The State of the World's Government Debt
Fiscal sustainability is about fulfilling the government’s responsibility to maintain an inclusive society in which everyone who wants to work can.
do is to reverse this reliance on unemployment – the government can spend to pick up this slack in the economy and put it to productive use.
Within MMT this is known as the Job Guarantee, which would offer a socially-inclusive, minimum wage job to anyone who wants work but cannot find it. These jobs would not compete with the private market and would therefore avoid any inflationary pressure.
Job Guarantee workers would enjoy stable incomes and other benefits (holiday and sick pay, superannuation contributions), and their increased spending would boost confidence throughout the economy. This confidence would translate to greater demand for work in the nongovernment sector, who are then able to hire employable workers out of the
Job Guarantee pool.
In the government's own words, the best welfare is a job – a Job Guarantee enables workers to stay employable by keeping them in the workforce and maintaining their skills until there is demand from the private sector.
The Centre of Full Employment and Equity4 at the University of Newcastle estimated that for an investment of $51 billion over 12 months, the unemployment rate could be cut by 6 percentage points (1.2 million jobs).
Two hundred thousand jobs would be created in the private sector because the Job Guarantee workers would have higher incomes than before. This would stimulate private investment confidence and the Job Guarantee pool would shrink quickly as private employers sought workers.
Yet what about the government debt generated by such a scheme? After 1971, government no longer needed to match its deficits with debt issuance. In reality, public borrowing is better thought of as corporate welfare, providing risk-free assets (bonds) where investors can safely park funds in uncertain times. We saw that clearly in 2001, when the Australian government agreed to continue issuing debt at the behest of the large investment banks, despite the government running surpluses.
But do bond sales reduce the inflation risk of public spending? Mainstream economists claim that if central banks just credit bank accounts on behalf of governments (erroneously called ‘money printing') without private bond issuance, then inflation will result.
The Japanese experience shows these claims to be ridiculous.
History supports the MMT depiction. Over the last three decades, central banks have been purchasing large quantities of government bonds (quantitative easing) as a strategy to increase inflation. This was based on the mainstream predictions that such behaviour would be inflationary.
The strategy failed because the underlying theory was flawed. While these bond-buying programs have effectively been funding fiscal deficits, there were no inflationary consequences because overall spending in the economy remained within the real resource constraints. Only MMT economists articulated the causation correctly.
MMT stresses that the size of the deficit per se should never be the focus. Mainstream economists obsess over financial ratios (public debt to GDP, etc.). But a responsible government will allow deficits to be whatever is required to maintain overall spending at the level consistent with full employment. No more, no less. Fiscal sustainability is about fulfilling the government's responsibility to maintain an inclusive society in which everyone who wants to work can.
The way forward
The current circumstances will require elevated fiscal deficits for many years to come. A return to the mainstream surplus obsession is the last thing the government should consider. The only way that Australia will get out of this crisis and drive growth fast enough to absorb the huge pool of unemployed is through sustained fiscal deficits. As explained, there is no inflation threat if government spending does not exceed the resource slack in the economy.
Further fiscal stimulus should invest in green infrastructure projects, address the massive shortage of social housing, invest in apprenticeship schemes, properly fund research and innovation, and, most importantly, target job creation.
Apart from expanding the career public service and improving the scope and quality of public services, the government should introduce the Job Guarantee – the economic and social benefits of the scheme will not only protect again the worst economic and social outcomes resulting from the pandemic, it would place the country in position for the strongest possible recovery.
Only an ideologically blinkered government would choose massive losses and sustained unemployment over the transformative opportunity of MMT.