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Economists and public debt

June 6th, 2009

Belatedly, thanks to site crises, I’m linking to Nicholas Gruen, who organised this article in Wednesday’s Fin, signed by 21 prominent economists from across the political spectrum (text over the fold).

Combined with the good GDP number released the same day (I discussed it at Crooked Timber , this letter does as Peter Martin says, leave the opposition looking naked. They haven’t really offered any analysis to justify their opposition to economic stimulus, and unless the rest of the year brings really bad economic news, it’s hard to see them recovering any credibility on economic issues. Unsurprisingly, the government ran with it in Parliament , and the best Joe Hockey could do in response was to sneer at Bernie Fraser.

In Paul Krugman’s words, right now, “knowledge is our only defence against catastrophe”. A natural reaction would be to retreat into timidity. But that would repeat mistakes that exacerbated the Great Depression by giving in to our fears and phobias. IMF Chief Economist Olivier Blanchard has a similarly blunt message. “Above all, adopt clear policies and act decisively. Do too much rather than too little.”

Of course other things being equal it’s better for governments to be debt free. But as any homebuyer knows, debt can help us build assets now that we couldn’t otherwise afford, and repay the costs when the assets bear fruit. Australia entered this crisis relatively well placed to weather the storm. In addition to the recent mineral boom, for twenty five years Australian governments have consistently stressed fiscal responsibility and taken large political risks doing what they thought right for Australia, for instance with tax reform and fiscal austerity during the mid 1980s and again in the mid to late 1990s.

Many developed countries were already running cash deficits and had substantial public debt before the financial crisis. However all of them have accepted one lesson of the Great Depression – that during a downturn we should let the ‘automatic stabilisers’ work by loosening budgets temporarily as revenue falls and outlays on welfare relief increase.

Given Australia’s relatively stronger balance sheet, it’s been in a better position to engineer additional discretionary fiscal stimulus than most comparable countries. Cash handouts of nearly two percent of GDP are being paid to middle and lower income Australians. There is no more effective way to stimulate the economy quickly. The success of this measure can be seen in the relative strength of Australian retail sales compared with almost any of our peers. In addition the Government plans to spend many billions more on infrastructure.

All this has converted a sizable expected cash surplus next financial year into a deficit of nearly 5 percent of GDP. This compares with the average of our peers of nearly 9 percent. On current Treasury projections, which seem as plausible as any (though like all such forecasts, they are only ‘best guesses’), net debt will stay below 14 percent of GDP compared with an average of over five times this in comparable countries which nevertheless retain their creditworthiness in capital markets. Ultimately if other countries run weaker balance sheets than us, that’s no reason to relax our own standards. But the comparison does provide some context. It illustrates that even after the stimulus, we remain within a very healthy margin of safety in our Government’s reputation for economic prudence.

None of this is to suggest that Australia should rest on its laurels. There’s a fair chance (but no more than that) that our economy will recover strongly within two years. But just as we don’t know today how far or fast interest rates should be increased then, we don’t know today precisely how fast we should be returning towards budget surplus then. So these debates need to go on and there will come a time when we need to change direction, from supporting economic growth to restraining it, perhaps with great vigour. But that time is certainly not now.

Further, as Australia’s population and infrastructure needs grow, Australians must decide whether they prefer a balance sheet more suited to genteel decline or one that supports investment, dynamism and growth. In addition to building genuinely valuable assets in R&D and carbon abatement, our education, health and transport systems and housing stock, the stimulus will, in Treasury’s words keep up to 210,000 Australians in work who would otherwise be out of jobs. Major infrastructure projects should also pass independent and transparent benefit/cost assessment.

Deploying our strong balance sheet to use otherwise idle resources – or to put it more compellingly, deserted factories and unemployed workers – to build assets that improve our lives and our economy in the future, seems much more appealing; much more commonsensical than retreating into phobias.

Fred Argy, Former Head of EPAC.
Paul Binsted, Company Director and Economist
Tony Cole, Former Secretary to the Treasury
Max Corden, Emeritus Professor, Johns Hopkins University
Owen Covick, Associate Professor, Flinders University
Steve Dowrick, Professor of Economics, ANU
Saul Eslake, Chief Economist, ANZ Bank
John Foster, Professor of Economics, University of Queensland
Bernie Fraser, Former Governor of the Reserve Bank of Australia and Secretary to the Treasury
John Freebairn, Professor of Economics, University of Melbourne
Joshua Gans, Professor of Economics, Melbourne University
Paul J. Gollan, Associate Professor, Macquarie University
Roy Green, Professor, Dean, Faculty of Business, University of Technology, Sydney
Stephen Grenville, Former Deputy Governor, Reserve Bank of Australia
Nicholas Gruen, CEO, Lateral Economics
Tony Harris, Former Auditor General of NSW
Stephen Koukoulas, Global Strategist, TD Securities
Andrew Leigh, Professor of Economics, ANU
John Quiggin, Professor and ARC Federation Fellow, University of Qld
Mike Waller, Former Chief Economist, BHP Billiton
Glenn Withers, Adjunct Professor, Australian National University

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  1. philip travers
    June 6th, 2009 at 10:56 | #1

    Eggheadarightisism at its worse,as above.Not that the Opposition can say much either.If any Prof. believes a compiled list like the above has an ability to withstall any attitudes developing in the community,that says,we have had enough of this lot,it will not be because of the above…it will be because “we have had enough of this lot.”

  2. rog
    June 6th, 2009 at 11:53 | #2

    In his address to the house Ben Bernanke warns that if Govts don’t balance their books recovery will be delayed;

    “Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth–requires that spending and budget deficits be well controlled.

    Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”

  3. SeanG
    June 6th, 2009 at 19:03 | #3

    Reminds me of that fateful letter by over 300 economists criticising Margaret Thatcher’s 1981 budget that corrected the fiscally horrendous position she was placed in by Labour.

    I would be very careful about writing such a letter because it reminds me of what happened in the UK where they maintained a policy of never having debt above 40% of GDP. That meant as the economy grew, so too could government debt. I agree that we need investment in key infrastructure but politics can be a messy business and it is merely a small jump to maintaining a permanently high level of debt for this “investment”.

  4. stockingrate
    June 7th, 2009 at 08:27 | #4

    “Deploying our strong balance sheet”- an alternative view: deploying the strong balance sheets of foreigners so we can further weaken our own balance sheet to live beyond our means, maintain political popularity, and weaken our sovereignty.

    “The success of this measure can be seen in the relative strength of Australian retail sales “

  5. Alice
    June 7th, 2009 at 09:57 | #5

    Yet what of the money sloshed into banks? What of the effect of all that printing?
    Now the focus on reigning in budget deficits in recession but more money than the combined wages of sin has been thrown at financial institution bailouts….. and Bernanke focuses on repairing deficits as a matter of priority?? Repair the problems in the financial markets first, that gave rise to the need for deficit budgets. Bernanke’s comments a bit like closing the gate after the horse has bolted.

  6. ABOM
    June 7th, 2009 at 19:19 | #6

    “Above all, adopt clear policies and act decisively. Do too much rather than too little.”

    Where you all when the madness of financial “innovation” was LEADING us to catastrophe?

    As Alice said, the horse bolted with unregulated financial markets – which few if any of the establishment shills objected to.

    Now they come out of their dark little academic holes to try to explain the worst budget deficit since WWII and that the sucker-taxpayers have to pay for Macquarie Bank’s (and other banks’) stuff ups.

    Do these “economists” (who did not predict the catastrophe) also support the Rudd Bank, with billions of debt from the richest property developers in Australia being “guaranteed” by the taxpaying middle class – who cannot flee to tax havens overseas (unlike some of the very property developers being bailed out by Rudd Bank)? Where is the criticism over this glaring “moral hazard” (something even academics should understand)?

    Give me less talk – and more gold.

  7. Alice
    June 7th, 2009 at 19:56 | #7

    ABOM – Im thinking that way myself and the Perth mint is working overtime. I am seriously nervous about inflation. I dont know if its reading too many history books but when the printing presses start rolling it seems appropriate to be nervous.

  8. ABOM
    June 8th, 2009 at 14:25 | #8

    Swap your worthless pieces of toilet paper for as much gold and silver as you can lay your mits on. It’s all blowing up, and no one wants to admit the bleeding obvious – we’ve screwed ourselves in debt and the only way out is to debase the world’s currencies.

    This is what the shill establishment economists are really saying: “We have no idea what’s going on, we’re flying blind, but it’s bad and it’s worth putting our children neck-high in debt to get out of this mess.”

  9. Gaz
    June 9th, 2009 at 22:03 | #9

    SeanG :Reminds me of that fateful letter by over 300 economists criticising Margaret Thatcher’s 1981 budget that corrected the fiscally horrendous position she was placed in by Labour.

    Not only that, but it also prevented unemployment from rising just about continuously for the following five years, from 8.1% at the time of the 1981 budget to 11.3% five years later!! Oh no, hang on, umm, wait a minute….

    (OECD harmonised unemployment rates data)

  10. Alice
    June 9th, 2009 at 22:23 | #10

    Just Great Gaz! – the budget is fine but the people are not!

  11. June 10th, 2009 at 17:05 | #11

    ABOM says: “Do these “economists” (who did not predict the catastrophe) also support the Rudd Bank, with billions of debt from the richest property developers in Australia being “guaranteed” by the taxpaying middle class – who cannot flee to tax havens overseas (unlike some of the very property developers being bailed out by Rudd Bank)?”
    It seems ABOM never lets facts get in the way of being politically pure. The so-called Rudd Bank has not yet been established. So pray tell ABOM how are some property developers being bailed out “by Rudd Bank”?
    Presumably, to take the ABOM position to its inevitable conclusion, it would be better to see all property development stop, so that construction workers and others could be unemployed.

  12. jquiggin
    June 10th, 2009 at 17:48 | #12

    “As Alice said, the horse bolted with unregulated financial markets – which few if any of the establishment shills objected to.”

    Umm, perhaps not, but at least one signatory of the letter did object, quite vociferously. Similarly with several other suggestions above about what economists didn’t do.

  13. ABOM
    June 10th, 2009 at 17:49 | #13

    (1) Please define moral hazard. I don’t think you understand the term.
    (2) Rudd Bank is/will guarantee debts of property developers. The usual response to this “support” is that it is not actual $$$s because it’s just a guarantee that may never be triggered. Yeah, well then why do they need it at all? Why don’t we all get govt guarantees on our small business loans (the UK govt has something similar in the UK for small business)? This is so clearly big end of town lobbying a TOTALLY CORRUPT Labor govt it’s not only funny you are so naive, it’s sad.
    (3) It won’t matter when bond prices collapse (they are now for 10 and 30 year US Bonds) and I’m tired so I won’t bother with you any further. Enjoy your happy delusions.

  14. June 10th, 2009 at 18:07 | #14

    Can anyone point me at these “unregulated financial markets”? I would be fascinated to see where they are. I know of very few – and those few have little, if any, effects on the mainstream financial markets.

  15. Alice
    June 10th, 2009 at 18:19 | #15

    @Andrew Reynolds
    Andrew – you cant be serious? lets start with the obvious repeal of Glass Steagall?
    Its been gone over so many times in here …to start arguing now there were no “unregulated financial markets” may be in one sense right …but they were suddenly less regulated than they have ever been…and it made a mess. The super statements are due in soon and as usual the ordinary man pays. It was not enough regulation over gambling banks (with too much to gamble with).
    The only regulation I agree with ….is clamping down and not letting the banks lend so much (higher fraction of resrves needed) and some REAL freedom to indisviduals in how they save for retirment…instead of giving the financial markets a guaranteed secure pot (and govts a guaranteed secure pot to steal from).

    You want individual freedom Andrew? And no government intervention? – give the people their super to manage themselves (in the hands of the individual to do with what they want?) or is that a little too free for you?

    What say Andrew? Or might it disturb the financial empire too much??

  16. Alice
    June 10th, 2009 at 18:52 | #16

    JQ I dont think I actually said that (that “few of any of the establishment shills objected to”) but I admit I did wonder it..? Can you tell me who exactly objected so vociferously? I take may hat off to them.

  17. ABOM
    June 10th, 2009 at 20:52 | #17

    Alice, I think I love you…

  18. jquiggin
    June 10th, 2009 at 21:00 | #18

    @16 I think it was ABOM who said it, quoting Alice, which gets a bit confusing. As to which signatory of the letter criticised financial deregulation at the time, readers of this blog ought to be able to make a pretty good guess :-) .

  19. June 10th, 2009 at 21:22 | #19

    They were hardly “less regulated than they ever have been”. Try the free banking era in Australia up to about 1892. Parts of the USA from 1830 to 1860. Scotland 1716 to 1845. There are plenty of others.
    Glass-Stegall was annoying, but its repeal hardly amounted to wholesale deregulation. All it did was to break down a wall that already had huge gaping holes in it, while the US Congress merrily went on making new regulations and mandating further nonsence through other regulations.
    The presence of Glass-Stegall did not stop other wholesale banking crises – the S&L collapses for one. I very much doubt it would have had any effect on this one – in fact it may have worsened it.
    That said – I would agree with you on the super. While increased saving is A Good Thing, mandating it is, to me at least, likely to cause some real distortions. It should go. No argument from me on that – nor has there ever been.
    On the wider point – the fact of government regulation is at least in part, what has been driving down reserve requirements. Why should depositors care who they deposit with and what their financial position is if the full value of the deposit is guaranteed by the government? As happened in the US the impact of the FDIC has been to drive deposits to dodgy institutions.
    You seem to believe I am in favour of regulation when it seems to help business, Alice. I do not. It really is that simple.

  20. TerjeP (say tay-a)
    June 10th, 2009 at 23:00 | #20

    It’s all blowing up, and no one wants to admit the bleeding obvious – we’ve screwed ourselves in debt and the only way out is to debase the world’s currencies.

    If governments or people can’t pay their debts then the correct solution is default not debasement.

  21. Alice
    June 11th, 2009 at 09:18 | #21

    Sorry JQ -

    I realised it had to be you after I posted my comment (doh) who was vociferous in objecting to financial de-regulation of the type that occurred under Bush’s leadership and it now appears that objections came from all sides as ABOM noted in another post (with at least one free marketer / Austrian? refusing to vote for the repeal of Glass Stegall saying “Im for de-regulation – but NOT this regulation”)…so it would seem, somehow, that vital legislation, as recognised by many economists (except lesser economists), was just overridden by the reach of power and influence. That power (over considerable resources able to be deployed towards extreme deregulation) likely emanated from within the large financial institutions themselves. An unhappy story (banks in control of policy).

    ABOM – the feelings are mutual. You could me into trouble. (Good thing you are a foreign national)…and Id personally like to throttle the large financial institutions with you. How can anyone make an honest investment dollar unless you work on the inside (in which case its a dishonest investment dollar)?

  22. ABOM
    June 11th, 2009 at 10:26 | #22

    I’d like to get you into trouble. I’m not as foreign as you think…

    The stockmarket is full of embezzlers shorting the market and selling “your” stocks (I know them personally so please don’t put your long-term money there – it’s a gambling pit).

    Residential property is normally safe – but not at these prices and these yields.

    Cash is (ironically) OK because interest rates will rise in the next 12 months. Look at the 10 year US bond! It’s blood on the streets for long-term bonds, signalling higher interest rates in future.

    Gold, silver and oil are all long-term positive.

    I am desperate to buy a self-sufficient farm in the hinterland of Nthern NSW. Are you with me on this? Can we get an anarcho-libertarian commune started in Australia with a few like-minded survivalists?

    I feel we could live together happily (Platonically of course)…

  23. June 11th, 2009 at 11:58 | #23

    And you failed to address any of the points I raised. More bombast?

  24. Alice
    June 11th, 2009 at 13:16 | #24

    Andrew – I can see very clearly you are in favour of no regulation (at all). Is this correct? In that case, should I declare the road to my house a private road from now on, and given there are lots of units as well as a few houses in my street, I will let the neighbours slug it out over parking, and then slug it out over blocked private drains, and then slug it out over potholes and maintenance, and I wont call the police to any fisticuffs (and there would be lots) because that would involve regulation.

    Im not being bombastic but Im not wanting to address further discussion on Glass Steagall and regulation of the financial sector (we…you and I… are never destined sadly, not to agree on this one) and also because it was already covered in another debate with you and ABOM. And Andy – ABOM won that one clean, fair and hands down with a couple of knockout blows.

  25. June 11th, 2009 at 13:24 | #25

    More primitive straw man argument. Can you please get away from it? I am in favour of minimising regulation. The usual strawman of roads is irrelevant to a discussion about banks, yet you introduce it. I am not an anarchist.
    I am not looking for agreement, Alice (although it would be nice) what I am looking for is actualy engagement. So far you are content to contend that there has been “financial de-regulation of the type that occurred under Bush’s leadership” and that this led to the current problems. When I point out that the financial sector is one of the, if not the, most heavily regulated area of commerce you merely try to point at Glass-Stegall’s repeal. I point out that this was one piece of legislation amongst thousands, and that was widely ignored anyway, and you come back with a bit about roads and say that there is no point arguing as we are not destined to agree. What sort of reply is that?
    As for ABOM winning – that is a matter of opinion. His ignorance on the very basics of banking did not allow him to understnad the points, let alone answer them.

  26. Alice
    June 11th, 2009 at 13:33 | #26

    Andy – at least we do agree on super. Id rather have that money in my hot little hand because Id keep more of it and make more from it and have more to show for it now, with growth at a more comfortable speed than the ferrari returns (and break your neck crashes) that became so fashionable, in almost every fund, in the last decade. A casino it has been (with global super) and never before would I ever have thought I would say this but – “too much money chasing too few real investments and too many shonky investments”.

  27. June 11th, 2009 at 13:38 | #27

    Perhaps we could add a large tax cut into the equation? Less money forced out of your hand and spent where the government wants it to be (some wasted) and more in your hands to allow you to choose what to spend it on – like donations to your favoured charities, purchase of fair trade goods and environmentally responsible goods, increased saving for retirement. Surely having 40% or so of your spending being directed by someone else who may not share your ideals is not entirely a good thing?

  28. ABIM
    June 11th, 2009 at 14:06 | #28

    “As for ABOM winning – that is a matter of opinion. His ignorance on the very basics of banking did not allow him to understnad the points, let alone answer them.”

    This, from someone who did NOT predict the crisis and who is the middle of the cow pat that is the Australian financial system? Blind, blind, blind.

    And as for a REAL understand of the shell game that is “banking” (a.k.a “embezzlement”) I repeat that you actually read this Austrian School piece, written in August 2003, four years before Chapter One of Armageddon began:


    Do you have any comment on this piece, Andie?

    And for a website from someone who actually knew what he was talking about and predicted the crisis, see Panzer:


    Yet another writer who understand the danger of OTC derivatives and UNREGULATED financial markets, which are basically large-scale embezzlement operations, massive vaccuums sucking real wealth from the working people.

    Alice, thanks for the support. I’d actually like to “get you into trouble” :-)

  29. ABIM
    June 11th, 2009 at 14:09 | #29

    “ABIM” is ABOM in disguise, trying to hide from the banking zombies, who seek to destroy anyone with either gold or a brain.

  30. ABIM
    June 11th, 2009 at 14:12 | #30

    Yes, I’m drinking again, and although I might not know how to type “understanding” or “understood” in my present state of mind, at least I DO “understand” that we face a massive financial crisis fuelled by too much DEBT.

  31. Socrates
    June 11th, 2009 at 14:31 | #31


    You aren’t fooling anyone with your sophistry. First you say “can anyone prove…’, then Alice does so, then you pounce on one phrase to move the goalposts with some arcane reference to the 1890s. Its a childish high school debating trick. Trying to defend insufficiently regulated markets by saying that none were (completley) unregulated is creating a straw man argumetn that is no more credible than some left wing loon trying to defend communism. The regulation of financial markets internationally has been found to be insufficient, and needs strengthening. The fact that Australia, with stronger regulations, has suffered less losses, only proves the general point more. I woudl agree that some of our reporting regulations are stupid and should be abolished, but some are too weak and should be expanded, especially on private equity.

    Having an ideological view that minimal regulation is preferable only makes sense if you are one of those trying to avoid being regulated. For the rest of us it is a case of however much regulation is needed to protect our investments is what should be put in place. If investment funds really cared about investors, the first thing they would do is reduce their own fees and bloated executive salaries from compulsory products like super, rather than whinge about reporting and regulation costs. I respect that you know the market better than I, but the market interest isn’t the same as the public interest.

  32. Alice
    June 11th, 2009 at 15:35 | #32

    @Andrew Reynolds
    Perhaps we could add a large tax cut into the equation?

    Andy…actually thats a no – Im for a large tax increase on top income earners and when govts are bankrupted and degraded public infrastructures verging on chaos…Im sure it will happen (tax increases on the wealthy)..The very wealthy have been gambling with the proceeds of large increases from growing inequality in industrialised nations over the past thirty years (thanks precisely to excessive tax cuts granted to them) and they need to get back to the business of being responsible corporate citizens.

    Its just a shame its taking major governments so long to realise the bleeding obvious. You can only push other people down (at the same time insisting on their own supernatural, but unfortunately epehemeral, wealth creating abilities) and wreck economies and financial markets and governments and workers.. with empires of highly concentrated, insider traded and hoarded monies…for only so long Andy..

  33. June 11th, 2009 at 15:42 | #33

    It is not by ideology that I believe that mininmal regulation is better – but by observation. When I left Uni I had the same (IMHO naive) opinion that regulation was a good thing. Kept those nasty bankers in check.
    Having actually spent 20 years (or so) trying to deal with the fact of regulation my opinion has changed.
    As for “can anyone prove” – can you please point me at the relevant comment? I have tried to wade through them, but I cannot find it. The reason for the point to the 1890s is simple – the weight of regulation since then has been such that finding anywhere that has any experience of minimal regulation since then has been very tricky. Besides, If I cannot argue with historical perspectives it does somewhat tie my hands.

  34. Alice
    June 11th, 2009 at 15:46 | #34

    ABIM – LOL! Just dont rotate through all the vowels with those name changes…

  35. ABUM
    June 11th, 2009 at 17:47 | #35

    Like this?

    Did I tell you that we could have a wonderful life together, hiding from the zombie-like “let’s keep deregulating the financial system even if kills us!” Andies of the world in my “Financial Armageddon” shelter somewhere in the South Pacific.

    Please heed my warning – with the quality of brain you have, you’re a prime target for the banking zombies. Please be careful, Alice!

    Let’s elope from the madness!

  36. ABUM
    June 11th, 2009 at 18:00 | #36

    And don’t think I’ve forgotten about you Andie. 20 years of having your mortgage and kid’s dental bills paid by the finance industry certainly has “turned” you, hasn’t it? I wonder why you turned 180 degrees?….Hmmmm….let…me….think….

    And don’t think you can just avoid commenting on the prescient 2004 piece by The Prophet Robert K. Landis, entitled ironically, “Saving the System”.

    I will NOT let you sneak away from being intellectually trapped so easily. Like a thief (or embezzler) in the night, you must be hog-tied down and forced to confess your sins….

  37. June 11th, 2009 at 18:42 | #37

    Ummm – no, ABOM. I have only been paid directly by banks for about 8 years of that. 7 years was working on a prosecution of fraud in banks and the rest was in consulting partially to banks but mostly to banking clients.
    You must hate it when the attempt at ad hominem argument falls flat. It means you may actually have to address the points. Naaah – you can always try to play the man again.
    As for “Saving the System” – the system is coming back up again. Does that mean that he has turned from being right to wrong again? What about the Australian experience. Does the fact that only one (big risk taking) institution has failed (without any loss of depositors funds) mean that he was completely and utterly wrong?
    No – he is right in parts. He does, however, at th eroot make the same mistakes you do. Not uncommon, but that does not make him right.

  38. Alice
    June 11th, 2009 at 20:38 | #38

    LOL Abum – should never have mentioned it – laughing so hard – the zombie banks have made bums out of all of us!!!

  39. Alice
    June 11th, 2009 at 20:51 | #39

    Andy – give up consulting and go back to working on prosecuting the banks for fraud. We need more people with your skills..!!

  40. SeanG
    June 11th, 2009 at 22:07 | #40

    Gaz :

    SeanG :Reminds me of that fateful letter by over 300 economists criticising Margaret Thatcher’s 1981 budget that corrected the fiscally horrendous position she was placed in by Labour.

    Not only that, but it also prevented unemployment from rising just about continuously for the following five years, from 8.1% at the time of the 1981 budget to 11.3% five years later!! Oh no, hang on, umm, wait a minute….
    (OECD harmonised unemployment rates data)

    Tough medicine was needed. Maybe you ignored the massive structrual changes that were required… oh well I guess you would prefer the UK to have an unmanageable economy.

  41. ABOM
    June 11th, 2009 at 22:23 | #41

    Andie, be careful my friend. You’re treading on landmines.

    You admit you are CURRENTLY paid by the banksters and have been paid by them for 7 years. Interesting.

    When I was a barrister many years ago (before leaving in disgust at the system) I saw ex-coppers come over to the other side as barristers. They did very well. Very well indeed.

    Ad hominem? No, I just missed by a few years.

    I have never seen a weaker analysis of the Austrian School position. “No – he is right in parts.”??? What the Hell is that all about. He is right 100%. FULL STOP.

    “The system is coming back up again.” Perhaps like a zombie?

    I say, “Oh, yeah? Check out 30 year notes, Andie. Or even 10 year.”

    Just you wait my banking “consultant” friend. Just. You. Wait.

  42. Alice
    June 11th, 2009 at 22:23 | #42


    Thatcher’s legacy?

    Industrial production declined rapidly under Thatcher, unemployment tripled during her premierhsip. By the end of her reign 28% of children were living below the poverty line in 1990 and it kept on rising to 30% by 1994. By 1997 the poverty rate was the highest in Europe after doubling under Thatcher. Inequality rose from 0.25 in 79 to 0.34 in 1990 showing exactly how Thatcherism failed.

    Tough medicine needed? As the Brits would say… “bollocks.”

  43. Alice
    June 11th, 2009 at 22:27 | #43

    ABOM – Andy isnt alone. There are more in here employed by the finance sector..

  44. ABOM
    June 11th, 2009 at 22:33 | #44

    “In here”???

    I keep telling you to RUN. Why aren’t you taking my advice? They’re going to go for your brains, I’m warning you.

    (At least I promise I wouldn’t do that!)

  45. SJ
    June 11th, 2009 at 23:12 | #45

    Test (sorry).

  46. SeanG
    June 12th, 2009 at 00:25 | #46

    Alice :@SeanG
    Thatcher’s legacy?
    Industrial production declined rapidly under Thatcher, unemployment tripled during her premierhsip. By the end of her reign 28% of children were living below the poverty line in 1990 and it kept on rising to 30% by 1994. By 1997 the poverty rate was the highest in Europe after doubling under Thatcher. Inequality rose from 0.25 in 79 to 0.34 in 1990 showing exactly how Thatcherism failed.
    Tough medicine needed? As the Brits would say… “bollocks.”


    Industrial activity fell because British industry was been heavily subsidised for years of loss-making: no changes were made because of union action and the government used to control prices so that a permanent loss was being made. GOS fell to 4% of GDP at one point and the Industry Secretary stated that this was too high.

    Inequalities have risen under Thatcher and under 12 years of a Labour Gov’t – inequality is greater today than it was under the Tories.

  47. June 12th, 2009 at 01:42 | #47

    Sorry to spoil your continued ad hom – but I am not currently paid by bankers. I am in fact consulting to bank clients and doing some academic work.
    It’s a pity when the facts don’t fit your prejudices, hey.
    Now – how about actually answering a question. Oops – I forget. Just chuck another link in.
    As for “100% correct” – he has the basics wrong. A bank account is not money even though it is commonly counted as part of the money supply. The reason is clear – money is something that you can buy something with. You cannot walk into a shop and hand them your bank account. You need to withdraw funds from it first. As I said a while back:

    Now, look at bank deposits and some of the other things in M3. Would someone seriously take my bank deposit or CD in exchange for his goods? No. He or she will normally accept cleared funds of one description or another, but not my bank account – there is no real way I can transfer that, other than changing the name on the account, which would be silly. They may accept a cheque, but if it is not met at the bank then I still owe them money (and the bank some additional fees).

    This is your “100% correct” person quoting Rothbard – I won’t put a link in as too many links will put it into auto-moderation. The relevant para has his footnote 5 in it.
    I always love it when Rothbard is quoted on money. Makes the process as easy as shooting fish in a barrel. If you ignored Rothbard and read someone who actually had a clue about banks (like Mises or Hayek) you may actually learn something.

  48. SeanG
    June 12th, 2009 at 07:14 | #48

    This debate has gone through advanced stages of confirmation bias with no compromise by any participant.

    Maybe ProfQ can write a post about what changes he has made to his views (economic/political/policy) since this crisis has started?

  49. ABOM
    June 12th, 2009 at 10:34 | #49


    It becomes “real” money (IN A FLASH!) the second central bankers start acting like chickens with their heads cut off as the private bankers scream “BANK RUN!!! The WORLD IS ENDING!!!” and FORCE the central bankers to print e-money on a Weimar scale (like in Q4 2008 – and right now).

    To say just because M3 isn’t “real, real, REAL money” it doesn’t have an effect on the “true” money supply shows just how detached from reality you really are.

    M3 is functionally today so close to money, it IS money. Especially with the electronic systems we have today where I can transfer e-money from my internet account into GOLD (real money) at the drop of a hat.

    I would have agreed with you if QE hadn’t occurred in Q4. But the central bankers buckled under the pressure and now we all know no big bank will be allowed to fail. If people rush from M3 to M1 or to gold, the authorities will print as much as required. The banks will FORCE M1 higher because of PAST excessive M3 growth. This makes M3 = M1. Simple.

    You are so wrong, as Q4 2008 so clearly shows.

    You really worry me Andie. With people like you out there, I now see how the financial crisis came about. Ken Lewis yesterday stated that the world had not seen a financial catastrophe like the one experienced in Q4 last year for 80 years (perhaps ever). He said the modelling wasn’t working, the chaos was incredible, and the regulators were pressuring banks to do deals because of the chaos. The biggest “silent” bank run of all time.

    As an outsider, you wonder: “Who are these people, and how could supposedly ‘clever’ people at the heart of our financial system stuff up so badly and have no idea themselves what is going on? If they were bridge engineers we’d all be dead!”

    Now I see why. They really have no idea because they fervently believe ABSOLUTE RUBBISH (like flat earthers), despite “outsiders” screaming about the problems in front of their noses for YEARS.

    How blind do you have to be NOT to think:

    “Hey, I was SO wrong last year. I never saw it coming. It was like it came out of nowhere. I was blind! Perhaps Austrians such as Ron Paul, Peter Schiff, Bob Landis, Jim Sinclair, Bill Bonner and Richard Daughty (who all saw the crisis coming and accurately predicted catastrophe YEARS AGO) know more about banking than me!”

    Very, very blind. Just like a zombie.

  50. Alice
    June 12th, 2009 at 16:46 | #50

    ABOM – we could have a wonderful life together RUNNING away from the zombie-like “let’s keep deregulating the financial system even if kills us!”
    Trouble is, its not just the financial system they are after…its every damn system. Sean here thinks Thatcher did a good job (just because she was a Tory?) and she started the mess we are in now with her de-regulations and free market nonsense and privatisations. She tripled the Unemployment rate for goodness sake, TRIPLED it. She DOUBLED poverty. Under her reign. Sean thinks this was good thing (tough love?)?

    All she did was make a mess.

    Well, even her own self appointed Chancellor of the Exchequer couldnt stand her in the end and resigned prematurely because he couldnt stand her. A good man. Nigel Lawson (father of Nigella). Nice family. I knew his father. What can we say about Thatcher’s family? Dubious and includes criminal offspring.

    Sean, how is the UK doing now? If Thatcher was the captain of a ship it would be called the Titanic.

  51. ABOM
    June 12th, 2009 at 17:04 | #51

    Thatcher raped Britian. Or facilitated the rape. The tragic broken faces of the “seduction” and subsequent rape are only now appearing. Torn, battered without hope or a future. Raped by debt.

    Sad that someone would even think that a few years of being drugged on the Rohypnol of easy money and state asset sales was “worth it”.

    Protectionism, govt regulation of banking and even unionism would have been better than what we got.

    I support free markets with free money. I support govt regulation when we don’t (yet) have gold and silver being allowed to circulate as money.

    Either allow the young girl to choose her man voluntarily (free market money) or force her to stay at home away from the drugs and thugs (fiat money/fractional reserve banking). Under NO CIRCUMSTANCES allow her to go out naked to a rave party full of barbaric pigs who will just abuse her with drugs.

    What is there not to understand?

  52. SeanG
    June 13th, 2009 at 04:02 | #52


    The FSA – the financial regulators who failed so abysmally – were created by a Labour Government.

    Personal debt in the ten years that Labour have been in power grew from £600bn to £1460bn. Public Sector borrowing stood at £35bn BEFORE the recession and is now standing at £175bn. Inequality in Britain today is higher than at any time under the 18 years of a previous Tory Government. Strikes crippled the British industrial machine leading to one point (infamously) where dead bodies remained unburied and garbage was not picked up.

    Poverty increased, I don’t like that, but saying that everything she did was wrong is pig-headed and ignorant. The massive reforms lead to lower inflation and higher productivity and investment. It allowed the Labour Government to claim for years of economic growth to allow them to waste it all.

    Nigel Lawson – who reduced the top rate of income tax from 60% to 40% and what happened? The % of total tax paid by the top 1% of taxpayers went up. Indeed – the Tories have a more progressive tax system than Labour does.

    Lord Lawson, Lord Howe and Ken Clarke were all brilliant Chancellors. Before Thatcher, the Government decided the price of biscuits… and yoy think she was bad?

  53. Alice
    June 13th, 2009 at 09:48 | #53

    Sean – a budget deficit isnt a failure. A deficit budget is cyclical adjustment necessary at times, just like now. The country was in depression and had just come out of the stagflationary 70s crisis when she came to power. Of course the budget was in deficit.

    Your point that Thatchers “tough medicine” was needed is wrong because there have been no successful outcomes since Thatcher’s “tough medicine.” The de-regulation and union busting saw unemployment triple and poverty double and inequality rise by one third just until 1994 and it kept on rising. Thatcher was a bully who’s response was “3 million unemployed is a price worth paying.” The same bullying attitude that alienated her colleagues one by one.

    You just dont get it. You want people to beleive in deregulation (and tough medicine) “till it wrecks everything”. If Thatcher’s reforms were so vitally “structural” the reforms should have lasted no matter what governments came and went since. It was “tough medicine” that made a lot of people and their government unwell in the long run. Then when there are no public assets left to sell…how to do you restore the deficit then Sean? You need to restore production and employment and as far as I can see that hasnt happened despite Thatcher’s so called “structural” reforms. She fuelled a boom in the 1980s and it led to an even bigger one in the 1990s. Thatcher added to cyclical volatility and her “rising tide” smashed boats on the rocks the same as Reagan’s policies did.

    So much for Thatchers “tough medicine.”

  54. Alice
    June 13th, 2009 at 09:54 | #54

    Ande Sean – Thatcherite and Reagan policies of tax cuts to the rich has fuelled these destructive booms (1980s, 1990s and now the big mother). The sheer percentage size of tax cuts granted to the rich, relative to everyone else, since the 1970s are proving immensely procyclical in nature and are at the very core of the mess but no government is ready to admit it.

  55. SeanG
    June 13th, 2009 at 17:39 | #55


    This is not a cyclical deficit – it was structural in the 1970s and 1980s and it is structural today. Look at it this way. From 2011-2014 the Government is projecting a 7% increase per year in cash spending. “Great” you would think – high public spending! However once the numbers were crunched because the borrowing is so high, the amount of money it will take to service the interest cost, the natural depreciation due to inflation and taking into considering welfare payments and each department must not cut real spending by 7%. That is what happens with a structural deficit and weak public finances. Thatcher had it, and it is here today.

    Lord Tebbit once said that the mistake people on the left made about unemployment was that people had a job that was unproductive and a drag on everyone else. If they were not heavily subsidised then they would not be employed. His point is valid.

    I don’t quite think you “get it” Alice… Before Thatcher, Britain was truly backward. People were in jobs because the productive sections of the economy at that paid were bled dry to keep them employed. Even the Labour Government PM in 1978 said that the idea of manipulating the economy via spending and tax had failed to work. I know that you have pet hates – but you are wishing to see only what you want to see. Without Thatcher, Britain would have been left behind with high unemployment, low growth, low productivity and low relative prosperity.

  56. June 13th, 2009 at 17:46 | #56

    The problem is that the UK in essence experienced one long bust from about 1913 onwards. Even if you are right (again, not conceded) then to me at least a cycle of boom to bust is better than one long bust.

  57. Alice
    June 13th, 2009 at 21:03 | #57

    Sean and Andy,

    I tell you what…I will broker a deal with both of you.

    If you can find me any research that shows a positive correlation between the dramatic tax cuts granted to the wealthiest in industrialised nations since the 1970s, and the level of private investment then I may reconsider my views. I think you will find that private investment correlates to the level of GDP more commonly. The rich know when to invest and they will invest when GDP is growing, not because they get preferential tax treatments. They are not stupid.

    On the other hand governments are forced to invest when GDP is falling and I think you will find government investment also correlates strongly and inversely to the level of GDP growth. My point is, if tax cuts to the rich are not correlated strongly with private investment (and thus GDP growth), then I have an argument that it is the level of private investment that is letting the government down and causing pressure on the need for larger public deficits in the more volatile boom and bust cycles since the early 80s (Thatcherism and Reaganism) precisely because taxes from the rich are less and unemployment and underemployment higher (meaning less taxes from ordinary employees). There is no buffer.

    You can complain about budget deficits all you like but they are the new reality and its no use tossing another 3 million into unemployment and underemployment and / or casual employment if its not getting rid of deficit budgets …and its clearly not (and there are only so many public assets to sell…and there are not many left).

    In return for greater de-regulation in most business sectors…I will trade you for higher taxes on the rich and lets see if things improve? If you read todays Fin Rev – it is already happening (the closing of tax loopholes for the rich). You may also notice the large US financial institutions are already rushing to pay back their bailout monies….not through a sense of social or economic good, but because they want full board say over the profits from which they can retain freedom over their remuneration. The executive rich will not regulate themselves in terms of their unfair extraction of profits from shareholders, and it has been the excessive freedoms granted to this group that have caused pressure on public budgets globally. Some of the greatest eras of growth in history in industrial nations came when the rich were still paying 80 – 90% tax. They will still invest – make no mistake. They will still want to make more money.

    So what say we trade greater business deregulation for higher taxes on the wealthy and see how it goes? Andy? Sean?

  58. SeanG
    June 14th, 2009 at 02:39 | #58


    I think the correlation between private investment and GDP growth is in a different paradigm than what you see it. Firstly it is not just about the top rate of income tax. Tax as a whole need to be considered – income tax, corporation tax, capital gains tax, consumption tax. These must be considered because not only do they affect the sie – quantity – of investment but also the methods of investment – equity vs. debt.

    Private sector investment is determined by a number of factors and they are encapsulated broadly as “RAROC”. This drives GDP growth and investment can be extremely variable in some areas while decidedly fixed in others. It is not the paradigm of income taxes.

    What is Government investment? Is it the same as spending? Is there any opportunity costs involved? Have a cost-benefit analysis been completed on the expenditure? Is it politically motivated? These are questions that are not asked by yourself Alice. That is what frustrates me. You state that government investment rises in a recession when government spending does – investment is a loose term.

    Deficits are both structural and cyclical. At the peak of the boom in 2007 (before the start of the credit crunch in August of that year) the UK Government was looking to borrow approximately £35bn in the world markets. The borrowing as labelled as “investment” when it was recurring expenditure. The weakness in public finances showed itself with the recession. Out of the £175bn deficit for 2009-2010, at least £90bn is considered structural.

    Deficits are not “new reality” – they have been around for years. Unemployment in the UK is already heading towards 3 million despite the huge budget deficit. Unemployment will go up irrespective of government actions and this is something that you have to accept. You also have to accept that everytime the government borrows money from someone, they are potentially depriving investment going to the private sector leading to higher interest rates on corporate borrowing. This provides a drag on economic growth.

    Interesting trade-off idea, but the rates of growth were despite, not because of, higher taxes. Coming out of WW2 with massive spare capacity being added to by developments from the war combined with additional (and vital) government investment in education and skills led to economic growth. Taxes did detract from growth but the drives of growth were fundamentally different than they are today. I think your idea is interesting. I dislike paying tax but we need to reduce the loopholes because otherwise people lose the moraland economic justification for lower taxes. Remove the loopholes (and complexity) – this will increase tax revenue, then reduce the taxes to stimulate private-sector investment and savings by individuals and this will create deeper capital markets and economic growth which will lead to higher revenues for government to devote public spending on health, education, energy and transport.

  59. Monkey’s Uncle
    June 14th, 2009 at 02:57 | #59

    Alice, the argument that tax cuts for the well-off are pro-cyclical doesn’t really hold up well at all. Or rather, it would only hold up if you believe governments are disciplined enough to run large budget surpluses during periods of economic growth (a heroic assumption).

    Generally, the more progressive the tax structure the more that government revenues should fluctuate based on the economic cycle. That is because when the economy is growing, there are more people making a lot of money, and therefore more people in higher tax brackets. Conversely, when the economy contracts, fewer people are making a lot of money and therefore paying the higher tax rates, so government revenues will fall more sharply.

    If governments increase spending during times of economic growth and higher revenues, this would tend to be pro-cyclical, i.e. stimulate the economy at the wrong point of the cycle and exacerbate the boom-bust trend.

    Unless governments are disciplined enough to run bigger budget surpluses and contain spending during periods of economic growth, it is more likely that progressive taxation would tend to be pro-cyclical.

  60. Monkey’s Uncle
    June 14th, 2009 at 03:20 | #60

    Alice says “Thatcherite and Reagan policies of tax cuts to the rich has fuelled these destructive booms (1980s, 1990s and now the big mother)”

    During the last several years of Gordon Brown’s tenure as Chancellor and now PM, taxation and public spending have risen considerably as a share of the economy in the UK. So the current mess can hardly be blamed on ‘Thatcherite tax cuts’. Moroever, the current recession looks like being much worse than the early 1990s downturn.

  61. Alice
    June 14th, 2009 at 09:32 | #61

    MU – as I suspected there is no compromise. I offered as a deal deregulation of businesses in exchange for raising taxes on the rich – but no, the right want it all dont they….deregulation and minimal to no taxes and then when they gamble us into a major sharemarket crash with ponzi schemes of unregulated financial derivatives – the executive elite want to whinge about the size of public deficits now needed to correct their excesses. The solution is simple. Correct their excesses before they fuel the financial markets with exotic derivatives, with higher taxes on the rich.

    I asked if any one of you (yourself or Sean or Andy) could find one piece of research anywhere that shows that private investment flows correlate with the tax reductions given to the wealthy over the past thirty years. You wont be able to because they dont. There was no trickle down.

    I would suggest public budget deficits would correlate more with tax cuts given to the rich once you subtract out the public asset sales (that have really masked the proper budgetary effect). Make no mistake, the rich would happily see a return to economies like the poor tenant farmers of Ireland under the British aristocracy if they could get away with it, and they will if the governments of industrialised nations persist in bowing and scraping to appease the “no regulation and no taxes either” crowd.

  62. Kevin Cox
    June 14th, 2009 at 10:03 | #62

    There is no need for the government to go into debt to “fix” the economy.

    As a person who has spent many years (successfully) raising and investing small amounts of money for investment in innovation here are my observations on why public investment is important and why private investment for innovation is difficult to obtain. I will then describe a mechanism for how investing in innovation is the way to fix the economy and how this can be done without the government going into debt.

    Innovation, which I will define as achieving the same output of goods or services but for lower cost or introducing a new goods or providing goods and services that did not previously exist, is what drives wealth accumulation. Some people call it productivity. I prefer to call it innovation because productivity improvements is a subset of innovation and does not include the creation of new goods and services. Innovation/productivity also drives wealth destruction when processes that were once profitable become obsolete.

    If you have an innovative idea then you cannot get a bank to invest in the idea. You cannot get a super fund to invest in the idea. You cannot get most fund managers to invest in the idea. You cannot get these institutions to invest because they do not care whether your idea is innovative or not – only whether they will get the back the money they loan along with some interest for the time you have the use of the money. That means you have to have assets that you can “mortgage” against the loans. In other words the main sources of capital will only lend money if they are reasonably assured of getting their money back – not how innovative it is and how much it will potentially earn. All bankers are essentially the same including merchant bankers who are the ones supposed to be in the business of lending for innovation but their main incentives (payments) come from making the deal not from what they advise people to invest in so they tend to favour the tried and true and the least risky not the most profitable.

    You would think that successful companies would be the main drivers for investment in innovation but they are constrained by “the innovators dilemma” so well described by Christensen.

    So who are the people who fund innovation. It turns out that the people who fund innovation are the rich who have become rich themselves through innovation. They are more likely to invest but in Australia there are relatively few innovators who have become rich and even they tend to only risk small amounts as they try to preserve what they have rather than invest in innovation. Most rich people in Australia have become rich because of property investments or inheritance or in taking advantage of public and private monopolies. In Australia for small companies who are yet to be profitable, a major source of funds for innovation turns out to be the government through its R&D tax credit scheme.

    The funding of innovation this way will not raise the large amounts of money needed to get productivity improvements or introducing new technologies required to address the large problems of climate change, securing water supplies, building broadband networks, creating efficient public transport networks, investing in education etc. The funds needed to address these problems will not come from Australian private companies or individuals.

    The only way is for the community as a whole to bear the risk of funding innovation – because it is risky – and it does not always work. That is also the reason why governments are so bad at doing it because they tend to put all their eggs in one basket or give the money to existing players such as the coal companies or the auto manufacturers who are not renowned for innovation. The goverment frequently get it badly wrong as with our transport infrastructure.

    A solution to these major problems is to fund innovation through public money but give the public money to the population (or at least to a large number of people) and require them to invest in ways of producing goods and services that address particular problems. This brings the market place – which is a good way of allocating resources – to investment in innovation.

    I propose we invest public money collected either through taxes, surcharges or by printing it by giving it to the population and require them to invest in the infrastructure to provide goods and services through an investment market place. The risk of failed innovation is thus spread. Some people will get the good investments others will get the duds but they will invest because that is all they can do with the money. People are not risking their existing wealth so they will not feel quite so bad when they lose their money because in a sense they never had it – and they can always eliminate their risk by selling their investment money at a discount to someone who is prepared to take the risk.

    If you haven’t already done so take a look at http://stableproductivemoney.wordpress.com/2009/06/12/submission-to-national-broadband-network-greenfields/ to see how to fund the National Broadband Network.

    How does this relate to the economists and public debt? I think it is unnecessary to create public debt to fix the economy. Debt is about who owns things – it is not about wealth creation. If we have public debt what does that mean? We owe money to other members of the public be it in Australia or elsewhere. Debt is a zero sum game while growing the economy is a non zero sum game. We have let the mechanics of debt (or the dividing up who gets the goodies) cloud our view of what is important for wealth creation. What we need to concentrate on are the mechanics of wealth creation and I am advocating a process of wealth creation through investment markets where there are a lot of people investing for particular purposes and where the wealth is widely distributed.

    That is what the current system is supposed to do and it has worked well for some of us. What I propose is an innovation in how we as a community invest our public monies for the public good and where debt is not the mechanism used to fund our investments.

  63. Monkey’s Uncle
    June 14th, 2009 at 12:22 | #63

    Alice, I would be quite willing to accept a deal along the lines of what you suggest. Perhaps we should increase taxes on high-income earners to about 60 or 70% and see what effect this has on the economy. If the economy improves, you win.

    If it’s true that tax cuts for the wealthy and deregulation caused the current financial crisis, then why are countries in Western Europe (where taxes, public spending and regulation are higher) faring just as badly? The latest GDP figures coming out of France and Germany are awful. And why is a more social democratic country like Iceland on the brink of bankruptcy?

    Indeed, many European countries largely missed out on the economic booms of the 1980s and late 1990s-early 00′s, yet they are still experiencing the current bust just as badly.

  64. Alice
    June 14th, 2009 at 12:50 | #64

    MU – Flow on effects MU (trade) – it started in the wealthiest industrialised nations remember?

  65. SeanG
    June 14th, 2009 at 20:39 | #65


    I have rejected the paradigm of correlation between top marginal rate of income tax and private investment because it is wrong. There are correlations between reduction in income taxes and consumption and a reduction in capital gains taxes and investment but income tax and private sector investment do not correlate because income tax is taken from a variety of sources both both employees and entrepreneurs. There is an inverse correlation, however, between reductions in income tax and the proportion of tax from the top income earners.

    I really tire of when people talk about tax within the paradigm of income taxes. I hate it because it is such a false argument. Unless we look at taxes as a whole then this is a false debate that will be circular.

    Alice, you wrote “I would suggest public budget deficits would correlate more with tax cuts given to the rich once you subtract out the public asset sales “. This is plain wrong. The real increase in spending in the British government is at over £100bn a year. That means incomes in public spending has risen year-on-year beyond inflation to the point that the government borrows tens of billions during the good years to fund recurring expenditure and over £175bn this year (a bad year) to fund that recurring expenditure. No tax cuts for the rich – just extra spending on public services that is bankrupting a nation.

  66. SeanG
    June 14th, 2009 at 20:47 | #66


    Do you believe that there is any correlation between tax and private sector investment? Do you know what are the main drivers of investment and the different forms that they come in?

  67. Alice
    June 15th, 2009 at 10:35 | #67

    Sean G says “I have rejected the paradigm of correlation between top marginal rate of income tax and private investment because it is wrong.”

    Thats what I have been trying to tell you. Lower taxes granted to the rich is SUPPOSED, according to the trickle clowns …enrich us all and create production because they are so entrepreneurial they cant help but “invest.”

    They dont invest their own personal money in risky ventures (instead, thats in a tax haven somewhere). The executive rich want to be fabulously remunerated with others people’s money (people who have now lost a lot of it) for investing other people’s money and they can always take the golden handshake and leave if it doesnt work out. Nothing to lose and everything to gain in their own personal sense. Its a win win for them. When there is an economic crisis because of their profligate ways, they want to hammer governments and the poor for budget surpluses (just in case their taxes rise).

    Well let them rise as they should. A just outcome and it would help governments get out of the mess of deficits created by their financially speculative excesses.

    SeanG, your reaction is predictable, as ever. It could have come straight from the denialists manual. You want deregulation and lower taxes on the rich and you want budget surpluses as well and there is not one ounce of compromise

    OK I did the deal with MU anyway – at least he has an open mind – deregulation in exchange for higher income taxes on rich individuals.

    I am talking about income taxes Sean (I am aware its not the only tax but income taxes was what we were discussing and I wont be veered sideways into discussing the alcopops tax or whatever other tax – you do rather like that approach dont you?).

    The rate of income tax on wealthy individuals is too low (and has been since at least the early 1980s). It is feeding a cancerous growth in inqequality (which contributes to budgetary pressures) that needs to be halted. It is astonishingly obvious, except to those who profit and have profited, from growing inequality in the past two/three decades.

  68. ABOM
    June 15th, 2009 at 13:35 | #68

    Business is now lobbying for lower corporate taxes and higher GST rates (a regressive tax if ever there was one).

    Why not just get it over with, put us all in chains and let’s be open about the fact that there are “overlords” and “wage slaves”? Why the silly charades?

  69. Alice
    June 15th, 2009 at 13:55 | #69

    ABOM – the overlords have run amok and are taking us all down with them (the eejits – they just cant see they will take themselves down as well by bankrupting the very hands that feed them!). I saw what they are after now – 15% corporate taxes BUT they want THAT and lower personal income taxes. SHEESH. It never ends and if you beleive them its all “good for us”, “tough medicine”, “fiscally responsible”, “efficient” and it even restores hair loss.

    More power back to the middle classes and the wage slaves I say!

    The tide needs to turn and its turning ABOM.. you and I are eloping to that Island.. where there are NO large banks and NO Business Councils and NO wacko Treasury Models..

  70. ABOM
    June 15th, 2009 at 14:25 | #70

    I’ve got two tickets, my new board shorts (snazzy red ones with turtle images all over them) and a small luggage bag with a reasonable collection t-shirts, boxer shorts and…ummm…a few other items I may need :-)

    Seriously, check this out:


    A parasite keeps sucking until the body (or the system) dies and it dies. It NEVER thinks “That’s enough, or I’ll kill the poor bugger!” It. Just. Keeps. Sucking. That’s the very nature of a parasite.

    That’s what a parasite does. Most of the parasite species are LITERALLY blind – they don’t need to see. They just rely on you to see. They don’t even need a brain. They just rely on you to think for them.

    The malaria bugs don’t say to each other, as they’re blowing up and eating thousands of red blood cells, “Everyone just pause for a while, this kid could die if we keep going at the rate we’re going, and if he dies, we die!” You’ve never seen a case of a “slow, sustainable” malaria infection have you?

    We are on a collision course with diaster because the parasites have taken over the cockpit command centre of ALL WESTERN ECONOMIES and are COMPLETELY BLIND.

    They’ve killed the real pilots (gold and silver) and have been partying with the pretty stewardesses and have taken their eyes off the mountains looming in front of the plane.

    You and I are have been pushed into the back of economy because we argued with the thugs outside cockpit and both got shoved to the back of the plane.

    Both of us KNOW the WHOLE PLANE is doomed but there’s nothing we can do – everyone in the cockpit is completely p*ssed (even more than me!) on POWER (the ulimate drug) or on real drugs like coke and the young stewardesses are now completely naked with their panties over the pilot’s eyes. It’s ugly in there, let me tell you (most of the pilots are SHORT, FAT, BALD, OLD and HAIRY ALL OVER).

    Do I jump before the plane hits the mountain or do I just stay along for the ride, chatting to a princess with a beautiful heart like you?

  71. ABOM
    June 15th, 2009 at 18:57 | #71

    Or do I just blow my brains out before 99% of the children of the world are enslaved by the tiny number of sadistic bwankers?

  72. ABOM
    June 15th, 2009 at 18:58 | #72

    Sorry – I’m soooo bad with typos :-)

  73. Alice
    June 15th, 2009 at 19:06 | #73

    ABOM – check the comments on Monday message board. For the Sean and Andies I would like to know also – how much of a subsidy does the capitalist system need?

    It needs workers pushed into humiliating contracts, its needs not 70%, not 80%, not 90% de-regulation – it needs 100% and more and more concessions granted to the greedy. It needs the rich to be subsidised while they invest (apparently they dont make good enough products not to need slave labour and govt tax subsidies) and it needs the poor to get the plot or get off welfare (despite tipping more and more people into that ugly bucket every year).

    It needs not one worker per family but Mum as well to take every low paid crap job around on a casual basis to be able to keep up with asset inflation to get a roof over her and the kids heads (Dad has been emasculated and cant support a family – in fact a lot are living alone, and a family is a luxury they cant afford they have been pushed down so far).

    Yet the rich get richer and richer and richer…and the mountains are coming you are right.

    I say we get the captain of this plane intoxicated (MacAllens, Coke, whatever…then we tie him up while he is unconscious…put the plane on autopilot…kill the robotic voice box recordings that keep saying “everything is fine – the market will land us all safely”…and when the idiot pilot wakes up… we force him to take us to Hawaii!” Leave your turtle boardshorts behind – if they are not Billabongs they dot count!

  74. ABOM
    June 15th, 2009 at 19:20 | #74

    The rich get richer because of fractional reserve banking creating a massive maggot on the economy sucking in and concentrating the wealth into the financial (and govt) sector.

    I’ll kill the pilot if you promise to go back to a gold or silver standard after I’m killed in the process. Nothing else will work.

    A gold standard will: (1) kill off excesses in the the financial sector (2) dramatically reduce assets prices (such as housing) which is a GOOD THING and (3) dramatically increase REAL wages in the long run.

    There is no other solution.

    Trust me on this. There is no other solution.

    Pray China demands gold from the US instead of T-notes. Once that happens, the solution will become clear.

  75. Alice
    June 15th, 2009 at 19:43 | #75

    ABOM – Thats a very interesting article and it appears someone recently drew a quote from it -

    \In theory, there’s no di erence between
    theory and practice, but in practice there
    |Anonymous -

    maybe Crooked Timber?

    I was particularly impressed by the Stiglitiz quotes around p.39 – a man the World Bank let go because he was way too intelligent for them and they failed to listen to him (a bit like Keynes at Bretton Wood – why do lesser mortals and inferior ideas prevail over things that might actually work for the good of all? It must be the travails of life – the suffering of having to watch it take place…and then later fail).

  76. June 15th, 2009 at 22:56 | #76

    Sorry, ABOM – FRB does nothing other than allow the short term savings of everyone bo be used for productive purposes. Without that most of the deposits of most people in every bank will just attract more fees than they currently do and not pay any interest at all.
    I am not sure even Alice would be happy with that.

  77. SeanG
    June 16th, 2009 at 05:17 | #77

    Alice #17 -

    I have obviously failed to adequately explain what I mean so I will give you a practical example. The UK Government has recently put income taxes up to 50p on the Pound for incomes above £150,000. What happened? It has made a huge commission for bankers, accountants and lawyers because people are now moving away from declaring an income towards declaring a return on asset and getting that taxed at the capital gains rate of 18%.

    You have failed to grasp the central point – one tax in itself is not sufficient. That is why Lord Lawson reduced the top rate to 40p to match it with capital gains. It was comparatively competitive for both employees of companies as well as the entrepreneurs who found new firms. It meant less liklihood of moving offshore to reduce/avoid tax or use dummy corporations as a form of transfer pricing.

    You view inequality as a relative term. France is more equal than Britain but it has a stubbornly high unemployment rate, horrendously low levels of inward investment and new corporation start-up rates (that has recently changed this year with a new law being passed to offer incentives for people to create companies). That is what I reject your argument of a correlation between income taxes and private sector investment – it is larger than that and must incorporate income, corporate, and capital gains taxes. I reject your argument, not agree with it.

    You think that I have paradoxically accepted your view that lower taxes does not lead to greater wealth while also wanting lower taxes and deregulation. It is a weird argument because I have said that unless we look at this realistically and take tax as a whole into the equation then it is a false argument. But for some reason you want false arguments.

  78. ABOM
    June 18th, 2009 at 16:35 | #78


    “FRB does nothing other than allow the short term savings of everyone bo be used for productive purposes.”

    Err…no…Andie, I respectfully disagree.

    As Murray Rothbard, Ellen Hodgson Brown, Michael Rowbotham, Antal E Fekete and others have written, it’s nothing of the sort.

    It’s actually a form of monetary embezzlement very similar to a simple Ponzi or Pyramid scheme, allowing potentially infinite inflation in the broad money supply, enriching the “insiders” and impoverishing the general populace by turning them into desperate wage slaves, prostituting themselves and their principles and morality for “precious” paper $$$s.

    For simple minds who don’t feel “comfortable” with big words and abstract ideas (or basic morality), perhaps a colourful cartoon will get it through your thic…sorry…non-receptive…head:

  79. Alice
    June 18th, 2009 at 18:19 | #79

    Has anyone noticed there are a string of very weird posts under “framing nationalization”? I cant work out if its some sort of “moving forward to the future (or back to the surrealists)”.. poetry competition or is it just some generally disruptive souls??

  80. June 18th, 2009 at 22:13 | #80

    Rothbard – ya gotta love him. Pity he got most so right and this so wrong.
    FRB is nothing like a Ponzi scheme, ABOM. A ponzi scheme, by definition, has no (or little) income other than incoming deposits. A bank has a clear, identified, income stream – the interest income from lending.
    They are completely different. Wrong again.

  81. June 18th, 2009 at 22:55 | #81

    Longer reason, ABOM. If a government were silly enough (and had the power to) ban FRB then a person going to the bank would have two options – go for a call account (however defined) that (because FRB is banned) pays no interest, as it cannot be lent out. To cover its costs for holding the funds and allowing them to be withdrawn on demand (i.e. employing staff) providing security etc. the bank would have to charge fees – larger ones than they do now as this type of deposit provides no income stream.
    The other choice would be to put it on “term” (again, however defined) deposit – this would then be able to be lent out, meaning that the person would lose access to the funds an would therefore not be able to break the term deposit.
    Most consumer deposits are of the demand type, ABOM. People like the convenience of having their funds available. Your way would just have them paying more fees for lower convenience and still not providing total security.
    Thanks, ABOM. More fees to the bankers and less interest paid out.

  82. Alice
    June 19th, 2009 at 17:06 | #82

    Anyway – Andrew Im so glad you are thinking about me.”I am not sure even Alice would be happy with that.”

    I really dont mind if banks have a lot more controls placed on them. I dont mind tighter credit regulations. I wouldnt mind seeing the fraction they can lend reduced (severely compared to now – maybe to 50%). I dont care about interest as much as I care about having less asset price inflation and financial stability (shares, houses for the young etc). I dont mind if people have to save up more to prove their credit worthiness. It would reduce household debt, encourage savings, and restrain reckless credit card borrowing. It would also make banks think twice before they send the reps out to offer credit to uncredit worthy borrowers…and they were doing a lot of that. You couldnt clear out your mailbox without getting an offer of more and more credit and more credit in the past ten years – even to very young people with no history at all.

    Im not saying no FRB. Im suggesting a half way measure. Less interest is a very small loss (interest is piddling anyway) compared to more stability in the financial system. Why did they ever deregulate banks and let them go global? Big mistake. Banks need regulation to stop them gambling like drunken sailors every time the economy picks up. They are not “real production.” They are meant to help “real production” and make a modest profit from doing so….not to hype up the markets the way they have been doing. I still maintain the problem at the source is manadatory super though…its been force feeding and inflaming speculatively creative, but ultimately destructive, financial innovation (and motre volatility in the financial system ie procyclical).

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