4 SEPTEMBER

North Carolina map thrown out

A North Carolina court delivered a big win to Democrats overnight, ruling the state’s legislative district map unconstitutional. The decision paves a path to undo years of Republican gerrymandering in one of the nation’s most bitterly divided states.

The court is leaving it up to the Republican state legislature to redraw the maps, but it is setting specific guidelines for them to follow, including that the new maps must be redrawn within two weeks and that lawmakers can’t use data to try to draw a partisan advantage.

The ruling by a three-judge panel has the potential to bring to a decisive end a years-long battle over gerrymandering in a critical swing state.

United States Studies Centre CEO Professor Simon Jackman has provided expert testimony in previous legal challenges to North Carolina's congressional redistricting. You can read his explainer on gerrymandering here. 

NEWS WRAP

Troubled waters

• Are rising regional and global tensions beginning to reveal the limitations of US power and its long-term willingness to maintain the post-World War II order? Defence Connect took a look at the USSC's latest report on US military spending in the Indo-Pacific region and the implications for Australia. READ MORE HERE.
   

• We've seen a few dropouts in the race for the Democratic nomination for president so far, but how many are likely to hold on until to the Iowa caucuses in February 2020? Research Associate Elliott Brennan spoke with ABC News about the big 2020 dates to watch out for and the likely trajectories of the large Democratic field. READ MORE HERE.
   
• There is increased appreciation by Prime Minister Scott Morrison and others that the economic tensions between the United States and China are not simply driven by an irrational US president, Senior Fellow John Lee writes in The Australian Financial Review. "The tariffs may be Donald Trump's, but they have brought the real cause of tensions into the open: structural imbalances in the world economy and rising intolerance of China systematically breaking World Trade Organization and other trading rules over an extended period." READ MORE HERE.
   
• President Trump has every reason to want a resolution to the trade war with China. But the chance of striking a deal by Christmas is more remote than ever, according to the USSC's Freya Zemek. She looked at the current stalemate for Young Australians in International Affairs this week. READ MORE HERE.
   
• Former US Defense Secretary Jim Mattis has released a book, titled Call Sign Chaos: Learning to Lead, which details some of the disagreements he had with the Bush and Obama administration, but stops short of criticising President Trump. "I don't discuss sitting presidents," Mattis told NPR in an interview about the book. "I believe that you owe a period of quiet". READ MORE HERE.

 A no-deal Brexit is really a Trump-deal Brexit, leading to a one-sided United States trade deal that will put us at the mercy of Donald Trump and the biggest American corporations.

British opposition leader Jeremy Corbyn
1 September 2019

The monetary theory behind Democrats' promises

Jack Brown
USSC Internship Program           

The 2020 Democratic primary debates have revived various promises of new government spending and services without mention of how to finance the subsequent deficit. Some in the progressive left, including Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez, have proclaimed modern monetary theory (MMT) as a means of securing the idealised Scandinavian-style safety net without enduring the political unpalatability of using the 't' word, at least on the front-end.

MMT is now salient thanks to the rise of the Democratic Socialist movement, with Ocasio-Cortez and Sanders as the most prominent faces. The Green New Deal, championed by Ocasio-Cortez, would be entirely financed by MMT. Sanders, a believer in universality, has proposed a myriad of government programs (universal college debt forgiveness, medicare-for-all, infrastructure package, etc.) each of which have been conceptualised by Sanders’ economic advisor Stephanie Kelton, a leading proponent of MMT. It seems that if the scale of a policy’s spending and ambition is gargantuan, MMT is your answer.

So how does it work? MMT theorises that governments in monetarily sovereign countries trading in fiat currency are unable to default on their debt since their central bank can provide corresponding fiscal stimulus in order to compensate their debt. Since the central bank is the monopoly issuer of their currency, and is centralised under this model, government spending is unlimited. However, an increase in the amount of money chasing the same number of goods leads to inflation. MMT proposes that congress raises taxes to drain the new liquidity from the system in order to keep inflation and debt levels stable. In short, the government prints and spends money to provide social services then hikes tax to reign in inflation which ensues from large amounts of new money entering the economy.

The problem with more money chasing the same amount of goods is that supply and demand doesn’t change, only its medium does. Let’s take a nation which meets the criteria for implementing MMT and has a large federal spending demand: for example, Bangladesh seeking to provide universal healthcare. Bangladesh can’t print and spend infinite money to grant every citizen universal healthcare because there is a real resource constraint. In other words, prices reflect the supply of doctors relative to the healthcare demands of citizens, and fiscal stimulus won’t fundamentally change this dynamic but only increase the scale of it’s figures. The result of Bangladesh pursuing this universal healthcare policy would be that prices would go up in tandem with the fiscal stimulus, unless there is an increase in the supply of real resources to meet demand.

Advocates of MMT have two defences against the inflation argument, both of which are true but not feasible. The first being that inflation won’t ensue a fiscal stimulus if the goods and services they seek to consume aren’t at their productive capacity, which is true since the spending wouldn’t run up against the real resource constraint. The merit of this argument varies depending on which sector it’s applied towards. The second is that passing new taxes would drain liquidity from the economy and subsequently curb inflation. This is true, but avoiding this was the implicit aim of enacting MMT in the first place. This responsibility would also fall in the hands of congress, which is problematic for a number of reasons. One, Congress is a rigid body that isn’t capable of the nimble policy action necessary to keep inflation at a steady 2 per cent. The second being that this would create a perverse incentive structure. Constituents aren’t fond of having their taxes raised, career politicians want to keep their jobs, and thus the responsibility is likely going to get kicked down the road.

This is the political benefit of MMT, frontloading benefits and delaying costs. Restructuring the role of financial bodies doesn’t change the fundamental economic principles that determine what is made and where it is distributed. Democrats promising a jobs guarantee or Republicans cutting taxes are theoretically responsible for keeping inflation from spiralling out of control and government debt from entering the critical mass of defaulting. It is the responsibility of government officials to persuade the public that the benefits of a new spending program outweigh the cost of new taxes, and there’s no economic sorcery that can make something out of nothing.

DIARY

The week ahead

• Wednesday, 4 September: CNN climate crisis town hall, with 2020 Democratic presidential candidates in New York City.
   

• 4-5 September: US Vice President Mike Pence is scheduled to visit the United Kingdom.
   

• Monday, 9 September: Australian Parliament resumes in Canberra.
   

• Monday, 9 September: Trump will hold a rally in Fayetteville, North Carolina.
   

• Tuesday, 10 September: Apple launches iPhone 11 in California.

EVENT

Iran Deal 2.0?

VIDEO

'It has to stop’: 2020 candidates react to Odessa, Texas shooting

THE WEEK IN TWEETS

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University of Sydney NSW 2006

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