Home > Boneheaded stupidity, Economic policy > The zombie economics of austerity in Australia (updated again)

The zombie economics of austerity in Australia (updated again)

February 16th, 2012

Yesterday’s Fin ran a piece from Stephen Kirchner and Robert Carling of the Centre for Independent Studies, under the headline “Give austerity a chance” which was a pretty accurate summary of the contents. It’s paywalled, but you may be able to read it by clicking here. The piece relies almost exclusively on the work of Alberto Alesina and his colleagues, promoting the zombie idea of expansionary austerity. As I pointed out here, the most influential of these pieces by Alesina and Ardagna, is riddled with errors, at least as it applies to Australia.

Although Kirchner is a blogger himself, he and his co-author could be forgiven for missing my post. But Alesina’s work is probably the most-refuted piece of economic analysis put out (though never published in a peer-reviewed journal) in recent decades. It’s been demolished not only by the usual suspects like Krugman and DeLong (and me), but by the Economist, the IMF and even by one of Alesina’s own co-authors, Roberto Perotti.

Charitably assuming that Kirchner and Carling had managed to miss just about every publication on the question of austerity in the last year, could they not have spent 30 seconds with Google before hitting “Send”? A search on Alesina+austerity reveals a torrent of criticism, none of which they mention.

It is hard to know which is worse – the possibility that Kirchner and Carling, presented by the CIS as expert economists, were ignorant of all this, or the alternative hypothesis that they knew it and decided not to mention it. Either way, it’s an appalling breach of elementary standards of research.

I’m pretty sure the facts have been brought to the attention of Kirchner and Carling. The honest thing to do would be to write to the Fin pointing out that the work on which they relied was, at best, highly controversial. If Kirchner, Carling and the CIS are unwilling to do this, we can draw the conclusion that they cannot be trusted in anything they write.

Update Sinclair Davidson at Catallaxy has a lengthy reply, but the sole substantive criticism is that contrary to my parenthetical remark, Alesina and Ardagna did finally publish a peer-reviewed paper in 2010. But the work that was actually influential was done back in the 1990s. I’ll republish my blog post pointing out what a shoddy job that paper in describing developments in Australia. Davidson’s piece is notable for the lack of any substantive defence of Alesina’s work, and also for this , offered in response to my observation that the research in question had been comprehensively demolished by the IMF among many others

Fancy that – cutting edge research into a highly politicised aspect of public policy is “controversial”. Does Quiggin think AFR readers are so dumb they wouldn’t realise that?

So, next time you read an opinion piece from the CIS you can safely assume the caveat lector “This research is probably discredited, the authors almost certainly know it, but, if so, they’re not going to tell you”.

No one expects opinion pieces to be “fair and balanced”, but if you are going to rely on work that has been subject to serious and credible criticism, you should at least point out the main criticisms and (if possible) say briefly why you think they don’t stand up. As an example, Wilkinson and Pickett’s The Spirit Level produces some striking evidence of relationships between inequality and bad social outcomes.. This work has been subject to a lot of criticism, not fatal in my view, but enough that it needs to be mentioned. I did this when I cited the work in Zombie Economics and then at greater length here

Further update While still not disputing any of the substantive points I’ve raised, Davidson digs deeper on the question of whether the original Alesina and Ardagna work was published in a peer-reviewed journal. The work was published in Economic Papers, which does not take unsolicited submissions. Rather the editors commission pieces, or you can propose a piece to them. That is, this is, as the webpage says, a policy forum, not an academic journal. Standard practice for publications of this kind is for the editors to approve (or return for revision, or, very rarely, reject) the pieces they’ve commissioned. This isn’t peer-review in the normal sense. I’ve always assumed that Economic Papers follows the standard practice in this respect, but Davidson is welcome to check it out, if he cares enough.

As a PS, I couldn’t resist checking a 700-comment thread on the US elections. I shouldn’t link, but I will. While there is plenty of not-so-innocent amusement to be had, what struck me was that most of the commenters appear to be creationists – the handful holding up the flag for evolution are getting hammered.

  1. Chris Warren
    February 18th, 2012 at 08:20 | #1

    @sdfc

    You would need to have a lot of detail before you could say that trade and budget deficits suggest that an economy is uncompetitive. However Greece certainly scores low in the IMD Yearbook for a range of reasons, see:

    http://www.imd.org/research/publications/wcy/upload/scoreboard.pdf

    IMD looks at a lot of factors, many far too subjective to be useful – and the whole area is arguable.

    Going into deficit can be a form of competitiveness. Deficits of concern are more to do with structural contradictions that would exist even if international transactions were zero.

    However global competitiveness measures are in a state of chaos due to the injection of oppressed labour in hi-tech manufacturing in Asia and India (and export zones elsewhere).

    Australia is competitive in a few exports (minerals, some agriculture and education services), but uncompetitive in clothing, vehicles, shipping, air travel, house-hold goods, electronic equipment, publishing, etc. Our tourism exports are in deficit (or close to) although these are sometimes boosted by industry lobbyists, by mixing in business travel and international student travel.

    But Australia would be ‘competitive’ in many more products, if the competitiveness measure adjusted for oppressed working conditions that presently feed into world prices. This is something the boffins behind the World Competitiveness Yearbook (and similar exercises) do not do.

    In fact they appear to take the opposite tack. They often misrepresent low wages to make them appear better with respect to the value of tradeable commodities, by using PPP measures.

    So if pound of rice is a dollar in Asia, and wages are a dollar. Then a wage in Asia is inflated to 10 “PPP” dollars US, if rice in the USA is 10 dollars a pound and US wages are 10 dollars.

    The essential argument is that a wage gains ‘purchasing parity’ because it always purchases a pound of rice in different economies as different currencies apply.

    However this means that the exports from Asia, manufactured with “1 dollar labour”, flow into the global market and can be sold to “10 dollar” customers. In PPP terms it looks like the unit labour costs in Asia are much the same as in the West.

    This is exploitative but capitalists claim it represents – ‘competitiveness’, ‘productivity’, ‘efficiency’, ‘development’ and ‘growth’.

    What a joke. Even the ACTU is fooled by this, agrees to all manner of Free Trade Agreements, based on Keynesian promises, and then wonders (10 years later) where all the manufacturing jobs went? and how come they have been effectively sidelined?

    This was all argued by AUSTRADE and DFAT in the 1990′s using US Federal reserve papers such as Stephen Golub’s. Also various funded think-tanks such as Brookings Institute faithfully played the same tune, as did the ILO.

    Probably many economies rushed (or got pushed) into the globalisation mania, and borrowed heavily in order to compete in what they hoped would be a stable growing global marketplace based on fair trading rules. Poor fools – a bit like the Prices and Incomes Accord, it never happened as it was presented.

  2. Ikonoclast
    February 18th, 2012 at 08:39 | #2

    @Freelander

    Freelander, perhaps you would like to enlighten us as to what is Greece’s real problem (or set of problems) then. If you have posted on this topic in this thread give a dot point summary plus supporting reasoning or link back to your relevant post.

    I hope your reasoning is not of the ilk that Greeks are more lazy and dishonest than other races/nationalities. Structural, infrastructural, demographic, geographical, trade-linkage, institutional and cultural factors (to name a few) will all be seen to play a part in any full analysis. However, you must be careful to delineate your institutional and cultural arguments carefully to avoid even the appearance of rascist argument.

    Bill Mitchell at his MMT blog has posted a series of cogent arguments that being tied to the Euro and not having its own sovereign currency (and thus not having full democratic government control of its own fiscal and monetary policy) is ineed one of Greece’s central problems.

    However, you blithely assert “Greece’s problem is not and never was the Euro” without a single piece of supporting evidence or reasoning in your latest post. You need to front up with evidence and reasoning rather than unsupported assertions with could possible be interpeted or misinterpreted as having a snide sub-text.

  3. Ikonoclast
    February 18th, 2012 at 09:08 | #3

    @Chris Warren

    Chris makes a lot a good points and I won’t rehash what he has said.

    More generally, I would like to say that most capitalist and globalist arguments about efficiency and competitiveness are spurious nonsense to an egregrious degree. Their focus of consideration is always far too narrow.

    1. Efficiency and competitiveness should not be the prime concern of any political-economy system. Human rights, equality, quality of human life and sustainability should be the primary concerns. Efficiency and effectiveness are second order concerns at best.

    1. As Chris implicitly points out, when efficiency and competitiveness (narrowly defined) are purchased at the cost of oppressed labour then such efficiency and competitiveness is both tainted morally and not efficient nor effective nor competitive in the long term as it is purchased at the loss of human potential and (sooner or later) at the cost of increased social disorder meaning any or all of crime, civil dissent, riot, insurrection, civil war and so on.

    2. How is it efficient and adaptive (genuine competiveness is adaptive) to destroy our resource and bio-sphere base making and marketing ever greater amounts of spurious toy junk destined for rapid obsolescence? The bulk of the running shoe / sneaker market, the i-gadget and related gadgets market and even the IC engine private car market (to name 3 examples) are exactly this. They are spurious, ephemeral, trivial, toy junk that is completely vain, unecessary and useless for any serious purpose which could be better met in better ways and are highly environmentally damaging into the baragin.

  4. Troy Prideaux
    February 18th, 2012 at 10:10 | #4

    @Ikonoclast
    Ikonoclast, (re: question to Freelander), I assume you don’t have any Greek friends or contact with anyone who’s done business in Greece or have been watching or listening to many of journalistic reportings of Greece over the years which *all* make the same consistent claims about Greece?
    Tax avoidance is a national sport amongst the rich – that’s direct quote from Greeks BTW
    Business Taxes on production are way too high eg. Payroll Tax
    There’s widespread, systemic and culturally entrenched corruption
    A large portion of the economy works on cronyism – to get anything substantial done you need to know the right people.

    Ask anyone, I mean anyone on the planet who has ever done business in Greece and I’ll be very surprised if they didn’t experience the last 2 points directly 1st hand.

    Now, could they survive and avoid crisis with their own currency… yeah, I would say yes they could, but that in itself doesn’t translate to there not being problems in Greece.

  5. Ernestine Gross
    February 18th, 2012 at 13:26 | #5

    @Ikonoclast

    MMT and environmental and resource sustainability (read no human induced catastropic point) are inconsistent (read incompatible, make no sense, are contradictory objectives). That is, the issuing of currency to ‘stimulate the economy’ (MMT) constitutes a demand on physical resources in the future. Aggregate net debt (as distinct from person A lending notes and coins to person B) has the same effect. Sometimes people express their worries about ‘the debt their children have to repay’. This is not a good way of looking at the aggregate net debt (money printing) problem. Another way of looking at it is that their children or grandchildren (or later generations) may not have enough to eat and not enough of other material things.

    Macroeconomic models (MMT methodology) may have some role for some problems (eg short term management), however not for the problem you seem to be concerned with. This is so because these models do not have a physical (and environmental) resource constraint. These models work, so to speak, back to front by assuming unemployment is evidence of excess supply of physical resources and the environment is a free good, igoring the possibility that unemployment may be evidence of problems with the wealth distribution path and, in some countries, social habits that hinder improvements in wealth distribution. (Verbal qualifications found here and there don’t change the logic of this methodology.)

    Regarding the topic of the thread, ‘expansionary austerity’ is also a contradiction in terms. But this contradiction does not negate the other one.

  6. Chris Warren
    February 18th, 2012 at 13:38 | #6

    @Troy Prideaux

    I wouldn’t get too excited over media reports.

    However if you want to claim that payroll taxes are too high, how about some data?

    This is a pretty common claim. Anyone can claim that: PAYE taxes are too high. GST – too high. Sales tax – too high. Trade taxes – too high.

    Anyone can claim the revers – PAYE – too low, GST – too low, etc.

    So you need reasoning.

  7. Troy Prideaux
    February 18th, 2012 at 16:21 | #7

    @Chris Warren
    “I wouldn’t get too excited over media reports.”

    True, but as I said, when there’s a myriad of them and they’re utterly consistent and it relates to what you hear word-of-mouth and with my experience and the numbers back it up, then that’s good enough to convince me.

    “However if you want to claim that payroll taxes are too high, how about some data?”

    44% is the current rate according to Wiki.


    This is a pretty common claim. Anyone can claim that: PAYE taxes are too high. GST – too high. Sales tax – too high. Trade taxes – too high.

    Anyone can claim the revers – PAYE – too low, GST – too low, etc.

    So you need reasoning.

    Reasoning? You’re comfortable with a tax that penalizes businesses for employing people? Do a need to provide a reason?

    Ok, about about this (from the McKinsey Report):
    http://www.mckinsey.com/locations/athens/GreeceExecutiveSummary_new/pdfs/Executive_summary_English.pdf

    Greece has the lowest labor participation rate in all of Europe — just 66 percent of the employable population have jobs, compared with 73 percent in the European Union and 70 percent in Southern Europe.
    Not only are fewer Greeks working, those who do are far less productive: A Greek worker’s productivity comes in at $35 an hour, compared with $49 an hour in the EU, $55 an hour in Central Europe, and $58 and hour in the U.S.

    Yes, those Greeks that do work are incredibly hard workers, but unfortunately the “system” in Greece needs fixing to increase the participation rate and increase the underlying productivity.

    Chris, unfortunately their dept crisis is real, not fabricated.

  8. sdfc
    February 18th, 2012 at 19:11 | #8

    @Chris Warren

    Chris

    It doesn’t matter whether you think the Greek’s are hard done by or not. The trouble is they can’t fund themselves so absent an exit from the euro deflationary policies it is.

  9. Chris Warren
    February 19th, 2012 at 11:25 | #9

    @Troy Prideaux

    yes the debt crisis is real, and therefore taxes need to increase, or margins need to fall.

    UK has hiked VAT to 20%, so wages taxed at 30% mean a total tax-take of 50% when they spend as final consumption.

    Businesses pass most of VAT through (just VAT on their value adding), claim a heap of deductions and accelerated depreciation, and now complain about 44%.

    A real link would have been better – I assume there are thresholds in this.

    In any case – if this GFC is resolved by keynesian levers, the next will require even greater tax changes. The continuing existance of capitalism is based on taxing business to repair the damage.

  10. Dan
    February 19th, 2012 at 11:39 | #10

    Chris Warren :
    In any case – if this GFC is resolved by keynesian levers, the next will require even greater tax changes. The continuing existance of capitalism is based on taxing business to repair the damage.

    Not correct. That interpretation rests on the assumption that there is no multiplier attached to the Keynesian expenditure and similarly that there is no ongoing increase in aggregate demand resulting from that expenditure (both of which are at odds with the premise of Keynesian stimulus working at all, even in the short term, which I don’t think you subscribe to).

    If the economy hums back to life you don’t need to increase the tax rate to pay for the investment. In fact you may be able to lower taxes and still have higher revenues than otherwise would have been the case, since the volume of transactions is greater (to spell out the obvious).

  11. Dan
    February 19th, 2012 at 11:42 | #11

    Sorry – to be clear, I think you do think that Keynesian stimulus works in the short term – correctly, I might add. So I encourage you to just follow through the corollaries of what that means down the line. It doesn’t ipso facto mean that tax rates have to increase.

  12. Chris Warren
    February 19th, 2012 at 12:10 | #12

    @Dan

    The argument would probably be in two parts:

    1) the multiplier is insufficient. Maybe sufficient for the business cycle but not to overcome the contradiction of capitalism. You need marxist copuntervailing tendencies for this.

    2) levers do not address the core problem which ratchets up underneath and always has done.

  13. Dan
    February 19th, 2012 at 13:15 | #13

    Okay, so it comes down to how severe the contradiction is vs. how much the state is in a position to do about it. I think we are in the realm of pure supposition here (gratified to see you’re sure of your position, though – evidence, pah!)

  14. Ikonoclast
    February 19th, 2012 at 13:21 | #14

    @Ernestine Gross

    Ernestine, in the bigger picture I agree with you. You are 100% right! I bet you didn’t expect that reply!

    However, it is possible for us to hold 2 or 3 different concepts (economic models) in our minds at the same time and to see how each model can work within certain parameters and how we should effect transitions at appropriate times.

    I myself could always see that MMT growth economics (as well as the more orthodox growth economics) ran into problems with limits to growth. I have been the most vocal (and vitriolic) pusher of limits to growth facts (limits to growth are empirical facts) on JQ’s blog.

    You are essentially right IMO in saying “Macroeconomic models (MMT methodology) may have some role for some problems (eg short term management).”

    I would argue that there is no need for any able and willing adult to not be gainfully employed or in education or training. And I would argue that it is rarely individual fault but mostly systemic failure (market failure plus public policy failure) that causes the bulk of this unemployment. In a mixed economy, welfare state like Australia, we are feeding all people and housing all (or most) people anyway whether or not they ar gainfully occupied in employment education or training . Those costs are somewhat fixed. The nation pays them anyway and consumes the resources anyway. In that case we might as well put all able and willing adults into work.

    For example, if we shifted the emphasis of our culture from cars, grog, sport, entertainment, gambling, excessive consumption etc. to renerable resource development, mass transit public transport, health, education, the arts etc etc we could employ all people, produce a much more intellectually and aesthetically stimulating society whilst actually using far less physical resources. MMT prescriptions, Job Guarantee, dirigisme policies etc would play a role in doing this.

  15. Dan
    February 19th, 2012 at 13:32 | #15

    ps. I agree with Ernestine at #5 that there is a bigger problem at hand than smoothing out the business cycle, but won’t have a go at addressing that now.

  16. Chris Warren
    February 19th, 2012 at 18:19 | #16

    @Dan

    I think I have posted references to the evidence within OECD economies often enough.

    There is no pure supposition.

  17. Ernestine Gross
    February 19th, 2012 at 22:55 | #17

    @Ikonoclast

    I am not surprised, Ikonoclast. about your position regarding resource (including environment) feasibility. Over the years I learned (or I belief I did!) something about media and a little bit about politics and about interest groups. So, in a sense my post to you was directed at third parties.

    I don’t agree with the Job Guarantee as proposed by people who write under the heading MMT. While I agree with the objective of full employment, I don’t agree with the said Job Guarantee because it looks to me like a potential ‘unintended negative consequences’ policy. I have in mind the danger of young people being locked into low paying jobs and these jobs are in the social service area with the possible outcome that already relatively low paid social service providers will become an institutionalised underclass.

  18. Chris Warren
    February 20th, 2012 at 07:36 | #18

    @Ernestine Gross

    I am very, very skeptical about wastful statements such as: “I agree with the objective of full employment”. We have had decades of this stuff.

    All statements of concern and for full employment as an aspiration have failed. Unemployment is measured at over 5%, which appears low compared to the 1990′s, but this mostly represents the impact of increasing part-time and casual job supply.

    QANTAS, banks, aluminium smelters and car factories, seem to have their own dynamic (and interests) when it comes to employment.

    If the choice is between margins or jobs, I know what capitalists will choose. What bank will suffer even a few points fall in margins if they can protect themselves by destroying workers incomes by 100%?

    Unemployment is caused by politics, and economic greedy games, not by theories and models.

  19. Dan
    February 20th, 2012 at 08:40 | #19

    @Chris Warren

    Re: macroeconomic stability, no, not really. What you’ve demonstrated is the existence of a Minsky-type financial instability cycle.

  20. Chris Warren
    February 20th, 2012 at 09:06 | #20

    @Dan

    No, it is underlying tendency for macroeconomic instability to increase in the long-run in OECD economies.

    See: http://uploads.wikidot.com/new-page

    Anyone covering these issues in “Australia Reconstructed” era, would have seen this issue hinted at, but in terms of a “misery index” (just CPI and Ue).

    It is more fundamental, and long-run. It is not a financial issue (this is a symtom). It is a structural issue.

  21. Chris Warren
    February 20th, 2012 at 09:07 | #21

    symtom symptom

  22. Dan
    February 20th, 2012 at 09:25 | #22

    @Chris Warren

    Chris, you’re presenting a circumstantial case and claiming that it is a smoking gun.

    I have significant sympathy for Marxian analysis but you’re engaging in merry rounds of confirmation bias.

  23. Ernestine Gross
    February 20th, 2012 at 09:45 | #23

    Dan, I agree with your ‘Minsky-type financial instability. I’d like to add that corporate law is another factor.

    We are stretching the scope of the topic of the thread. My excuse is that the ‘expansionary austerity’ topic, like MMT, are part of a type of macro-economics (not sure how to name the type).

  24. Chris Warren
    February 20th, 2012 at 10:01 | #24

    @Dan

    yes, the circumstances and smoking guns (as in the charts) are symptoms of an underlying structural problem.

    Financial instability, is another circumstantial, smoking gun, symptom.

    True symtoms will always be ‘smoking guns’.

    Changing terminology does not remove the relationship.

  25. Dan
    February 20th, 2012 at 10:09 | #25

    I’m bowing out. Thanks.

  26. Troy Prideaux
    February 20th, 2012 at 10:33 | #26

    @Chris Warren
    So what’s the fundamental underlying mechanism(s) that create financial instability (other than Minski-type instability)? Are we talking about mechanisms like:

    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

  27. Mel
    February 20th, 2012 at 12:42 | #27

    It’s a stretch to credit Chris Warren’s incoherent ramblings with the term Marxian analysis, unless we’re taking about Groucho, Harpo or Chico. Karl Marx certainly had no time for nuff-nuffs who employed his name to peddle manure.

  28. derrida derider
    February 20th, 2012 at 14:07 | #28

    What a boring threadjack! People, most of us don’t care about your dissection of the finer points of Marxist theology, especially when the subject of the post is what should be a scientific, rather than theological, question – ie what are the short-term effects on economic activity of fiscal policy in differing circumstances.

    Coming back to the orignal topic, did you spot the feeble reply to John in today’s AFR Letters to the Editor? These “scholars” have now resorted to the “we just want to teach the controversy” move so beloved of climate change deniers and creationists.

Comment pages
1 2 3 10400
Comments are closed.