Greenie economist Garnaut appears also to be a fan of Modern Monetary Theory. He says government should maximize employment and to heck with everything else. In particular we should stop worrying about inflation.
It is true that for the last 8 years the USA has allowed levels of monetary growth that would once have been regarded as inviting roaring inflation. It is still a puzzle as to why U.S. inflation has in fact remained quite modest. Modern Monetary theory simply says "That's the way it is and so what?"
So Garnaut is saying that Australian governments too could spend up big and not worry. It's a logical position if you accept MMT as a rule rather than as a one-off happening.
It's clear that there IS a limit to government spending. The roaring inflation in Venezuela, Zimbabwe and Argentina show that. And in such economies the people's savings are destroyed, which is deplorable for several reasons.
So would big Australian government spending end up with us like the USA or like Argentina? That is the issue and the answer appears to be that you can go so far and no farther. How far is too far in the Australian case remains to be seen. But, as a short-term policy, Garnaut's recommendations could be beneficial
With weeks to go before the JobSeeker rate is cut, one of Australia's most respected economists has suggested there are potentially hundreds of thousands of Australians on unemployment benefits who shouldn't be there.
Professor Ross Garnaut, a Professorial Research Fellow in Economics at the University of Melbourne, has condemned Australia's economic policymakers for the situation.
But his criticism refers to how they've been running the economy for years, not just for the last 12 months.
He's referring to the federal government and the Reserve Bank.
He says their decision to "allow" hundreds of thousands of Australians to languish in unemployment in recent years, to suppress wages and inflation, as part of the country's broader economic policy settings, has immiserated people and cost the economy hundreds of billions dollars in lost economic activity.
In his new book, Reset: Restoring Australia after the pandemic recession, Professor Garnaut says our policymakers should drop that policy and return Australia to having genuine full employment.
He says that would mean an unemployment rate of 3.5 per cent or lower — the lowest it's been since the early 1970s.
The unemployment rate is currently 6.4 per cent.
He says it's hard to know for sure, but that lower level of unemployment will probably be the point at which wages finally start to rise and inflationary pressures emerge. But we would have to test it. It could be much lower than that.
"Certainly, it is lower than the 'well below 6 per cent' that Treasurer Josh Frydenberg said would trigger efforts to reduce the budget deficit," Professor Garnaut has written.
The problem with Australia's economic policy architecture
It's a scathing assessment.
Between 1946 and 1975, when Australia pursued an official policy of full employment, the national unemployment rate averaged below 2 per cent.
Successive federal governments (both Labor and Coalition) deliberately recorded budget deficits to achieve that full employment.
But since the 1980s, Australia's policymakers have accepted higher levels of unemployment, which they say are "natural" for prevailing conditions.
They developed a new definition of full employment: full employment would mean the level of unemployment that keeps a lid on inflation (i.e. that stops wages and prices growing too quickly).
The ugly term for that level of "full employment" is the NAIRU, or non-accelerating inflation rate of unemployment.
When 'full employment' isn't
One of the Reserve Bank's targets is full employment, but back when that target was set it meant a very different thing to what does today.
Professor Garnaut says Australia's policymakers have repeatedly miscalculated the NAIRU in recent years, meaning they have often suspected the economy is getting close to full employment when it is far from that point.
For example, consider a situation in which the national unemployment rate was 5.5 per cent and falling, and the RBA suspected full employment (i.e. the NAIRU) was 5 per cent.
That means the RBA would expect inflation and wage pressures to start building soon, because the unemployment rate was apparently getting closer to "full employment," so it would prepare to start lifting interest rates.
However, what if, in this scenario, the economy was only going to be in genuine "full employment" when the unemployment rate was 3 per cent?
That means the RBA would start lifting interest rates prematurely, when the unemployment rate was 5 per cent (rather than 3 per cent), effectively killing the momentum in the labour market before everyone who wanted a job could find one.
Professor Garnaut says Australia's policymakers have to stop guessing where full employment could be.
"We can find out where it is by increasing demand for labour until wages in the labour market are rising at a rate that threatens to take inflation above the Reserve Bank range for an extended period," he says.
He says the difference between the actual level of unemployment and the lower level of genuine full employment represents people who are "unnecessarily unemployed."
"The number of unnecessarily unemployed people is actually larger than this, because more people would be encouraged to seek employment if unemployment rates were lower," he says.
He says the years since 2013 have been particularly bad.
"An average of several hundred thousand fewer people were employed [from 2013 to 2019] than would otherwise have been possible," he says.
"This is voluntary unemployment — voluntary for the Reserve Bank, because it is unemployment that the Reserve Bank chooses to allow.
"At current levels of economic activity, having several hundred thousand people unnecessarily unemployed holds annual gross domestic product [GDP] down about $50 billion below what it could be, and, all other things being equal, raises Australia's public deficits by nearly $20 billion each year."
Support for idea promoted by Modern Monetary Theory
Professor Garnaut says Australia should use as many resources as possible to get the unemployment rate down to 3.5 per cent by 2025, as a matter of national urgency.
He says the budget deficits needed to achieve full employment should be funded "directly or indirectly" by the Reserve Bank, "at least until full employment is in sight."
That puts him squarely on the side of people like former Prime Minister Paul Keating, and economists of the Modern Monetary Theory school, who say the RBA has the power to create money itself to finance the federal government's stimulus spending, so there's no reason why the federal government's deficit spending should be supported by an explosion in Commonwealth government debt.
Modern Monetary Theory explained
MMT attacks the obsession with government deficits and debt, and is gaining traction at a time when both are rising fast. Gareth Hutchens explains what MMT is, where it comes from and what its critics say.
As things currently stand, the Reserve Bank is waiting for Treasury to sell new Commonwealth government bonds (via the Office of Australian Financial Management) to private banks, pension funds, and insurance companies that comprise the so-called "secondary market", before buying those same bonds from those private entities at an agreed interest rate.
That traditional practice of "raising money" from the secondary market for government spending is what has led to the explosion of Commonwealth government debt over the last year.
Professor Garnaut says that's unnecessary.
"We're really arguing about angels dancing on a pinhead when we talk about a difference," Professor Garnaut told journalist Alan Kohler's Eureka Report this week.
"The only difference between the Government selling bonds into the market and then the Reserve Bank buying them is you give a margin to the small number of players in the bond market, to the banks that participate in that trade.
Can modern monetary theory knock out free market capitalism?
A white piggy bank sits in the centre of the image surrounded by rows and rows of pink piggy banks.
Modern monetary theory is taking on free market capitalism promising to end the "surplus fetish". But is it a brave new future or "voodoo economics"? "I'd say, let's take away their free lunch."
Phil Lowe, the RBA governor, has repeatedly dismissed suggestions that the RBA should be directly financing the Government's stimulus spending.
However, he's never said it's not possible. He's only said it's unnecessary.
"I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be," he said in July last year.
"The Australian Government is able to finance itself in the bond market, and it can do so on very favourable terms."