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A surplus of stupidity

December 6th, 2012

When commentators as disparate as me, Warwick McKibbin, Bernie Fraser, ACOSS the Australian Industry Group and the Business Council of Australia are all in agreement, it might be time for the government, and the opposition to start paying attention. At this point, I doubt that there is a single credible economist who thinks that the government’s promise to return the budget to surplus this financial year is a good idea. Yet the Treasurer remains absolutely committed, and the Opposition is ready to denounce him if we miss the target by even a single dollar.

To restate the case, it’s clear that growth is slowing, and, as usual in these circumstances, monetary policy is becoming less effective. In cases like this, fiscal policy ought to be moderately stimulatory, or at least left neutral, so that the automatic stabilizers (declining revenue and increasing welfare payments) are left to cushion the impact of a slowdown. Instead, thanks to this absurd pledge, the government is committed to matching every reduction in economic activity (and therefore in the budget balance) with its own cuts or tax surcharges.

Obviously, the reasoning here is political not economic. The government suffered badly from the gratuitous “no carbon tax” promise[1] made before the 2010 election. To dump the equally gratuitous “early return to surplus” promise would involve a whole world of pain. And of course Tony Abbott cares nothing at all about good policy, unless it’s defined as policy that will make him PM. So, we have the politicians united on one side of the debate, and everyone who has any idea of economic reality on the other.

fn1. Feel free to parse this in comments, but the fact remains that the Rudd government was elected with a strong commitment to carbon pricing, which Labor then dumped in a loss of nerve before the 2010 and was forced back to (something like) its original position by the election outcome. In this context, the question of whether a specific promise was made and broken is of secondary intersest.

  1. Andrew
    December 9th, 2012 at 23:30 | #1

    @Senexx Particularly when it doesn’t even correlate!

  2. m0nty
    December 10th, 2012 at 00:01 | #2

    Show me a serious open economy, bigger than toy size (i.e. Singapore doesn’t count), that averages 2% unemployment and I’ll believe it is possible in the modern age. South Korea and Norway are closest but they don’t get much lower than 3%. Figures from 50 years ago are hardly relevant.

  3. Graeme Bird
    December 10th, 2012 at 16:09 | #3

    “Show me a serious open economy, bigger than toy size (i.e. Singapore doesn’t count), that averages 2% unemployment and I’ll believe it is possible in the modern age. South Korea and Norway are closest but they don’t get much lower than 3%. Figures from 50 years ago are hardly relevant.”

    But Monty;

    1. What is your point?
    2. Why exclude Singapore and small sub-economies more generally?
    3. Why be bigoted about economic experience PRIOR TO “the modern age?”
    4. What year are you calculating “the modern age” from?

    Lets say it is 71 (the break in the last link to Gold) or 66 (Where Professor Keen as a Minsky follower identified that the US economy had hit a debt level implying fragility) or 73 ( the date of the first oil shock. The first time since not long after the second world war, when energy wasn’t essentially “free.”)

    Monty we need to know what the thesis is. Professor Hutt showed, with excruciatingly excellent logic, that if corporations are agency and fat-free, attempts to push up the price of labour, by way of unions and/or regulations, will lead to lower wages and higher unemployment on the bottom end of the labour market. But he explicitly said that this doesn’t hold if there is fat in the corporations. He just asked the question …. ought it not be that fat that we attend to? I agree but I consider the accumulating fat as inherent to the very notion of the “artificial person”. These artificial persons corrupt government, and are corrupted by government, in an evil self-reinforcing circle. And after all these corporations (we can find exceptions yes) in “the modern era” are fundamentally a creature of government. Even the Hanseatic League morphed into a government of sorts.

    Now as excellent as Hutts analysis is it suffers, as does all of the most excellent British Classical school, and the Austrian School (I say “excellent” on a technical level. But on a moral level both schools are horribly weak on our oligarchs. They are belly-crawlers for the super-rich). As excellent as Hutts analysis is, nowhere within it is the scandal of debt-inducement, debt explosion, fractional reserve, and the analysis of what amounts to debt-peonage.

    An analysis of the Middle Ages (When the Venetian Republic and Florences Medicis) were amongst the most important debt-pushers) shows us that when the monetary collapse comes the ghastly period of monetary famine can last 20 years. This goes against Austrian and Neoclassical assumptions. They just assume that if there are no minimum wages and trade unions, that the price of labour will reach a new equilibrium. This turns out not to be correct. Actually in this context the flippant statement “In the long run we are all dead” takes on some meaning even for me.

    Neoclassicals and Austrians assume that we can defeat any recession with wage deflation inside of 18 months. And this would be true were it not for;

    1. The hateful market concentration that the preponderance of artificial persons brings.
    2. The hateful market concentration that the fractional reserve subsidy brings.
    3. The way these last two dovetail with government largesse.
    4. THE ISSUE OF EXCESSIVE DEBT.

    Everyone is paralysed until the amount of debt comes into line with the stock of cash to pay off that debt with, and in line with the growth of that stock of cash, insofar as its really the growth of that cash that inspires the spending.

    Now back to what you were saying about the modern era and back to Singapore.

    Singapore owns its banks. Singapore controls its banks. If I have this wrong it could only be because I may have matters mixed up with Hong Kong. Hong Kong I believe owns the land underneath its buildings, but does not own the banks. Whereas Singapore doesn’t own the land but has total control of its banks. If I’ve mixed and matched this scenario forgive me. But the point is that neither city faces the FULL wrath of the problem of fractional-reserve bankers and real estate coming together. And that in both cases a greater proportion of loanable funds will be going to wealth-creating activities that also leads to more employment.

    We CAN have private banking and full employment. But the adjustment process in terms of wiping debts and getting used to growth-deflation….. thats probably a thirty or forty year process. That is a long time to wait for a functioning society, at the sacrificial alter, of what are essentially the RELIGIOUS side of the libertarian belief system.

    My recommendation is to nationalise the banks, with a view to privatising them in forty years time when we have all transitional issues settled. Earlier if possible but not so early that we screw it up.

  4. m0nty
    December 10th, 2012 at 17:44 | #4

    This is why we can’t have nice things.

  5. Graeme Bird
    December 10th, 2012 at 19:19 | #5

    You are right Monty. Because the bankers will attach debt to all the nice things if we let them. That is the real reason we accepted their dysfunctional version of privatisation, as convincing as the arguments for privatisation were, before we saw it at close quarters. The real reason we radical free enterprise advocates got our way on privatisation, was that the northern hemisphere bankers looked at what we were saying and saw within it an opportunity to take all that was nice–and-good … and start bidding wars on these things, and attach debt to these things. Nothing else can explain the ludicrous invasion of Libya for example.

    No less a figure as Lord Acton said that one day the conflict between the people and the bankers must be resolved. But in his day the problem wasn’t nearly as vital. Back then it was a handful of bigshots . Now its a substantial part of society sucking off the rest of us. I myself was recently a beneficiary of subsidised money creation. It got me out of debt-addiction and it changed my life. But we ought not live like this.

    At least in our hemisphere, the banking racket, is a more or less an apolitical setup. Less of a conspiracy. But if its the northern hemisphere bankers you are talking about, and you don’t believe in conspiracy, well you are really just being silly.

    Its pretty clear now that the banking insiders are the strongest force in the northern hemisphere. This is the greatest fight of our age. The northern hemisphere banking controllers are the greatest enemy

    The Soviets pointing 7000 ICBM’s at the Americans, were a small problem, as compared to this more significant struggle.

  6. December 14th, 2012 at 14:35 | #6

    Peter Martin says
    “The revenue forecasts in this year’s budget were built around nominal GDP growth of 5 per cent, knocked down to 4 per cent in the mid year review. But new growth figures not available at the time show nominal GDP inching ahead at an annual pace of 2 per cent — a rate which if sustained would wipe at least $5 billion from projected revenue, more than obliterating the wafer-thin $1.1 billion promised surplus.’

    Judy Sloan says
    “MYEFO downgraded the nominal GDP forecasts from 5 to 4 per cent. The problem is that according the latest nominal accounts, nominal GDP is growing at less than 2 per cent. Given that it is nominal GDP that is key in driving tax revenues – leaving aside the issue of the MRRT (see below) – the data are already in to show that the surplus will be missed.

    The irony is that the MYEFO on which the Prime Minister places so much store provides some handy sensitivity analysis on the impact on the cash balance of a one percent fall in nominal GDP. For 2012-13 ,the impact is negative $2.8 billion and for 2013-14, it is negative $6.7 billion.

    She and anyone at Catallaxy has NEVER mentioned nominal GDP growth as important
    to the budget bottom line. Indeed fellow ignoramus SamuelJ was on about real GDP being important to the budget this week but no Judy to be seen saying no it was nominal GDP grwoth.
    She must have been putting the peroxide on then.

    Given she has has been picked up for cough carelessness on this topic her words today are a remarkable coincidence.

  7. Graeme Bird
    December 14th, 2012 at 16:52 | #7

    “Given that it is nominal GDP that is key in driving tax revenues …”

    In the short term yes. Because its nominal GDP growth that is closely connected to the GST tax take. Then there is profits. Profits will be high in a consumption boom even if Gross business revenue has stalled. But this is 1. A situation where we can expect a weak labour market and 2. This sets us up for low growth later on. Really you want to look at nominal GDP only to the extent that you don’t really want it to fall precipitously. Because wages and salaries would have to fall to maintain full employment in that scenario. But Gross revenues ought to be given two thirds of the attention. Its as though you want Gross Revenues to expand maybe 1% per quarter, or 2% if you have debt problems to deal with. Whereas you don’t really want GDP to grow in the medium term. But what you want to avoid is nominal GDP dropping too much.

    What I’m really driving is, is opposition to the cult of the one key metric. If you really wanted one key metric it would be Gross Domestic Revenue and not Gross Domestic Product. But we want to get away from this one metric cult. And even though Gross domestic revenue is by far the more superior metric, still Gross Domestic product is important to keep an eye on for the reasons mentioned.

  8. Jim Rose
    December 15th, 2012 at 20:50 | #8

    Reagan has his strategic budget deficits in the 1980s to tie the hands of a future incumbent with different political goals.

    Left-wing governments use strategic budget surpluses to free their hands at future elections. They buy their way into office without promoting uncertainty about future taxes.

    OECD governments running large budget deficits are experiencing slow GDP growth.

    See Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration by Finn E. Kydland and Carlos E. J. M. Zarazaga for why:

    • The U.S. economy isn’t recovering from the deep Great Recession of 2008-2009 with the anticipated strength.
    • A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a higher taxes regime.
    • The fiscal sentiment hypothesis can account for a significant fraction of the decline in investment and labor input in the aftermath of the Great Recession, relative to their pre-recession trends.
    • The perceived higher taxes must fall almost exclusively on capital income. People must suspect that the tax structure that will be implemented to address large fiscal imbalances will be far from optimal

    Australian tax increases to close the deficit are likely to be increases in capital taxes. A swift return to surplus avoids this fiscal sentiment that would weaken the recovery.

  9. December 20th, 2012 at 14:04 | #9

    Swanny bows to economic reality and won’t try to obviate the automatic stabilisers. This is about time

    I was surprised at how good he was at the press conference.

  10. December 20th, 2012 at 15:40 | #10

    @nottrampis

    Regulars will know I despise ALP/LNP in equal measure, but yes Swan did well and Abbott and Shrek came across as silly.

    e.g.: Did you know that Julia Gillard said ‘There will be no carbon tax under a government I lead’?

    And Shrek promising that when elected he will extract $250billion from hard-working Aussies. What a boofhead!

  11. Fran Barlow
    December 20th, 2012 at 16:01 | #11

    @Megan

    Really though, Swan should simply have said, from September 2008 onwards, that there was no particular virtue in surplus nor vice in a deficit, and that while as a matter of general principle, ceteris paribus, a steady reduction in public debt as a proportion of GDP was a worthwhile thing, the first duty of the government was to maintain and grow valuable public services and improve equity of access to them, maintain employment and a diverse economy and to keep growth at or slightly above population growth, and that to the extent that focus on “balancing the budget” (stuill less “achieving a surplus”)complicated those tasks, the government would have none of it. Pro-cyclical policies in a downturn were futile and harmful to community.

    As with asylum seekers, the attempt to outflank the conservatives on the right in circumstances where they could not control the game merely set thm up to fail policitcally and entailed appopinting ther opposition — who could entirely avoid explaining how they’d do better — as their examiners. That was simply foolish with knobs on because they were never marking on merit.

  12. December 20th, 2012 at 16:12 | #12

    Fran,

    Whilst on his record one could make out a very good case for Swan being the best treasurer the nation has had I think it would be a lay down misere to say he is the worst politician to occupy the office.

    He couldn’t sell a cold beer in a heatwave

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