The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability

 This is a snippet from new blog source Corrente that I found recently,  spreading MMT ideas.  It gives a well recorded account of a Fiscal Counter Summit with all of the MMT big hitters.   The second part includes Bill Mitchell which I excerpt here to give some Southern hemisphere balance  on Smart Taxes.

The Fiscal Summit Counter-Narrative: Part One

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability.

…Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

Bill Mitchell is one of the three thinkers most responsible for the development of Modern Monetary Theory (MMT) and its approach to Fiscal Sustainability. Bill’s a prolific writer and blogger whose career has been devoted to Macroeconomics and to public policy intended to achieve Full Employment and price Stability. He’s watched and lived through the growing dominance of neoliberal ideology and the developing economic inequality that belief in it has created, and he has fought it every step of the way. His presentation was a distillation of his views on fiscal sustainability fueled by his search for a new economic paradigm transcending neoliberalism. Here are his main points, supplemented by a few comments of my own.

— The last 25 years of neoliberal dominance in Australia and elsewhere was a period in which the major western governments abandoned the goal of full employment they had previously embraced in the post WWII period, in favor of the goal of “full employability.” As a result, unemployment rates have been trending upwards over the neoliberal period but also are very high now. This is how people are affected by neoliberalism, and it’s real.

— “Fiscal policy has saved the world from a Great Depression, yet, two years later… ” (now four), “… after the handouts have been gratefully received by the top end of town, after we’ve put some sort of floor into the downward spiral, we’ve now seen this mass hysteria, … We’ve completely lost track of what’s happened, and we’re basically setting ourselves up again for the next crash… .”

— All the talk now is about “financial ratios divorced from any context or what else is happening or what other goals you might have … .all applying the logic that related moralists to a monetary system that ended in 1971.”

— But this ratio fever isn’t just restricted to the hawks/austerians: “… the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. … You just impose these fiscal rules out of context and with no comprehension of what it means… . “

— “You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments… . “ Those analogies are flawed because: “The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that… .”

LetsGetItDone Comment: This is a key point which will come up again and again in these posts on the counter-narrative. Neither the austerian/deficit hawks nor, generally the deficit doves, make the distinction between Governments with non-convertible fiat currencies with freely floating exchange rates and no appreciable debts in foreign currencies (nations sovereign in their own currencies); and other nations that are either currency users, have pegged their currencies to those of other nations, or owe significant debts in foreign currencies. This distinction is of fundamental importance because all the instances of insolvency or hyperinflation we’ve seen have occurred in systems with non-fiat currencies, currencies pegged to the currencies of other nations, or appreciable quantities of external debt in currencies not their own.

The historical evidence suggests that nations sovereign in their own currencies cannot have solvency problems and are also more resistant to inflation than nations in other categories. To discuss fiscal sustainability without making this critical distinction between currency issuers and currency users ignores an issue that is central to fiscal sustainability and guarantees that good policy cannot result from such an analysis and related policy approaches. Austerity/deficit hawk analyses almost always ignore this distinction and blithely compare currency sovereign nations with others. That’s why their analyses often involve predictions that nearly always turn out to wrong, and that’s why austerity policies in currency sovereign nations like the US, Australia, Japan, Canada, and the UK only work to prolong recessions, unless the private sector blows huge debt bubbles to compensate for the failure of government to deficit spend to close output gaps caused by demand leakage, as they did during the 1990s. Back to Bill!

— “You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant.” … You won’t find a definition of fiscal sustainability in any invariant fiscal rule.”

— “So where should we start in trying to come up with a concept of fiscal sustainability? … ask yourself the question “Why do we bother to have a government in the first place? … The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually… . And we might call that the public purpose of government.”

— “So what are the dimensions of that? … the sustainable goal of the economy should be the zero waste of the people in the economy… . as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.”

— “And then from my point of view, that means, we – the state – should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.”

— “Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions … then the role of government advancing public purpose … is to ensure that its policy intervention is consistent with those private decisions such that you get full employment. … That seems to me to be a basic element of what we mean by fiscal sustainability.“

— “And so if it’s typical that the non-government sector will want to save, then there will be spending gaps … the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating.”

— There are bad and good deficits. The bad ones come from Government not maintaining aggregate demand through deficit spending and are produced by the automatic stabilizers. They leave a bad, depressed economy with high unemployment. Good deficits result from a government deficit spending strategy that produces high employment, high income growth, falling poverty rates, and smiling faces.

— “You can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing… . .” Government spending ”… constraints are voluntary… . And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught – a pure concept of it – can’t be caught up and tied in with any of these voluntary constraints.”

— “And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending … . The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government… . “

— “What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They’re largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose.”

LetsgetItDone’s Comment: Bill’s bottom line is that fiscal sustainability has nothing to do with deficit and debt numbers including debt-to GDP ratios, but everything to do with whether the Government spends to achieve the economic public purpose of “the zero waste of the people in the economy.” He defines a clear line from “public purpose” to “zero waste of the people in the economy” to Government spending to enable full employment at a living wage with price stability. But why is that “fiscal sustainability”? Well, to see why, consider this alternative definition:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

This one is more explicit in tying patterns of spending to maintaining the capability to spend to achieve public purposes. But it turns out that these notions are closely connected by considering what happens if Governments don’t spend to enable full employment with a living wage and price stability, but instead rely on an employment buffer stock to control inflation. I think what happens is the growth of economic inequality due to the growth of an increasing number of “wasted” people, followed by increasing political inequality in the long run.

What also happens is the degradation of skills of working people and along with it the decay of real wealth like housing stock, neighborhoods, educational systems, communities and other essential aspects of a civilized and free society. This, in turn, causes a decline in productive capacity over time, which in its turn, limits the capacity of the Government to freely spend in the short run without causing demand-pull inflation. So, austerity in its effects on productive capacity degrades fiscal sustainability, not through insolvency, but by creating additional inflation constraints on government so that it is restricted in its ability to spend to achieve for the public purpose.

Further, political inequality, in its turn, reinforces the economic inequality still further, and as the years go by, the relatively few increasingly wealthy institutions and people continually increase their control over the political process and use government spending for their own purposes rather than for the public purpose. So, it turns out that the failure to spend to achieve full employment, in the absence of aggressive policy to redistribute nominal wealth, undermines the Government’s capability to continue to spend for the public purpose, and is therefore fiscally irresponsible. I’ll have more to say about fiscal responsibility and fiscal irresponsibility later on in this series.

Bill Mitchell’s presentation was followed by a panel discussion and then a Q and A session. Both were incredibly rich and added great depth to Bill’s already excellent presentation. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the Bill’s presentation. Bill’s written prolifically of fiscal sustainability. More than a hundred of his posts deal with it in some way. Here’s the link to the last page of his links. For the rest just follow the links at the bottom of each page. I’ve written a bit about fiscal sustainability too: here, here, here, here, here, here, and


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