MMTed is a project run by the Centre of Full Employment and Equity
Business Office:
G15V 162 Albert Street
East Melbourne 3002 Victoria
Australia
© MMTed 2024
Contact
Phone: +61-(0)419 422 410
E-Mail: Bill.Mitchell@newcastle.edu.au
Video Transcript: (use scroll bar as required)
And once you start to develop an understanding of MMT principles and start thinking about the challenges that society faces and the policies that we might develop to meet those challenges, the sort of questions you ask are fundamentally different.
Think back to a sailer when everybody believed that the world was flat. The sort of questions I would ask would be - how far can you sail out from the shore before you fall off the edge? And of course, once they understood that that was mythical, the questions then were quite different that they would ask.
And it's the same in modern times with these challenges that society faces.
Take the so-called ageing society problem. What's that about? Well, this is the idea that dependency ratios around the world, particularly in advanced countries, are rising. What does that mean? Well, the dependency ratio very simply, is the ratio of young people and retired people expressed as a percentage of the rest, the workers who are of working age. And the problem is expressed that as rising dependency ratios are witness, that means more people are going to have to be supported by pension systems, health systems, and less people will have to be supported by education and work.
And so the problem that the mainstream Economists then suggest is that the government won't be able to afford to provide health care and hip replacements for characters like me, that they'll run out of money and that the solution they propose is that they have to save up now and build up a little piggy bank of money so that they'll be able to afford the rising demands for health care and rising pension demands.
And they also say that, well, we need to make people work longer so there will be more people working for a longer period of time. And of course, that really disadvantages workers who've worked very hard manually for their lives because they can't work into their much older age relative to, say, a person like me who works in an office environment.
And the mainstream solution, having to save up money becomes an austerity solution that they cut spending now to save up for the future. But the spending cuts now, as you now appreciate, undermine the economy today and undermine confidence of business firms and undermine investment in technology.
And why does that matter?
Well, when you think about what is what's the problem of the ageing society, it just means that the generations that are going to be coming through need to be more productive in material terms than the previous generations because they're going to have to support more people in their material consumption of goods and services.
And so the last thing you want to be doing is running austerity programs that undermine education expenditure, that undermine business investment, because those things are the future of productivity.
If we've got more highly educated young people, if we're investing in research and development in our university systems, that's the future of productivity and that's the solution to the ageing problem.
And you understand that once you understand MMT. And so the questions you then ask of government who are running these stories about austerity and needing to save up, you asked different questions. Why are they doing that? Because that's not the solution. Now take another application. And here we talk about climate change and the need for a green transition.
And in the popular narrative, we understand it is going to have to be some fundamental investments from government in the economy, some fundamental shifts in technology use, and probably a larger government sector because the market won't deliver the sort of changes in the short run that are probably necessary.
And we get besotted by arguments. Well, how are we going to afford it? How are we going to pay for it? And that's because the framing has been that the government would run out of money if it starts spending big in the economy.
And so MMT has very little to say about climate change debate and the need for a green transition, but what it has to say is extremely important, and that is, as we've learnt, it diffuses the notion that the government is financially constrained and can't afford to pay for things and shifts our focus to understanding that the constraints on government spending are real resource constraints.
And so the questions government should be asking and we should be asking of our governments in terms of the green transition are - where are the real resources that you're going to have to shift from carbon to non-carbon?
What are the labour implications of that in terms of retraining and retooling?
What are the technological investments that are going to have to be made and where are you going to get the resources from?
And will the investments in those resources overheat the economy and need accompanying policies of this type that we've talked about during the course?
They're the sort of things that an MMT understanding allow us to think about when we're thinking about something like climate change and the green transition.
The last thing we want to be doing is reducing our speed of transition because we don't think we can afford it in financial terms because as we've understood, that's another myth.
End of Transcript
This is an excellent example of how the application of the mainstream macroeconomic logic actually makes a genuine issue harder to deal with.
A government must always be forward looking and accept that its fiscal position will reflect changing challenges in terms of providing adequate public services and infrastructure while always be seeking to ensure that aggregate spending is sufficient to maintain full employment.
But the idea that fiscal surpluses have to be generated to provide the savings to reduce the future fiscal pressures arising from an ageing population has no validity.
Government surpluses do not allow the government to store up funds and increase its future spending capacity. A currency-issuing government’s spending capacity is not dependent on whether they have been recording deficits or surpluses in the immediate past. They can always bring resources into productive use through spending.
The problem of an ageing society is not that the government will run out ‘money’. Rather, an ageing society will require the future generations to be more productive than their predecessors. The emphasis on forward planning in the face of an ageing population debate is sound. We do need to meet the real challenges that will be posed by these demographic shifts.
Rising dependency ratios do matter. But not in the way mainstream economists think.
The population is divisible into the working age (say between 15-64 years) and non-working age. Using that demarcation, several different dependency ratios can be:
Most of the advanced nations have rising aged ratios whereas many African countries, for example, have rising child ratios. The implications for the future are quite different. For example, the nations with high child ratios, will soon experience falling standard ratios as the children move into the workforce. They require first class primary education and childcare provision, while the former nations, require increased aged care and age-related health care.
All these measures count people in terms of so-called gainful employment and ignore major productive activity like housework and child-rearing. The latter omission understates the female contribution to economic growth.
A fourth concept – the effective dependency ratio – is the ratio of economically active workers to inactive persons, where activity is defined in relation to paid work. This measure broadens our concept of dependency recognising that not everyone of working age (15-64 or whatever) are actually producing. As well as the unemployed and underemployed, there are many people in this age group who are also ‘dependent’. For example, full-time students, house parents, sick or disabled, the hidden unemployed, and early retirees fit this description.
It is clearly inconsistent to be committed to reducing the dependency ratio yet adopt fiscal austerity policies that create mass unemployment and rising underemployment.
Mainstream economists claim a rising dependency ratio is worrying because they assert it will reduce the government’s tax base while increasing demand for government spending on pensions and health care. According to this view, an increasing dependency ratio will blow the deficit out and lead to escalating debt, which ultimately requires higher taxes and the need for drastic spending cuts to stop the government running out of money and becoming insolvent.
Apart from advocating extending retirement age, which is biased against lower-skilled workers who are physically unable to work hard into later life, and higher immigration rates, the major mainstream policy to deal with the rising dependency ratios focuses on fiscal austerity. The ageing society topic is just another ruse to make government smaller.
However, the actual problem posed by an ageing society is not the government will run out of money, but, rather, that these nations face a productivity crisis. With a smaller proportion of the population working in the future, the future workers will have to become more productive (make more with less) than the current generation.
But the type of policy strategy that is being driven by the mainstream fiscal myths will undermine future productivity. Why?
Productivity growth comes from research and development and innovation, which requires a strong public presence in research funding and higher education and training. One of the first casualties in an austerity program is educational funding. The exact opposite that is required. Most importantly, maximising employment and output in each period is a necessary condition for long-term growth and a vibrant environment for innovative technology investments.
Austerity creates unemployment, which is not spread evenly across the labour force. Typically, older workers become victims of the job losses and their experience and skills are then lost to the economy. Business investment weakens due to a lack of sales opportunities, which undermines future productivity growth.
Further encouraging increased casualisation and allowing underemployment to rise is not a sensible strategy for the future. The incentive to invest in one’s human capital is reduced if people expect to have part-time work opportunities increasingly made available to them.
All these issues are about political choices rather than government finances. The ability of government to provide necessary goods and services to the non-government sector, in particular, those goods that the private sector may under-provide is independent of government finance.
MMTed is a project run by the Centre of Full Employment and Equity
Business Office:
G15V 162 Albert Street
East Melbourne 3002 Victoria
Australia
© MMTed 2024
Contact
Phone: +61-(0)419 422 410
E-Mail: Bill.Mitchell@newcastle.edu.au