Governments, Budgets and Employment

Governments, Budgets and Employment

Adapted by Graham Paterson from a Post by Bill Mitchell on Monday, August 19, 2013 ref


The conservatives imply that the unemployed are abusing the income support system and they need to be weaned by stricter screening tests. Thus the unemployment victims become the miscreants responsible for their own situation. The unemployed become the “Others”; who are obviously different to “us”, the employed and those of “us” who take responsibility for their own state. The conservatives try to exclude employment as a responsibility of the government, even though it is through the actions of the government that the economic conditions generate unemployment.  Unemployment is really only a “problem” perceived by the unemployed. Job shedding represents the major cost cutting option for the corporate world, and the government, in order to balance the books and improve the bottom line. In reality, it is a very short term measure in respect to a consumer economy, such as our society.

When the politicians try to avoid responsibility for their decisions, they deliberately distort the position. They claim that unemployment is a result of an informed choice by each of the unemployed. This claim implies that people prefer to give up employment for the benefit of living off the dole and bludging off the taxpayer!
That is not a choice “we”, the still employed, would take, but if “we” accept the Government’s propaganda, that the unemployed “bludgers” do make such a rational and conscious decision, then “we” feel we can justify our indignation.

Of course, it’s only the “bleeding hearts” that are prepared to argue the case on behalf of the unemployed. Because “we” aren’t in that class, it absolves “us” of having to actually look at the facts.

High unemployment must cause a major drop in the national income. That immediately impacts on the consumption capacity of the nation. When the consumption capacity falls, lower productivity will always follow. This then becomes a self fulfilling cycle leading to more unemployment as productivity is reduced. Inevitably, a major recession, or a depression, must result. Under these conditions, the private sector has absolutely no motivation to risk capital in trying to restart the economy. This historically proven cycle should be sufficient motivation for political action by the government. As history has also shown, the only way to get out of this cycle is for the Government to take the lead. They must step in to provide the capital which the private sector is unwilling to risk.

Government Budgets

Thus, we come to the question of Government budgeting and budget deficits. Before we can rationally discuss this subject, certain facts have to be recognised. The first, and most important, is that while Australia remains a legal colony/dominion of Britain, it operates on an independent monetary sovereign status with its own fiat currency. The Australian dollar has no legal, constitutional, or other ties with any foreign currency, or any physical commodity, such as gold or silver. It can, of course, be exchanged for any of the above at market determined exchange rates, but such exchanges are purely on a voluntary basis, or under voluntarily agreed contracts.

The second fact that must be recognised is that a Government budget is completely different to a household or corporate budget, in the private sector. It is completely irresponsible to compare the microeconomic budget of a household/corporation with the macroeconomic budget of a government.

The reason for this is explained as follows - Private and household spending can only occur through earning an income, using savings, and/or borrowing, which means they must finance their spending prior to the fact. Obviously, the private sector has budget limits and cannot sustain increasing debt in the long term. Government spending is exactly the opposite because, a Government that issues the currency, cannot go bankrupt, or be held in default. It can simply spend without the necessity of seeking funds in advance. That’s why Government finance in the macro economy cannot be compared to household finance in the micro economy.

This leads us to analysing Government budgets. A balanced budget is achieved when the government income is equal to the Government expenditure. In other words, the Government taxes the private sector with one hand and gives it back with the other hand. If the Government strives for a surplus it means it will bleed the savings from the private sector and reduce economic activity. If the Government opts to run up a budget deficit, it means they are deliberately increasing the savings capacity of the private sector, and therefore, theoretically, stimulating the economy.

HOWEVER, the continuing use of the government budget process by a monetary sovereign nation with its own fiat currency is a monumental confidence trick played on a gullible public. The Government has gotten away with this trick, because most people have been brainwashed into equating the government budget with an ordinary household budget. As explained above, this cannot apply in the case of a monetary sovereign nation. In truth, there is no need for a monetary sovereign nation to impose any taxes at all, unless it chooses to use taxes to control an overheated economy.

This brings us to the understanding of the role of a monetary sovereign government in today’s world of finance and economic activity. As the monopoly issuer of the nation’s currency, the Government is ultimately responsible for the issue of every single dollar in circulation. It gets those dollars into the economy in two ways. The first, and most obvious way, is by spending. It does this by buying goods and services from the private sector, by employing people in the public services, who in turn spend their earnings in the private sector. It also spends by providing various welfare payments as part of the accepted social responsibilities associated with the public purpose for having a government in the first place.

The second, and actually far more prolific method of circulating currency, is by allowing the private banking sector to create “money” out of thin air. This is done in accordance with the fractional reserve banking system, as approved and endorsed by the Government. Bear in mind that 93% of all “money” in the economy is really just an accounting entry in a computer spreadsheet, and only about 3% is in actual coins and notes.

Hence, when we look at the Government budget in an honest and realistic way, it becomes clear that every dollar a government spends is ultimately, transferred to the private sector. In the real world, deficit public spending serves to increase financial savings in the private sector. Unfortunately, most politicians, the media, and many economists, simply do not understand this!  Any government deficit spending, always EQUALS, exactly, the total net increase in the financial assets, or ‘monetary savings’, in the private sector, which includes, businesses, households, residents and non residents, assuming that is, that the government has first gained an income from taxation.

The corollary to this is that any taxes imposed by the Government, represents a direct reduction in the financial “savings” of the private sector. Simply put, under the fraudulent government budgeting process, any deficits must exactly, to the cent, ADD to the nation’s savings. This is an accounting fact beyond dispute; it is not theory or philosophy; it is basic national income accounting. For example, if the government deficit last year was $1 or $1billion, it means that the net increase in savings of financial assets for everyone else combined, was exactly, to the cent, that same amount. Although net savings, as an identified accounting entity, are often defined as a combination of cash, various securities and reserve bank deposits, politicians and government deliberately misrepresent this.

The big anomaly for a monetary sovereign nation is to talk about deficits in the first instance. It is from the refusal of politicians to acknowledge the true nature of a nation’s monetary sovereign status that the concept of a budget deficit arises. There is absolutely no need for any monetary sovereign nation to borrow money from the private sector, let alone pay interest as well, in order to fund any government spending at all. Of course, this thinking requires a paradigm shift in respect to the generations of indoctrination related to the now obsolete gold standard system that has controlled finances in the past. Obviously, this is beyond the mental capacity of most of today’s politicians, and a great many in the economic and academic fields.

Government spending/deficits do ADD to savings as shown in the following;

1. When the government sells bonds to the private sector, that sector can purchase the securities if they believe it is better to hold a bond rather than leave money in a bank account.

2. The buyers now hold these securities as savings.

3. The government receives money, which it can then proceed to spend.

4. That spending flows directly to various accounts in the private sector.

5. Thus, the private sector increases its accounts by the amount of government spending plus, it still holds the script for the bonds.

          As shown above, Government spending directly adds to the savings of the non-government sector. Conversely, a budget surplus directly subtracts exactly that much from the savings of the private sector. That’s why the politicians, the media, and many economists, all have it BACKWARDS!  Every time a government runs a budget surplus, it drains the savings from the private sector. That inevitably leads to a period of recession. These periods of recession can only end when the government runs a deficit high enough to return the lost income and savings to the private sector. Thus, the Government is able to restore the demand needed to restart the economy and create employment.

All this, of course, assumes the Government of a monetary sovereign nation will continue to use the con trick of deceiving the public about the need for a budget, and its related implication that taxation is an essential part of running the government.

The Role of Government

Having examined the role of budgets in the micro and macro economies, it is now time to examine the role of the Government. I think there are four axioms that need to be accepted – the first is that governments are created to serve a public purpose. Without going into details of what constitutes “a public purpose”, I believe we can say that governments are there for the benefit of the society, and society is not there for the benefit of the Government.

The other axiom is that Governments are not created to make a profit at the expense of their citizens. Any government that budgets for a surplus is obviously profiteering, especially so in the case of a government operating on a monetary sovereign basis. Such a Government can always fund any obligations to which it chooses to commit itself. It can never go bankrupt, and can never default, unless it voluntarily chooses to do so for some totally irresponsible and vindictive reason.

The third axiom is that the rational citizens of a society consider they have certain inalienable rights to their freedom and liberty, which are protected by a constitutionally controlled government operating within a system of laws.

The fourth axiom is that our society operates a mixed economy with the government having certain identified responsibilities and obligations, but coexisting with a private sector, which is principally responsible for manufacturing, production, resource development, distribution, marketing and selling. Individual enterprise and entrepreneurialship are encouraged, but monopolies are prohibited, and the myth of “free enterprise” exists only to the limits allowed by social standards, as proclaimed through government regulation.

Thus, if a government, especially a monetary sovereign one, operates on the basis of these axioms it is in a position to foster a healthy, competitive economy and a vibrant, productive private sector, capable of providing the level of employment to sustain the national and international consumption capacity, in keeping with the nation’s resources and demand.

In essence, a nation’s economic activity is conditioned by the amount of “money” available. Too much money leads to inflation, while too little leads to stagnation and recessions. The trick is to relate the money supply to the production and consumption demands of a growing economy. As long as that supply can equate to the goods and services available for consumption, then inflation does not become a problem. The weak link in that chain is the consumption demand. It is obvious; there is absolutely no point in producing anything if it is not going to be consumed. Such production, whether it is in goods or services, is a complete waste of energy, resources, time and money if it isn’t consumed. Thus, it should become relatively clear that the major concern for a society is finding the best and most efficient means, of distributing purchasing power to the general population.


Employment as the Primary Means of Distributing Purchasing Power

Historically, employment has been used as the practical solution to this problem. However, over the last century, as the industrial revolution took hold, the remuneration from employment alone was no longer sufficient to keep pace with the quantity of goods produced. The private banking sector leapt into the breach the filled the gap with an inexhaustible supply of interest bearing credit. With the connivance of the government, they were able to create this credit, virtually, out of thin air. This free flow of credit was able to ensnare whole populations into a lifetime of debt.  

Thus, the modern consumer society, and all the vast improvements in every aspect of the standards of living, has been developed on this foundation of ever increasing debt. Like so many other aspects of life, debt is a double sided coin; if properly managed, it comes with its blessings, but if wantonly used, it can be an unforgiving curse.

But the point is, that despite the fact the last 200 hundred years has been progressively aimed at producing more with less human effort, in other words, putting people out of work, employment is still perceived as the most effective means of distributing purchasing power to the general population. As long as this approach remains in vogue, it is incumbent on the part of the Government to foster the best policies to promote employment for everyone willing to work.

To do otherwise invites a host of social problems, starting with the loss of income, the increased costs of damaged physical and mental health; family breakdown; increased alcohol and substance abuse; increase crime rates; loss of skills, and various other side effects.
It is ridiculous for the Government to claim that society must tolerate the pain and suffering associated with high unemployment, because it leads to a “stronger” economy, when that “economy” is only measured by the bottom line of the financial and banking sectors.
Any government that considers full employment is not a legitimate responsibility has forsaken their obligations to their society. How can a policy that promotes suffering and hardship from unemployment be considered a good and moral policy?