We're edging towards a big change in how the economy is managed

Extensive creation of new money has become respectable

Ross Gittins

We must be in a recession because I’m getting a lot more letters from readers telling me they’ve figured out how to fix the economy in a way the economists haven’t been smart enough to discover.

Their solutions can be weird and wonderful, but a lot of them boil down to a simple proposition: if the economy’s in recession and unemployment’s high because people aren’t spending enough money, why doesn’t the government just print a lot of money and spend it itself?

But here’s the scoop: the idea that, rather than borrowing to fund their budget deficits – thus incurring big debts and interest bills – governments should just create the money they need has been anathema to economists for the past 40 years, but this may be changing.

There is a growing debate among economists, between the proponents of what they call “modern monetary theory” and more conventional economists and econocrats over whether governments should just create the money they need.

The defenders of the conventional wisdom have had to concede a lot of ground. Whereas a decade ago MMT was lightly dismissed as a crackpot idea, as this radical idea has gained more attention its opponents have had to admit it would be perfectly possible to do. They just think it would be a really bad thing to do.

Unconventional already the norm

Trick is, the “unconventional policy” of “quantitative easing” – where the central bank buys second-hand government bonds and other securities and pays for them merely by crediting the seller’s bank account – is quite similar to what the radicals are seeking.

All the major advanced economies – the US, the Eurozone, Britain and Japan - began doing this in big licks in the aftermath of the global financial crisis in 2008, once their official interest rates were so close to zero that they could be pushed no lower.

And now, once this coronacession had prompted our Reserve Bank to drop our official rate to its “effective lower bound” of 0.25 per cent in March, it too has resorted to quantitative easing, promising to buy as many second-hand bonds as necessary to keep the interest rate on three-year government bonds no higher than 0.25 per cent.

So, how exactly would what the RBA is already doing be very different to what the MMT advocates say it should be doing?

The greatest proponent of MMT is an Australian, Professor Bill Mitchell, from my alma mater, the University of Newcastle. Internationally, its highest profile salesperson is Professor Stephanie Kelton, of Stony Brook University in New York, author of the big-selling The Deficit Myth.

Our leading commentator on the debate is Dr Stephen Grenville, a former deputy governor of the RBA. And our most vocal opponent of MMT is present RBA governor Dr Philip Lowe.

Those opponents are right to say there’s nothing new about “modern” monetary policy. In the days before the loss of faith in simple "Keynesianism", it was common for governments to fund their budgets partly by selling bonds to the Reserve Bank, rather than to the public.

So the fatwah on governments “printing money” dates back only as far as Milton Friedman and his monetarists’ semi-successful attack on Keynesian orthodoxy in the late 1970s, when all the developed economies had a big problem with high inflation.

Friedman argued that inflation was “always and everywhere a monetary phenomenon” which governments could control by limiting the supply of money. Governments eventually realised that the quantity of money was “demand-determined” and that setting targets for growth in the money supply didn’t work. They switched to using the manipulation of interest rates to target the inflation rate.

As sensible economists always knew, it was never true that creating money always leads to greater inflation. It does so only when the demand for “real resources” – land, labour and physical capital – exceeds the supply of real resources. Only then do you have “too much money chasing too few goods”.

This has been confirmed by the failure of all the money created by quantitative easing since the global financial crisis to cause much, if any inflation, contrary to the predictions of the world’s few remaining monetarists.

The opponents are also right to say, quoting Friedman’s most famous aphorism, that “there’s no such thing as a free lunch” and it’s a delusion to imagine MMT offers one.

As Lowe argued vigorously at his appearance before the Parliament’s economics committee earlier this month, in reply to questions from Greens leader Adam Bandt, it may seem that by creating money rather than borrowing it you’re avoiding a lot of debt and interest payments but, in reality, all you’re doing is delaying and hiding the bill to the government and its taxpayers.

Risky business

It’s also a delusion (as the leading proponents of MMT acknowledge) that governments would be free to create (or “print”, to use a misleading metaphor) as much money as they needed, without restraint. The restraint is the same one it always was: the limited supply of real resources.

While ever the demand for real resources – the things we use to produce goods and services – is falling short of the supply of those resources, creating money should lead to increased demand for them (provided you do it more effectively than the big central banks did it after the financial crisis).

But once demand was growing faster than the supply of real resources, any further money you created would simply cause inflation. This is what’s really worrying the opponents of MMT (and me). If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached?

While ever all we’re doing is quantitative easing, the independent central banks do the deciding, not the politicians. Which brings us to Lowe’s “advanced negotiating position”: why risk letting the pollies start creating money when the government can borrow from the public at interest rates that are pathetically low. And RBA governor Lowe’s promising to keep them low for as long as necessary.

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A practical way of using renewables

Kalbarri [in Western Australia] is now the proposed site for a massive 5,000-megawatt renewable hydrogen export operation. Although construction is still 10 years away from breaking ground, should it go ahead, the project will put the tiny town at the bleeding edge of a pioneering technological development in renewable energy.

“The idea is to become a low-cost producer of green, renewable hydrogen,” says Terry Kallis, one of the project’s promoters.

Like solar and wind power, the technology to make “green” hydrogen from water has been around since the 1970s.

Historically the production of hydrogen relied on fossil fuels to make “brown” or “blue” hydrogen by running an electric current through water using an electrolyser – a device that breaks down water into oxygen and hydrogen.

But today the development of renewable energy has advanced enough that coal or natural gas are no longer needed to create the electric current. The entire process can instead be powered by wind and solar – making green hydrogen possible.

For years, technological development in the sector stalled due to a lack of demand, but that is changing rapidly. Each year the world consumes 70m tonnes of hydrogen to make glass, steel and fertiliser. That figure is projected to grow to 90m tonnes by 2050 under the more conservative scenarios.

The Kalbarri proposal aims to take advantage of this by constructing a combined wind and solar plant to power the commercial production of hydrogen from seawater. If all goes well, the gas will then be exported to nations like Korea, Japan and Singapore, countries that – thanks to their geography – cannot make it themselves.

Kallis and his business partner, Peter Sgardelis, have a background in large-scale renewables. Kallis was involved in the construction of the first commercial windfarm in South Australia and Sgardelis worked on the Star of the South offshore windfarm in Victoria.

This experience – along with the growing global interest in renewable hydrogen – has helped attract support from German multinational engineering giant Siemens, which in October last year signed up to build the electrolysers for the project.

“We’ve seen the costs associated with production of green hydrogen coming down, or coming down sooner than expected,” Kallis says. “We’ve also seen the development of the electrolyser to commercial scale and people start talking about demand. That has been a missing link.”

The area around Kalbarri – the traditional land of the Nanda people with whom they are currently negotiating a land use agreement – is an obvious choice, he says.

The landscape offers the right type of wind, good exposure to sun, and is close to both ocean and the Dampier-to-Bunbury pipeline – the longest gas pipeline in Australia.

Since the project is being developed in stages, the earliest phases will see hydrogen blended into the liquid natural gas supply before it then pivots to focus on export.

Like any ambitious project that pushes the boundaries of technological and industrial development, it is not without problems to solve.

While the process of making hydrogen from water is well understood, until recently the electrolysers required for the process have not been large and efficient enough to produce in commercial quantities.

The other issue has been transport.

Moving hydrogen offshore currently requires the gas to be packaged up in ammonia, or cooled 250C below freezing until it forms a liquid that can then be pumped out onto a ship like LNG.

“Those details have yet to be determined, as it will depend on what the buyer wants,” Kallis says. “We’re under no illusions and we make clear this is a very large project, something that will be developed in stages over time.”

Should they succeed, they will be helping to pioneer what may be a whole new industry for Australia.

Many believe hydrogen could play a role in turning Australia into the Saudi Arabia of renewable energy.

“Countries such as Japan, Korea and Germany have already come to Australia, asking for us to export renewable hydrogen for their domestic energy consumption,” says Ken Baldwin, the director of the Energy Change Institute at the Australian National University. “We have enormous opportunities … [to create wealth and] jobs due to the demand for our energy from these countries.”

In November last year, the CSIRO released the National Hydrogen Roadmap to plan out how an export industry could be developed.

The potential to get in on the ground floor of a future industry has the private sector excited, with a flurry of 30 new proposals for renewable hydrogen projects in Western Australia alone.

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Independent review into NAPLAN advocates for replacing test with new Australian Standardised Assessment “ANSA”

The latest independent review into the National Assessment Program - Literacy and Numeracy (NAPLAN) was today presented to the Education Council which comprises commonwealth, state and territory Education ministers.

The review’s key recommendations included that NAPLAN be replaced with the new test “ANSA”, and testing students in Year 10 instead of testing students in Year 9 to better inform senior subject choices.

Sweeping changes to the writing assessment and more focus on critical thinking and science, were also among the recommendations.

If adopted, ANSA would be held earlier in the year as opposed to when NAPLAN is held in May in a bid to prevent schools “teaching to the test”.

It would aim for results to be returned within one week, to inform teaching and learning for the rest of the year.

However, replacing or amending NAPLAN would require consensus of the Education Council.

The review found that the lag between testing and results makes data ineffective for teachers, the writing test was flawed, the timing of the test contributes to teacher stress and student anxiety, and the test lacks contemporary content and delivery.

Education Minister Grace Grace said the review acknowledged that standardised testing should remain but needed to be improved.

“It is clear that the current NAPLAN testing is not world’s best practice,” Ms Grace said.

“By modernising these tests, we will be able to find a model that best suits parents, teachers and most importantly students.

NAPLAN performance has been calculated by finding each school’s yearly average total over five years. Five year change has been calculated by finding the percentage change between a school’s NAPLAN scores over five years.

Queensland schools cover the 2015 to 2019 period. Schools in all other states and territories cover the 2014 to 2018 period.

The Palaszczuk Government recently promised the Queensland Teachers’ Union, who have relentlessly opposed NAPLAN, to advocate for its replacement as a bid to appease the union over its anger and lobbying against the pay-rise deferral.

Ms Grace said the report proposes changes that would address issues that have been heard “loud and clear” that the “testing is onerous for teachers and too high-stakes for students”.

“This review aims to make changes to NAPLAN that alleviate these concerns, all while providing valuable information to schools, parents and the wider community alike.”

Since the testing began in 2008 NAPLAN has been subject to several reviews and controversy, and was this year cancelled because of COVID-19.

The latest review was commissioned by the Queensland Victorian, New South Wales and ACT governments and conducted by education experts Emeritus Professor Barry McGaw AO, Emeritus Professor William Louden AM and Professor Claire Wyatt-Smith.

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Australia announces changes to citizenship test and English language program for migrants

In a major policy overhaul impacting migrants, Acting Immigration Minister Alan Tudge has announced that Australia will be updating the citizenship test with a strong focus on Australian values to boost social cohesion.

Flagging the changes in an address to the National Press Club in Canberra on Friday, Minister Tudge said new questions “on Australian values” will be included in the citizenship tests.

“Australian citizenship is both a privilege and a responsibility, and it should be granted to those who support our values, respect our laws, and want to contribute to Australia’s future,” he said.

Minister Tudge particularly recognised the efforts of the volunteers of the Sikh community who provided free meals to over 3,000 residents of the nine public housing estates in north Melbourne that were forced into “hard lockdown” amid a COVID-19 outbreak in July earlier this year.

“When you see Buddhist monks providing free massages to weary fire-fighters, Muslim builders putting on barbeques for bushfire survivors, Irish truck drivers delivering hundreds of thousands of litres of water, and Sikhs cooking and delivering curries to Melbourne’s public housing estates during the COVID lockdown, you know we have something special in this nation,” said Minister Tudge.

A record number of people – over 200,000 pledged their allegiance to Australia in 2019-20, of which a majority were from India.

Melbourne-based permanent resident Simreet Dua who is keen to be added to the list of Australian citizens this year said most migrants who want to assimilate into the country’s social fabric would welcome the inclusion of questions on Australian democratic values in the citizenship test.

“While it is too early to comment what the revised tests would look like, I strongly believe that all migrants should be across the Australian values, to be able to integrate into the Australian society and to make a valuable contribution to its culture and even economy,” said the 32-year-old.

Minister Tudge also announced that migrants who can’t speak English will be allowed to attend an uncapped number of free language classes in an overhaul of the billion-dollar worth Adult Migrant English Program (AMEP), which currently offers 510 hours of free tuition to be completed within five years.

Under the changes, the government has announced it will not only scrap the cap on the hours but also remove time limits on the classes, enabling permanent residents or citizens to be able to attend classes free of charge until they have acquired "functional English.”

“Without English language skills, migrants are less likely to get a job, less likely to integrate, and less likely to participate in our democracy,” said Mr Tudge.

Census data indicates that around half of overseas-born Australians who arrived with no English skills still cannot speak the language well, or at all after 15 years of residency.

Former senior Immigration Department official Abul Rizvi said while the English language is a key element of successfully integrating migrants into Australia, the question remains how much more money is the Morrison government willing to allocate towards the expansion of AMEP.

"No one can deny that the English language is important for migrants to communicate and survive in Australia. But the thing to watch out for is how much more money is the government allocating to this approach. If the answer is zero then you will have to question what the value of the policy is?” questioned Mr Rizvi.

He said the key here is to encourage more migrants to attend and participate in these classes.

“The main problem is that many of the migrants who want to attend classes are also searching for work and are often working. And the difficulty is accessing AMEP while you’re working. Its accessibility is a greater challenge than the allocation or the hourly limit,” added Mr Rizvi.

Welcoming the changes to the English language program, Violet Roumeliotis, the CEO of Settlement Services International (SSI), a Sydney-based community organisation, that supports new migrants told SBS Punjabi that the change in the policy will “further strengthen” Australia’s resolve and success towards the settlement and integration of migrant communities.

"We welcome any move that will further enhance social cohesion for new migrants and lead to better settlement outcomes, especially during these unprecedented times,” said Ms Roumeliotis.

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