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. Gaz
    February 9th, 2012 at 17:16 | #1

    Paywall? You mean we’re expected to pay for an article titled “Give austerity a chance?”

    What a hoot.

  2. Fran Barlow
    February 9th, 2012 at 17:41 | #2

    I have a vision of people with swaying arms singing in unison …

    all we are sayying
    is give pain a chance

  3. Fran Barlow
    February 9th, 2012 at 17:43 | #3

    Perhaps teh US Constitution could be amended to guarantee the right to:

    Life, liberty and the pursuit of misery

  4. Ernestine Gross
    February 9th, 2012 at 19:35 | #4

    JQ, it seems to me the ‘give austerity a chance’- promoters are either confused or are trying to exploit a confusion.

    IMHO, there is a confusion between ‘austerity policy’ as in Alberto Alesina (ie a general policy prescription) and policy measures specifically aimed at saving the current international financial market operators and those whose preferences have been influenced by neoliberal believes from themselves. Greece serves as the point of confusion.

  5. Ikonoclast
    February 9th, 2012 at 19:59 | #5

    Expansionary austerity is an absurd notion on a par with ideas for a perpetual motion machine; the latter ignores the laws of physics and the former ignores the empirically observed behaviours and regularities (laws) of macroeconomics.

    The modern microeconomics championed by these neoclassical economists considers humans to be a “continuum of infinitely lived agents normalized to one” to quote a recent IMF formula. Their disconnect from reality is total. They think “Emergent Phenomena” must be a new funk-jazz band.

  6. Freelander
    February 9th, 2012 at 20:51 | #6

    How clever. “Give Austerity a Chance”. Expansionary austerity simply an oxymoron from the mouths of morons. How about, Austerity, like Charity, should start at home?

    I notice that those preaching austerity rarely practise it themselves, and are not really proposing anyway that the austerity ought to apply to themselves, in terms of, for example, pay-rises or a by having a holiday from receiving a ‘bonus’. No, their pay-rises and bonuses must continue to be paid, and that pay unrelated to profit or any obvious sign of performance, unless performance is counted as the speed with which they cash their bonus cheques.

    Why do places like the CIS not only have charity status, which they ought not to under any good definition but why is it like some others named in the act? A very special status indeed.

    Why do places like the CIS not only have charity status, which they ought not to under any good definition but why is it like some others named in the Act? A very special status indeed. If Wilkie can’t get anything on gambling due to the perfidious Gillard and the equally perfidious Labor maybe he should simply try to get the CIS’s name removed from the Act?

  7. Freelander
    February 9th, 2012 at 20:52 | #7

    Awaiting moderation?

  8. Freelander
    February 9th, 2012 at 20:53 | #8

    Is perfidious not allowed?

  9. Freelander
    February 9th, 2012 at 20:54 | #9

    Or is it morons?

  10. rog
    February 9th, 2012 at 22:00 | #10

    German advisor has given austerity the finger, so to speak.


  11. rog
    February 9th, 2012 at 22:08 | #11

    Sinclair Davidson has a puff piece in the Drum http://www.abc.net.au/unleashed/3818614.html The counter factual would be, where would our economy be without govt intervention? The evidence from the US is that TARP was critical to economic recovery.

  12. Sam
    February 9th, 2012 at 23:07 | #12

    I’m not going to pay to read that. But surely the case for austerity is a little different in Australia now? We’re not in a liquidity trap, as evidenced by positive interest rates with low unemployment. Surely the government could now balance the budget, with aggregate demand kept up by loose monetary policy? I don’t say they actually should do this, but austerity here and now needn’t actually be contractionary.

  13. Charles
    February 10th, 2012 at 06:58 | #13

    February 9th, 2012 at 23:07 | #11
    Reply | Quote
    Surely the government could now balance the budget, with aggregate demand kept up by loose monetary policy?

    Why do you think the government is so confidently predicting a surplus in 2013? Perhaps because it actually makes economic sense. As smith said; you can’t be a Keynesian on the way down a not one on the way up.

  14. Dan
    February 10th, 2012 at 07:51 | #14


    They’re not. They were for a while and then Penny Wong said – wisely – that it’d be the first thing to go overboard if Europe worsened.

  15. James Haughton
    February 10th, 2012 at 08:36 | #15

    I don’t think that piece is firewalled after all. At any rate, it took me straight to it.

    On the topical application of the argument: is there any consequence of Greece not accepting the current Austerity package, and consequently defaulting, that is worse than the consequences of accepting it?

  16. Alan
    February 10th, 2012 at 08:49 | #16

    Economists do not write for the popular press in order to make recondite economic theories accessible to the public. They do so in order to promote their personal preferences about how the world ought to be.

    The Centre for Independent Studies would have written almost the same article if Alberto Alesina never existed. Ditto, mutatis mutandis, for Professor Quiggin’s articles.

  17. Dan
    February 10th, 2012 at 09:10 | #17

    That’s a little reductionistic. There are such things as truth and intellectual precision, and I would like to think that the writers for the popular press I respect (JQ, PK, Nouriel Roubini, many others) do so because they believe they have an understanding of how economies work that is worth sharing, and ideology comes alongside and a somewhat behind that.

    On the neoliberal side I think it’s easy to be intellectually dishonest as you laugh all the way to the bank (I’m thinking of that bit from Inside Job – ‘conflict of interest – what me worry?’).

  18. Troy Prideaux
    February 10th, 2012 at 09:23 | #18

    James Haughton :
    I don’t think that piece is firewalled after all. At any rate, it took me straight to it.
    On the topical application of the argument: is there any consequence of Greece not accepting the current Austerity package, and consequently defaulting, that is worse than the consequences of accepting it?


  19. John Quiggin
    February 10th, 2012 at 11:13 | #19

    The general point is right, but not the specific application. To quote myself

    The 2009-10 Budget, which included a large deficit as a Keynesian stimulus, proposed a return to surplus by 2015-16. This was seen at the time as quite ambitious – most developed countries have no obvious path back to surplus.

    Nevertheless, by May 2010, with economic conditions much stronger than expected, it seemed as if the government had not been ambitious enough and the target date was brought forward to 2012-13.

    Over the past year, however, the economic news, both locally and globally, has mostly been bad, with natural disasters producing short-term shocks, and the US and Europe mired in heavy debt and sluggish recovery. The economy has slowed a bit and tax revenue has fallen short of expectations. Unsurprisingly, on the government’s current policy settings, the return to surplus would be delayed, though probably still ahead of the original 2015-16 target.

    From a Keynesian point of view, that’s exactly what should happen. Although the slowdown isn’t enough to justify an active fiscal stimulus, the standard Keynesian prescription would be to allow the automatic stabilizers to work, smoothing the path back to full economic recovery. Unfortunately, that’s not what the government is doing.

    Rather than adjust the target to reflect the fact that the strong conditions of last year have not been sustained, the government is planning sharp spending cuts, not justified by any evaluation of costs and benefits, to ensure that the target is met on the new timetable.

  20. Tom
    February 10th, 2012 at 12:22 | #20

    @John Quiggin

    The desperate attempt to return to surplus in my opinion is an attempt to win votes, which is understandable for politicians. Although it’s harmful to the economy when the economic conditions are bad, if ALP is willing to use that surplus to manage the economy the way it is suppose to be managed after they won the election, then I don’t really have a problem with their desperate attempt. Nothing is worse than a self-driven Abbott being in power with his garbage policies.

  21. Troy Prideaux
    February 10th, 2012 at 13:02 | #21

    The surplus will obviously be a pure tokenistic one. They’ve been bullied by the coalition for years and hence politically stigmatised over economic management of budget deficits. It’s also interesting that even Abbott and Robb appear to be distancing themselves from offering a surplus for next year’s budget.

  22. JB Cairns
    February 10th, 2012 at 14:15 | #22

    There is a political motive.

    Make fiscal policy tighter and thus monetary policy is looser.

    They think they will get plaudits for a budget surplus and lower interest rates.

    Maybe they wil but given this mob couldn’t sell a beer on a hot day I have my doubts

  23. Tom
    February 10th, 2012 at 15:04 | #23

    @Troy Prideaux

    It’s understandable as the situations in Europe and America worsen, the decision of Europe as to whether to continue with this austerity dream or stimulus recovery certainly have an impact on the difficulties of delivering a budget surplus.

    So far as least the general public of Greece is largely against austerity so the situation may not be as grim as it looks, if Europe runs a stimulus recovery of some sort.

  24. Dan
    February 10th, 2012 at 15:39 | #24

    The problem is that Greece has no money and can’t borrow any.

  25. rog
    February 10th, 2012 at 23:08 | #25

    The policy of returning to surplus is to keep Australia in step with current global thinking and to maintain its excellent rating ie to achieve the best judgement of its peers.

  26. sdfc
    February 10th, 2012 at 23:41 | #26

    The problem is that Greece has no money and can’t borrow any.

    Exactly why Greece has to leave the euro.

  27. rog
    February 11th, 2012 at 04:23 | #27

    The “problem” with Greece is that the loss of democracy coupled with the impositions placed upon it by a foreign power are proving to be unpopular. The Troika need to understand this.

  28. Chris Warren
    February 11th, 2012 at 09:13 | #28


    In a way this is correct. However given this as a starting point, the game at the moment is:

    Accept more austerity and Europe/IMF will lend you the funds so you can meet the March 20(?) deadline.

    In this context, austerity is not designed to fix the economy, it is to protect the funds newly despatched.

    At this point austerity is a political demand, not a economic resolution. Greece is probably better off defaulting and rebuilding its economy that slaving for the next 50 years as a economic keepsake of core Europe.

  29. JB Cairns
    February 11th, 2012 at 09:30 | #29

    sdfc is correct.

    Greece has two problems all of their own making.
    They have excessive debt which they have lied about.

    They are hugely uncompetitive.

    They can eventually solve both problems under their own currency but I can’t see how they do either under the euro

  30. Freelander
    February 11th, 2012 at 09:56 | #30

    Greece would be worse out of the Euro as its debt is in Euros. The so-called uncompetitiveness is simply that their wages and salaries and benefits are currently too high for the current Eurozone price level and their productivity. Another debt problem they have is the high interest rates they are facing. Sensible policies by the ECB, as advocated by JQ and several others would go a long way to helping. A bit of QE and inflation would help. Attempting to leave the Eurozone would be trading a crisis for a much larger catastrophe.

    The fastest way to bring back confidence in Greece would be to replace Merkel with someone sensible and then for Germany to invade Greece!

  31. Dan
    February 11th, 2012 at 10:08 | #31

    Has anyone got (or seen) an implementation plan for how to get from the Euro back to their own currency? I just can’t see it.

    @Chris Warren

    The austerity thing is essentially a path to simply trickle away the funds. No investment = no improvement in productive/competitive capacity = no chance of recovery. But I think everyone on this forum knows that.

  32. Dan
    February 11th, 2012 at 10:14 | #32


    ‘Greece would be worse out of the Euro as its debt is in Euros.’

    I don’t think this is correct. Sure its newly-minted currency would depreciate quickly against the Euro (and living standards would drop, though that’s happening regardless), but with their own currency they are in a position to undertake QE, which the ECB obviously isn’t willing to.

    ‘The fastest way to bring back confidence in Greece would be… for Germany to invade Greece!’

    This is probably correct :P

  33. Chris Warren
    February 11th, 2012 at 10:22 | #33


    What is the evidence that Greek wages and salaries are too high “for the current Eurozone price level and their productivity”.

    In 2008 Greek minimum wages were 38% of per capita GDP, significantly less than Australia and New Zealand, and European states: UK, Spain, France, Cyprus, Malta, Portugal, etc.


  34. Freelander
    February 11th, 2012 at 10:24 | #34

    As their debt is in Euros ‘their newly minted currency’ would rapidly become worthless and they would face the same sort of perils as Iceland. Which, if you remember, wanted to join the Euro when no one would take their currency. Germany couldn’t get out of its debt problems in the Weimar republic simply by printing. At least you can buy things internationally with the Euro, and you can pay off international debts with Euros as well.

  35. Freelander
    February 11th, 2012 at 10:32 | #35

    @Chris Warren

    The evidence is that they can’t sell their junk and make a profit. If inflation in the zone raises prices and they manage to hold their cost down by not raising wages, salaries, benefits and bonuses they will be able to sell their junk. If not they are a lost cause. In that case Greece should be asset stripped with its lands properties monuments and chattels sold off. (In the good old days the population would also be sold into slavery, but transferable property rights in labour have fallen out of favour).

  36. Freelander
    February 11th, 2012 at 10:37 | #36

    Oh no moderation for a link…

  37. Freelander
    February 11th, 2012 at 10:38 | #37

    Wolfson has set up a prize of quarter of a million British pounds to anyone who can solve that puzzle. http://www.economist.com/blogs/freeexchange/2011/10/wolfson-prize

    will it work this time?

  38. Freelander
    February 11th, 2012 at 10:42 | #38
  39. Dan
    February 11th, 2012 at 11:19 | #39

    The FT one is paywalled.

    Re: the Economist’s one: I’m interested to see no-one’s got a developed answer (apart from, apparently, some guy in South Africa whose thread comment reads suspiciously like a Nigerian scam email). So they’re not even at the stage of political debate/resistance with that.

  40. Freelander
    February 11th, 2012 at 12:27 | #40

    The entries closed end of February. They will anounce their short list some time in March and the winner some time after that. The Wolfson site is:
    Hope this link got through….

  41. Freelander
    February 11th, 2012 at 12:28 | #41

    Sorry. End of January they closed.

  42. Chris Warren
    February 11th, 2012 at 14:53 | #42


    This is a recipe for shifting the crisis onto personal incomes. It is a consequence of the GFC and is unrelated to the proposition that:

    wages and salaries are too high “for the current Eurozone price level and their productivity”.

    Greek manufacturing wages (hourly compensation US$22.19) fell 3% 2008-2010, are less than in Spain, Ireland and Italy, and are near 50% the wages in Australia, Belgium and France.

    According to: http://www.bls.gov/ilc/#gdp

    And the capitalists want to blame Greek wages for not being able to sell junk bonds!?


  43. Freelander
    February 11th, 2012 at 15:16 | #43

    Greek workers real remuneration is still way above China and their other competitors. Plus, the country is probably sub-optimally polluted due to ‘big brother’ government protecting workers from freely negotiating away their working conditions.

    But, on a more serious note. Doesn’t matter if their wages are substantially lower, the labour costs can still be significantly higher than elsewhere because much more has to be used per unit produced. Often the reason for that is management and a variety of other factors. Nevertheless, the inefficiencies end up being reflected in the returns to less mobile factors of production.

  44. Dan
    February 11th, 2012 at 15:53 | #44

    Yes – don’t forget productivity and participation as well – all those superannuated public servants can’t be good for the national accounts.

  45. rog
    February 11th, 2012 at 16:41 | #45

    Dealing with Greece must be a nightmare, they are dreadful fantasisers and live in a bubble world of tavernas, ouzo and souvlaki.

    Years ago I was involved with agricultural commodities and was amazed at the level of corruption in Italy. The EU helped to grow corruption, funds were being deployed to farmers for growing then pulling out crops. As the job of monitoring was onerous they set a level at which farmers could self assess, to work around this farmers split holdings up between family members and then cooked the books. One investigation found that if all the citrus trees in Sicily existed they would cover the island and then into the sea filling the harbour at Palermo.

    Greeks hate Italians calling them liars and then apply their own version. Corruption, backhanders, gifts – they call it the Mediterranean way.

    It was a mistake allowing them into the eu and will cost dearly whichever way it goes.

  46. Chris Warren
    February 11th, 2012 at 18:23 | #46


    Why has a statement that wages are too high been compared to Europe been mutated into too high compared to China?

    Why has a statement that wages are too high been mutated into a statement that unit labour costs are too high?

    This is just blaming workers for ideological reasons when no facts are ever presented to substantiate this attack?

    Where is the data on unit labour costs that substantiates your claim?

  47. Alan
    February 11th, 2012 at 19:33 | #47

    It is worthwhile to compare the medicine that the ‘Every debt is sacred, every debt is great’ crowd prescribe for the people of Greece and for the banks that have carried out fraudulent foreclosures in the US. The settlement granted the banks does not seem to to regard every debt owed by a bank as sacred at all.

  48. Peter Whiteford
    February 12th, 2012 at 11:40 | #48

    As I see it the first problem is that you can’t leave the euro overnight – it normally takes a couple of years to establish a currency, and exiting a currency takes about the same length of time.

    If you are running a primary budget deficit (excluding interest payments), then as far as I see it default brings on the problems that you have been dealing with through the austerity package.

    If no one is willing to lend you money then your tax revenue and your spending have to coincide within a couple of months at least i.e. instant austerity.

    Of course if you have your own currency then you can print money (to pay public servants and pensioners), but if it takes a couple of years to establish a separate currency, then you have a period of all the costs and none of the benefits of default.

    As I read this – http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_12464_10/02/2012_427207 – the primary budget deficit in Greece is now about 2.4% of GDP or about 5 billion Euros. When you default you no longer pay interest payments currently 15 billion Euros – so your fiscal position improves enormously.

    But you have to come up with 5 billion Euros in tax increases or spending cuts to close your primary deficit. Given that the current sticking point is about 325 million Euros – http://www.guardian.co.uk/world/2012/feb/10/greece-crisis-bailout-euro-default – I think Greece is better off not defaulting.

  49. wilful
    February 13th, 2012 at 09:29 | #49

    I really do wonder how Sinclair Davidson manages to go round as an academic economist. I mean, sure he knows a lot more about economics than me, but that’s not my job is it? Whenever he gets a public comment out it always appears to be riddled with basic, fundamental biases and selective blindnesses. He never appears to come at anything neutrally, and whenever there’s been a debate on the facts of matters, he always seems to end up going down in flames. Unlike many other right-wing economists, he never seems to win a trick, he gets pwn3d every time. As the RMIT Professor, Institutional Economics, it may be that he’s quite good in his field, but he comments outside his field often?

  50. Dan
    February 13th, 2012 at 09:52 | #50

    Any institutional economist who isn’t an advocate of a reformist/redistributive state has missed something major – possibly the first lecture.

  51. Troy Prideaux
    February 13th, 2012 at 10:04 | #51

    :) ^2

  52. James Haughton
    February 13th, 2012 at 15:36 | #52

    Prof Q, you probably know already, but Kirchner has responded to your post.

  53. February 16th, 2012 at 15:47 | #53

    It is a fact when it concerns Australia, that going broke in the middle of a boom (highest terms of trade in 140 years) with very low unemployment is the road to doom unless something is done. Is the post actually suggesting our government should just continue to spend what they want? How about if our unemployment reaches recessionary levels like 10% our deficit would be no different to Greece. It only took the US about 10 years to go from our current position to their current position.

  54. Alan
    February 16th, 2012 at 15:52 | #54

    The US went from surplus to deficit in 10 years because they persuaded themselves that (1) there is no relationship between taxes and revenue and (2) fiscal rectitude is tis own reward, except when it involves admitting a relationship between taxes and revenue.

  55. February 16th, 2012 at 16:16 | #55

    I don’t have a high level of trust in what is called a surplus as the US government debt has gone up every year since 1900 except 1920-1931, 1947, 1948 and 1951 http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

  56. Alan
    February 16th, 2012 at 16:43 | #56

    What is your evidence that Australia is going broke? Australian central government debt is 12.6%, the fourth lowest in the OECD and dwarfed by economies like the US at 61.3% and Germany at 44.4%.

  57. John Quiggin
    February 16th, 2012 at 16:47 | #57

    @James Haughton

    I had seen it, but given the absence of any content, I didn’t feel the need to link or reply.

  58. Bruce Bradbury
    February 16th, 2012 at 16:50 | #58

    “Economic Papers” should be “Economic Policy”

  59. February 16th, 2012 at 17:01 | #59

    Alan I didn’t say we are broke yet but going broke very quickly. The 12.6% figure you use is very low because it is so called net debt which is questionable and also does not include State debts some of which are large like QLD at $62 Billion and counting. Australia is in a boom so if we have any increasing debt whatsoever that in my opinion is going broke. If we continue on this path it will not hit home until such a time as we lose our AAA ratings. Ironically I think we gained the AAA rating partly due to having a large debt and liquidity in the bond markets because there is no other explanation why we are seen as a better investment than when we had no debt. The boom will end one day and that day is not predictable but that it will happen is.

  60. Alan
    February 16th, 2012 at 17:58 | #60


    That’s not a figure I ‘use’. It is the standard measure used by the OECD. Given the parlous state of most US state governments I think you’d find their debt would balloon dramatically if you included state and local debt. Has the right nothing better than constantly arguing that statistics do not mean what they mean or that ‘in my opinion’ overrides a number?

  61. February 16th, 2012 at 18:48 | #61

    Lets just say I am concerned and cutting government actually frees up workers for private enterprise which is productive in itself.

  62. February 16th, 2012 at 18:58 | #62

    John please correct the reference to Economic Papers – this rubbish would not be published there because I edit that.

    Catallaxy is a blog based on deceit – crank theories on climate change, crank macroeconomics and cranky foul-mouthed commenters whose collective intelligence amounts to an individual fail.

    These losers are part of an IPA program to fill newspapers with idiotic op ads on all topics. They have no skills, exert no intelligence and have no shame. Throw them in the rubbish bin and reorient the debate away from them.

  63. Dan
    February 16th, 2012 at 19:01 | #63

    Given that unemployment remains above the frictional rate I hardly think ‘freeing up workers’ should be public policy priority no.1. And of course private spending doesn’t have any special monopoly on generating, and facilitating the generation, of wealth – public infrastructure spending springs to mind. Kelly, you are barking up thoroughly the wrong tree.

  64. Chris Warren
    February 16th, 2012 at 20:23 | #64


    A comparison with other countries is not the key issue.

    If you download the Australian data going back to 1980, and graph it, you will see a pattern that, if it continues (waves getting bigger), could very well point to a overload in a decade or so.

    Of course the mining tax is a saving grace and may counter the underlying tendency.

    So there is evidence in your own reference, if you apply a bit of thought.

  65. rog
    February 16th, 2012 at 20:39 | #65

    There is always the important disclaimer to consider

    an op-ed is not the place for a literature review

  66. Mel
    February 16th, 2012 at 21:56 | #66

    PrQ says:

    “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.”

    John, I checked that thread and found only 3 commenters, including one non-regular, taking a line sympathetic to creationism with the other regulars saying it is nonsense or ignoring the issue altogether. Less than one-tenth of the comments on the thread deal with creationism.

    If you wish to remain a trusted source of information, you’ll need to lift your game.

  67. charles
    February 16th, 2012 at 22:04 | #67

    John Re post 19.

    The timing may not be perfect, but political consideration do come into it. I think what you wrote is correct, the baltic dry index is back down to GFC levels. This is not over yet, but if the government is going to act without being attacked there needs to be a bit of pain and a bigger poll buffer this time for them to act. There seems to be very few lining up to thank them for what was a very successful stimulus last time around.

  68. charles
    February 16th, 2012 at 22:10 | #68

    [ kelly liddle
    It only took the US about 10 years to go from our current position to their current position.]

    Hopefully not even Abbott is planning a few wars to destroy the countries wealth.

  69. rog
    February 16th, 2012 at 22:17 | #69

    @Mel Possibly a typo, more properly cretinism.

  70. rog
    February 16th, 2012 at 22:21 | #70

    RBAs Philip Lowe addressing CEDA.

    “There is therefore a material risk that fiscal consolidation weakens growth in the short run, which leads to more fiscal consolidation in order to meet previously announced targets and, in turn, yet weaker growth,”

  71. February 16th, 2012 at 23:42 | #71

    Charles I’ll give you that one.

  72. Peter Kirsop
    February 17th, 2012 at 05:49 | #72

    Ms Liddle, the reference you gave includes ‘legal tender notes’ as debt. Now to me that means that when the government increases money supply that automatically increases debt. That does not mean though the government owes more money to anyone.

  73. Chris Warren
    February 17th, 2012 at 07:31 | #73

    @Peter Kirsop

    If debt enters the system, and increases on a proportionate basis (either per capita, %income, or %GDP), does it really matter whether it is government or private debt?

    Once you have a certain quantity of debt, why do you need more?

    How do you reconcile this in a circular flow or have you just turned it into a spiral?

  74. Ikonoclast
    February 17th, 2012 at 09:29 | #74

    @Chris Warren

    Chris, yes it does matter whether it is government debt or private debt. They have very different effects on workers and different effects on the economy overall. One of the first requirements of Marxist analysis is being able to make an accurate analysis of capitalism at each of its stages.

    Take this simple real world example. Worker wages have not kept up with house price inflation due to greed motivated, ideologically driven downward pressure on wages on one side of the equation and policies that encourage asset speculation (negative gearing etc.) on the other. How can the capitalist system maintain demand? The “solution” was to push up private debt in the form of large mortgages and personal loans. These large loans allowed consumer spending on houses and other goods to be maintained and the asset bubble to grow further. This created a large debt overhang which sooner or later has to paid back or defaulted upon. At this point the credit accelerator pushing aggregate demand fails and becomes a deleveraging brake. The economy slips into major recession as in 2008.

    The government then goes into deficit (“debt” supposedly but we will come back to this) firstly via the automatic stabilisers of welfare payments rising and tax receipts falling. The government then goes into further deficit by making extra one-off payments of some kind to taxpayers to stimulate demand. The effect of all these payments is to inject liquidity and alleviate the recessionary crisis.

    The difference now comes in. A debt-laden consumer (householder) can pay off his/her debt or can default on it. A sovereign government issuing a fiat currency has more options than a householder because a national budget with a fiat currency is NOT like a householder’s budget. A government with debt can pay it off, or default on it or use extra instruments to defer it OR run continuous net deficits. The latter is also called “printing money”.

    Orthodox bourgeois economists and heterodox economists will differ about the latitude for and ultimate effects of printing money via deficits but will usually agree (to different degrees) that it is possible, as at least an interim solution, and that aggregate demand boosted by deficits will assist the national budget to come back into balance eventually via higher tax receipts and lower welfare payments (the automatic stabilisers).

    In summary, private debt to GDP ratio matters and matters in a different way to public debt to GDP. Private debt, while being taken on, adds liquidity to the system, but all this liquidity must be taken out of the system eventually by repayment or default. While being pumped into the system it stimulates aggregate demand but when being taken out of the system its lack sends the economy into a serious slump. This boom and bust cycle (when not mitigated by government action) is of course typical to capitalism. Capital, particularly finance capital, functions according to its own logic, seeking sector profits without attention to the health of the overall system and without attention to social negative externalities (worker stress / mortgage stress) or environmental negative externalities.

    A social democratic government, even from within the framework of capitalism, can do better than the blind, selfish capital operations of finance capital, in the sense that it can manage its “debt” or deficits with a view to the viability and stability of the whole system. There is actually no absolute funding requirement for a fiat currency issuing sovereign government to take on debt though it may still take on debt for valid ancillary reasons (maintenance of interest rate policies). This means that government debt or public debt is qualitatively different from private debt and nor nearly as disastrous for the populace.

    There is a real world restraint on large deficits (printing money) being well in excess of taxation. Excess liquidity will lead to excess inflation once idle capacity is fully employed. However, orthodox economists who subscribe to the standard myths in the standard form like the GBC (Government Budget Constraint) framework and the NAIRU (non-accelerating inflation rate of unemployment) do not understand the economy they (purport to) run. The proof is in the empricial pudding. The GFC (Global Financial Crisis) and now the EMU crisis illustrate this. These crises are the direct real world proof that standard bourgoise orthodox neoliberal economic theory is entirely fallacious. The more they apply the austerity strait-jacket, the more the economy sinks into recession and probably ultimately depression. This is especially borne out in neoliberalism’s current obsession of putting sovereign budgets into private finance strait-jackets which are entirely unnecessary except for the purpose of enriching plutocrats at the expense of the general populace.

  75. Dan
    February 17th, 2012 at 09:46 | #75

    Great post, Ikonoclast. Thanks.

  76. Troy Prideaux
    February 17th, 2012 at 09:58 | #76

    Dan :
    Great post, Ikonoclast. Thanks.


  77. Tom
    February 17th, 2012 at 10:28 | #77


    Great post, I’d add to that people who claims that “private sector debts are not a problem on the basis that it will generate a much more sufficient investment return to cover to debt” has also proven to be wrong on the basis of GFC and the current Europe crisis.

    The private sector that focus so much on maximum profits and investment returns eventually lead the private sector to venture into risky investments which might turn out to be junk. This is extremely lethal if the public sector shrinks and private sector accounting for larger and larger proportion of the economy due to privatisation and deregulations.

    More so the claim on private sector works more efficiently than public sector has one very big factor that people don’t take into account. Which is the size of the organisation, private organisation usually operates with a smaller number of employees than public sector due to the fact that there are multiple businesses in the same field in the private sector compare to one big organisation that is responsible for the whole industry. However when a single business takes a large proportion of the market share and become a large corporation with hundreds and thousands of employee, it will be just as inefficient and even worse than government organisation in the same field. Also a free market economy do allow large corporations to defeat competition and become monopoly/oligopoly that becomes extremely inefficient. Anyone who have dealt with large monopoly/oligopoly business will know how inefficient they are (1 email takes them more than a week to respond when it only actually takes a few minutes of confirmation).

  78. Troy Prideaux
    February 17th, 2012 at 10:49 | #78

    Exactly! As Dick Smith keeps stating – the system is built around limitless growth in a world with finite resources. Shareholders want their maximum return on investment. The end goal for their interests is a monopoly. The interim goals include consolidation, amalgamation, acquisition and efficiency increases via cost cutting as that’s an easier option to productivity increases.

  79. Chris Warren
    February 17th, 2012 at 11:24 | #79


    I think most will accept that:

    …it is possible, as at least an interim solution, and that aggregate demand boosted by deficits will assist the national budget to come back into balance eventually blockquote> with the emphasis on as an interim solution .

    Particularly if Australia has favourable foreign transactions and can rely on at least some population increase although, as you have done, theorists also add in a convenient assumption of “idle capacity”.

    However to understand the essential interplay of such factors, start from equilibrium or static conditions with no “idle capacity” and a closed economy.

    In such capitalist equilibrium, workers wages are inadequate to purchase goods and services.

    The solution has been to increase debt. Unfortunately this validates, and locks-in, over-hiked selling prices. It does not facilitate selling prices falling to where wages are able to purchase all goods and services.

    So under static conditions this debt cannot be “taken out of the system” without a adverse adjustment to the original equilibrium.

    Capitalists use their power to shift this adjustment onto labour which is represented in several measurable ways:

    1) wages increases < labour productivity

    2) labour factor share in GDP falling

    3) increase hours of labour.

    All these are well established and were conveniently published in the latest issue of D!ssent (no 37, Summer 2011/2012 – Dick Bryan and Mike Rafferty).

    Concepts such as “higher tax receipts” also indicate someone cops an adverse adjustment. Capitalists will struggle to ensure that it is not them.

    Of course household debt is different to government debt, which is different to business debt. However in terms of unblocking consumption they serve the same function.

    Now if the debt was once only, then what is the new equilibrium … Higher expected selling prices due to artifical market clearing. Higher apparant commercial revenues. A step into inflation. Compromised wages – and so a greater need for debt in the next cycle.

    This is not boom-and-bust behaviour but a general rise in instability.

    If this cannot be resolved starting from equilibrium, with zero population growth, and a closed economy, (no idle capacity) then it is a mistake to accept an empirical solution derived from population growth or foreign interactions and with deliberate assumptions that inject room-to-move (eg idle capacity).

    Other pundits look to “increased productivity”.

    In any case your key thesis is that:

    aggregate demand boosted by deficits will assist the national budget to come back into balance eventually via higher tax receipts and lower welfare payments (the automatic stabilisers).

    There is no reason why in a economy (with the above assumptions) that the aggregate demand derived from the debt-boost will be sufficient to balance the noted effects. It will have created a wedge between wages and final retail prices and inflated entrepreneur’s expectations.

    This would also occur under market socialism if debt-money was injected. But thankfully, under market socialism, original wages would always have the necessary purchasing power.

  80. may
    February 17th, 2012 at 12:14 | #80

    JB Cairns :sdfc is correct.
    Greece has two problems all of their own making.They have excessive debt which they have lied about.
    They are hugely uncompetitive.
    They can eventually solve both problems under their own currency but I can’t see how they do either under the euro

    their seems to be another problem that applies,in that Greek people want the benefits arising from a strong public purse at the same time as individually and collectively refusing to contribute to that public purse.

    a culture of reviling tax while ignoring the neccessity of tax as a legitimate function of responsible government is,to my mind,one of the defining attributes of stateless corporate bodies(we want to drown government in a bathtub) and the Greek population seems to share this way of thinking in spades.

  81. Ikonoclast
    February 17th, 2012 at 12:21 | #81

    @Chris Warren

    Chris, I think we tend to debate at cross-purposes a bit. This is because you always take the long view that capitalism is unsustainable. You are correct of course and it makes me sound like I am criticising you for being right (which of course is untenable).

    However, I tend to take capitalism somewhat on its own terms “in the interim” to use my own phrase. I do this for interim realistic purposes and for the purpose of attempting to chart an evolutionary rather than a revolutionary path from capitalism to something better, more equitable and more sustainable.

    I may be wrong in my (now dimming) hopes that a relatively peaceful evolution is possible. And to set store in peaceful evolution rather than violent* revolution is probably not Marxist either.

    * “Violent” does not necessarily pre-suppose that is the people being violent though it can mean that. We are all going to suffer “violent” changes to our way of life even if we all remain peaceable about it during the transition (which latter probability is vanishingly small of course.)

  82. Dan
    February 17th, 2012 at 12:53 | #82


    Someone in the Aust public discourse pretty mainstream and senior (was it an RBA board member? I can’t recall right now) said something a year or two ago about wanting first-world gov’t services but second-world tax rates. I just don’t understand this disconnect in the public mind between paying for something and getting it.

  83. Tom
    February 17th, 2012 at 12:57 | #83

    @Chris Warren

    While I do agree with you, in my own opinion social democracy is sustainable economically, over time however it will defeat itself not because of economical reasons.

    1. Freedom of media generally comes with freedom of speech and human rights, because of this it is hard to imagine the media will not be biased opiniated that aims to destory social democracy and implement capitalism again because of interest groups which might gain control of the mainstream media.

    2. The education system might be manipulated like whats happening today.

    The above two major reasons will slowly destory social democrat and slowly turn into a capitalism society. There are no methods to prevent it unless heavy regulations such as education and media regulations. However with this it will also provide the opportunity of the government to manipulate these two systems for it’s own benefit as well. Hence the only safe guard of social democratic society is the need of mandatory economic studies (unbiased) and logical and critical thinking of the population (to prevent the public being manipulated by the media); however these safe guards are very complex to implement. Since social democracy’s survival depends so much on the wisdom of the general public, I do agree when people says “socialism or similar sorts can only survive in a dictatorship”

    P.S. I’m not advocating anything here, I do support social democracy. All I’m saying here is just my opinion on the reality. Any discussion with me on this topic please take it to the sandpit (I think the comments in this thread is going off topic).

  84. BilB
    February 17th, 2012 at 13:46 | #84

    That Cattalaxy thread was at 663 at last visit. A couple more prods and it will zip past the 700 comments, no problem.

  85. Koala
    February 17th, 2012 at 13:47 | #85


    Yes I always take the long view that capitalism is unsustainable but the underlying causes are always present.


    True social democracy is sustainable. The threat is that it may reinstate capitalism again.

    However with the levels of literacy, tools and experiences, we can forget about ‘dictatorship’. This is clear – even Lenin said dictatorship was unnecessary in the right conditions – as did Marx.

  86. Troy Prideaux
    February 17th, 2012 at 13:50 | #86

    We would’ve naively thought the GFC would’ve taken some of the wind out of Free Market Right’s sails, but alas, David Cameron is using belt tightening as a good reason to further (and ultimately completely) privatize the UK’s health system; after all, it’s such a success in the US.

  87. Chris Warren
    February 17th, 2012 at 13:55 | #87


    Yes I always take the long view that capitalism is unsustainable but the underlying causes are always present.


    True social democracy is sustainable. The threat is that it may reinstate capitalism again.

    However with the levels of literacy, tools and experiences, we can forget about ‘dictatorship’. This is clear – even Lenin said dictatorship was unnecessary in the right conditions – as did Marx.

  88. Tom
    February 17th, 2012 at 14:24 | #88

    @Chris Warren

    “The threat is that it may reinstate capitalism again.”

    This is what I meant by my post, we both agree that education will help as a safe guard of social democracy from capitalism and the need of dictatorship. But it is not so easy as well, for economic studies and logical and critical thinking training would have to be a mandatory subjects of the course of education, and the neutral stance the education would have to take in economic studies instead of being biased.

    It isn’t easy to get the majority of the population to develop critical thinking skills to think about the information they are getting from the media and search about the truth behind the issue. I don’t even know if there are even 1/10 of Australians that does that, theres so many people who reads the daily telegraph and the australians and just go the government is #%$%# without even trying to know they are reading edited news.

  89. John Quiggin
    February 17th, 2012 at 14:45 | #89

    @Mel Thankfully, I don’t know who are the regulars and non-regulars at Catallaxy. There were 700+ comments, so 10 per cent is a lot, and my reading was that the creationists had more support. As you say, lots of people ignored the issue, but, again on my reading, that amounted to giving the creationists a win by default. Yet again on my reading, that’s because the arguments of the creationist side would have received almost universal support if you crossed out “evolution” and substituted “climate science”

  90. Troy Prideaux
    February 17th, 2012 at 15:19 | #90

    Tom, why is it that we’re apparently achieving a far greater level of education in comparison to, say, 2-3 generations past, but we appear to be more naive to such issues and our minds less openly objective to opposing arguments?
    Stigma that communism has provided the the left with? The global influence the Murdochs of the world have had? The human tendency for selfishness? The education system? Rise of the American Empire?

  91. Chris Warren
    February 17th, 2012 at 15:27 | #91

    Please delete the Koala post it is an erroneous duplicate (it happens when I do not log out another user using this machine).

  92. Tom
    February 17th, 2012 at 16:20 | #92

    @Troy Prideaux

    I’ll reply my thoughts on the topics you’ve raised in the sandpit.

  93. paul of albury
    February 17th, 2012 at 17:31 | #93

    @Troy Prideaux
    That depends on what you consider a successful health system. It’s quite likely they put higher value on a system that delivers private profits over one that delivers public health outcomes.

  94. sdfc
    February 17th, 2012 at 18:19 | #94


    Rog and Freelander

    The Greek government can’t fund the refinancing of its maturing debt let alone new borrowing while it is in the euro. That’s a big problem.

    While in the euro it has no means of stimulating the economy so deflationary policies it is. The move to its own sovereign currency would of course mean an economy wide default as the debt is redenominated. I don’t know of anyone who is under the impression an exit from the euro will be anything other than horrific. However in the long run (in my opinion at least) it is likely to be a more efficient outcome than the death from a thousand cuts and the threat to Greece’s political stability.

    Iceland are doing considerably better than Greece.


    As for Greek competitiveness. The persistent trade and budget deficits suggests they aren’t all that competitive.

    Real wages in Greece are going to fall either way you look at it. Achieving it through inflation will impart less cost on the Greek population than the outright fall in nominal wages that will be the outcome of the current trajectory.

  95. Troy Prideaux
    February 17th, 2012 at 22:36 | #95

    @paul of albury
    All too true Paul, and on that metric, it’s a 10 from 10 mark.


  96. rog
    February 17th, 2012 at 23:13 | #96

    @sdfc Quite right, Greece is the EU’s subprime. So who invested in the land of Zorba?

  97. rog
    February 17th, 2012 at 23:17 | #97

    Real wages in Greece are going to fall either way you look at it.

    It goes without saying that that would only apply to those in work.:-)

  98. John Brookes
    February 17th, 2012 at 23:18 | #98

    The organised campaign of disinformation by the right is painful. That newspapers publish their rubbish is also annoying.

    Trouble is, the right probably feel the same way about the left. But they are wrong.

  99. sdfc
    February 17th, 2012 at 23:35 | #99


    I was sloppy earlier. What I should have written is real income. How is deflation in a high debt economy a more efficient means of lowering real income than inflation?

  100. Freelander
    February 18th, 2012 at 08:17 | #100

    Some of these ‘arguments’ are as clever as saying “That person can’t live with their head chopped off while they are seated on the couch. I know. Let’s move him off the couch.” Greece’s problem is not and never was the Euro.

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