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.
Dr Hail holds a BSc and an MSc from the London School of Economics, in addition to a PhD from Flinders University.
How do you spend your days?
I spend my weekdays teaching financial economics at the University of Adelaide, and my weekends mostly in the Adelaide Hills.
Why is economics important to you?
Economics is important because in the end economists, for good or ill, rule the world. At the moment, it is largely for ill, because the economics profession has become increasingly dominated by the ideas of economists who misunderstand and misrepresent how the economy works, and even what governs human and social well-being. To make genuine progress towards building sustainable and equitable societies, we have to take economics back these people. This is vitally important. As Keynes' says, at the very end of his 'General Theory', "the ideas of economists and philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist". And as Hyman Minsky said, in 1986 in his great work, 'Stabilising an Unstable Economy', "The game of policy making is rigged; the theory used determines the questions that are asked and the options that are presented. The prince is constrained by the theory of his intellectuals." The defunct economists are in control of the options presented to policy-makers at the moment, and there are a series of questions that are not being asked and options that are not being presented to policy makers, because they are listening to defunct economists, and are not even aware that there is another better way of thinking about the economy.
What drove you to focus on economics. Was there a particular moment you can remember that led you to this field?
As an adolescent, I wanted to understand the reasons for the rise of Thatcherism, and the causes and likely consequences of the changes going on around me in the UK. I think the election of the Thatcher Government in 1979 was the single biggest motivating factor for me to study economics.
What drives you professionally?
I enjoy my job. I don’t need anything to drive me, beyond that. I am a teaching specialist, and my job is to share an understanding of realistic macroeconomics and finance with as many students as possible.
In your opinion what are the three biggest problems facing the developed and developing world?
(1)Climate change (obviously)
(2) The fact that most of the economics profession, almost all politicians, almost all journalists, and almost the whole of the engaged public completely misunderstand macroeconomics, leading to unnecessary underemployment and relative poverty, excessive private debt and frequent financial crises.
(3) The prospect of further wars and terrorism, encouraged in part by the consequences of (2) and increasingly also by the consequences of (1)
If you hadn’t become an economist, what would you have done?
Been a maths teacher.
What led us to this moment in history?
The persistent and successful promotion and pursuit by the Right of a particular way of organising the economy and society, starting in the 1950s, but with sustained success only since about 1980. The craven submission and surrender of the establishment Left, which has more or less en masse accepted the disastrously misleading frame used by the Right for generating and evaluating policy proposals. The tame co-operation of journalists and other commentators in what has now been a long period in which the public have been gradually brainwashed into thinking there is no alternative to what has become known as neoliberalism.
What are the lessons we failed to learn during and since the 2008 crisis?
Fiscal policy works. Governments that issue their own currencies can’t become insolvent in those currencies. Monetary policy doesn’t work, Economies relying on private debt and bubbles in property and/or share prices to grow demand and pursue full employment will eventually face a severe recession. The approach used to manage economies since the early 1980s eventually created a very fragile financial system, and won’t work any more. There will be no return to the pre-2008 ‘normal’ times.
Can you list some ‘Baby Steps’ out of the current economic mess?
Stop talking about a ‘return to surplus’, and shift your concern away from government debt (which isn’t really debt in the conventional sense at all) and towards household debt. Start regulating banks and financial markets properly. Introduce a job guarantee, along the lines suggested by people like Bill Mitchell, at the University of Newcastle in NSW, and Pavlina Tcherneva, at the Levy Institute in New York.
If you were a global President what would your first three pieces of policy be?
To dissolve the world government, as it won’t work. That is the last thing we need. Then I would not be global President any longer, so there would be no need for two further pieces of policy.
Tell us something you have been wrong about?
Spoiled for choice. I used to be, until 10-15 years ago, a largely uncritical teacher of neoclassical (neoliberal) economics. I had started off as an idealist, but (like so many students down the decades) was brainwashed by the single school of thought presented to me, while at university. It took years for me to realise there is more than one school of thought regarding the way capitalist economies work, and that the modern orthodox neoclassical way of looking at the world has rotten foundations and is in many ways disastrously misleading. I try to be compassionate to those still thinking within a neoclassical frame, because for a long while I was one of them, and I know how very hard it is to escape that frame. In some words of Keynes, written in December 1935, ‘the difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.’
You are stuck in a ski lift for twenty four hours - you can have one person (living or dead) with you who will it be?
My late mother. Sorry – not interesting, but true. If forced to pick someone else, it would be John Maynard Keynes. Predictable perhaps, but it would. (1) Mum (2) JMK. Perhaps I could have them both there. We’d have a great time of it.
Name the book that changed you….
On Being a Christian, by Hans Kung.
This is the book which finally convinced me I was (and am) an atheist.
What would you do differently if you were to start all over again?
Move to Adelaide sooner. I left London in the year 2000. Wish I’d come here in about 1990.
Give our readers, members and subscribers a piece of advice that has served you well… Anything you would like to plug? Now is your chance.
The best piece of advice I have ever received is to have limited expectations about changing the world for the better, but to keep trying anyway. I have never voted for the winning side in a general election in the UK or Australia. It would be easy to be discouraged. But it is important to me to retain a sense of purpose, and even if making genuine progress is a very long game, to at least do my best to be helpful, and to not be remembered as a flat-earther (which is how many of today’s most prominent orthodox economists will be remembered in the decades to come).
I encourage everyone to take an interest in modern monetary theory. An easy way of doing this is to watch the many presentations by and interviews given by Bill Mitchell, Stephanie Kelton, Warren Mosler and Randall Wray.