In this episode of the Australia Together Podcast on Substack I read Parts 7 and 8 of Chapter 2 of my latest book, The Public Interest Economy: the path to wellbeing, security and sustainable consumption in a democratised Australian economy.
Chapter 2 is called Deploying money so that it can make Australians safe. It describes a project of reform of the macroeconomic policy and governance arrangements for Australia’s economy so that in future all Australians can be assured of their prosperity through the achievement of full employment and price stability.
In Parts 1 and 2 of Chapter 2, I foreshadowed the need for a reduction of the degree of independence currently enjoyed by the Reserve Bank of Australia, suggesting that it amounts to an economic governance arrangement that is not in the public interest and is fundamentally anti-democratic.
In Parts 3 to 6, I began explaining how that economic governance arrangement should be replaced with a new integrated approach to macroeconomic management led by the Treasury via the use of functional finance – a marcoeconomic management system devised in the 1940s in line with Keynesian economics. This system can function as a counter to the failures of neoliberal and neoclassical economic theories.
In Parts 7 and 8, I put the view that good economic management in Australia is not simply a matter of downgrading or removing the independence of the Reserve Bank, although that is essential if we want to democratise the economy. The even more important thing to do is to de-prioritise monetary policy itself, especially since it is not an effective macroeconomic tool.
Monetary policy is not conducive to establishing either full employment or price stability. The chapter shows how damaging it is to prioritise monetary policy in macroeconomic management and how fiscal policy will be far more effective in achieving full employment with stable prices.
Functional finance offers a new basis for arranging economic governance in a manner that can significantly improve the reserve bank’s chances of achieving all its statutory objectives and the government’s chances of achieving a strong and stable economy that works for people. In large part this is because in functional finance it is not necessary to leverage inflation and employment against each other. It is not necessary to sacrifice one for the other. Rule 1 of functional finance, if properly applied, rescues the government from having to make that trade-off. It allows the government to regulate total spending to achieve both full employment and price stability. And as later sections of this chapter will show, when the three rules of functional finance are applied in concert, they offer an efficient system for achieving the permanent maintenance of prosperity for everyone, not just for some.
In Australia, it is therefore necessary to push fiscal policy to the top of our macroeconomic tool box and use functional finance to drive the economy. Functional finance integrates monetary and fiscal policy in such a way as to prevent the need to create unemployment as a means of stabilising prices.
Put simply, monetary policy doesn’t work. It does Australians no good, either in controlling prices or ensuring employment. Instead, monetary policy as used by the Reserve Bank of Australia favours profits for the financial sector over a productive economy that offers employment opportunities to all. By contrast, functional finance – with the preminent role being given to fiscal policy – can stabilise prices without creating unemployment.
Australia’s governments and the RBA have built an economy that works much better for the financial sector, big business and the wealthy than it does for small business and for the vast majority of Australians whose main source of income is from employment. This is all the more reprehensible given that history has proved that governments can use fiscal policies to achieve unemployment rates of around 1%, as they did in the post-war boom, with no contractionary economic effects.
Quick views of how functional finance works
For a readily accessible summary of the policy orientation of functional finance see Extracts from The Public Interest Economy, particularly:
Table 1 – Key takeaways for macroeconomic policy and governance reform.
Box 1A – The rules of funcational finance.
Box 1B – The most effective macroeconomic governance arrangement using functional finance.
Table 5 – which shows the prevailing economic policy orientation under neoliberalism in Australia and the alternative policy orientation necessary for a public interest economy.
Table 6 – which shows the current mindsets predominant in governments in Australia and the mindsets needed for a public interest economy.
Listen to a full reading of The Public Interest Economy
You’ll be able to listen to a complete reading of The Public Interest Economy in weekly instalments.
If you wish to keep reading, the full book has already been published and is available on Kindle here. The paperback is available for mail-order here or click on the picture below. Or visit the Australian Community Futures Planning website to purchase The Public Interest Economy at https://austcfp.com.au/publications#public-interest-economy
