Home > Economic policy > Is Australia prepared for a crisis?

Is Australia prepared for a crisis?

May 9th, 2012

I spent yesterday in the Budget lockup for Crikey. There’s little real need for a lockup these days. The original justification was to stop people taking advantage of inside information on things like higher tax on cigarettes, but these taxes are now indexed, and changes are mostly either backdated or applied from well after Budget night. Then, for a while, the Budget was the central statement of economic policy. But nowadays, policies are put out all through the year, and most of the Budget measures are leaked in advance. Still, it’s a traditional piece of theatre and no-one seems to mind.

The first piece I wrote, over the fold, was about the implications of the European crisis

Is Australia prepared for a crisis?

The international economic environment is as threatening as it has been at any time since the Global Financial Crisis. The Chinese and US economies are faltering, Britain is in recession, and the eurozone is threatened with complete breakdown. A new global crisis is real possibility for 2012-13. How well, or badly, does the Budget help us to prepare for such a shock?

In purely fiscal terms, the strategy adopted by Rudd and Swan in the 2009-10 Budget, of a large stimulus followed by a steady return to surplus in 2015-16, was designed to give us the ‘fiscal space’ needed to allow another emergency response to a crisis like the one emerging in Europe. In that context, a more rapid return to surplus is helpful, since it gives us more room to turn around.

The problem is that the government’s rhetoric has shifted in ways that will make it much harder to achieve this turnaround.

The crisis response in 2008-09 involve a shift to strongly stimulatory fiscal and monetary policy in the short run, with the idea that fiscal and monetary policy would be tightened in parallel as the economy recovered.

The idea that fiscal and monetary policy should work together represented a return to the policy orthodoxy of the Keynesian era, for good reason. The policies of the market liberal era, in which governments aimed for consistent balanced budgets, leaving macroeconomic management central banks and monetary policy, had failed comprehensively, as Kevin Rudd acknowledged at the time.

Until about a year ago, the government’s policy and rhetoric were broadly consistent with this approach. The recovery turned out stronger than expected, and both monetary and fiscal policy were tightened accordingly. The announcement in the 2010-11 Budget, that the return to surplus would be achieved three years ahead of schedule, made perfect sense at the time.

Since then, however, the news has been generally bad, but the government has been trapped by its commitment to a 2012-13 surplus. Instead of fiscal and monetary policy moving in parallel, we have a combination of fiscal contraction and monetary expansion. The contradictions became acute last week when the Reserve Bank cut interest rates by 50 basis point, an indication of deep concern (if not some degree of panic) about the potential for a sharp downturn.

Changes in Swan’s rhetoric have reflected these contradictions. As recently as a few months ago, he was maintaining the line that the expenditure cuts simply reflected the logic that ‘if you are Keynesian on the way down, you have to be Keynesian on the way up’. But as it has become clear that the economy, with the exception of the mining sector, is no longer on the way up, Swan has effectively abandoned this position.

Instead, he is now taking the pre-Keynesian view that, if weak economic growth leads to lower government revenue, the appropriate solution is to cut spending even harder. Rather than seeing the opposite movements of fiscal and monetary policy as an indication of incoherence, he has returned to the pre-crisis orthodoxy that tight fiscal policy is good because it makes room for interest rate cuts.

All of this has weakened the government’s capacity to respond to the populism of the Abbott-led opposition, which combines a pre-Keynesian opposition to fiscal stimulus with opportunistic criticism of any measure that might improve the budget balance, and particularly of the kinds of long-term structural measures that are actually needed.

The return to orthodoxy is spelt out both in the Budget speech, where Swan advocates

Surpluses that provide a buffer against global uncertainty, and continue to give the Reserve Bank room to cut interest rates for families like it did just last week.

and in Budget Paper 1, which states

The return to surplus also recognises that fiscal policy should be set in a medium-term framework. In normal circumstances monetary policy should play the primary role in managing demand to keep the economy growing at close to capacity consistent with achieving its medium-term inflation target

There is some room to move in the qualification ‘in normal circumstances’, and in the observation in the Budget Outlook that the buffer created by the surplus will

‘provide the Government with more options to respond, if necessary, in the most effective way to unexpected changes in the domestic and global economy. ’

This may be read as code for the possibility of an emergency fiscal stimulus, should there be another crisis. But neither the Treasurer nor the officials I talked to was willing to actually speak the “S word”.

Having effectively conceded defeat to the conservatives in the argument over the stimulus, the government will find it very difficult to flick the fiscal switch if we are faced with another global crisis. The problem is exacerbated by the government’s general loss of credibility under Julia Gillard’s leadership. Somewhat unfairly, that loss in credibility has extended to her leading ally, Wayne Swan.

Probably the best hope for the government is that any renewed crisis might coincide with the return of Kevin Rudd to the Prime Ministership, presumably with a new Treasurer. That would permit a return to the bold policy approaches that saved us from the global crises in 2009, and might even save the government from the crushing defeat that now appears inevitable.

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  1. Chris Warren
    May 9th, 2012 at 14:25 | #1

    I hope that, one day, the Government will be such that instead of the above, we will get:

    In normal circumstances monetary policy should play the primary role in managing demand to keep the economy growing at close to capacity consistent with achieving its medium-term employment target.

    It is a pity that most of the criticism of Keynes is rightwing and preoccupied with spending cuts. If Abbott gets in, then “Is Australia Prepared for Crisis?” will need a total rewrite. Putting Abbott in, is in fact how big business gets ready to deal with the crisis – by cutting the conditions and stealing more from others.

  2. May 9th, 2012 at 16:03 | #2
  3. Tom
    May 9th, 2012 at 16:26 | #3

    @Chris Warren

    Well, if people have inquirying minds to actually learn what is happening in Ireland where austerity in a recession is imposed 3 years ago. Tony Abbot wouldn’t even have a chance getting elected by advocating for austerity given the current economic circumstances and the grim future outlook.

  4. plaasmatron
    May 9th, 2012 at 17:58 | #4

    Swan’s words “to cut interest rates for families” are ridiculous.

  5. Jim Rose
    May 9th, 2012 at 18:40 | #5

    See http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2012_spring_bpea_papers/2012_spring_BPEA_delongsummers.pdf where De Long and Summers say that:

    “It surely cannot be the case that at most places and times expansionary policy is desirable, nor that at all times when economies are severely depressed fiscal policy should be pursued without limit.

    This is why we stressed that, outside of extraordinary downturns where the zero lower bound constrains interest rates, we believe that the right assumption is that the fiscal multiplier is effectively zero. Increases in demand will run up against supply constraints.

    And to the extent they do not, increases in demand will be offset by monetary policy. With a zero policy-relevant multiplier, judgments about fiscal policies should be on allocative rather than stabilization-policy grounds.

    … While we believe that our analysis has relevance to the question of fiscal policy in the United States and probably a number of other countries at present, we do not think it is likely to have much bearing on policy after the economy has recovered and has exited the zero lower bound.”

    I ask whether Australia is now on or is likely to face a zero-bound in the next few years?

  6. JB Cairns
    May 9th, 2012 at 19:08 | #6

    Tom,

    Ireland went backwards by more than 10% which is a depression not a recession.

    No I cannot see that we will be at zero bound interest rates.

  7. Jim Rose
    May 9th, 2012 at 19:31 | #7

    JB cairns, ireland’s mistake was to guarantee the bond holders of its bad banks as well as the depostors.

    then, after finding out that the guanrantees were based on fraud about the state of the finances of some of those banks, honoured the guarantees anyway.

  8. Alan
    May 9th, 2012 at 19:40 | #8

    The extent to which the speculariate have become the prime advocates of government assistance (to them and no-one else) is not surprising. What is surprising is that this drivel gets credence. If we keep on wrapping up lenders in the warm nanny state cotton wool of guarantees and subsidies they will never get more efficient.

  9. Chris Warren
    May 9th, 2012 at 21:25 | #9

    @Tom

    We can only wait and see – but Abbott is a rightwing Liberal and will apply austerity against one part of society to foster another – dog whistling as he goes.

  10. Jim Rose
    May 9th, 2012 at 22:45 | #10

    chris warren, Abbott is a conservative populist. There are populists on all wings of politics. populist leaders even cross from left to right and back again over their political careers.

    politicians use populist rhetoric as a signal to voters that their affinities lie with the common worker, not corporations or the wealthy elite.

    poularism worsk for more than people just not understanding that decline in their country might be a consequence of policies conducted by the politicians.

    if we are looking at a country with a disproportionate number of politicians coming from the elite, or a disproportionate number of politicians are corrupt, you will observe populism as a way to signal that a politician is not from the elite or in favour of the elite.

    the power of the electorate to turn elected officials out of office at the next election gives the officials an incentive to adopt policies that do not outrage public opinion and to administer the policies with some minimum of honesty and competence. The worse the incumbent party, the better even an extremist challenger looks.

  11. May 10th, 2012 at 03:35 | #11

    This may seem somewhat off-topic, but it just lifted me up so much to see an intelligent young English-speaking Syrian patriot defending her country against the corporate media liars on her own YouTube station at http://www.youtube.com/SyriangirlPartisan.

  12. May 10th, 2012 at 05:28 | #12

    Pr Q said:

    Probably the best hope for the government is that any renewed crisis might coincide with the return of Kevin Rudd to the Prime Ministership, presumably with a new Treasurer. That would permit a return to the bold policy approaches that saved us from the global crises in 2009, and might even save the government from the crushing defeat that now appears inevitable.

    Can we please tone down the Keynsian spin, at least as far as the Rudd government was concerned. AUS never really had a GFC crash because we did not have an NFC, quite the opposite, our banks went from strength to strength BEFORE the fiscal stimulus was given, they shot up the global rankings in late 2008.

    What ‘saved us from the global crisis in 2009″ was, in order of policy priority:
    1. factoral
    2. financial
    3. foreign exchange
    4. fiscal

    1. Factoral policy was set by Howard’s strategy of drawing in masses of Asian students to undergird the universities and Residential Investment Property;
    2. Financial policy was set by the RBA which changed course to an easing bias in MAR 2008;
    3. Foreign exchange policy saw the floating AUD go into free-fall in 2008 which greatly assisted in softening any blows to the terms of trade caused by a fall in export volumes;
    4. Fiscal policy was really driven by the PRC’s massive fiscal stimulus in 2009 which again propped up global demand for minerals.

    The fiscal stimulus didn’t hurt and helped a bit. But most of it probably went off peoples mortgages and did not boost consumer demand all that much.

    In any case it probably wasn’t necessary. The AUS economy was already in good shape largely thanks to good management by Howard-Costello and our traditional slice of good luck.

    But we already knew that since I Told You So throughout the 2008-2010 period. In 2008 correctly predicted that AUS would not enter recession, well prior to the fiscal stimulus.

    I was right.

  13. Chris Warren
    May 10th, 2012 at 08:15 | #13

    @Jim Rose

    Populism only addresses what they say. I am more concerned about what they do.

    Having been through Fraser’s Razor-gang cuts, and Howards attacks (particularly against the public service), I cannot imagine what Joe Hockey and Abbott have in store.

    Attacks on workers and abolishing minimum wages and other entitlements would be automatic. The Liberals in Canberra are already calling for the end of long-service leave as ‘redundant’. [Canberra Times, 9 May, p5]

    The results of rightwing populism (Nicholas Sarkozy, Silvio Berlusconi, Boris Johnston, Pauline Hanson) and leftwing populism (Ken Livingstone, George Galloway, Phil Cleary, Jack Munday) are two very different beasts.

  14. Chris Warren
    May 10th, 2012 at 08:31 | #14

    Munday => Mundey

  15. Ikonoclast
    May 10th, 2012 at 08:31 | #15

    Jack Strocchi makes much of “factoral” issues and their role in “saving” Australia from the GFC, assigning them the most significant role in staving off recession in Australia. Jack refers to “drawing in masses of Asian students to undergird the universities and Residential Investment Property”. How signficant were the income and capital flows drawn into Australia by the Asian “masses” referred by Jack Strocchi? Can anyone quantify this and relate it to the overall size of the Australian economy?

    Jack refers to the “good management” of the Australian economy by Howard-Costello. Perhaps, Jack would like to explain how “good management” leaves unemployment so high. Remember, anything over about 2% (frictional unemployment) is high compared to the “golden era” of the 1960s during which genuine Keynesian policies were in force. Perhaps, Jack would like to explain how selling $100 billion of Commonwealth and State assets for $50 billion (on most estimates) and thus effecting a massive wealth transfer from ordinary people to the already wealthy is morally or economically “good”? Perhaps Jack would like to explain how the creation of the huge private debt mountain and the associated asset bubble in the Howard-Costello era is good management, bearing in mind that sooner or later that debt mountain must be paid down or defaulted upon. How is it “good” that housing affordability declined by about a factor of at least 2 times in the Howard-Costello era?

    Jack seems to think that the GFC is over and Australia has avoided it altogether. In truth neither is the case. We have had a slight hiatus, in terms of historical timeframes, between round 1 and round 2 that is all. Even now round 2 gathers way as the EU stands on the brink of another major recession and the US labour market weakens again. Australia’s fundmentals are still a mess due to the atrocious legacy of the Howard-Costello era. We have;

    (a) high unemployment, high under-employment and hidden unemployment;
    (b) a huge private debt overhang;
    (c) an inflated housing and asset market still due for a crash;
    (d) crumbling infrastructure needing major national investment and overhaul;
    (e) an economy dependent on climate-wrecking, non-renewable resources;
    (f) an under-trained and under-educated populace;
    (g) an economy geared only to primary production and manufactured import dependency;
    (h) an larglely inflated and non-productive FIRE sector to our economy.

    These are all legacies of the Howard-Costello era. Perhaps Jack can explain how any of this is good?

    I’ll make my own predictions now. Round 2 of the GFC is about to hit in the next year or so. Australia is highly unlikely to survive this round unscathed. If it does, there are more rounds to come as the world economy will sonn face a decade long financially induced depression. But this time it will be a depression with no end as there are no longer enough real resources left to drive recovery out the other side.

  16. socrates
    May 10th, 2012 at 09:24 | #16

    Jack
    [4. Fiscal policy was really driven by the PRC’s massive fiscal stimulus in 2009 which again propped up global demand for minerals.]
    This is false, but is a falsehood that has been repeated many times. Why?

    Mining companies CUT employment and investment during the GFC. They did not restart again till 2009/10, which helped the recovery, but was too late to get us through the 2008-09 period. The Ravensthorpe mine closure in WA was a prime example, as was the deferral of the Olympic dam project by BHPB. Likewise the economy survived through an increase in domezstic demand, nto exports to China.

    These facts were all pointed out in Treasury speeches available on line back in 2009/10.

    Having disposed of the right-wing spin, I don’t think much of the left wing budget spin either. I think the commitment to early stimulus is purely posturing, driven by Labor paranoia over being painted as failing to deliver budget surpluses in the past. They never had the ability to communicate to voters that surpluses gained through cutting investment in the future were foolish. I share John Quiggin’s dissappointment in the lack of education funding. Worse, I don’t really agree with the cash giveaway in this budget. To me, it is shades of John Howard buying votes.

    The GFC cash splash was justified by events at the time. This one is not. We aren’t in recession yet; there is no need for a cash splash now, especially given the tax cuts that will come into force on July 1. Meanwhile there is (as JQ says) no real reform in this budget (middle class welfare lives on) and no new real investment in health, education or infastructure. Personally, I think it is one of Swan’s worst budgets.

  17. Jim Rose
    May 10th, 2012 at 09:32 | #17

    chris, you forgot to mention george wallance, ross perot, and what’s her name who is running argentina into the ground at the moment.

  18. Jim Rose
    May 10th, 2012 at 09:34 | #18

    nice one at http://www.economist.com/node/6802448 on the ‘give me a balcony’ populists

  19. Ikonoclast
    May 10th, 2012 at 10:02 | #19

    The idea of “fiscal space” needs some critical assessment. What is “fiscal space”? Is it some real quantity and thus measureable? Or is it some vague quality that exists mainly as a sort of colourful, comforting nimbus around the real when viewed through a particular ideological kaleidoscope?

    The Wikipedia suggests to us that “Fiscal space is a relatively new term that refers to the flexibility of a government in its spending choices, and, more generally, to the financial well-being of a government. Peter Heller (2005) defined it “as room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy.”

    It seems that “fiscal space” is perhaps crudely not much more than the accrual of a surplus during a boom for spending during a recession. If this is the view it seems to be based on the misunderstanding that it makes sense for a government to save in its own fiat currency and that this is somehow analogous to a household saving in that same currency.

    But let us attack this from another angle first . I have some questions for the “Hard Keynesians” among us who seem to advocate that government budgets should balance in the long run.

    If the economy grows in the long run then surely money supply must grow in the long run (at an equal applicable pace) otherwise the economy would face a money supply problem and experience deflation?

    The only creation of permanent new money supply under a fiat currency system is money creation (printing money) by the government. Debt money created by banks is not permanent new supply as this money is destroyed again (removed from the money supply) when the debt is repaid. We will also assume that forgeries of fiat money are detected and destroyed and that international capital inflows and outflows are neutral in this “thought experiment”.

    Is it not then the case that only if the government prints more money (ie. runs net deficits in the long run) can the money supply expand over time? Does this not prove that whilst the economy grows the government must on balance run a deficit?

    In what sense does saving in its own fiat currency mean a government “has more money”? No sense at all, as such a government can print fiat currency at any time. This is not to say that running a surplus has no purpose. The purpose of a surplus is to withdraw government spending (its stimulatory impetus) from the economy when private spending is strong enough (or too strong) and the economy is booming. The purpose of a surplus is not for a government to “save up in its own fiat currency”.

    Money supply manipulation (via deficits, surpluses and other means) is or should about the real economy, particularly about ensuring full employment and full utilisation of capital equipment. Where money, money supply, and its manipulation are “reified” we get nonsensical notions like fiscal space. That is the money is not treated as a fully manipulable accounting abstraction (at the antional level) but rather as it were somehow real in its own right. For sure the money system is a tool (albeit a notional tool) and like any tool we don’t want to break it.

    But that’s food for another post.

  20. John Quiggin
    May 10th, 2012 at 11:22 | #20

    @Ikonoklast “Budgets must balance in the long run” is a somewhat misleading shorthand for “The budget balance must stabilise the ratio of debt to GDP at a sustainable level”. For plausible values of nominal growth (say 5 per cent) and target debt/GDP ratio of 30 per cent (needed for fiscal space) that implies an average deficit, over the cycle, of about 1.5 per cent of GDP (in Oz, about $20 billion).

  21. John Quiggin
    May 10th, 2012 at 11:28 | #21

    Jack, I’m adding “I told you so” posts to your list of banned topics. When I bother checking, as in this case, there’s a lot of selection bias, as with most self-evaluations of predictive success. If you want to make predictions and keep track of them, you really need to start your own blog, not rely on selective links to comments.

    No correspondence will be entered into on this point (i.e. anything further will be deleted).

  22. Chris Warren
    May 10th, 2012 at 12:02 | #22

    John Quiggin :“The budget balance must stabilise the ratio of debt to GDP at a sustainable level”.

    Why? How? – when the economy as a whole does not do the same?

    The very existance of debt as a ratio is a problem particularly when Australia does not have control of its own interest rates?

    If there were strict controls on capital flows things may be different. An amount of debt as a ratio to wages, salaries and supplements, may be useful.

  23. Jim Rose
    May 10th, 2012 at 13:50 | #23

    see http://online.wsj.com/article/SB10001424052702304451104577390482019129156.html?mod=WSJ_Opinion_carousel_2 for Stimulus Spending Keeps Failing If austerity is so terrible, how come Germany and Sweden have done so well? by Robert Barro

  24. JB Cairns
    May 10th, 2012 at 14:02 | #24

    For pete’s sake,

    Germany’s stimulus package was bigger than the US given what the States and Local Government did there and Sweden had lower interest rates and a reasonable large depreciating currency.

    Barro is kidding himself.

    His last great bit of research was forgetting taxes rose to apy for the Korean war!

  25. Jim Rose
    May 10th, 2012 at 15:09 | #25

    Barro, de long and summers all seem to agree that the multiplier is zero outside of a liquidity trap.

    if there is a liquidity trap, see http://ideas.repec.org/p/nbr/nberwo/9814.html The Case for Open-Market Purchases in a Liquidity Trap

  26. JB Cairns
    May 10th, 2012 at 15:41 | #26

    well Keynes only agreed on using fiscal policy when there was a liquidity trap as monetary policy didn’t work.

    People never realise the General theory was about monetary economics as David Glasner perceptively pointed out some time ago.

  27. Jim Rose
    May 10th, 2012 at 18:36 | #27

    “But whilst this limiting case might become practically important in future, I know of no example of it hitherto.

    Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test.

    Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.”

    J.M. Keynes (1936)

  28. May 10th, 2012 at 19:33 | #28

    Pr Q @ #21

    Jack, I’m adding “I told you so” posts to your list of banned topics. When I bother checking, as in this case, there’s a lot of selection bias, as with most self-evaluations of predictive success

    No problem, this blog is your private property and you have a perfect right to gag or evict tiresome guests.
    But in self-defence I would point out that my tendency towards “confirmation bias” in tumpetting “predictive success” with “I told you so” is balanced by an equal tendency to bewail predictive failure by (2600 pages worth) of “I was wrong”.

  29. May 11th, 2012 at 00:43 | #29

    Jim Rose, I’m no expert on the Argentine economy, but explain to me again how Cristina Fernández de Kirchner is running the country into the ground.

    http://krugman.blogs.nytimes.com/2012/05/03/down-argentina-way/

  30. John Quiggin
    May 11th, 2012 at 05:45 | #30

    Fair enough, Jack. I’m just tired of having you keep score here. Not doing so will, I think, improve the quality of your comments

  31. Jim Rose
    May 11th, 2012 at 07:49 | #31

    see Lies and Argentine statistics at http://www.economist.com/node/18587317 on doctoring the CPI and http://www.forbes.com/sites/timworstall/2012/05/04/paul-krugmans-very-strange-ideas-about-argentinas-economy/

    the graph you linked is to real GDP: this is after the adjustment for any inflation

    There’s a good reason why inflation figures might get a little fudged: Argentina has issued bonds where the interest payment is supposed to vary with inflation.

  32. Ikonoclast
    May 11th, 2012 at 08:08 | #32

    John Quiggin :
    @Ikonoklast “Budgets must balance in the long run” is a somewhat misleading shorthand for “The budget balance must stabilise the ratio of debt to GDP at a sustainable level”. For plausible values of nominal growth (say 5 per cent) and target debt/GDP ratio of 30 per cent (needed for fiscal space) that implies an average deficit, over the cycle, of about 1.5 per cent of GDP (in Oz, about $20 billion).

    I feel Professor Quiggin’s honest statement above illustrates a problem the general public has in dealing with economic debates. The experts talk in code. Here we find that “balanced budgets” does not mean “balanced budgets” at least not in the literal sense in which 90% of the public would take it. My statements below are not aimed at Professor Quiggin but at the entire manner is which economic debate and other “expert” debates are handled in our society. Instead of being conducted in plain language (which is still capable of great precision if used correctly) these debates are conducted in an elitist, exclusionist and obscurantist manner.

    Some might cavil at equating professional “shorthand” with “code” but shorthand (of any sort) is a code for those not trained to read it. I would further argue that that code quickly becomes debased and literalised especially in the mouths of politicians and in political and public debate in general.

    I assume that the statement “The budget balance must stabilise the ratio of debt to GDP at a sustainable level” has also elided a word or two and should mean “The (government) budget balance must stabilise the ratio of government debt to GDP at a sustainable level.”

    This begs two further questions. The more trivial question (in a sense) is why stabilise at about that level? The more profound question, to my mind, is why does a government which issues a fiat currency need to issue debt or borrow? I am not presupposing the answer, I am simply posing the question. Anyone care to answer?

  33. Jim Rose
    May 11th, 2012 at 08:21 | #33

    while budgets that are balanced over the cycle are a good idea, and tax smoothimg is good too, this fetish about large surplus is very bad. who gains?

  34. Ikonoclast
    May 11th, 2012 at 08:22 | #34

    Ancillary to my post above, I will honestly note my central suspicion. My central suspicion is that that part of the bond market related to funding public expenditure, is largely if not wholly an artificial and unnecessary construct designed (by financiers, capitalists and opportunists) to siphon “wealth” (essentially the “right” or power to conume real goods and services) from the public sphere back to the private sphere. As such it essentially comprises an “anti-tax” system or a tax nullifying system for its wealthy beneficiaries.

  35. JB Cairns
    May 11th, 2012 at 09:02 | #35

    Jim,

    If you were in the midst of a commodity boom as we were with the previous government it is a necessity.

    It isn’t at present but it may become so.

  36. Chris Warren
    May 11th, 2012 at 09:10 | #36

    @Ikonoclast

    You may need an example here. The government is only borrowing from the world at large.

    Presumably it may have to increase taxes to pay interest on the bonds it has issued, or if the income from bond sales goes to construct productive enterprises (eg Snowy Mountains Scheme) the wealth stays in the public sphere.

    However under capitalism, bonds are also used to paper over contradictions of capitalism, so the world now has near $100 trillion worth of bonds and they want more.

    This is the problem, not bonds themselves.

  37. Jim Rose
    May 11th, 2012 at 09:49 | #37

    are government bonds known as an above average investment option? any plans to buy greek, spanish or italian bonds.

    Michael Dooley wrote nice papers on insurance attacks on emerging countries where bond yields and currency attacks follow the arrival of new information on the availability of lines of credit from the IMF and others, in the current case, germany

  38. Ikonoclast
    May 11th, 2012 at 11:32 | #38

    @Chris Warren

    Bill Mitchell points out recently on his blog that “There is no fiscal distress in Japan (highest public debt ratios and on-going relatively large deficits), in the US and elsewhere where the bond markets know that the government faces no solvency risk and where the central bank can always deal them out of the equation with appropriate bond purchasing policies. In those nations, the bonds markets are the recipients of corporate welfare and know it!”

    His final statement is important “… the bonds markets are the recipients of corporate welfare and know it!”

    The key point here is that capitalist bond markets are not necessary to fund the expenditure of sovereign nations which operate a sovereign fiat currency. These current institutional arrangements (which could be changed by law) exist to siphon free money (as interest on sovereign debt) to the capitalists in the bonds market.

  39. sdfc
    May 11th, 2012 at 19:39 | #39

    Jack

    Your argument is circular. You argue that the lack of a “recession” in Australia suggests fiscal stimulus was unwarranted. The stimulus was targeted at preventing a “recession”. It appears say you are using the success of the stimulus to suggest you were correct.

    Jim

    Cash rates should never go to zero. It’s a sign that monetary policy has become relatively ineffective. If you wait until CB drops rates to zero before implementing some form of fiscal stimulus you are well behind events.

    Barro is just so second rate it is not funny. Just what do Sweden and Germany have in common with the PIIGS?

    Deficit spending is inflationary. Balanced budgets over the cycle limit the public sector’s impact on prices.

  40. JB Cairns
    May 11th, 2012 at 20:06 | #40

    SDFC,

    Do you think the people at Catallaxy have worked out that off-budget is not off-balance sheet yet.

    Given the prominence the NBN has been given in assets I do not understand how anyone who has read a budget could ever say it was off-balance sheet.

    Yes,
    One of the main reasons Keynes wanted to use fiscal policy was to get inflation. Remember he lived in a country that had a devaluation but still had deflation.
    Australia regained inflation after our massive devaluation in the 30′s.

    This meant monetary policy beginning to work as it should again.

  41. sdfc
    May 11th, 2012 at 20:10 | #41

    Of course not. Off budget is a nonsense anyway.

  42. JB Cairns
    May 11th, 2012 at 20:22 | #42

    It can be nonsense but not A nonsense.

    funny how little people talked about Telstra being off-budget including one reasonably paid talker for Telstra called Ergas.

  43. sdfc
    May 11th, 2012 at 20:30 | #43

    It’s a nonsence because spending on the NBN is in the budget. It is not general government spending and which is apparently not something that is well understood.

  44. sdfc
    May 11th, 2012 at 20:31 | #44

    Nonsense. Too many beers, typing is likely to go down hill from here.

  45. JB Cairns
    May 11th, 2012 at 20:47 | #45

    I do not disagree however people who are bleating about this at present were silent when Telstra was around.

    It is a pretty standard government accounting standard though.

    A lot of people do not understand what is general government spending!!

  46. BilB
    May 12th, 2012 at 11:01 | #46

    Talking about crises, these can come in many forms. The IMF has done some forward looking assessment of oil supply and economic impacts.

    http://www.theoildrum.com/pdf/theoildrum_9182.pdf

    This suggests a petrol price of between $3 and $4 per litre within the next 8 years. Couple that with electricity at a probable 30 to 40 cents per kilowatt hour and you are talking about a serious impact on even the resources propped up Australian economy.

    This would mean for a family renting at $400 per week, using a modest 8,000 kilowatt hours of electricity, and running one commute car and a local family car a bottom line energy and accommodation bill of $34,100 per year. This is based on our suburban 600 sqmtr block medium commute SUV+2 door hatch model for the average family.

    I think that crises are coming “ready or not”.

    And that is before you start to count in the mounting cost of climate change economic impacts, or the compounded effects of resource warfare.

  47. May 12th, 2012 at 15:37 | #47

    Eight years, BilB? Sweet! I’ll be well-established at The Doomstead by then.

  48. BilB
    May 12th, 2012 at 16:00 | #48

    Let’s hope your don’t get burnt out in the now forming El Nino, DI. Not that the loss of a few thousand houses each year will have much of an impact on the National accounts, but it will add to the pressure on insurance rates for “at risk” property.

    Yes, eight years seems like a long time, but for the young it is high school and a couple of years of uni before living standards take a nose dive. I doubt that unions can squeeze employers enough for there to be no impact on family incomes. The difference will have to come out of property values and property servicing costs. This will of course impact on banks who will increase fees and rates to maintain profitability.

    The other way of looking at eight years is that the work conditions slash and burn Coalition will still be in control through this period so pressure on family incomes will be accute. Not that this will excessively affect the comfortably retired.

  49. May 13th, 2012 at 19:05 | #49

    socrates @ #16 unsuccessfully attempts to “dispose of right-wing [sic] spin”:

    Mining companies CUT employment and investment during the GFC. They did not restart again till 2009/10, which helped the recovery, but was too late to get us through the 2008-09 period. The Ravensthorpe mine closure in WA was a prime example, as was the deferral of the Olympic dam project by BHPB. Likewise the economy survived through an increase in domezstic demand, nto exports to China. These facts were all pointed out in Treasury speeches available on line back in 2009/10.

    Wrong on both counts. The points I am making are not “right-wing” and they are not “spin”, they are data-driven and were predicted at the time by a tiresome commenter on this blog on February 5th, 2009, whom modesty and commenting rules forbid me from mentioning by name.

    FWIW, I am not an anti-Keysnian. Far from it, I have belaboured the point that the GFC generally speaking had “Austrian causes and Keynsian cures” ie elites playing silly buggers with the monetary system caused a financial crash that could only be treated with a fiscal stimulus. But AUS is the orthodox exception that proves the Keynsian rule.

    My claim is that economic policy staved off a depression in AUS in the wake of GFC mainly due to the liberalising, regulating and stimulating policies of previous governments, rather than Swan’s Keynsian stimulus alone doing all the heavy lifting. Credit should be give to the following policies in the descending order of priority:

    1. Factoral: high immigration of high human capital-endowed, RIP mortgage-servicing Asian students
    2. Financial: cuts in the cash rate plus more prudential regulation by post-Wallis APRA
    3. Forex: free-floating AUD, introduced by Hawke-Keating, shock-absorbing oscillations in global trade
    4. Fiscal: Howard-Costello surpluses paying down sovereign debt, fending off bond vigilantes

    The claim that the relative stability of AUS’s export revenue did nothing to stave off depression does not pass the laugh test. Its not all about mining, tourists and ETM’s also make up part of the picture. In the wake of the GFC the AUS terms of trade falling sharply and global export demand was plummeting. The immediate fall in the AUD acts acted as a shock-absorber, stabilizing the incomes of exporters and increasing the incomes of import-substituters. Just as it did 10 years earlier in the “Asian Crisis” when the AUD plummeted.

    I am not denying that Swan’s fiscal stimulus package helped or was not justified (that would be “right-wing spin”). Just insisting that it was not primary or critical in getting us over the GFC slump, and this for perfectly good Keynsian reasons, AUS did not suffer a classic financial collapse therefore we did not enter a liquidity trap.

    The same conclusion was reached by other professional economic analysts one year after your tiresome commenter. Stephen Long, writing for the ABC Drum on 10 AUG 2010, reviewed the explanations for AUS’s soft-landing and concluded that forex, rather than fiscal, policy was critical:

    But it must be acknowledged that, in the six months after the credit crash brought on by the collapse of Lehman Brothers, fiscal stimulus was not the main contribution to the economy’s performance. The main thing that saved the economy was the exchange rate. By far the biggest contribution to GDP was net exports (as the national accounts are measured, if the value of exports exceeds the value of imports, it adds to GDP and vice versa). Net exports rose strongly because of a big depreciation in the exchange rate, with the Aussie dollar falling by 25 per cent in trade weighted terms. That boosted the competitiveness of Australia’s exports and made imports more expensive for domestic buyers. There was also sustained demand for Australia’s mineral exports from Asian buyers, including China, over that time.

    His analysis was based on Tony Makin’s analysis of trade and GDP figures up to and after the GFC. Makin concluded that forex policy saved the day:

    Close scrutiny of the pattern of aggregate expenditure recorded in the national accounts, especially for the December 2008 and March 2009 quarters, reveals it was the behaviour of exports and imports, not increased fiscal activity that was primarily responsible for offsetting the fall in private investment due to the GFC…Using raw data from Australia’s national accounts, this paper establishes that net foreign demand, as reflected in quarterly changes in exports and imports, not federal fiscal stimulus, was primarily responsible for countering the GFC-induced economic slowdown over the December 2008 and March 2009 quarters. Indeed, the federal government’s direct contribution to the change in domestic consumption and investment was minimal at that time with its major impact arriving several quarters after it was deemed necessary.

    My own reasoning at the time was consistent with that. Although I am convinced that the resilience of AUS’s banks through the GFC was the strongest possible stress test of the underlying strength of our property market. Which means that whatever was under girding the demand for property was the true bullet proof vest that stopped the banking shrapnel from cutting us to pieces. And that was Asian student renters and buyers.

    But I strongly insist that economists should take a “whole-of-government” approach to the review of economic policy through the 2008-10 period. That is they should recognise that every arm of government economic policy – Immigration, Treasury, RBA, APRA – did its bit. As a tiresome commenter speculated at the time: “they will throw everything including the kitchen sink at this problem”. They did, and it worked.

    So lets have some credit to the Canberra econocrats, the guardians of AUS civilization.

  50. May 13th, 2012 at 19:06 | #50

    socrates @ #16 unsuccessfully attempts to “dispose of right-wing [sic] spin”:

    Mining companies CUT employment and investment during the GFC. They did not restart again till 2009/10, which helped the recovery, but was too late to get us through the 2008-09 period. The Ravensthorpe mine closure in WA was a prime example, as was the deferral of the Olympic dam project by BHPB. Likewise the economy survived through an increase in domezstic demand, nto exports to China. These facts were all pointed out in Treasury speeches available on line back in 2009/10.

    Wrong on both counts. The points I am making are not “right-wing” and they are not “spin”, they are data-driven and were predicted at the time by a tiresome commenter on this blog on February 5th, 2009, whom modesty and commenting rules forbid me from mentioning by name.

    FWIW, I am not an anti-Keysnian. Far from it, I have belaboured the point that the GFC generally speaking had “Austrian causes and Keynsian cures” ie elites playing silly buggers with the monetary system caused a financial crash that could only be treated with a fiscal stimulus. But AUS is the orthodox exception that proves the Keynsian rule.

    My claim is that economic policy staved off a depression in AUS in the wake of GFC mainly due to the liberalising, regulating and stimulating policies of previous governments, rather than Swan’s Keynsian stimulus alone doing all the heavy lifting. Credit should be give to the following policies in the descending order of priority:

    1. Factoral: high immigration of high human capital-endowed, RIP mortgage-servicing Asian students
    2. Financial: cuts in the cash rate plus more prudential regulation by post-Wallis APRA
    3. Forex: free-floating AUD, introduced by Hawke-Keating, shock-absorbing oscillations in global trade
    4. Fiscal: Howard-Costello surpluses paying down sovereign debt, fending off bond vigilantes

    The claim that the relative stability of AUS’s export revenue did nothing to stave off depression does not pass the laugh test. Its not all about mining, tourists and ETM’s also make up part of the picture. In the wake of the GFC the AUS terms of trade falling sharply and global export demand was plummeting. The immediate fall in the AUD acts acted as a shock-absorber, stabilizing the incomes of exporters and increasing the incomes of import-substituters. Just as it did 10 years earlier in the “Asian Crisis” when the AUD plummeted.

    I am not denying that Swan’s fiscal stimulus package helped or was not justified (that would be “right-wing spin”). Just insisting that it was not primary or critical in getting us over the GFC slump, and this for perfectly good Keynsian reasons, AUS did not suffer a classic financial collapse therefore we did not enter a liquidity trap.

    The same conclusion was reached by other professional economic analysts one year after your tiresome commenter. Stephen Long, writing for the ABC Drum on 10 AUG 2010, reviewed the explanations for AUS’s soft-landing and concluded that forex, rather than fiscal, policy was critical:

    But it must be acknowledged that, in the six months after the credit crash brought on by the collapse of Lehman Brothers, fiscal stimulus was not the main contribution to the economy’s performance. The main thing that saved the economy was the exchange rate. By far the biggest contribution to GDP was net exports (as the national accounts are measured, if the value of exports exceeds the value of imports, it adds to GDP and vice versa). Net exports rose strongly because of a big depreciation in the exchange rate, with the Aussie dollar falling by 25 per cent in trade weighted terms. That boosted the competitiveness of Australia’s exports and made imports more expensive for domestic buyers. There was also sustained demand for Australia’s mineral exports from Asian buyers, including China, over that time.

    His analysis was based on Tony Makin’s analysis of trade and GDP figures up to and after the GFC. Makin concluded that forex policy saved the day:

    Close scrutiny of the pattern of aggregate expenditure recorded in the national accounts, especially for the December 2008 and March 2009 quarters, reveals it was the behaviour of exports and imports, not increased fiscal activity that was primarily responsible for offsetting the fall in private investment due to the GFC…Using raw data from Australia’s national accounts, this paper establishes that net foreign demand, as reflected in quarterly changes in exports and imports, not federal fiscal stimulus, was primarily responsible for countering the GFC-induced economic slowdown over the December 2008 and March 2009 quarters. Indeed, the federal government’s direct contribution to the change in domestic consumption and investment was minimal at that time with its major impact arriving several quarters after it was deemed necessary.

    My own reasoning at the time was consistent with that. Although I am convinced that the resilience of AUS’s banks through the GFC was the strongest possible stress test of the underlying strength of our property market. Which means that whatever was under girding the demand for property was the true bullet proof vest that stopped the banking shrapnel from cutting us to pieces. And that was Asian student renters and buyers.

    But I strongly insist that economists should take a “whole-of-government” approach to the review of economic policy through the 2008-10 period. That is they should recognise that every arm of government economic policy – Immigration, Treasury, RBA, APRA – did its bit. As a tiresome commenter speculated at the time: “they will throw everything including the kitchen sink at this problem”. They did, and it worked.

    So lets have some credit to the Canberra econocrats, the guardians of AUS civilization.

  51. sdfc
    May 13th, 2012 at 19:58 | #51

    Export revenue slumped in late 08 / early 09 and with it real gross domestic income. That Makin seems unaware of this bizarre.

  52. May 16th, 2012 at 22:34 | #52

    Jim Rose, I have no idea whether the Argentinian government is cooking the books on inflation. However, if they are they seem to have not only fooled their own people (de Kirchner having been re-elected in a landslide) but sources such as the CIA World Factbook.

    But then we all know they’re lefty dupes.

  53. Jim Rose
    May 16th, 2012 at 23:03 | #53

    stephen, the CIA estimates the Argentine annual CPI inflation rate to be 22% in 2010. this is twice the government figure of 10%.

    Foreign investors report presentations by the Argentine Central Bank mentioning an inflation-adjusted exchange rate that implies annual inflation of around 20%. The Argentine government has often granted unions pay rises of that order.

    Latin voters may not be surprised to learn that their political leaders are less than honest.

    The people of Argentina have suffered enormously from political mismanagement of
    their once-robust economy during most of the past 80 years.

  54. JB Cairns
    May 17th, 2012 at 08:21 | #54

    Just to add to SDFC Treasury has looked extensively at this period ( it is one of their Treasury roundup papers).
    What Makin doesn’t not seem to realise is that exports dropped BUT Imports dropped EVEN more.

    you do not get a stimulus from an accounting identity. you need to follow it through.
    He didn’t. He is merely a partisan hack

  55. Chris Warren
    May 17th, 2012 at 08:39 | #55

    @Jim Rose

    You may be channeling capitalist theory. There appears to be an underlying issue around how you measure inflation. According to the “Economist”;

    Argentina will no doubt say that (Western measures) measure consumption by the rich rather than the poor, who may not shop online.

    If you index consumer prices for the consumables for poor, you may get a different result than if you index the prices of the consumables for the rich.

    Different sectors in any economy will always have different inflation rates.

  56. JB Cairns
    May 17th, 2012 at 09:10 | #56

    Chris,

    the economist dumped official statistics on Argentina as they were obviously at odds with what was happening there.

    They now use a different series which shows a much higher rate of inflation.

    People who attempted to do this in Argentina were targeted by the government there in very unpleasant ways.

  57. Chris Warren
    May 17th, 2012 at 10:32 | #57

    @JB Cairns

    Yes precisely. But according to the “Economist” the Argentinian judgement as to:

    what was happening there

    appears different from the Economist point of view.

    And possibly inflation of poor peoples’ budgets can be lower than inflation of rich peoples’ budgets.

    Anyway I am not aware of the Argentinian explanation. The point about rich and poor was only admitted at the very end of the Economists propaganda piece at:

    http://www.economist.com/node/21548242

    There are always two types of inflation: – 1) socialist lubrication which is mundane and 2) additional inflation to allow capitalists to realize their ‘expected’ monetary profits.

  58. Chris Warren
    May 17th, 2012 at 10:44 | #58

    @JB Cairns
    Yes precisely. But according to the “Economist” the Argentinian judgement as to:

    what was happening there

    appears different from the Economist point of view.
    And possibly inflation of poor peoples’ budgets can be lower than inflation of rich peoples’ budgets.
    Anyway I am not aware of the Argentinian explanation. The point about rich and poor was only admitted at the very end of the Economists propaganda piece at:

    http://www.economist.com/node/21548242

    There are always two types of inflation: – 1) socialist lubrication which is mundane and 2) additional inflation to allow capitalists to realize their ‘expected’ monetary profits.

  59. JB Cairns
    May 17th, 2012 at 10:55 | #59

    Chris,

    if you want to measure the rise in prices you do it openly and honestly. The ABS here is one of the best in the business.

    This is not happening in Argentina. Moreover the government targets whomever wishes not only to point out how dishonest they are but actually wish to make a honest and open series on prices.

  60. Jim Rose
    May 17th, 2012 at 11:24 | #60

    Chris Warren, if the rich can shop online, would that not make their inflation rate lower, not higher than that of the poor?

  61. JB Cairns
    May 17th, 2012 at 11:48 | #61

    This is irrelevant.

    you construct a series for the country.

  62. Chris Warren
    May 17th, 2012 at 11:55 | #62

    Jim Rose :
    Chris Warren, if the rich can shop online, would that not make their inflation rate lower, not higher than that of the poor?

    As you are no doubt aware – this depends on the basket of goods they consume and whether their online expenditures are substitutions.

    If the rich purchase online latest gizmo’s they would not have purchased domestically, and they purchasing using some new credit, then this can feed into “inflation from the rich”.

    If the rich purchase pizza’s and hamburgers online (cheaper) – which they substitute for the same they would have purchased on the street – then the effects may be different and confused – what would they do with their surplus cash?

    But in general, however a transaction occurs – it is reasonable to expect better returns selling to the rich than selling to the poor. The rich generate more debt than the poor.

    If by some circumstance, online shopping lowers inflation for the rich, I see no mechanism leading to necessarily making:

    their inflation rate lower, not higher than that of the poor?

    This assumption is unsustainable.

  63. socrates
    May 17th, 2012 at 13:08 | #63

    Returning to the topic of this thread, I sincerely hope somebody in Canberra is asking how we might prepare for another global recession right now. With the news that Greece will go back to the polls on June 17, and China growth is slowing down (though in my view temporarily), the prospects of another world recession seem pretty good right now. Such expectations may be self-fulfilling even if the causes are temporary. Combine that with an anemic Australian budget and BHPB cancelling large mining projects, and I suspect our economy will need stimulating again very soon.

  64. John Quiggin
    May 17th, 2012 at 13:27 | #64

    Again, re Jim Rose DNFTT. From long experience, he offers a combination of concern trolling and deliberate, though relatively subtle, misrepresention. This lengthy comments thread shows plenty of examples of both

    http://www.harryrclarke.com/2012/04/20/latham-on-denialism/

  65. JB Cairns
    May 17th, 2012 at 14:42 | #65

    Socrates,

    if it occurs and credit markets do not freeze like last time then monetary policy can take most of the heavy work as Keynes believed.

Comments are closed.