US economist Stephanie Kelton, a former adviser to Bernie Sanders, has just embarked on a tour of Australia. Kelton is promoting her vision of government funded jobs to deal with unemployment and underemployment in Australia: a government Job Guarantee. While the idea sounds nice, a government guarantee is nothing but a guaranteed failure.
The economic rationale for this proposal is the idea known as Modern Monetary Theory (MMT), which began gaining popularity in the early 90s, evolving from existing theories developed by economist Georg Friedrich Knapp in the early 20th century. The theory proposes that taxation does not fund government spending and is merely a policy tool to control inflation and unemployment. The same thinking applies to government spending being a policy tool. Further, MMT proposes that when a sovereign nation establishes its currency as fiat money and is the sole supplier, the government commands an unlimited ability to finance spending and to fulfill future payments to bondholders. Thus insolvency and sovereign bankruptcy are impossible as government can always pay by issuing more currency.
At this point it would be sound to question where the value of money would arise in such a system, and how inflation is affected when governments can issue currency to cover spending and liabilities.
According to MMT, when governments issue currency which is not backed by bonds, value is guaranteed by imposing taxation on the populace, payable only in that particular currency, ensuring value and acceptability.
History has shown, however, that this is simply not the case.. In Venezuela, as foreign direct investment from the US fell from $600bn to less than $0 and the price of oil, its major export, collapsed, the government issued more currency to pay its liabilities and fund its spending. According to MMT, the Bolivar should have held at least some of its value. In reality, as the value of the Bolivar was diluted, prices skyrocketed. Venezuela’s annual inflation rate is now 1,000,000% according to Forbes, a rate so high that the price of a cup of coffee doubles between weekly pay cheques. Private savings in Venezuela are now worthless and millions have been pushed into poverty, with black markets for basic necessities being established trading in United States Dollars.
Venezuela does not provide the only example of this economic folly. In 2000, Zimbabwe began printing money to finance involvement in foreign wars and fund increasingly corrupt government departments. After Zimbabwe’s principle export industries, such as tobacco production, collapsed under government mismanagement, foreign investment and trade decreased sharply. As a consequence of collapsing industries and sharp increases in the money supply, the value of the Zimbabwe Dollar declined significantly with 112.1% inflation in 2001, increasing to a peak of 79,600,000,000% by the end of 2008.
It is undeniable that government issued money cannot fund spending or liabilities in any significant manner or prevent sovereign insolvency. Modern governments issue currency everyday, but it is relative to the amount of taxation raised from the populace. To consider government created money as a source of infinite spending or protection from national economic catastrophe is nothing short of absurd.
The premise that taxation ensures value and acceptability is also shown to be far-fetched. The above examples show how government can destroy the value of its currency and that individuals will switch to an alternative stable currency to ensure value and carry out transactions. Thus value and acceptability can be bolstered by government, it can never be ensured.
Despite all this naysaying, Modern Monetary Theory is not without a foundation in reality. Its core notions that taxation and government spending are just means for discretionary adjustment to inflation and unemployment are not necessarily untrue. Money taxed from the people is sent to the Central Bank for destruction and money government spends is created by the Central Bank, another core tenant of MMT which is true. Much like the modern anti-vaccination movement, however, asserting that a founding aspect of your theory is true does not make your theory as a whole without fault. The assertion in the anti-vaccination camp that mercury is poisonous does not make vaccinations a global conspiracy to control the masses, nor does asserting that all government spending is created money mean that governments have near unlimited command to fund spending liabilities.
One wonders how educated economists like Stephanie Kelton can promote such dangerous economic thinking. Should the Australian government abandon its modern principles of responsible spending relative to taxation to embark on a massive spending project to employ hundreds of thousands who otherwise cannot find work, the consequences will far outweigh any benefit.
If unemployment was wiped out in such a short period as Kelton describes in her speeches, we also disregard already accepted ideas like the natural rate of unemployment, leading to further inflationary consequences.
For Australia to continue its trend of economic growth and increasing standards of living, we must reject calls for further government involvement in our lives. Rejecting a Job Guarantee is the only sensible response to Kelton, as the only thing it will guarantee is widespread poverty and misery.