Welfare Law and MMT
Could Modern Monetary Theory reframe welfare and welfare law in Australia?
Germane to the discourse of welfare law is one of the chapters in Stephanie Kelton’s best-selling book The Deficit Myth (2020). The insights of MMT (modern monetary theory) are also related to welfare law in a direct and obvious way. That’s because welfare payments constitute around 35% of the Australian government’s spending each year, and because MMT is in large part focused on questions related to government spending — to monetary policy. Kelton has noted that when the focus of a government is not on ‘balancing the budget’ but instead on ‘balancing the economy’ — or, on achieving sectoral balance in the economy — then the question whether and the extent to which to issue currency to those entitled to government benefits under a scheme becomes a lot easier.
That question is not simply, or even, about identifying the tax receipts or tax revenue required to recoup the so-called government spending allocated to welfare. (The word ‘spending’ here could easily be substituted with ‘government investment in the real and potential labour resources of the economy’). Rather, it is about whether the sectoral imbalances are such that, to achieve economic stability or to lower unemployment, the government is required or well-placed to allocate more currency to those entitled persons. The empirical sectoral imbalances should be the target of one’s examination in this policy decision-making and evaluation process. Balancing the budget should not be the guiding principle or goal. Balancing the budget refers only to a situation in which the government, in effect, governs for free. It receives tax revenue in an amount that is equal to the amount of currency it issues to its legislated programs.
The problem here is what is left out. If those legislated programs result in a better economy (eg, higher employment, stronger economic growth, higher GDP, or lower foreign debt), then the government does not subtract or offset those quantifiable outcomes from the equation. Instead, the government will still use the value of the original budget hypothecations (the fiscal spending) as a yardstick for measuring economic responsibility.
In the real world, if a successful government program generated higher rates of full-time (FT) employment, so that that the unemployment rate in Australia dropped to 2%, then one would ordinarily say that the program had been a terrific success and that the economic benefits conferred by that program can now be taken into account when it comes to evaluating the costs of the program. One would look to calculate the increased GDP as against the program’s cost and then attempt to subtract that increased GDP from the cost, to arrive at a real-world measurement of the economic cost (and the success) of that program. However, this is not what occurs.
What occurs instead is this. The government looks at the cost of that program in terms only of the currency issued in respect of that program and seeks to identify whether or not tax revenues have been able to recoup the cost of that program. Debits and credits. If the government has recouped those costs — and a ‘line-item surplus’ is generated — then the program is said to have been a success. If those costs are said to have not been recouped — such that a line-item deficit is created — then the program is said to have been a failure.
The reason why this is a flawed piece of logic is because the tax environment (who pays tax, how much they pay, when they pay it, and so on), is not recalibrated in respect of these individual programs. Thus, a government program may mean that many thousands more people in Australia move from part-time employment to FT employment. However, because the incomes received by these people are only marginally higher than before, the additional tax receipts from this cohort do not make a significant difference to the overall tax receipts of government. In this circumstance, the government tax revenues may have increased only negligibly. Thus, although there has been an extremely positive improvement to the economy as a whole, insofar as underemployment has been effectively eradicated, the tax revenues resulting from this change are not significant enough to say that the program has been a success.
For the purposes of the annual budget, welfare may remain a debit on the account ledger. The problem with this is that the clearly desirable outcome of reducing underemployment is deprioritised; that goal now sits beneath the more important goal of increasing tax revenues to ‘pay for’ the annual costs of welfare. If an economy is evaluated in this way only, then the pernicious problem of underemployment will never be solved — unless, perhaps, we see tax policy also change in a way that specifically suits the program’s outcomes. (For example, firms that employed underemployed people might be given a tax subsidy.)
But even before we think about tax policy, we should be thinking about ‘what success looks like’ for an economy. The MMT position is that success looks like this:
high or full employment
maintained and sustainable infrastructure: eg, public transport, health care, education
low inflation
high productivity and economic growth
a few more things
As Kelton, an MMT scholar, also notes, if we focus on the above yardsticks as the measure of a good economy, and deprioritise the conventional idea that balancing the budget is the best proxy for ‘what success looks like’, then we can actually achieve the above things. While we remain focused on balancing the budget, however, we ironically cannot seem to achieve the things identified above, much less achieve a balanced economy.
Achieving the above yardsticks requires the different sectors of the economy to be balanced. Thus, perhaps the private sector, relative to GDP, is overcapitalised; in other words, the government has hypothecated large amounts of funding or capital to various programs, or to tax subsidies, to the benefit private firms. One economic principle that is often used to justify the allocation of funding — or the issuance of capital — by governments to private firms is that those private firms may or will pass on those benefits to the economy more generally. Perhaps they will do this by employing more people, or by increasing wages, and so on. To state the obvious, this idea forms part of the supply-side economic policy, and specifically forms a part of trickle-down economics, where taxes remain low, regulatory controls are reduced (either through repeal of legislation or through soft law or ‘policy’ positions adopted by regulators and guidelines).
The idea behind supply-side economic thinking is that supply comes before demand in generating economic growth. Thus, if you increase supply (by producing more goods) then the demand will follow. It logically follows from this premise that investing money in ‘suppliers’ of goods and services — ie, corporations and firms — will increase demand for those goods and services, and therefore, an economy’s speed and productivity (GDP) can be increased if its supply system can be boosted.
There is so much more to analyse in relation to supply-side economics and its underlying assumption that the benefits of assumed growth in the private sector — and the increased supply that follows therefrom — will be passed on to those who are unemployed or otherwise not beneficiaries of the general economy. Alas, those details cannot be covered here.
The purpose of this post, rather, is to bring attention to Kelton’s chapter on welfare and to briefly identify the differences between the US system the subject of Kelton’s analysis and the Australian system.
Kelton opens her chapter, titled ‘You’re Entitled!’ with the following myth and reality:
MYTH #6: “Entitlement” programs like Social Security and Medicare are financially unsustainable. We can’t afford them anymore.
REALITY: As long as the federal government commits to making the payments, it can always afford to support these programs. What matters is our economy’s long-run capacity to produce the real goods and services people will need.
As is made clear by this simply premise and retort, the notion that a currency-issuing government like the US or Australia ‘cannot afford’ social security or welfare programs is a myth. The most commonly cited reason for this is that the government can always fund the programs in circumstances where it issues the currency into existence. As discussed above, the idea that ‘the budget’ needs to be balanced, and that, therefore, any money issued for the purposes of providing welfare needs to be recouped in equal amounts, is a biased way to think about economic advancement. It focuses only on budgetary balance, and fails to consider sectoral balance or a balancing of indices across the economy. Issuing currency for the purposes of welfare, and expecting all of that currency to be returned directly through taxation, is an arbitrary idea. the way in which the success of welfare programs should be evaluated is not whether they are ‘free’ (ie, the government recoups all of the costs of running the program through tax receipts), but, rather, whether the true outcomes of the program (higher employment, full employment, less underemployment, more productivity, greater GDP, and son on) have been achieved.
Measuring the success of welfare programs simply via the extent to which they result in higher taxation is almost like measuring the success of a medical science researcher who is funded by the government (for one year) via the extent to which their product generates an equal economic return in that year. What if a medical researcher was to discover a cure for a widespread disease that in turn enabled hundreds of people to live longer, and to work for many more years into their lives, thus creating a more productive economy? Would we measure that achievement simply by the extent to which that researcher generated increased tax revenues within the same year in which the medical treatment was discovered? Naturally, we would not expect those increased tax revenues (if any) to be identifiable until the treatment had been approved for sale, marketed, and sold in the years followings its initial discovery. But this is not what happens with respect to budgetary analysis and the calculation of surpluses and deficits. These things are measured on an annual basis only, with the difference between the amount debited in the annual budget and the amount credited (or forecast to be credited) being the sole index by which economic success is calculated.
Much apart from going into all of this detail, Kelton’s book chapter focuses on the US’s system of social security, which was essentially created by President Roosevelt with the enactment of the Social Security Act of 1935. One of the interesting aspects of the American system is that it incorporates a self-funding component. Kelton suggests that the reason this component was invented was to combat criticisms of social security entitlements, usually from those who would dismiss the benefit system as a socialist policy. However, as Kelton argues, the invention of the ‘social security trust fund’ was, in political terms — and in terms of clarifying the economic reality of welfare programs — a mistake. The way it worked, and continues to work, is as follows. The trust fund is a mechanism by which a percentage of everyone’s payroll tax is allocated to social security every year. In this way, the trust fund is a way for the government to ‘pay for’ social security in society. As long as the trust fund exists, and as long as it builds up credit, then the government would never need to issue any ‘new’ capital to social security. Thus, it is self-funding and self-regulating. It is directly tied to payroll tax revenues.
As Kelton notes, the whole premise of the trust fund actually reinforces the wrong idea that social security should never be paid for with ‘new’ government dollars. That wrong idea is based in turn on the notion that social security is a government expense that is not likely to generate a better economy on the yardsticks that matter. That is not correct. I will give two reasons for this before moving on.
First of all, social security benefits are almost always spent back into the economy. A person who is unemployed or who has limited income is very likely to spend any benefit they receive into the economy on goods and services, rather than to save that benefit. This is because their income demands are high (rent is due, groceries are needed to make food, and the costs of living are high relative to their total income). It is also because the benefits of saving that income are, for the no- or low-wage earner, non-existent. In most cases, bank interest on amounts of savings below the hundreds of thousands will be negligible. The obverse is, of course, not the same. Deposits held in the bank accounts in the order of millions will usually generate a significant return for those who store them there. As a consequence of these basic observations, recipients of government benefits are effectively conduits for economic productivity. As soon as these benefits are spent into the economy, GDP increases (albeit probably in a negligible amount), because a good or a services has been paid for.
Second of all, other benefits will also likely accrue over time because of the provision of social security. For example, if social security payments allow an unemployed person to live well enough to improve their life and, over time, to generate the skills they might need to become employed (or to self-employ), then the social security system has delivered a benefit to the economy. It has allowed a person to find employment and has decreased unemployment in the order of one. The way in which that benefit is then calculated or quantified would depend on the nature of that person’s achievements. If they in turn employ others (pay others), then GDP would raise and underemployment would decrease. This, of course, might not occur in a fiscal year. Therefore the full extent of the resultant economic credit might not be quantifiable in the same annum in which the fiscal debit is registered.
The purpose of this post was to draw attention to Kelton’s chapter on welfare and to sketch out just a few of the basic principles and ideas emanating from MMT. It has also been to apply some of those ideas to welfare.
In some respects, it may be said that the US social security legislation is almost an exception to the overarching principle of MMT in which taxes do not fund government spending. That is because the legislated ‘trust fund’ effectively creates a budgetary fund that is in turn used to provide for social security. Whereas the government will issue ‘new’ currency in respect of its programs for defence, infrastructure, health, education, and so on, it is arguable that it does not do so in respect of welfare. That is because the welfare program is funded by taxes levied on already-issued dollars that the America population must pay back into the government’s balance sheet when the taxed at the level of payroll. This is a monthly withholding known as a FICA (Federal Insurance Contributions Act) payment.
The question that I will investigate in part 2 of this post is how the Australian system governs its provision of welfare. As is relatively well known, the 1946 referendum in Australia enabled the Commonwealth government to provide benefits to the citizens of Australia. Before 1946, the constitutional position was arguably unclear. However, after the referendum, an amendment was made to the Constitution so that a new ‘benefits power’ was written into section 51 of the Constitution, clearly allowing the central government to pay benefits to Australians residing in any state or territory for various purposes, including to veterans or the elderly, or for health and education.
Following this constitutional amendment, legislation has been developed to enable the provision of welfare to Australians. Unlike the American legislation, however, the Australian legilsation never introduced a ‘trust fund’ to ensure that (at least putatively) social securiy payments would be ‘self-funded.’ It is arguable that this difference has led to a different cultural understanding of welfare in Australia. In the second (and possibly subsequent) posts on this topic, I will explore some of these issues.