By Redge Nkosi
There is perhaps no other single issue, albeit from differing vantage points, that unites South Africans, from economists, politicians, business people, right and left wingers to the common man, than the fear of budget deficits, and with it, fear of debt and inflation.
But as always, something must be profoundly amiss to have a cross section of usually rambunctiously different bedfellows worshipping together and blithely imbibing from a cup of poisonous concoction. For the fear of deficits is all concocted from the discredited laissez-faire ideological economics powerfully disseminated by a priestly caste of economists as economic truth yet ungrounded in any empirical evidence.
Their common refrain is one intuitively simple but compelling economic message: consolidate fiscally by cutting spending and raising taxes, lest we face the hyperinflation horrors like those of all fiscally irresponsible nations such as Zimbabwe, Venezuela, Germany etc.
And to go against this widely received ‘wisdom’, as I always do, is to incur national ignominy, let alone from self regarded economic cognoscenti. Yet, it is this intellectually bankrupt doctrine, backed by questionable academic research that eventually withered under scrutiny, which has ignominiously retreated globally among all self-respecting economists, but remains stubbornly current among SA economists.
In a shocking admission in a 1995 interview, Nobel economist Paul Samuelson acknowledged: “Once debunked”, i.e.“…the superstition that the budget must be balanced at all times, it takes away one of the bulwarks that every society must have against expenditure out of control”… “And one of the functions of old fashioned religion was to scare people…”. Here, the economic priesthood openly conceding that budget deficit fear is mere superstition.
Ideally, the target for any knowledgeable government is not the setting of an arbitrary deficit target informed by fear of debt, interest payments and inflation, but by the levels of existing unemployment and of public capital stock deficiency. Her Majesty’s Treasury former official and the greatest economist of all time JM Keynes once said “Look after the unemployment and the budget will look after itself”.
Balancing the economy, not the budget to enjoy full employment, and high investment in the nation’s capital stock upon which both public and private life depends are the ultimate responsibilities of government and public policy. There can never be any greater guiding macroeconomic principle than this, otherwise the state’s role, legitimacy and capacity to project both external and internal power will be undermined and weakened. And deficits are central to this. After all, government spending adds new money into the economy and deficits in state books are surpluses in the private sector accounts.
By saying it has no money, government effectively succumbs and thus accepts the dreadfully clear choice of using the privatised control of money supply by making it only accessible through debt, on which it has to pay interest, thus ignoring the democratic right of people, state and state institutions to debt-free money which state can create and has the sole prerogative to create.
Their main posit against state creating money is that it’s inflationary. Besides being empirically unsupported, they ignore the fact that the privatized money creation from banks as debt or bonds to finance deficits can, as well, be equally inflationary! Lack of intellectual clarity as to what money is, dynamics about its creation and allocation fused with the poisoned reasoning about deficits and inflation, strangle this economy. SA’s macroeconomic policy muddle has its source not only in the superstition about deficits, but also in the application of microeconomic doctrines while in search for macroeconomic consequences besides what Harvard’s Prof JK Galbraith said, “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not reveal it”.
Deafening though the dins of inflation in the chamber halls of treasury, reserve bank and elsewhere are, it is widely known and accepted that neither the mainstream (neoliberal) economists worldwide, including those at the US Federal Reserve, have a robust theory of inflation. Yet everyone shouts ‘inflation’. In Oct 2017, recently retired Governor of the Federal Reserve Board, Prof Daniel Tarullo wrote: “The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making”. Professing similarly was Janet Yellen, retired Fed Chair saying she does not know “what determines inflation” with Financial Times’ Martin Wolf summing up, “Only the ignorant live in fear of hyperinflation”. And yet, here we are definitively claiming to know it all.
To condemn generations of South Africans to untold misery on the altar of budget deficit myths, debt and inflation fears is mind shatteringly immoral. This economic derp was condemned in the strongest possible language at a meeting of 18 nobel economists in Lindau, Germany in 2014. Prof Christopher Sims of Princeton University, threw the first and hardest punch, saying anyone who feels threatened by inflation is stupid. His call was echoed many more times by other nobel laureates.
Furthermore recent empirical confirmation has shown that Germany’s Nazi Hitler rose to power (1932), not because of the hyperinflation of 1922-23 as previously claimed, but due to the deflationary policies pursued by Chancellor Hendrich Brüning. Brüning’s fear of budget deficits led him to impose bouts of fiscal consolidations by presidential decree, having been initially rejected by the Reichstag (Parliament). They caused so much suffering among Germans. Unemployment rose to 30%. On promise of relief from spending cuts and tax rises, Hitler won the elections.
SA’s development model and its macroeconomic framework are built on a pile of myths and false understanding of our monetary system. Clutching at any straw to anchor their irrelevance, the delusional economic and political establishment add ‘policy uncertainty’ and lack of ‘confidence’ as policy escape hatches to hide their ignorance of real policy alternatives for SA. Even lack of empirical support fails to dampen their enthusiasm.
Unless South Africa unambiguously crosses an intellectual Rubicon in the field of macroeconomics; deficit, debt and inflation fears and the resultant fiscal consolidations will not only remove ANC from power soon, just as it did in Germany, irrespective of Ramaphosa’s win, but will also hasten the occurrence of what professor Adam Habib feared as a, “deferred revolution”.
@redgenkosi is an executive director at Firstsource Money and an executive board member of Money Reform International (UK).