MMT Influence: Shifting Perspectives on Debt and Economic Management
It's encouraging to see that both former Treasurer Scott Morrison in 2017 and current Treasurer Jim Chalmers in 2022-2024 recognise the distinction between good and bad debt, challenging the long-standing myth that all debt is a sign of fiscal mismanagement.
For too long, the idea of debt as the ultimate evil has clouded public debate, and it's crucial to emphasise a more nuanced understanding of debt's role in economic management.
Debt, as both Morrison and Chalmers have noted, plays a vital role for households, corporations, and governments as a means of managing their finances. In the context of Modern Monetary Theory (MMT), governments that issue their own currency can fund public investments, such as infrastructure, education, or healthcare, by creating new money.
This process leads to the private sector holding government debt in the form of bonds or other financial instruments. By strategically investing in projects that yield long-term benefits for the economy and society, governments can create value and promote economic growth without the same constraints faced by households and corporations.
Treasurer Chalmers' recent remarks resonate with some key ideas from MMT, as presented by Stephanie Kelton in "The Deficit Myth." These ideas emphasise the importance of understanding the real limits of an economy and the need for targeted, productive government spending that can generate long-term benefits without exacerbating inflationary pressures.
Chalmers' concern about the lack of productive investment coming from the current deficit and debt reflects the need for better allocation of government spending to ensure it generates long-term benefits for the country. This relates to the concept of good and bad debt, as it highlights the need to evaluate the effectiveness of government spending and its impact on the economy's potential.
It's essential to recognise that expenditures cannot always be easily categorised as "good" or "bad" debt.
Instead, the focus should be on the effectiveness and long-term impact of government spending on the economy and society. Assessing government spending as a whole provides a more accurate picture of its role in economic management.
As John Quiggin pointed out, the distinction between current expenditure and investment isn't always clear-cut. By acknowledging the complexity of this distinction and reconsidering how we categorise expenditures like education, we can better align our fiscal policies with our long-term goals and societal needs. Conversely, we should also scrutinise capital investments to ensure they generate lasting benefits and avoid wasteful spending.
While Treasurer Chalmers' remarks on debt and the budget bottom line reflect a more traditional approach to fiscal policy, it's crucial to remember that such rules are not set in stone. As noted by economist Ross Gittins, the belief that government shortfalls must be covered by borrowing from the public is not an inherent necessity but rather a conventional policy choice.
This perspective aligns with Modern Monetary Theory, which challenges the conventional wisdom surrounding debt and highlights the fiscal flexibility available to governments with their own sovereign currency.
By focusing on the debt bogeyman, Chalmers risks perpetuating a limited understanding of debt's role in economic management, thus hindering productive discussions and decision-making in fiscal policy.
Overall, the acknowledgement of the complexity of debt by both Morrison and Chalmers marks an important shift in the public debate.
It's vital to continue moving away from simplistic notions of debt as an inherently negative force and embrace a more nuanced understanding of its role in economic management, as suggested by MMT. By doing so, we can make more informed decisions about how best to utilise government spending to serve the public interest.
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