There will be no true economic recovery – or growth – until world leaders stop confusing government finances with that of a household budget, writes economist, Dr Steven Hail.
Australia’s Prime Minister, Malcolm Turnbull has promised a ‘return to surplus’. So has Theresa May. Though America’s President Donald Trump has no such concerns one way or the other, President Obama repeatedly characterised a budget surplus as something to aspire to. They are completely wrong to do so.
A surplus means a government collects more in taxes more than it spends – taking more from us in tax than it gives us in its spending, and weakening our bank balances. The aspiration for surplus is the reason so few Australians, Americans or Brits have had a real pay-rise in 15 years. It is the reason that public services have been cut, inequality has taken off and private debt has increased. It is the justification for austerity, in all its forms.
They are wrong to think a budget surplus is necessary. They are wrong to think a surplus is consistent with sustainable economic growth. They are wrong in nearly everything they ever say about government finances and how these are linked to current and future prosperity.
Wrong because they have confused the finances of a government that issues its own currency with those of a household, business, company or state government.
The Keynesian revolution was approved of for a generation by virtually all governments, including those of the USA, the UK and Australia, and virtually everyone, between 1945 and 1970. It was understood that budget deficits could supply sufficient spending power so that people who wanted full time jobs would be able to find them, people who needed income support could be given it, and that governments need not and normally should not balance their budgets.
They are wrong to think a budget surplus is necessary. They are wrong to think a surplus is consistent with sustainable economic growth.
But by the 1970s, deficits were under threat. Economists, like Friedman and Hayek, politicians like Reagan and Thatcher, and those interest groups who supported the restoration of a higher level of inequality and insecurity had been searching for years for ways staging a counter-revolution, ever since the formation of the Mont Pelerin Society in 1947. Keynes’ colleague, Michal Kalecki, had predicted such a fight-back as early as 1943, in an article called The Political Economy of Full Employment.
Friedman and his fellow counter-revolutionists needed to convince people that full employment could not be afforded, or would lead to financial ruin, and to persuade them to accept a return to inequality and small government.
Their golden opportunity came in 1973/4, following a massive and unexpected increase in the price of oil. It was a supply side problem, driven by a cartel of oil producers, and a temporary one. It did not require the abandonment of Keynesian economic principles. It did not require the end of full employment. It did not require a return to the inequality and small government of a previous age. It was not caused by too much government spending. And yet by 1976, in the UK, Prime Minister James Callaghan in so many words accepted that it did, in a speech at the Labour Party Conference.
Just as economist Milton Friedman sold the story that the inflation of 1975 was caused by the failure of Keynesian ideas and too much government spending, his predecessors have somehow convinced voters and governments alike that the Global Financial Crisis (GFC) of 2008 was due to too much government spending and government debt, when it clearly was not.
That politicians like Margaret Thatcher and Ronald Reagan wanted to abandon the Keynesian consensus is not surprising. It is only natural that the Right took the chance to return to economic ideas consistent with smaller government, tax cuts for the rich, and the restoration of inequality and privilege.
The tragedy is, it wasn’t only the Right which opted to turn its back on the macroeconomic periodic table Keynes had offered the world, and return to alchemy. The mainstream Left followed suit, The Democratic, Labour and Labor Parties meekly surrendered the very economic concepts that produced the wealth which endowed the middle class and drove prosperity during the 50s, 60s, 70s and 80s.
A resurgent orthodoxy came to dominate the field. Conservativism became full-strength neoliberalism; Labour parties were neoliberal-lite, if that.
We are still living with those consequences today: inequality, financial fragility and austerity, Treasurers, Prime Ministers – even State Premiers and Mayors – who are wrong on nearly everything to do with macroeconomics, and who no longer understand the difference between a currency-issuing government and currency-using households.
Malcolm Turnbull, Theresa May and others think a fiscal surplus is something to which they should aspire. They are completely wrong.
They claim a fiscal surplus will guarantee financial stability. It will do the precise opposite. It always does – at home or abroad. The Clinton government surplus helped to drive the growing private debt which created a very fragile US financial system in the 2000s. Germany’s now record budget surplus and trade surplus are right now making it harder for southern European countries to recover stability and growth.
They need to re-learn their Keynesian periodic table. The sooner, the better.
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