Fighting The Free Money Syndrome

Written by:
31 March 2022
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Tesla drivers, the Morrison government and the Reserve Bank are united by the same idea. That it does not really matter where money comes from.

It is a strange world we live in, if when the government cuts taxes on a product it is accused of giving it a “subsidy”. But this is exactly what’s happened after this year’s federal budget reduced the fuel excise tax to lower the price of petrol. According to John Peck, the owner of a Tesla electric car, as reported in this newspaper, lower taxes on petrol “represented a fossil fuel subsidy”.

“It’s a high-visibility way of cutting the cost of living for people. I understand why they’ve done it [but] it does seem like if you’re going to give a subsidy … could you have given that subsidy more broadly to include electric cars in that too?” he said.

When the government cuts personal income tax it isn’t giving taxpayers a “subsidy” – it is just taking less of their money.

Not only Tesla owners suffer from such woolly thinking. When the Morrison government decided to give 6 million people $250 “to help reduce the cost of living on items such as groceries, fuel and rent”, it wasn’t actually “reducing” the cost of these things.

The government is simply requisitioning $250 from one person and giving it to someone else. Ever-increasing housing rental costs aren’t the result of Russia’s invasion of Ukraine – they’re the product of deliberate federal, state and local government population and planning policy.

‘Modern Monetary Theory’ is an effect of the ‘money is free’ syndrome, not its cause.

And so it goes on. This time last year the governor of the Reserve Bank of Australia, Philip Lowe, said interest rates were “very likely to remain at [their] current level until at least 2024”.

A war in Europe certainly does change the situation, but for Lowe to make such a statement given the inflationary pressures created by years of record low interest rates created by central banks around the world, is for him to either ignore or refuse to acknowledge the obvious.

Tesla owners, the Morrison government and the RBA all suffer in their different ways from the same problem, the idea that “money is free” – that it doesn’t matter where it comes from or what is its price. (History shows us how that movie ends.) To blame such thinking on so-called “Modern Monetary Theory” is wrong. Modern Monetary Theory is an effect of the “money is free” syndrome, not its cause.

Which is a problem for political parties that define their brand to be one of responsible economic managers. If “money is free”, then it almost doesn’t matter what the government does with the economy, because at least until a few months ago, the prevailing view was that inflation would always be low, interest rates would always be low, and the capacity of the government to borrow more money was almost unlimited.

That’s the challenge for the Morrison government going into May’s federal election. It’s not that the economic policies of the Coalition and Labor are nearly identical (although they are). The issue is that voters have been led to believe by both sides of politics that economic policy doesn’t require difficult decisions.

The Conservatives in the UK have a similar problem. When Rishi Sunak, the Chancellor of the Exchequer, recently increased the national insurance tax contributions to pay for additional funding for disability and aged support services he was widely criticised, particularly by his Tory colleagues.

Such was the backlash that Sunak was forced to deny that he had ever desired to be a “tax-cutting chancellor”. But he made the point that if the public (and his prime minister) want higher spending on public services, it must be paid for somehow. That’s a realisation that hasn’t yet hit most Australian politicians.

As more than one commentator has remarked over the past few days, this week’s federal budget is a political statement not an economic one. Which would be fine, if only political statements like Tuesday’s budget didn’t have real-world financial consequences.

While it would be too much to expect the budget to lay out a comprehensive reform agenda just days from an election being called, it wasn’t unreasonable to hope that at least the government would take the opportunity of beginning the task of, for example, telling those 6 million Australians where their extra $250 is coming from.

Sadly, that didn’t happen.

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