Another week and another glut of evidence that the Australian economy is flatlining. Growth figures showed that households have stopped spending and that the economy is being propped up by a few government projects. The next day, retail sales growth came in at exactly 0%, showing that consumers have taken the Coalition’s tax cuts and used them to pay off debt.
But as Josh Frydenberg rebuffs the Reserve Bank’s calls for huge new federal spending and instead trumpets the possibility of returning Australia Pty Ltd to surplus, it seems increasingly likely the denizens of Martin Place will cut the cash rate again in February to kickstart the economy.
This is starting to feel like groundhog day. The RBA has already cut rates three times this year, in line with similar moves in the United States, Europe and Asia, and failed to move the dial on growth. Most economists doubt that it will make any difference even if the cash rate sinks to 0.25%, as many predict.
But a radically different way of managing the economy is gaining more and more attention and could reshape the way we think about society.
They talk of surplus as if it’s the norm – but it isn’tProf Bill Mitchell
When Alexandria Ocasio-Cortez burst onto the American political scene this year, her suggestions for a Green New Deal became associated with a way of seeing economics known as modern monetary theory (MMT).
One of its leading lights is Prof Bill Mitchell, of the University of Newcastle, who says that in contrast to the prevailing monetarist orthodoxy of the past 40 years, countries cannot, and should not, be run like a corner shop. He argues that any country such as Australia that issues its own currency can create as much money as it needs to meet the needs of its people and not worry about Frydenberg-style balancing of the books. You can’t default on your own debt, is the mantra of so-called MMTers, who include high-profile economists in the US such as one of Bernie Sanders’ 2016 campaign advisers, Stephanie Kelton.
Mitchell, who helped develop the idea in the 1990s, says the Coalition won’t make its surplus because the tide has turned on Australia.
“They talk of surplus as if it’s the norm, but it isn’t,” he says. “Australia has always run a small deficit of 2-3%. The only way Peter Costello delivered a surplus [for the Howard government] was by deregulating banking, so that household debt rose from 60% of disposable income in 1980 to 180% now. It was a massive credit binge. We have always said it would come unstuck, but we just never said when.”
Australia’s huge household debt means consumers are now fearing unemployment, he says, and they realise they have to stop spending. The last time Australia came close to recession, after the Lehman crash in 2008, the Treasury became “unbelievably pragmatic” and Wayne Swan switched overnight from fiscal conservatism to pumping funds into the system. “Australia was the only advanced economy to avoid recession,” Mitchell says.
There is a catch of course, which is that a lot of economists don’t think MMT would work. Creating your own money would led to inflation, they say, and the markets would have a field day by driving down currencies seen as devalued by taking the business of buying and selling debt away from independent central banks. The Obama-era treasury secretary, Larry Summers, has called MMT “fallacious”, others have sneeringly dubbed it the Magic Money Tree, while Nobel laureate Paul Krugman, who is on the left of economics thinking, is also highly sceptical.
Mitchell dismisses these concerns and argues that runaway inflation could be curbed by judicious government management and adds that the threat of financial markets is overrated.
“I don’t see it as a problem. If the currency sold off you can just introduce capital controls and that would be the end of that. The legislative system would triumph,” he says, citing Iceland’s success in forcing US hedge funds to accept losses after the country’s banking system collapsed in 2008.
“Instead of taking the neoliberal approach which was being forced on them by the British and the Dutch, they brought in capital controls and made the hedge funds take a hit. Markets can only work through the law of the land. Iceland did the right thing by their citizens. The government’s job is to protect the citizens, not to guarantee private capital.”
It’s a powerful example given the mess that the UK and European authorities made of clearing up the global financial crisis, after which private losses were essentially assumed by taxpayers, who continue to pay the price in austerity.
Even sceptics admit that the crisis proved to some extent that MMT might work. The independent Australian economist Saul Eslake says that the key tenet of the central bank effectively writing cheques for the government has to an extent already happened in Japan after years of quantitative easing, the money creation scheme seen in many countries after the GFC.
“The evidence of the last 10 years can support the idea. Despite fears about quantitative easing leading to a collapse of the US dollar or runaway inflation, this has not happened. The problem is that inflation is too low across the western world.
“The country that has come closest is Japan, where government holds debt equal to about 100% of GDP.”
Mitchell notes that what has happened in Japan has confounded mainstream economists. Despite decades of money creation, the country has a stable economy with low inflation and low unemployment. “The Bank of Japan BOJ says we are not a MMT laboratory but it makes me laugh,” he says. “Mainstream economists can’t explain any of it but MMT can explain all of it.”
But Eslake, vice-chancellor’s fellow at the University of Tasmania, still thinks there would be a significant risk of a run on currencies and also questions whether the political cycle of regular elections would succeed in managing growth properly.
“If politicians are controlling monetary policy, then it can be manipulated for electoral purposes. The central bank would not be independent,” he says. “Many advocates don’t think that’s a problem but I’m a bit more cynical about politicians.”
“But I don’t dismiss this out of hand. It’s a legitimate question. If there is another downturn there is virtually no room for conventional monetary policy.”
The answer, however, might come from an unlikely source: Donald Trump. For Mitchell, the 2020 US election will come too early for champions of his thinking to emerge victorious. But he believes the current resident of the White House, by drastically increasing the US deficit, is busy laying waste to the monetarist orthodoxy that has gripped international economic thinking for decades.
“Sanders is not really an MMTer but he won’t win. Joe Biden is still frontrunner but he’s a fiscal conservative and another Hillary Clinton so he won’t win ... I think Trump will probably win,” he says.
“But Trump’s legacy is that he is destroying the Republican party. He’s destroying the idea that fiscal deficits are bad and that there must be a debt ceiling. Catastrophist theorists about debt [typified by the Tea party movement in the US] are on the way out.
“Trump said ‘We’re going to spend. We issue the dollar so there’s no way we are going to default on our own debt.’ His legacy is not good in other ways but in fiscal terms he has shown that the mainstream economists have got it wrong. He’s just defied them.”
This, in turn, will open the way for more radical thinking in the future. “It opens it up for Democrats. The likes of AOC will come through over time.”