Budget fails to bring change in economic direction
By Redge Nkosi
The 2018 budget is more of the same approach and will bring the same results : misery for most South Africans. It once again does not cross the intellectual Rubicon in the field of macroeconomics, writes economist Redge Nkosi. Unless Ramaphosa changes direction, the present policy will lead to the end of the dream of achieving a fair South Africa.
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
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 has an opportunity to build an economy that can rival those in Asia. The Asian’s used what is called a “bank based approach”. South Africa uses what is called a “stock market approach”- hence continued suffering two and a half decades since. Very few understand the workings of the bank based economic system.
In a bank-based system, governments don’t have to borrow at all or if they do they should borrow from their own bank. This is what some nations are doing. For example, the Chinese power utilities get money from their local government banks at almost zero interest.
The era of the gold standard has long gone. During that time, any money creation by government had to be matched by the reserves of gold. So the government was constrained to perform its public services. Money creation had to be backed by gold.
Today, all that is gone but the thinking remains stuck. Not so in the USA. In the US alone, over 29.616 trillion dollars were created by government within a period of about 4 years to salvage the fraudulent banks, instead of saving people and building national infrastructure.
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 emprical confirmation has shown that Germany’s Nazi Hitler rose to power (1932), not because of the hyperiflation of 1922-23 as previosuly 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 enthusiam.
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, irrespective of Ramaphosa’s win, but will also hasten the occurrence of what professor Adam Habib feared as a, “deferred revolution”.