, it is increasingly advocated by those positioned at the more progressive end of the political spectrum, such as Greens leader Bob Brown.
Yet, for some 25 years, the notion that post-war governments should simply abandon their responsibility for keeping the workforce fully employed through deficit spending, would have been viewed as a retrograde and contemptible heresy.
This perspective on the role of government has recently been revived within a reinvigorated theoretical framework.
For contemporary advocates of Modern Monetary Theory such as Bill Mitchell at the University of Newcastle, and Randy Wray at the Levy Economics Institute, governments are seen as directly responsible for rising unemployment.
This is because they generate unemployment whenever they fail to create sufficient “net financial assets” to meet the non-government sector’s desire to net save.
Although “horizontal” transactions between banks, households and firms net out to zero, it is demonstrated that “vertical” transactions between the government and non-government sectors create or destroy financial assets, depending on whether the government chooses to spend or tax.
Conventional fears about deficit spending rely on the entirely spurious notion that government must finance their spending either by “printing” money or issuing bonds.
While the former is seen as inflationary, the latter is also viewed with concern because bond sales clearly drive up interest rates.
While this all-too-prevalent notion of a budget constraint is true of households, and for that matter, state governments – each of which have to draw down wealth or increase borrowing to consume over and above their income – a Federal Government, which can issue its own fiat currency, simply spends by crediting the central bank accounts of the commercial banks.
The demand for units of this currency is maintained by the need of the private sector to pay their taxes in the unit of account.
At the same time, the value of the currency is preserved by the manifest power that monopoly currency issue affords to governments intent on purchasing goods and services from the private sector.
While spending injects liquidity into the economy, taxation and the sale of government services withdraw liquidity from the non-government sector.
In the absence of any countervailing interventions, deficit spending would drive interest rates down to zero rather than increase them. To target a positive rate of interest, then, the government, in cooperation with its central banking arm, must absorb any excess liquidity through the sale of bonds.
In other words, the purpose of bond sales is to target a positive interest rate rather than to “finance” government spending. It is an easy matter to show that the net asset creation, which occurs when the federal government deficit spends to meet the savings desires of the non-government sector, is just the “other side of the coin” to an increase in effective demand of sufficient magnitude to avoid unemployment and under-utilisation of resources.
This raises the question of how to deal with inflation. An ongoing reliance on deficit spending to achieve full employment, it is argued, will surely let the inflationary genie out of the bottle once again, as happened around the world in the early 1970s and 1980s. Here, Modern Money theorists follow Keynes in privileging fiscal policy over monetary policy.
The use of interest rate hikes to control asset price booms and inflationary bottlenecks is seen as crude, unfocused and ineffective.
For Keynes, the lowering of interest rates, in an attempt to boost economic activity, is like “pushing on a piece of string”.
Fiscal policies can be targeted more accurately, especially when unemployment is both persistent and unevenly dispersed across different regions.
In such cases, one of the best kinds of fiscal policy is to directly create jobs in a range of worthwhile activities, including environmental improvement and provision of aged care services.
Public employment schemes recruit “from the bottom”, employing those willing and able to work at the minimum wage, so that private firms can attract workers simply through paying higher wages or better conditions.
The “buffer stock” of workers employed by the government both ensures that workers are “job-ready” and helps to stabilise inflation.
During periods of expanding private sector activity low-wage public workers move out of the government sector. During periods of declining activity they move back to take advantage of the income safety-net.
Traditional Keynesian policies of investment in public infrastructure and training are undoubtedly of importance.
One of the great weaknesses of our federal system, however, is the temptation for revenue-constrained State Governments to under-invest in their publicly owned companies by, instead, using them as a source of finance.
In addition, the expansion of public investment to increase effective demand can run into inflationary bottlenecks because activity cannot be directed into regions where unemployment is high.
Policies of direct job creation avoid this pitfall.
In short, progressive forces in Australia should actively promote the “right to work”.