Letter from The Cape
Episode 14
August 25, 2023

Hello, and welcome to another episode in my Letter from The Cape podcast series, where I discuss the social and economic matters from the perspective of Modern Monetary Theory.

Today's episode is being recorded at The Cape, which is Australia's most sustainable residential experiment in Victoria overlooking the Southern Ocean.

Sustainability is one of those words that gets used a lot - sometimes in a meaningful way and other times in a misleading and destructive way.

The Cape Project is an excellent example of the former and is providing a model for future housing design and construction.

But this week we had an example of the latter with the release by the Australian Treasury of the Intergenerational Report 2023.

The genus of this exercise dates back to the 1990s when the conservative Howard government sought ways to depoliticise cuts to net government spending.

They came up with the idea that if they released a super scary document every few years which projects all manner of disasters that they could claim threatened the financial viability of the federal government then they had cover to avoid meeting real challenges that faced the nation and would require significant government investment.

Like, for example?

Climate change.

Public housing.

Improving our run down health system.

Restoring integrity to our education systems.

And the list is long.

So every few years we have this media circus with all sorts of leaks and grandstanding from politicians about how the ageing society will require the government to pursue fiscal surpluses - that is, spend less than they receive in taxes - so they can 'save' up for the future spending challenges like all those hip replacements!

The problem with this exercise is that it combines truth with fiction and the fiction wins out and diverts our attention away from the real issues.

Further, in pursuing policies that the government claims are necessary to stop it running out of money, they actually make the actual problem worse.

Let's explore that a bit.

The so-called dependency ratio is rising in Australia as it is in most advanced nations.

There are many ways to express this ratio but the one that dominates the Australian discourse is more specifically referred to as the age dependency ratio.

What does it measure?

It is the proportion of the population who are not of working age relative to those of working age.

So as more people reach retirement age and are not replenished by younger workers, the age dependency ratio rises - that is, more people are 'dependent' on less workers for the supply of goods and services.

This is the fact or truth part of the exercise.

It is happening and it does matter.

But the way it matters is not the way that the intergenerational reports would like us believe.

The government wants us to fear higher taxes in the future to pay for the increased demands on the health and pension system as more workers retire and age.

They invoke the fear that we will not be able to afford a decent pension system for those who have worked hard but have little private superannuation.

They then tell us to solve this problem they have to cut spending now and 'save' up for the future.

They also tell us that we will have to retire later in life - that is, work for longer - before being eligible for a pension.

And they propose all sorts of privatisation stunts - like those which have made our vocational training systems dysfunctional and which have wrecked our tertiary education system.

And they force more people into private health funds, which rip everyone off with massive subscription fees and diminishing service coverage.

All of which just make the problem worse.

How?

Well first, the federal government will always be able to fund first class health care and a reasonable pension system should it desire to.

As the currency issuer the only constraint on its spending is the available real resources for sale in that currency.

It can never run out of that currency.

So if there are enough trained doctors, nurses and other medical professionals available, then the government will be able to employ them to service the higher demand for medical services in the future.

Second, the actual problem posed by the rising age dependency ratio is a productivity problem.

That is, the future generation - our children - will have to be more productive than the preceding generation - because there will be less of them supporting more of us in terms of provision of real goods and services.

The government has failed on the productivity front.

To enhance the growth of a highly productive workforce requires significant public investment in schools, vocational training and higher education - exactly the opposite to what the government is doing because it is allegedly trying to 'save up' for the future by cutting back now.

The problem is that we all believe the fiction and fail to understand that it is just part of the overall relinquishment of responsibility by our governments.

That relinquishment and the underinvestment in vital public institutions like health, education, public transport and more is now coming home to roost.

We are all starting to see broken systems and diminished services.

How we break out of the cycle of fiction is the unknown.

And as long as we are trapped within it, things will just continue to deteriorate.

Not a happy vision.

I will be back next time.

Until then, see ya later and take care.