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Stephanie Kelton: Throwing economic orthodoxies on their heads
Stephanie Kelton has been doing a round of interviews in Australia this week. Who? You might well ask. Along with a number of other highly influential female economists, Kelton is forcing a rethink about government debt and what it means. This is the second in a three-part series on women economists leading the way to a citizen-centred economy.
What’s the next crisis going to be? The question is being asked with a mixture of wry cynicism and genuine alarm. Will we see it coming? Failure to do so means failure to act in time and lost opportunity to reduce the impact. We learned this from the bushfire crisis and perhaps, as a consequence, did better than most nations in response to the onset of the coronavirus pandemic.
There is indeed another crisis; already visible on the horizon and easier to prevent than anything else we have been through in recent months. The government is out of the starting blocks and raising the alarm loud and clear: we are heading for depression-level economic conditions.
But, according to the US political economist Stephanie Kelton, only if we make them for ourselves.
Kelton, a professor of economics and public policy at Stony Brook University in the US who is currently visiting Australia, is dedicated to working for radical economic change. Like Ann Pettifor, the previous subject of this series on women who are transforming ideas about our political economy, she is committed to the Green New Deal, a policy approach in which social and ecological priorities are fundamental.
I believe it is not a coincidence that so many of the economists who are working for a new, bold, transformative approach to our economies are women. Political economy is a domain in which men have for millennia jostled for power and domination. If we are to dislodge the current prevailing mythologies in which this power is invested, female voices may be especially effective in opening up the power base and broadening public communication about matters that have been the preserve of “experts” who only talk among themselves.
Who is Stephanie Kelton?
Having served a term as chief economist for the Democrats on the US Senate Budget Committee and been an advisor to the Bernie Sanders campaign, Kelton is well-versed in the realities of government procedure. Her new book The Deficit Myth, which hit the New York Times' best seller list within days of its release earlier this month, spells out the recipe for disaster.
It goes something like this. Do everything you can, in every possible way, to prevent government debt. Claw back any stimulus measures as swiftly and comprehensively as possible. Make funding cuts to welfare, social services, education, arts, public broadcasting, and any other forms of government expenditure deemed a cost to the economy.
With this comes the blame game. Foist the responsibility for unemployment onto the jobless by lecturing the citizenry about skills deficits.
With this comes the blame game. Blame failing businesses for being dedicated to the pursuit of enterprises that are just not viable in this economic climate. Foist the responsibility for unemployment onto the jobless by lecturing the citizenry about skills deficits and the need to be fully primed to claim their place in a difficult job market.
As we have seen all too clearly in the past few months, women lose out in disproportionate numbers and many are forced to drop out of the workforce to manage responsibilities as parents and carers. As more people become destitute, more punitive measures must be taken to discourage welfare claims, shame the impoverished and harass the homeless. Sound familiar?
In a word, it’s the economic approach known as “austerity”. Figures in the US and UK, where austerity policies have bit deep, indicate that far from helping to reduce the national deficit, they actually serve to increase it.
Kelton’s argument, though, runs deeper. She focuses on the notion of deficit itself, calling it a myth, and drawing attention to how much effort governments put into promoting it.
Here's the problem
“Here’s The Problem,” she announces in public lectures, before showing a compelling two-minute video compilation of government leaders from both sides of the political divide warning in the most dramatic terms about the dangers of debt.
“Driving up our national debt …You might as well lock us in chains… We gotta deal with this problem, or it will deal with us… Stop this fiscal train wreck…Join us to protect our children from a crushing burden.”
Kelton sets out to explain why we are so ready to be persuaded by this rhetoric, why it is “pernicious” and what the reality of the situation is, when it comes to government expenditure and the financing of all aspects of our economy that are concerned with the common good rather than commercial profit. The idea that the federal government should budget like a household – just as Liberal MP Tim Wilson did earlier this week - is the foundation for a pervasive and dangerous popular delusion, and nothing less than a “Copernican revolution” is needed to turn it around.
Unless we are part of the super-wealthy 1%, our brains are hardwired to the concept of limiting expenditure.
The grounds for our belief in the myth are obvious. Unless we are part of the super-wealthy 1%, our brains are hardwired to the concept of limiting expenditure. “Can I afford it?” “Do we have enough?” are questions so essential to the way we make all kinds of decisions.
Women may be especially susceptible to pressure from this kind of thinking. Under austerity policies in Britain, 30% of children are living in poverty. The need to keep children fed, clothed and housed becomes all-consuming, especially for single parents, and the fear of debt is urgent. For the individual citizen, there’s no arguing with a budget bottom line, even if it means going without important things like dental treatment or adequate insurance.
Remember this acronym: MMT
For a government that issues its own currency, however, it doesn’t work like this at all. Kelton is one of the foremost proponents of modern monetary theory (MMT), an interpretation of national economy in countries – like Australia – that have sovereign currency. This means they are in control of their own money supply and do not have to negotiate with any other country for some form of bail-out arrangement if they want to increase it.
For an answer to the question of where the money will come from, we need look no further than the Reserve Bank, which issues bonds for sale. Terms like “borrowing” are misleading, says Kelton. There is no real debt obligation here. What matters is how the money is spent, and here she takes a phrase from the British economist John Maynard Keynes: “functional finance” is an approach that sets out to balance employment levels, inflation risks and the need for equitable distribution of wealth.
Austerity policies, which force those in the middle and lower tiers of the economy into poverty, fail on all three counts.
Austerity policies, which force those in the middle and lower tiers of the economy into poverty, fail on all three counts. They make the rich richer, they reduce household spending so generating further unemployment, and can cause financial instability leading to fluctuations in the value of the currency. While MMT proponents accept inflation as one of the necessary breaks on government spending, they point to research that shows no historical correlation between hyper-inflation and government investment in the economy.
“Instead of forcing the economy to balance the budget,” says Kelton, “use the budget to balance the economy.” In order to do this, the government spends first. As Kelton’s mentor and fellow MMT campaigner Warren Mosler puts it: “The money story begins with the state that wants to provision itself.”
The deficit myth
If this is a hard concept to grasp when we have been so relentlessly schooled in the deficit myth, Australians should look back to 1909, when Andrew Fisher’s Federal government was caught in a dilemma. It was in charge of nation that could not provision itself.
Pastoralists and manufacturers were unable to get loans to finance their businesses, invest in stock and machinery, and so generate productivity. The states were borrowing from overseas to pay for the building of essential infrastructure.
Fisher’s Minister for Home Affairs King O’Malley saw a way out of it this through the establishment of a Commonwealth Bank, a goal he achieved with an act of Parliament in 1911, thanks to which we are now a nation with sovereign currency, and the capacity to invest in ourselves. That, and not some crippling burden of debt, is the legacy he bequeathed to future generations.
Thinking back to that situation, it is perhaps easier to grasp Kelton’s point that, when it comes to provisioning the nation, government “spending” does not mean the same thing as household spending. The money has not gone, it has been put to work.
“Their red ink is our black ink,” as Kelton says.
The force of that equation is felt if we look at it in reverse. The government’s black ink as it claws back deficit means red ink for human services, civic institutions, schools and universities, health clinics, the national broadcaster, cultural foundations and local sports facilities. It means debt and deficit for every household affected by job losses from the pandemic. It means reduced trading and revenue losses for retailers and the hospitality industry.
One of the central planks of the MMT policy agenda is the Job Guarantee, a proposal that every citizen who wants to work should be provided with employment at a living wage. Those who are not employed in the private sector will be given work in the public sector. As the trading economy recovers, some of those jobs will move back into the world of commerce. And so the “trickle down” fantasy that has driven the agenda for corporate tax cuts is replaced by a ground-up economy, with the wellbeing of citizens as its founding principle.
Perhaps the real risk for government in the post pandemic recovery is not that we’ll realise we can’t afford the stimulus and support measures, but that we’ll discover we absolutely can afford them. Rather, those who have built their political careers on the “household budget” myth can’t afford to allow it to be exposed.