Divisions over public debt

William Mitchell

The recent Commonwealth Treasury Debt Management Review highlights the damaging divide among 'progressive economists' in Australia when it comes to macroeconomic analysis. This fracture is greater than the things that bind us and helps the neo-liberal orthodoxy to defend their appalling economic record.

First, let us establish common ground. Progressives should agree on the need to present a strong alternative economic stance in the face of neo-liberal dominance. This is especially crucial given that both major political parties are now advocating flawed economic positions and are virtually indistinguishable. There is no effective federal opposition to challenge the dominant paradigm. The Australian Labor Party (ALP) now sees fiscal policy as a contest over which party can generate the biggest fiscal surplus. It never considers that sensible macroeconomic management is, rather, measured by the role that deficit spending has in maintaining full employment. When federal spending increases, prior to the election, drove the budget into deficit for the first time in four years, the ALP attacked it as fiscal excess. But the deficit actually insulated the economy to some extent from the subdued world economic climate. It was a wonderful opportunity for the ALP to recast the fiscal landscape and it failed dismally.

Both major parties have abandoned the goal of full employment and now pursue the diminished goal of full employability. The government no longer ensures that there are enough jobs for all those willing to work but focuses, instead, on getting individuals 'work ready', should there be jobs available. The ALP follows lock-step. By accepting the neo-liberal definition of full employment as consistent with a high level of 'natural rate' of unemployment, Australian policy-makers have jettisoned essential and sustaining conditions for a social democracy.

One also hopes that progressives can agree on what causes the mass unemployment that has endured since 1975. When the non-government sector spends less than its income, output will go unsold leading to declining production and employment, unless there is an appropriate increase in net government spending. Wage cuts (money or real) per se cannot solve the problem, unless they somehow eliminate the desire of the private sector to be a net saver and thereby increase spending. The government is the only entity that can simultaneously accommodate any net desire to save (by providing the non-government sector with net financial assets) and eliminate unemployment. That is the role of deficit spending.

The Australian economy has maintained growth in the 1990s with federal surpluses only because the non-government sector has increasing deficits. This growth strategy is unsustainable because the deteriorating balance sheets of the private sector will finally unwind leading to a slow-down in real activity accentuated by the fiscal drag.

At this point the wheels fall off ...

Advocating persistent deficits is not a popular position in 2003. Yet progressive economists have to advocate deficits given our external sector position if they are to also argue for full employment (unemployment below 2 per cent). But many progressives make it difficult for themselves because they support the neo-liberal myth that deficits have to be 'financed'.