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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. Jim Rose
    December 6th, 2012 at 22:02 | #1

    The government is going for a surplus to prove its credentials as a fiscal conservative.

    Voters seem to be fiscal conservatives who penalise federal and state spending growth. The recent state elections illustrate this hostility among voters to fiscal deficits.

    Few voters can pretend that a fiscal deficit now due to a tax cut or a fiscal stimulus will not soon be undone by later spending cuts and tax rises. Fiscal conservatism in both parties makes Ricardian expectations about budget deficits straight forward to form and update.

    Australian fiscal policy has rarely been and example of tax smoothing.

    Whether a quick return to a budget surplus is consistent with tax smoothing is the main question. In normal times, tax-smoothing calls for close to a balanced budget.

    when did this fetish for a regular budget surplus start? the late 1990s?

  2. TerjeP
    December 6th, 2012 at 22:10 | #2

    Rudd promised to be a fiscal conservative. Lying bastard.

  3. TerjeP
    December 6th, 2012 at 22:21 | #3

    And of course Tony Abbott cares nothing at all about good policy, unless it’s defined as policy that will make him PM.

    I share your cynicism about Tony Abbott, however it is actually good policy for oppositions to hold governments to account on promises they have made. It is not Tony Abbotts fault that the government promised a surplus. Blaming him for the failings of this government is a convenient pastime for a lot of people but ultimately this government is crap for reasons entirely internal to the ALP.

    That said I’m all for spending cuts. Hopefully well prioritised rather than the alternative.

  4. Uncle Milton
    December 6th, 2012 at 22:25 | #4

    It’s fairly clear the slowing economy will ensure that the government spends more than it receives this financial year. Accordingly the Government should make a virtue out of a necessity and say that due to special circumstances a deficit is OK after all.

    If it persists with the surplus target then there will have to be an election before the cat is out of the bag for 2012-13, which will be around August, I think. But even this strategy will place the Treasury under intolerable pressure. By the time of the next Budget in May it will have to publish estimates of the budget outcome for the year that will be nearly over. If it succumbs to political pressure and publishes a nonsense surplus estimate for 2012-13 then that could be very career limiting for the Treasury Secretary in the likely event of a change in government later in 2013, especially when true picture of a deficit of (say) $10 billion comes to light.

  5. Katz
    December 6th, 2012 at 22:29 | #5

    Ever since Costello caught Beasley lying about public finances in 1996, the trope of profligacy and irresponsibility has been a potent electioneering device.

    An election campaign is no time for a reasoned discussion about deficit financing. In order to avoid that task, it is politically advisable for a government to cobble together a surplus, a believable facsimile thereof.

  6. John Mainard Kaynes
    December 6th, 2012 at 22:51 | #6

    Looking for scholarly work on depression psychology [in the economic sense] any suggestions

  7. Nicholas Gruen
    December 6th, 2012 at 23:35 | #7

    I think – and have written – that the promise to return to surplus was politically stupid, and also economically unwise – for the obvious reason that if the stimulus was a good idea in 2008-9 and similar circumstances recur it will be a good idea then.

    But at least in the circumstances we’re in so far, I’m not sure that it’s a bad idea – what it does mean is that monetary policy should be being eased more aggressively – we have another 300 basis points to play with but the RBA have cut by 25 basis points and gone on a two month holiday.

  8. Ikonoclast
    December 7th, 2012 at 07:13 | #8

    Prof. J.Q., I had thought I had caught you out in a small economic non sequitur but on reflection I realised you had a saving point that left you in the right.

    You said, “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.”

    If fiscal policy was moderately stimulatory or at least neutral then, when the automatic stabilizers kicked in as a slowdown continued, the budget would go into deficit. Then by definition the budget would be in deficit and stimulatory or more stimulatory than otherwise. However, the judgement that fiscal policy is “moderately stimulatory, or at least left neutral” is made at the time the budget is brought down and thus on estimates. Ikonoclast fails!

    On the actual grist of the topic I agree. Again, we have a government locked into a policy that almost nobody else in the nation thinks is a good idea. Indeed, we have enough knowledge and real world experience to know to a very high degree certainty that it is a bad idea. It sort of reminds me of Bligh’s bad policies (on privatisation) which again which almost nobody wanted. It makes one wonder why Labor have become so perverse, so against the democratic will, so politically inept and so far from their roots of the party. I find it bizarre and inexplicable.

    I’m preparing myself to be ready to be shaking my head from now until my grave (in about 30 years time). There are so many bizarre, irrational and ludicrous things happening now in national and global politics it is beyond belief. Oh well, my neck muscles are going to get a good workout.

  9. m0nty
    December 7th, 2012 at 07:28 | #9

    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.

    An honest question for you, Prof Q: under your understanding of Keynesianism as applied to Australia, what is the “normal” GDP growth figure at which you would proscribe a balanced budget, which is effectively what Swan is delivering? It seems to me that growth of 3% trending down from 4% is still well ahead of the median rate, thus a balanced budget is prudent under the circumstances.

    If we need stimulus at 3% growth, as you say above, you leave yourself open to criticism that you would call for stimulus under every circumstance. Obviously the economy is a complex thing and it’s not a simple equation, two-speedness etc, but Keynesianism itself sets up the system of countercyclical adjustment… is 3% growth really in the lower half of the cycle?

  10. Fred Struth
    December 7th, 2012 at 07:38 | #10

    The establishment parties have to a large degree become courtiers to power, limited by the constraints of the mainstream media and the increasingly selfish ignorant desires of voters, desires that are intentionally stoked by a rapacious corporate system. The politicians, in the absence of a broad based social movement that they fear, continue to market discredited economic rationalist trojan policies such as balancing the budget and associated tax cuts. This is not a new perspective, i recall Carl Sagan’s words about the ancient Greek elites in his Cosmos video documentary series which reveal another meaning for the term ‘economic rationalism’.

    “In love with whole numbers, the Pythagoreans believed that all things could be derived from them. Certainly all other numbers. So a crisis in doctrine occurred when they discovered that the square root of two was irrational. That is: the square root of two could not be represented as the ratio of two whole numbers, no matter how big they were. “Irrational” originally meant only that. That you can’t express a number as a ratio. But for the Pythagoreans it came to mean something else, something threatening, a hint that their world view might not make sense, the other meaning of “irrational”. But why had science lost its way in the first place? What appeal could these teachings of Pythagoras and Plato have had for their contemporaries? They provided, I believe, an intellectually respectable justification for a corrupt social order. The mercantile tradition that had led to Ionian science also led to a slave economy. You could get richer if you owned a lot of slaves. Athens in the time of Plato and Aristotle had a vast slave population. All that brave Athenian talk about democracy applied only to a privileged few.”

    I seem to recall reading a book about ideas from the crypt, continuously resurrected, something about clammy grasping hands extending from the undead unresting place of establishment self interest. Can anyone guess what the title of this book might be?

  11. JB Cairns
    December 7th, 2012 at 07:42 | #11

    Terje, You are merely showing ignorance. Using a stimulus IS conservative economics and what makes it better it worked!

    We are now in unique territory to which I have never experienced before and I am amazed no-one but no-one has talked about it.

    Real GDP is above trend at present ( just ) BUT nominal GDP ( which is the MOST important input for a budget) has been running below trend for sometime.
    In the last quarter released yesterday REAL GDP was > Nominal GDP because we had DEFLATION. ( Sorry but did some-one somewhere believe stagflation was on the cards M0nty?).

    Under these circumstances one is never going to get a balanced budget ( please note JQ NOT a surplus) no matter what smoke and mirrors you use.

    Monetary policy is simply not working as it has previously.

  12. TerjeP
    December 7th, 2012 at 07:52 | #12

    The generally quoted GDP growth figures don’t account for shifts in population. In per capita terms growth is now essentially zero.

  13. m0nty
    December 7th, 2012 at 07:56 | #13

    The Australian population is growing at 1.5%, TerjeP. Wouldn’t there be a 1:1 correlation on its effect on GDP?

  14. TerjeP
    December 7th, 2012 at 07:58 | #14

    Using a stimulus IS conservative economics and what makes it better it worked!

    I don’t agree with your interpretation of “fiscal conservative” but it’s a semantic point. As for the notion that the stimulus worked that depends on what you think the goal was and how you think the alternate scenario would have played out. Personally I think it was a wasteful activity.

  15. TerjeP
    December 7th, 2012 at 08:05 | #15

    Monty – GDP grew 0.5% in the September quarter. Population growth over the same period was 0.5%. As such we had no growth in per capita GDP.

  16. m0nty
    December 7th, 2012 at 08:07 | #16

    Quarterly figures are subject to seasonal variations, TerjeP. Give me annual figures.

  17. Ikonoclast
    December 7th, 2012 at 08:10 | #17

    @m0nty

    Monty, I think you are asking the wrong question or at least framing it in the wrong way. Growth as such is not the proper target. The proper targets are full employment and long term sustainability.

    Whilst we still have a growing population, growth in technology applications and (possibly) growth in productivity then economic growth is required to provide employment growth. Our target should be that amount of growth, business economic activity and government economic activity which gets us back to true full employment. We are a mixed economy and both private and public employment must play a role. True full employment occurs at about 2% (frictional) unemployment of all persons 15 and over who wish for and/or need employment.

    Beyond that, sustainability is the goal. This must involve stabilisation to a steady state population at some point (relatively soon) and stablisation to a ceiling state of physical infrastructure quantitatively speaking ie. the cessation of physical growth of population biomass and growth of material mass of infrastructure (cessation in growth of stock as measured by mass). Total flows of mass (and eventually total flows of energy) in production must also be stablised at some point.

    However qualitative growth (which is still a real form of economic growth) can continue almost indefinitely provided civilization suffers no catastrophe. (Like 6 degrees of global warming which unfortunately now seems likely.) Qualitative growth would include but not be limited to progress in science, technology, education, knowledge, arts, medicine, health, social welfare, global ecological “health”, human living amenity and so on.

  18. m0nty
    December 7th, 2012 at 08:27 | #18

    Ikonoclast, good luck getting the biomass stabilised without instituting Chinese style policies. It’s all very well to say these things, but they are practically impossible. Pegging NAIRU at 2% is also a nice thing to say, but very few countries have reached anywhere near that in history.

    You talk of sustainability, but the government books have to be sustainable as well. GDP at 3-ish% and unemployment at 5-ish% is a situation where the government should be keeping an even keel.

  19. JB Cairns
    December 7th, 2012 at 08:30 | #19

    Terje,

    Nations which followed your solution ended up in recession or depression (see Estonia for example) now that is wasteful!

    Even as likely under a coalition Government we would have has a stimulus program too late so look at Canada or NZ to see what would happen. Again that is wasteful.

    I might add the allged waste dissipates when actually examined.

    At present we have the unenviable situation of the Gregory effect and an exchange rate which is clearly over-valued.
    clearly commodity prices have not had the effect they had previously. The government certainly knows this. you only have to look at Capital gains tax and company tax.
    Why?

    Well overseas investors clearly like our fundamentals.

  20. Uncle Milton
    December 7th, 2012 at 08:43 | #20

    According to Laura Tingle in today’s Fin the Government is preparing to dump the surplus commitment if economic growth this quarter slips below the long term average.

  21. JB Cairns
    December 7th, 2012 at 08:51 | #21

    Uncle Milton as I stated before it is NOT real GDP that is important to budgetary calculations but nominal GDP and that has been below trend for some time ( because of disinflation).

    This is now a certainty. Can I recommend people transverse to Ricardian Ambivalence for an intelligent discussion abut this every so often.

  22. Ikonoclast
    December 7th, 2012 at 08:51 | #22

    @m0nty

    No, sorry Monty I disagree on all counts.

    1. Human population will inevitably peak at some point and then stablise or fall. This is an absolute 100% certainty. The earth is of a finite size therefore human population growth cannot continue forever. It is what will eventually limit our population that is the question. If we do not limit it by human action then natural processes will do it for us. I mean deaths by disease, starvation, conflict and zero-sum or negative-sum competition (this sort conflict and competition in over-dense populations is a natural phenomenon) and finally deaths by catastrophe, even self-induced catastrophe like AGW (Anthropogenic Global Warming).

    Human methods of population stabilisation are not limited to authoritarian-style birth policies. Educated and voluntary action is also possible. More importantly, the situation in the West shows that education, emancipation and empowering of women (esp. economically and reproductively) along with low infant and child mortalityrates due to good health care and public health measures, naturally leads to approximate replacement rate birth rates.

    2. The NAIRU is a fallacious theory unsubstatiated by empirical evidence. Full employment as I defined it existed circa 1950 – 1969 in Australia and other countires under Keynesian counter-cyclical policies and directive (even dirigist) government policy which promoted a mixed economy with healthy private and public sectors.

    3. Sustainability is ultimately about real resources (real materials, real energy) and the concomittent health and viability (physical, intellectual and psychological) of humans and their social and political systems. Books with symbols in them are exactly that. They are books of numbers, nominal numbers which set out the national accounts. Nominal numbers are not real. They may or may not have a real (objectively justifiable and useful) relation to real quantities depending on how well they are done and how valid the underlying asumptions are. This latter topic is what the GBC (Government Budget Constraint) discussion will be about when Prof. J.Q. posts on that topic.

  23. wilful
    December 7th, 2012 at 08:59 | #23

    I’ll take up the opportunity to debate “no carbon tax” one more time, though doubtless Fran B will expend far more words on the issue.

    “No tax” was said in the dying days of the election, to mean a simple tax wont be in place. However, a tradeable carbon price/permit system still would be. There was no substantive debate on the relative merits of a tax versus a tradeable system ever in Australia. Purist theoretical economists prefer a permit system, I think that the costs and ability to rort such a system mean a tax is far simpler. But that wasn’t the basis for the question put to Gillard – the point of the question is that there is visceral fear of the word tax. So the whole premise of the restriction is bullshit in the first place.

    Given that, the system that was negotiated with the Greens in order to form government isn’t even a tax, it looks and acts like one for the next 2.5 years, but is ultimately a permit system.

    So the charge that she broke her “promise” falls down on three grounds:
    1. It was strictly political, not policy driven. Everyone and their dog knew that Labor intended to put a price on carbon in some form.
    2. The conditions for forming minority government meant that promises had to be broken. This is a feature of the system, it’s not supposed to be anathema.
    3. We didn’t even get a tax in the end, we got a permit system that looks like a tax for a few short years.

    Unfortunately all of the above takes more than one cute sentence to explain, so is too complex for our media and looks like hair-splitting, so doesn’t pass the “tests” that the Very Serious Media people set.

  24. Tom
    December 7th, 2012 at 10:06 | #24

    @Ikonoclast

    Not speaking on behalf of anyone, but in economics the meaning of neutral stance on fiscal policy does not mean balanced budget. It simply means when all cyclical factors have being taken out (e.g. reduce in revenue or increase in unemployment benefit payment in downturn), the budget components are unchanged. So if the economy enters a downturn, the budget can be in neutral stance even when it is in deficit vice versa for economic boom.

  25. JB Cairns
    December 7th, 2012 at 10:23 | #25

    The other thing to take note of is that given all the smoke and mirrors are gone the government can only reduce the structural part of the deficit. However it is this part that affects both the economy and therefore the cyclical part of the budget ( which is far larger) the most.

    Given that we saw yesterday the public sector detract 0.5 percentage points from GDP growth just how much do there must be a budget surplus people want.

    Of course would the exchange rate and the RBA react to such a stronger fiscal policy to offset this? Possibly not enough which would mean the budget bottom line would go the way of European nations i.e deteriorate not improve.

    Thus as in the UK and the euro area the people doing the most harm to the budget bottom line are the very people who claim to want the budget in the black!

  26. Sam
    December 7th, 2012 at 10:29 | #26

    JQ, what’s the argument against using monetary policy on its own to smooth business cycles, and only employing fiscal policy once you’re at the zero lower bound? Is interest rate volatility inherently harmful? There seems to be some disagreement on this point. Paul Krugman appears at times to support a “exhaust monetary policy first” position.

  27. JB Cairns
    December 7th, 2012 at 10:47 | #27

    Yes , it is called Keynesianism

  28. Ikonoclast
    December 7th, 2012 at 11:12 | #28

    @Tom

    In that case Prof. J.Q. is even “more right” and I am even “more wrong” on that contemplated quibble. Not an unusual state of affairs. So whilst JQ accrues a further intellectual surplus on the “scorecard” and I accrue a further intellectual deficit. This is the “neutral” or default setting of the natural state of affairs in that province.

    Mind you, the non-professional can caught out on technical nuances like that where common words have specific technical meanings in specific circumstances. That said, it’s a significant bungle and indicates I really need a semester or 2 of formal economics 101 in micro and macro. Especially if I am going to continue trying to be a pernickity little know-all outside my own field of knowaldge … if I have any. But in making blunders I learn if corrected.

  29. December 7th, 2012 at 11:25 | #29

    No question you’re right Prof J.Q.

    Last time I checked political blogs, fiscal conservatism equalled fiscal liberalism, and the two terms were used identically. c. 2004 or 06

    It is reasonable to recognise what is fiscally conservative or perhaps better defined as fiscal responsibility depends on whether you’re a dove or a hawk.

  30. Sam
    December 7th, 2012 at 14:15 | #30

    @JB Cairns
    Keynsianism is just the argument that fiscal policy has a non-zero effect. I’m interested in the arguments, for and against, for using up all available conventional monetary policy before you go fiscal.

  31. JB Cairns
    December 7th, 2012 at 14:39 | #31

    Keynesianism is where you ONLY use fiscal policy because monetary policy doesn’t work because there is a liquidity trap.

    no liquidity trap then you only use monetary policy.

  32. Ben
    December 7th, 2012 at 15:08 | #32

    @TerjeP
    Care to say why Kevin Rudd is “a lying bastard” for those of us so ignorant of economics that we think you’re just being abusive rather than providing a penetrating insight into the inherent nature of reality?

  33. Sam
    December 7th, 2012 at 15:42 | #33

    @JB Cairns
    Leaving aside the question of whether that’s the correct definition of Keynsianism (I’m not fussed one way or another on the semantics), what are the arguments for and against that position?

  34. Graeme Bird
    December 7th, 2012 at 16:30 | #34

    It just depends what we are willing to do to return a budget surplus. Deficits are bankers rackets. Since the return on government bonds are still certain (for a country like Australia) this means that they can be the basis of further ponzi-money creation by the bankers. When bankers practice bank cash pyramiding they don’t offer a service but rather extort the REAL RESOURCES from the rest of society. If we had government owned banks, or alternatively 100% backing and no fractional reserve, we could take the level of new money creation, that is authentically needed, and perhaps a little bit more that isn’t really needed …. and that could be in the hands of the public for debt retirement or infrastructure investment.

    Swan was never going to deliver a surplus. He could never deliver a surplus. It was all smoke and mirrors. But in my view we ought to hold him to it and not back off or let him back off. The real way to deliver a surplus is to INCREASE pensions so that we can cut off subsidies to the medical professional drug dealers. The real way to deliver a surplus is to close down one department after another. That may seem a bridge to far for many people, but we must not let these mental restrictions stop us from doing the right thing. We could close down ABARE tomorrow, and a hundred more departments just like ABARE …… and no-one would get hurt ……. and the rest of us just throw a big national street party. Ten thousand public servant bigshots looking for work. They are affluent people and they would find that work pretty soon. Thats double or triple dividends for the rest of society.

  35. Graeme Bird
    December 7th, 2012 at 16:43 | #35

    You see if banking was a socialist industry. Or alternatively if there was 100% backing and no fractional reserve; We wouldn’t have this confusion between fiscal and monetary policy. I’ve been following Professor Keen. He’s the kingpin of this crowd that affect to extoll what they are calling “Modern Monetary Theory”. Well these guys are doing great work. And plus they are good guys. They are good people. Right now I’m more interested in them then I am even in the Austrians.

    But the problem still remains. That there is this hopeless confusion between what constitutes fiscal policy and what constitutes monetary policy and the effects of each. And the confusion can only go away, the bamboozlement can only end, if banking were a socialist undertaking ….. or if banking were strictly 100% reserve asset ratio.

  36. ratee
    December 7th, 2012 at 18:26 | #36

    The question of whether the evidence supports counter cyclical fiscal policy is not one I can debate but whether this is an appropriate time in the cycle to be withdrawing stimulus seems pretty clear – not yet.
    What are we doing in our education system matters.
    What are we doing in terms of built infrastructure matters.
    What we are doing in terms of scientific R&D matters.
    This years +/- Govt Cash balance – matters NOT one jot.

  37. Andrew
    December 8th, 2012 at 00:30 | #37

    @m0nty

    Australia maintained sub-2% unemployment for three decades (1945-1975).

  38. rog
    December 8th, 2012 at 03:35 | #38

    @JB Cairns MMTers like Bill Mitchell have been arguing that policy followed by central bankers is ruinous, by only targetting inflation they are effectively killing the patient. Only yesterday we had Draghi saying EU % rates are too high but didn’t want to lower them as it might send out a “negative measure”. We can certainly see the effects of tight RBA inflation only policy here with major asset classes (mainly property) in deflation, a situation now beyond govt control.

  39. Jim Rose
    December 8th, 2012 at 08:40 | #39

    Andrew, the period where the unemployment rate generally remaining below 3% was until the early 1970s. It was called the menzies era.

    the election of a left-wing government in 1972 started the rot that was later entrenched by keating’s great recession.

  40. Ikonoclast
    December 8th, 2012 at 09:37 | #40

    Menzies was PM and head of a Liberal government from 19 Dec 1949 until Robert Menzies resigned and Harold Holt was sworn as PM in on 26 Jan 1966. So the Menzies era ended in after 16 years 1966 not in 1972.

    All of the significant social-democratic insitutional machinery like the PMG, the Commonwealth Bank (when it was both a public owned bank and a functioning Rerserve), the Reserve, The Industrial realtions Commision and so on were were all set up before the Liberal party even existed and in many cases by Labor. In the Menzies era, Keynesianism was orthodoxy and Menzies followed the orthodoxy and also rode on the coat-tails of all the good work of old Labor. The post-war boom, wool boom etc. also helped enormously. And we can mention the Wool Board, a good old fashioned state intervention to hold up the price of wool. None of Menzies policies in economic matters were remotely like modern neo-conservatism.

  41. MG42
    December 8th, 2012 at 10:52 | #41

    Jim Rose :
    Andrew, the period where the unemployment rate generally remaining below 3% was until the early 1970s. It was called the menzies era.
    the election of a left-wing government in 1972 started the rot that was later entrenched by keating’s great recession.

    1972 – Whitlam government
    1973 – stagflation

    Conclusion: lefties cause societal decay

    Thud, thud, thud.

    In the same vein:

    1981: Reagan cuts taxes
    1981: OPEC cartel fails; high prices cause overproduction; oil prices fall 85%

    Conclusion: tax cuts are an economic miracle!

    Thud, thud, thud.

  42. MG42
    December 8th, 2012 at 11:29 | #42

    And, I forgot to add, what JR said is wanting to have his cake and eat it too.

    Productivity gains and improvements in quality of life since the 80′s? Obviously a product of neoliberalism and greater free markets.

    Social rot since the 70′s? The cause is the shift towards the left.

    Why not just ditch the labels and evaluate policy on it’s own merits?

  43. John Brookes
    December 8th, 2012 at 14:49 | #43

    A bit OT, but sort of relevant. I’ve got a theory, and it needs an economist to shoot it down in flames. The last couple of times unemployment figures have been due to come out, the predictions in the press have been for an increase in the unemployment rate. But this has not been born out by the actual numbers.

    So my theory is that the reason unemployment has not risen is because of the increased spending power of low income earners since 1 July, when the carbon tax compensation started hitting pay packets. And, if I’m correct, economists failed to properly factor in the effect on employment of giving money to low income earners (who of course will spend the lot).

    Economists from the right would be horrified if this analysis was correct, because they prefer to give money to the rich and wait for it to “trickle down”.

  44. Bring back Birdy at Catallaxy
    December 8th, 2012 at 14:54 | #44

    Jim Rose @35:

    “the election of a left-wing government in 1972 started the rot that was later entrenched by keating’s great recession.”

    This is as plausible as the claim by an elderly Queensland couple with whom my mother and I shared morning tea at Caboolture in 1974 that the Great Depression of 1929 was brought on by the ALP.

    The stagflation crisis of the 1970s affected the entire developed capitalist world, and the economic performance of most countries in 1974-75 was worse than Australia’s under Whitlam.

  45. JB Cairns
    December 8th, 2012 at 18:21 | #45

    It is patently ridiculous to categorize the election of the ALP as a left wing government.

    the program was right out of the Vernon Report. That is why we got the IAC!

  46. rog
    December 8th, 2012 at 18:39 | #46

    @John Brookes Participation rate has also to be considered, a drop in participation can lead to a drop in unemployment.

  47. Andrew
    December 9th, 2012 at 00:10 | #47

    I’m just saying that maintaining very low levels of unemployment is possible and that it is possible for a country to maintain those lows levels for several decades. Yes, NAIRU and all that, but surely there’s a better way to control inflation than firing millions of people?

    Whether we need to raise Menzies from the dead and have him wield whatever non-specific superpower he had Jim Rose says generated 2% unemployment four years before he took office or whether we need to return to whatever policy was the cause- either way, what has been called impossible was done.

  48. Jim Rose
    December 9th, 2012 at 14:25 | #48

    andrew, measured unemployment rates were also unusually low in Europe as well as Australia (and NZ) in the Menzies era.

    The seeds of an answer might lie in TWO QUESTIONS ABOUT EUROPEAN UNEMPLOYMENT BY LARS LJUNGQVIST AND THOMAS J. SARGENT

    When employment protection through unions is strong, there are lower inflows into unemployment pool because firing taxes are high.

    Unlike in recent decades, industry-specific skill losses after layoffs in the Menzies era were low, so those who were unemployed could find a new job quickly at a similar wage.

    The efficiency losses of a slower reallocation of labour to new, growing and more efficient firms because of the firing taxes were mitigated and masked in Australia (and New Zealand) by high rates of immigration in the Menzies era. Migrants filled the new jobs.

  49. Graeme Bird
    December 9th, 2012 at 15:22 | #49

    “The question of whether the evidence supports counter cyclical fiscal policy is not one I can debate but whether this is an appropriate time in the cycle to be withdrawing stimulus seems pretty clear – not yet.”

    We’ve got to reform monetary policy and if we reformed monetary policy you couldn’t possibly take this point of view. What we laughingly call “monetary policy” is simply an adjustment to the daily subsidy for financial sector. Thats not monetary policy. Thats a racket. Real monetary policy involves two measures and two measures alone.

    1. The release of new cash to the community by way of debt retirement, and a truck physically leaving the mint. No “Quantitative easing.” Real monetary policy involves a physical truck leaving with printed notes and minted coins.

    2. Increasing the reserve asset ratio.

    With these two measures a competent currency board can immediately hit any level of business revenue it chooses. So where is fiscal policy necessary in this context? Obviously its not necessary, its just the worship of wastefulness for its own sakes. The reason monetary policy doesn’t work is that we don’t practice monetary policy. We practice a heads we lose, tails they win, approach to our banking industry. This is not monetary policy.

    Supposing stimulus consisted of giving ME (ie Graeme Bird) the capacity to lend women in their 20′s millions of dollars of zero interest loans? And suppose that we called “monetary policy” increasing my personal allocation allowance by a billion dollars, or reducing it by a billion dollars …. Would that not drive home the corrupt and rotten reality of this farce, that we are calling “monetary policy”?

    The reason why monetary policy doesn’t work is that what we call monetary policy is a fundamental violation of fairness ethics. Is laughable. Its unjust enrichment. Its one part of the debauchment of our financial markets in violation of all understanding of economic principles. Once we know that we can hit any level of business revenues we choose through REAL monetary policy, then the science of economics becomes identical to husbandry more generally.
    >>>>>>>>>>>>>>>>>>

    Jim, during the Menzies era, bankers would send a great proportion of their loanable funds to local wealth creation. For the renovation of local small businesses. During our era they send those funds to asset speculation, enabling of bad budgeting, and debt addiction. Its the renovation of business that employs people. Hence the low unemployment in the Menzies era. If bankers take real resources and turn them into rubbish then thats not going to employ a lot of people. Until we bankers under strict control we will be wasting most of the countries potential capital resources. This is a matter of urgency.

  50. December 9th, 2012 at 15:46 | #50

    @MG42
    LOL. Correlation doesn’t equal Causation.

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