Tag Archives: Geoff Coventry

Language is Power!

Language is powerful. We have come to believe certain things about our government because we have been fed a steady diet of metaphors that embed scary images in our minds. These analogies are all based around the image of an irresponsible person or business that gets into financial trouble, spending more than they earn.

Look at these common phrases and think about how they make you feel:

  • Exploding budget deficit
  • Mountain of debt
  • Mortgaging our future
  • Living beyond our means
  • Spending is unsustainable

It all just sounds bad, right? These word images make us fearful or angry. But what if the underlying metaphor is actually wrong? Do you or I issue the nation’s currency? Do other nations save and trade in currency that I’ve issued? Of course not!

Our government issues the nation’s currency and is, therefore, nothing like a household or business. When there is a single supplier of something that serves the general public, what does that remind you of?

Think about a public monopoly like a water utility, an analogy first suggested by Warren Mosler and Matthew Forstater.

Picture a water utility that limited the supply of water only to what it measures coming out our drain pipes, keeping the amount flowing in and out of the city’s pipes exactly the same. Would we be happy that it was being responsible, or would we be upset that we didn’t have enough to drink or shower? What if we were saving water by filling up a swimming pool, or we were a beverage business that uses gallons of water every day to brew beer for export? It is completely normal for this city to need more water flowing in that what flows out the drains.

A failure to meet this demand for water that exceeds the amounts flowing out in the drain would cause massive problems for our city. Surely we would hold our public water utility accountable to make sure it is meeting the full demand for its water. It exists to serve all people, businesses and organizations that rely on it. Anything less is a breach of its public duty to service.

As the sole issuer of the Australian Dollar, our nation’s currency, the Australian government is like a public water utility that should always meet the demand for its product.

Now, let’s look at some new word images based on this metaphor and see how they make us feel. Nothing about the actual facts on the ground has changed, but our new perspective leads to a different understanding of the underlying issues at play.

  • The government invested more currency into our economy than it taxed out this year (formerly “deficits”)
  • Due to higher domestic savings levels and imports, the government increased its flow of currency into the domestic economy to maintain full employment (formerly “higher deficits”)
  • Savings of Australian Dollars are at an all-time high – our currency remains in high demand (formerly “national debt reaches $XX trillion”)
  • Parliament is studying the real resources needed and the impact on the domestic economy for a planned federal interstate high speed rail investment (formerly “where will the money come from?”)

Any metaphor has its limitations, but I trust you can see the stark comparison between the household budget and the public utility analogies. For those still struggling with the mental leap, let me paint a bit more of the picture.

  • The government has a monopoly on the issuance of Australian Dollars – we’d go to jail trying to counterfeit them! In this analogy, they are the public water utility monopoly with an unlimited source of clean water.
  • The water is, of course, the currency. Our government can never run out of money since it creates money on-demand, under the authority of Parliament. Money is not scarce!
  • We can think of the utility’s pipes and pumping stations as the financial and regulatory systems that provide for the distribution of currency from the government to the households and businesses that need it.
  • Drains and sewage pipes are like taxes – they remove currency that has previously been spent into the economy. Note the sequence – spending precedes taxing just like water additions precede drainage!
  • Let’s say our water utility gave away free water to households and businesses that stored excess water – maybe to make up for evaporation or just as an incentive to store water for unknown reasons! That’s akin to our government paying interest on government bonds, which are just savings of its currency that has, again, already been spent into the economy.

We could extend this metaphor into other areas.  There is a reason, we refer to the supply of currency as liquidity.

By now I hope you can see that this metaphor provides a very different way to describe the responsibility of our government’s fiscal policy. Should the water utility balance its water flows like a household or does it have a responsibility to provide for the needs of the whole city or state, factoring in the demand for water storage and the amount of water leaving in product sales? Does it make any sense to put a “water limit” on how much water the utility provides over and above what flows out the drains?

Yes, this presents a new challenge to government. It is easier to claim “fiscal responsibility” under the household budget metaphor simply by limiting the use of the currency to what we now see are arbitrary and harmful levels. But real fiscal responsibility for the currency issuer involves much more than this. They have a duty to account for imports and savings when determining how much currency the economy needs to maintain full employment and growth. Parliament clearly needs a different method to debate how best to use the currency. Just look at the results of our current model – sluggish growth and frequent periods of high unemployment. What we’ve been doing is simply not working.

We live in an age where our government’s fiscal activity disproportionately harms the weak. Imposing unnecessary austerity has become the norm under the pretence of market discipline, and the suffering that results is very real.

Government should seize this opportunity for reform, ending the harmful artificial budget limitations, and begin using its fiscal power to serve the people’s interest and invest in Australia again.

This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!

 

Does Money Really Grow on Rich People?

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!

How Many Jobs Do the Well Off Create?

One would be forgiven for believing that all good economic outcomes must flow down from the wealthy to the masses, given how much of our tax code has been designed for such an effect. Capital gains tax rates, superannuation tax rates, and negative gearing are just a few of the ways our federal tax system has been tilted to enable the wealthy to accumulate ever more wealth by retaining a high percentage of their financial earnings after taxes. And politicians keep dishing out the favours.

The economic argument that is presented to justify this approach is based on the mistaken belief that if we allow the rich to keep more of their income they will invest it in creating more private sector jobs. In other words, by granting more tax breaks (and often favourable treatment under the law such as removing, weakening or simply not enforcing regulations that are in the public interest), the belief has been that the wealthy would use their higher after-tax earnings and expanded access to national resources to invest in new ventures and businesses that will employ more people.

Now of course it is true that some of this untaxed income does end up in job-creating investments, but a large percentage is simply saved or used to purchase existing assets as investments and does not flow back into the economy in ways that increase sales and employment.

Unfortunately, this approach to economic policy has taken root in both of our major political parties. The decade-long pattern of tax cuts, deregulation, and lax financial oversight has continued irrespective of who holds office.

Rather than creating a bigger economic pie for all, these policies have resulted in the extreme concentration of wealth at the top in levels not seen since before the Great Depression, while the wages of the typical worker have been losing ground to inflation for more than a generation. Workers are getting less and less of the pie. It doesn’t take an economist to realise that this can’t go on forever without serious consequences.

Capitalism can and does take many different forms since it is a product of the rules we design and how we enforce them, along with the culture and ethic of the time. It is deeply troubling that the version we have been shaping via tax policy and legislative action for the past several decades is highly self-destructive since it is parasitic to the primary driver of economic growth: broadly distributed incomes (not to mention the negative impacts on a nation’s democratic institutions and shared natural resources that typically accompany such concentration of financial power).

The good news is that since markets are made, they can also be remade. We have gotten into this situation by changing the rules and we can get out of it the same way. But first we must gain a clear understanding of what makes modern economies work well so we implement the right kinds of changes.

Under capitalism, the economy grows with sales, not savings. This simply means that it is the general spending levels in the economy that matter most for investment and job creation, not the amount of cash that corporations and billionaires have accumulated.

Businesses hire only the number of people they think they need to produce the output they think they can sell. And businesses build up capacity only when they can forecast an increase in sales sufficient to cover debt service and obtain a return on their equity.

Sales drive capitalism, and sales come from incomes being spent, not profits saved. This is why we see corporations holding onto cash or buying back their own stock during recessions instead of investing in new growth.

We’ve been focused entirely on the wrong end of the problem. Tax cuts for the top do very little for the economy, and when allowed to continue for over a decade, often lead to extreme levels of wealth disparity and unhealthy shifts in power relations: dynamics we observe all too often today.

It is imperative that we restore incomes and jobs from the bottom up if we are to return to rising real wages for the majority of working families.

The responsibility for this lies both with policymakers and business leadership. Fiscal policy (how we tax and where we target spending) must play an important role in maintaining a robust economy, in addition to a more responsible corporate culture that takes a long term view of prosperity for all stakeholders.

For policymakers, it isn’t that federal tax cuts are never beneficial to the economy. Rather, it is that we are giving them to the wrong people. Rather than lowering taxes on hedge fund profits and real estate investments, we should be evaluating lifting the tax free threshold and cutting the GST from essential goods and services. Such changes would result in more spending in the economy, creating more demand for goods and services. More sales for businesses = more jobs.

Entrepreneurs rapidly respond to increased market demand for goods and services with new products and services. This is the kind of organic bottom-up, sales-led growth that sustainable and balanced economies require. Instead we create ever larger pools of managed funds chasing returns in assets.

Fiscal policy should also recognise that an increase in minimum wages and raising incomes for our senior citizens in retirement will spur more sales and healthy economic growth than a similar increase in take home pay for the wealthy. And as the issuer of the currency the federal government needs to take seriously its role in supporting domestic employment. In addition to tax policy and spending on infrastructure modernisation and other programs serving the common good, it could also effectively end unemployment by paying for transition employment for anyone between jobs, thereby also stabilising private sector employment levels.

Jobs don’t come from rich people. When we see the big picture, it becomes clear that capitalism runs on sales, not savings. We need growing incomes and spending across the entire population to create more jobs, not accumulation of cash hoards for a few.

We are asking that our politicians to stop pandering to millionaires, and focus on what will help our economy grow. Raising minimum wages, lowering taxes on wage earners, and ending tax favouritism for unearned income is a good place to start. There is so much more we can do to create a far more prosperous economy and enriched society.

This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!