In my previous post I outlined why jobs don’t come from rich people: capitalism runs on spending (sales), not savings. Job opportunities appear naturally when businesses forecast sales growth and expand output accordingly (and similarly disappear under reverse conditions). When viewing the economy as a whole, we can observe that private sector investment responds to rising incomes and spending as entrepreneurs expand output to match market demand and banks have confidence lending. In the absence of spending growth, accumulated savings do nothing.
So when tax policy provides powerful incentives for all households with surplus earnings to not spend their income (e.g. incentives like salary-sacrifice and other investment tax advantages), another source of spending must compensate for such savings and buy the output that workers are being paid to produce. If there is no other source of spending to replace what is being saved then sales decline, inventories build up, the economy slows, and people lose jobs.
To state the problem in simple terms, incomes are a cost to businesses. So if some portion of incomes in the economy are saved and not spent, then some portion of the economy is not able to sell all its output. Spending equals business income. Economic growth necessitates that incomes are spent, or some other source of spending must make up the difference.
This begs the question: how do we get more spending, especially when the economy is in decline? Are we left helplessly waiting for the “natural forces” of the “free market” to auto-correct or is there an alternative?
Oddly, the dominant view held by both sides of our political divide is that money grows on rich people and we have to rely on them to get the economy moving. We may not think about it in these terms, but it is evident in our approach to economic policy.
On the political right, this mostly takes the form of further cutting taxes on corporations and high income earners in the hopes that they will invest in job creating endeavours. Despite the fact that the rich already hold large amounts of cash and other assets, the stubborn belief persists that if we enable the wealthy to retain even more money finally they will spend it on the good things we need. Here, we don’t get money from rich people, but instead have to help them keep more of their income since the rich are the primary providers of good things like investments and jobs. (I’ve explained already why this fails, and instead drives up asset prices which is what rich people do with their excess when the economy isn’t growing).
On the political left, we have a different problem: the Robin Hood complex. In this view, the wealthy apparently have all the money available to spend and so we have to take it from them in order to give to the needy, fix a bridge, or give teachers a raise. Unfortunately, this kind of thinking serves only to elevate the power and importance of the wealth-class over our political process while creating direct conflict with money-interests over every aspect of public finance.
Yielding to this belief forces our elected officials to justify every government spending initiative and tax policy, not by the merits of the project to serve the public good and the economy, but by how much can be taken and by what means from bankers, corporations or the wealthy.
There’s a real alternative (TIARA).
We’ve forgotten that money doesn’t grow on rich people. We make our own money via the institution of government and it’s time we remembered how to use it properly. Sorry billionaires, you’re actually not so important after all.
As a sovereign nation, we legislated for ourselves the ability to issue our own currency for the express purpose of ensuring our nation could provide for its defence, establish self-governance, maintain the rule of law, invest in public projects of common benefit, develop our country’s human and capital capacities, and otherwise provide for the general welfare of all who come to and reside in this great land. We issue our own currency, the Australian Dollar, and while there are limits to how we can use it, there’s a lot more room to manoeuvre than we’ve been led to believe.
We have no obligation to convert our currency to gold or at a fixed rate to another currency (we left the gold standard in 1933 and the Bretton Woods gold exchange system in 1971-73 and floated the dollar in 1983). We can’t be forced into insolvency or have bond markets demand higher interest rates. We have no significant national debt denominated in any foreign currency. Our bonds are all Australian Dollar bonds.
We have the monopoly on making Australian Dollars, and that’s a really good thing – it’s why we aren’t and never will be like Greece. We have designed for ourselves the maximum possible fiscal space and we shouldn’t be so afraid to use it. We have “room” to use our currency to maintain a robust economy at full employment and address any challenges that can be tackled by the use of our currency (see below for how we understood this during World War II).
Nations that issue their own currency and have a monetary system like ours operate fundamentally differently that those nations (like Greece) that use a currency or (like Argentina) have foreign-denominated debt. Unfortunately, our economic thinking got stuck decades ago on an obsolete gold standard, fixed exchange rate paradigm. We need a completely different approach to thinking about federal tax policy and federal spending decisions: both should be made on the basis of their public purpose and their economic effects, not on the basis of how much one raises funds for the other.
Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York (USA), explained back in 1946 that taxes for revenues are obsolete. In other words, we don’t need to first get money from the wealthy to help the less fortunate (for our friends on the Left) or to have a robust economy (for our friends on the Right). That’s simply not the purpose of federal taxation. Note the 1946 date: Ruml was at the NY Fed when we used the national currency to fully employ our nation for war while keeping inflation in check. We didn’t fund the war by asking rich people for money. (Just as we did in Australia with the Full Employment White Paper). We issued our currency to pay businesses to make products for waging war, and then used taxation, aggressive promotion of savings (government bonds are purchased with the currency that was spent into the economy), and some rationing to manage inflation. That’s still how we fund war (and everything else, in fact). The point being that money doesn’t grow on rich people. If it ends up accumulating excessively in their bank accounts, it’s our fault for having bad tax policies. We need to relearn how to use our government’s fiscal contribution to have a more broadly shared prosperity during peacetime.
Now this may surprise many readers since we are not used to thinking about it in these terms, but we already have a system that provides significant injections of new government money during economic downturns. We should make it work better. When the economy slows, tax receipts fall (that means the government takes less of its currency out of the economy) and federal payments such as unemployment insurance rise (which means the government is also adding more of its currency into the economy). I know that many of us have been taught that such “deficits” are bad, but that’s that old gold standard thinking. This is exactly why we have a currency.
So now we have the answer to the question posed above. When we need more spending in the economy because the private sector is saving and businesses are losing sales, the government can always increase its monetary contribution to the economy. It’s called good fiscal policy! It already works this way – we just need to make it work better and stop operating our currency under meaningless constraints such as “pay for” rules and “balanced or surplus budget” approaches. A well-designed tax and fiscal policy can do the heavy lifting automatically so we can avoid political deadlock during recessions (The Henry Tax Review outlined a plan). As a compliment to existing safety net policies, the Job Guarantee is designed specifically for this purpose.
Our government has been given the power of the purse. More specifically, parliament has the responsibility for managing our nation’s currency monopoly. This entails balancing the needs of the whole economy and maintaining full employment for all who seek work to earn a living.
Let’s remind Canberra and parliament of how we can get our economy back to its full potential and rise up to the challenges of our time. As we seek to change our tax policies to become more equitable and our political process more transparent and democratic, we must also remember that we don’t have to wait for rich people’s money before the government of the day (parliament) can authorise spending for public purpose and tax cuts for workers. We absolutely need to change how we tax the rich, but not because we need their money.
This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!