ECONOMIC AGENDA by Patrick J. ByrneNews Weekly
How Tony Abbott can become the 'infrastructure PM'
, February 28, 2015
Tony Abbott wants to be known as the infrastructure Prime Minister. A major infrastructure program would likely win over many Australians who are in fear of losing their jobs.
Prime Minister Tony Abbott
Many leading economists and economic institutions are saying that in this time of global secular economic stagnation, which could go on for another 20 years, the only way governments can lift economic output and reduce unemployment is through massive government spending on infrastructure.
The International Monetary Fund (IMF) says that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking — or crumbling — in most advanced economies and emerging markets, with the exception of China.
Alan Kohler says: “The only antidote, and I do mean the only one, is public spending on infrastructure to improve human efficiency — mainly through better transport facilities.”
Harvard economist Professor Lawrence H. “Larry” Summers stunned the IMF’s 14th Annual Research Conference on the Economic Crisis in November 2013, when he said that if the population of consumers was not growing at a pace needed to sustain economic growth, then governments may have to inject financial capital into their economies permanently.
The 2007/08 global financial crisis (GFC) left advanced economies burdened with massive national debt that continues to inhibit economic growth.
The McKinsey Global Institute showed that, by mid-2012, the total debt of the United Kingdom and Japan had soared to more than 500 per cent of gross domestic product (GDP). The respective total debts of Spain, France, Italy, South Korea, the United States, Germany, Australia and Canada ranged from 276 and 363 per cent of GDP.
In addition, unemployment is rising as intelligent machines replace humans in the workplace.
Nouriel Roubini, professor at NYU’s Stern School of Business and chairman of Roubini Global Economics, has pointed out that Foxconn, which produces iPhones and other consumer electronics, plans to replace much of its Chinese workforce of more than 1.2 million with robots. Soon, says Roubini, “job-reducing technological innovations will affect education, health care, government, and even transportation.… Governments, too, are shedding labour … by transforming how services are provided to the public, the e-government trend can offset the employment losses with productivity gains.”
Australia’s unemployment is also rising because the car industry is closing with the loss of about 50,000 jobs; the smelting industry is contracting; the long-term decline of agriculture continues; and many industries are losing their international competitiveness as utility costs relentlessly rise.
These economic realities underscore the arguments in favour of huge investment in the nation’s infrastructure.
However, there remains the question of how to fund this investment, given that the electorate is hostile to further government asset sales to fund new infrastructure and that governments are reluctant to increase government debt?
The Commonwealth government should establish an Infrastructure Finance Corporation to provide such finance along the lines outlined by the Bank of England, without the Commonwealth government having to incur budget deficits and increased debt.
The Bank of England is the oldest reserve bank in the world. Last year, it devoted two articles in its Quarterly Bulletin (2014, Q1) to explain with great clarity — and to sort out the confusion over — how reserve banks and commercial banks create money.
The Bank of England has declared that it is a myth that banks act simply as intermediaries between savers and borrowers. Banks do not rely on “multiplying up” central bank money to create new loans and deposits. Rather, the BoE says, money is mainly created in two ways:
First, commercial banks create money by making loans to customers. About 97 per cent of money is created electronically by the banks by extending credit to customers. These loans are expunged when borrowers repay their loans.
Then central banks handle the overall amount of money in circulation — they “manage up” the official interest rate to restrict lending, or “manage down” interest rates to expand commercial bank lending.
Secondly, in times of crisis, such as the 2007/08 global financial crisis, reserve banks can undertake “quantitative easing”, i.e., using cash to buy government and corporate securities, thereby injecting spending into the economy.
The Bank of England’s model is a suitable one because an Infrastructure Finance Corporation could be authorised to create and lend money, in the same way that commercial banks create loans for customers.
This means that Australia can develop its infrastructure and create jobs — and without governments having to increase debt or sell off more government assets.
Many other nations have set up successful, broad-based government-backed investment banks. One of them is Germany’s famous Kreditanstalt für Wiederaufbau (KfW). By 2012, the KfW boasted a balance sheet of €494.8 billion.
Tony Abbot could ask the Bank of England and the KfW to advise his government on how to establish, fund and operate an Infrastructure Finance Corporation.
Patrick J. Byrne is national vice-president of the National Civic Council.
 Michael McLeay, Amar Radia and Ryland Thomas, “Money in the modern economy: an introduction”, Bank of England Quarterly Bulletin: Q1, Vol. 54, No. 1 (2014), pages 4–13.
Michael McLeay, Amar Radia and Ryland Thomas, “Money creation in the modern economy”, op. cit., pp.14-27.