Home > Economic policy > A belated victory for good sense

A belated victory for good sense

December 20th, 2012

Wayne Swan has finally announced the abandonment of the promise to achieve a budget surplus this financial year. Some observations

* Everyone with any understanding of economics knows this was the right thing to do. The idea of trying to maintain a balanced annual budget regardless of economic conditions is recognised as nonsense even by anti-Keynesians. In the absence of active fiscal policy, the standard recommendation is to maintain settings consistent with medium-term balance.

* Both parties have made an awful hash of this in political terms. Labor was silly to make the promise of a return to surplus on a specific date, and sillier to reaffirm it in ever stronger terms until very recently. Abbott and Hockey made a mess of their response. They could have used Swan’s announcement to dump their own surplus fetishism saying something like “since the government refuses to reveal the true fiscal position, we can’t promise to fix it in one year”

* With any luck, some of the appalling fiddles of the last few months, most notably the recent reallocation of aid funding to domestic funding on refugees can be reversed

* We still need a long term discussion about revenue and expenditure in the light of the global failure of market liberalism. I plan to address this in another post

Update Hockey has indeed backed off the surplus, showing more good sense than Abbott. I’m nearly alone in this view, but I think he is under-rated. Not a towering intellect, but still among the stronger performers on the LNP front bench.

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  1. Edumak8
    December 20th, 2012 at 20:35 | #1

    Absolutely! Now watch the: But you proooooomised! line from Libs et al. No promise should be kept if situations change and people will get hurt.

  2. Will
    December 20th, 2012 at 21:11 | #2

    A rare victory for common sense. This is just political grandstanding from the right, their hand-wringing about fiscal irresponsibility a product of ideology rather than any substantive economic knowledge. To put this in perspective to the non-financial types, $20 billion in the red represents a deficit of less than 2.5% of GDP, and with inflation being about the same the debt is constant in real terms. An excellent result considering the instability that plagues a large part of the rest of the world. I just wish the RW would stop their pitiful whinging about Greece, communism, imminent economic collapse, ad nauseum.

  3. Will
    December 20th, 2012 at 21:35 | #3

    Just confirmed that it’s closer to 1.4% of GDP. In economic terms, the difference between two methods of calculation.

  4. Jim Rose
    December 20th, 2012 at 21:51 | #4

    The “global failure of market liberalism”! as Andrei Shleifer explained, ‘between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined.’

    In Great Depressions of the Twentieth Century, Kehoe and Prescott (editors) 2007, conclude that while different sorts of shocks lead to ordinary business cycle downturns, overreaction by governments can prolong and deepen a downturn, turning it into a depression.

    Friedman tipped that the Euro-zone would not last past the first major recession. was he wrong?

  5. December 20th, 2012 at 21:55 | #5

    Thank goodness! I was worried I would have to give up feeling smug about Australia’s good economic management. Currently Australia is the last best hope the UK has of convincing itself to stop punching itself in the economic gonads. It would have been a huge shame for Australia to damage the excellent example of how to deal with a major financial crisis it has has given the world. And come to think of it, it wouldn’t have done us much good either.

  6. Fran Barlow
    December 20th, 2012 at 22:02 | #6

    @Ronald Brak

    Of course abandoning obsessive compulsive budget surplusism is a step forward. Still, the signs of the syndrome remained in Swan’s retreat when he said he was happy to get the politics wrong if he got the economics right. This is of course, and acknowledgement that his previous position privileged political over economic considerations, only to abandon this postion when even he could not imagine that such course would get him either.

    Massive points — Abbott points really — for dissembling. He’s like Hirohito surrendering by saying that the war had gone “not necessarily to Japan’s advantage”.

  7. SJ
    December 20th, 2012 at 22:28 | #7

    This is no kind of victory for “good sense”. It might be some kind of defeat for right wing bullshit.

    However, because Labor became fully paid up subscribers into the right wing bulls**t, for no reason whatsoever, Labor can’t benefit either themselves or the rest of us when they face to reality.

    Labor has been deliberately deceptive all along. They deserve to be turfed out. Their only chance of survival is that enough people might realise that the Liberals will be worse.

    Labor does not deserve any credit for this at all. It shows utter, utter, incompetence, and a willingness to only act to do something as simple as admitting the truth only when forced to at the extreme.

  8. Monkey’s Uncle
    December 20th, 2012 at 22:52 | #8

    Edumak8 :
    Absolutely! Now watch the: But you proooooomised! line from Libs et al. No promise should be kept if situations change and people will get hurt.

    The point is not simply whether the promise should be abandoned. The point is that the promise should never have been made in the first place, or ever taken seriously. It was always silly and pointless for the government to claim credit for a projected future surplus, when anyone with half a brain could realise that much can happen to change those projections and you simply cannot count your chickens before they hatch or take such projections to the bank.

    The government deserve to have their nose thoroughly rubbed in this. They staked much of their economic credibility on the promised return to surplus, and have spent years continually claiming credit in advance for it.

  9. Katz
    December 20th, 2012 at 23:07 | #9

    This hot of the presses.

    It appears that the deficit habit isn’t catching:

    In an unwelcome Christmas present for the French, the contentious austerity budget unveiled by president Francois Hollande in September has clinched parliamentary approval after months of deliberation. President Francois Hollande’s budget aims to cut €30bn, two thirds of which are set to come from tax hikes, including a 75pc levy on income over €1m – a measure which has seen French actor Gerard Depardieu revoke his citizenship in indignance.

    http://www.telegraph.co.uk/finance/debt-crisis-live/9756554/Debt-Crisis-Harsh-austerity-budget-passed-in-France-live.html

    The whole of Europe is enthralled by surpluses.

  10. Tim Macknay
    December 20th, 2012 at 23:27 | #10

    @Jim Rose

    The “global failure of market liberalism”! as Andrei Shleifer explained, ‘between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined.’

    That may well be true Jim, but the thing is, you could just as easily say ‘between 1945 and 1970, as the world embraced mixed economies and welfare states, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined’. So it doesn’t necessarily prove anything about economic policies.

  11. December 21st, 2012 at 00:12 | #11

    @Tim Macknay

    Yes,

    “When I had an American Express Platinum Card with unlimited credit I lived like a king and all those around me, and dependent upon me, enjoyed wonderful living standards. They had joy, they had fun, they had summers in the sun. Democracy was something they did every few years at a local school. They lived – and if they didn’t, at least they died smug and better than other people. They could afford better degrees from universities selling that product – and because an awful lot of us had those cards, we outnumbered those who didn’t.

    Bring back the good old days!

  12. paul walter
    December 21st, 2012 at 03:58 | #12

    Yes!
    My xmass corks popped early this year.
    And the press and moribund opposition even try to use it to revive criticism of the government, but I’d rather find out neoliberalism is a con now, rather than later, as with people in America.

  13. Katz
    December 21st, 2012 at 07:32 | #13

    Labor’s retail politics were worse than their sense of the possible.

    Even Abbott can look credible taking the long handle to Gillard and Swan for this incompetence.

  14. wilful
    December 21st, 2012 at 08:49 | #14

    Tim Macknay :
    @Jim Rose

    The “global failure of market liberalism”! as Andrei Shleifer explained, ‘between 1980 and 2005, as the world embraced free market policies, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined.’

    That may well be true Jim, but the thing is, you could just as easily say ‘between 1945 and 1970, as the world embraced mixed economies and welfare states, living standards rose sharply, while life expectancy, educational attainment, and democracy improved and absolute poverty declined’. So it doesn’t necessarily prove anything about economic policies.

    Tim, I suspect you could show that in the places that took the fewest, most moderate steps towards “free market policies”, living standards rose the most and poverty was the least, while those that most wholeheartedly went the whole Reaganomics deal had the least good outcomes.

  15. Ernestine Gross
    December 21st, 2012 at 09:40 | #15

    Monkey’s Uncle is spot on when he (I assume) writes:

    “The point is that the promise should never have been made in the first place, or ever taken seriously. It was always silly and pointless for the government to claim credit for a projected future surplus, when anyone with half a brain could realise that much can happen to change those projections and you simply cannot count your chickens before they hatch or take such projections to the bank.”

    I wonder whether those who promote ‘key performance indicators’ (in schools, in universities, in publicly listed companies) will understand the sillyness of the notion in a world of incomplete contracts (a version of incomplete markets).

  16. Ikonoclast
    December 21st, 2012 at 10:05 | #16

    “We still need a long term discussion about revenue and expenditure in the light of the global failure of market liberalism. I plan to address this in another post.” – Professor John Quiggin.

    Bring it on! I can’t wait for this debate. Since I am not an economist does this mean I need;

    (a) a real occupation?
    (b) another hobby?
    (c) to get out more?
    (d) all of the above?

    Frankly, I reckon it’s “all of the above”. ;)

    This society has little to no “use” for critical thinkers. It just wants repetitive production, over-consumption and blind compliance to a set of dogmas leading the entire system straight over the cliff. Neo-lemmingism! (Yes, yes I know the lemming migration “suicide” sequence was faked in the 1958 Disney nature “documentary”. Disney faking things! Why doesn’t that surprise me?)

  17. Katz
    December 21st, 2012 at 10:20 | #17

    @Ikonoclast

    I lived near Disneyworld at the time of the strike of the rubber-clad characters. The tropical heat of Orlando, Fla was baking them inside those suits. The employees wanted more time off in the cool room. DisneyCorp refused.

    Instead, DisneyCorp sent the thugs after the ringleaders. The local press carried several photos of bruised and battered dwarfs.

  18. Tom
    December 21st, 2012 at 11:07 | #18

    When the press writes “economically right but political wrong”, this already shows how economic illiterate the broader community is. They are in fact saying, politicians will be rewarded if they do the wrong thing. I do, however criticise the stupidity of the Labour government to promise a fiscal surplus when it is a discretionary policy tool.

  19. Sam
    December 21st, 2012 at 11:58 | #19

    Yeah, totally agree with their policies but they seem to be terrible at politics. Why make these obviously silly promises when it always looked likely they would have to break them?

  20. December 21st, 2012 at 12:06 | #20

    Given the state of our economy for the past few years, we should have been running a roughly balanced budget. It doesn’t matter if it’s just above or just below zero… but to consistently run fairly large deficits is not right.

    I’m amazed that anybody is still running the “failure of market liberalism” line. Nearly all the problems of the last few years are linked to government intervention (moral hazard, monetary policy, dumb regulations), and given that government is larger than ever, it is crazy-strange to pretend that we live in a “liberal” world.

  21. Will
    December 21st, 2012 at 12:45 | #21

    I’m amazed that anybody is still running the “failure of market liberalism” line. Nearly all the problems of the last few years are linked to government intervention (moral hazard, monetary policy, dumb regulations), and given that government is larger than ever, it is crazy-strange to pretend that we live in a “liberal” world.

    Not this again. The core, the [u]absolute unquestionable core[/u], of the GFC had to do with collateralised debt obligations. Banking institutions could make mortgages, repackage them and “eliminate the risk”, and increase their assets as a result and either make more loans or sell derivatives on the balance. All banks got in on the action since it was essentially free money. All banks had to fall in line or else the management team of the lagging banks would be replaced by a team that would use CDOs. Risk management went out the window as properties were pushed on anyone with a pulse – this was encouraged by the banks as a default meant foreclosure on a property that had appreciated or they could eliminate the bad loan by rebundling – either way, free money. The bubble popped, as bubbles do, risk analysts found out they had grotesquely underestimated the risk on their financial instruments, the assets side of the ledger very quickly moved into the red, hence credit crunch and depression. Rational actors focused on their own well-being in a free market caused this, please don’t be so disingenuous.

  22. Ikonoclast
    December 21st, 2012 at 12:51 | #22

    Why is it the case that “to consistently run fairly large deficits is not right”? Where is your discussion and evidence? Define “fairly large”.

    I am amazed that anyone is still running the “failure is not linked to market liberalism” line. But then my amazement just like your amazement does not constitute an argument.

  23. December 21st, 2012 at 13:09 | #23

    john,

    That is complete claptrap ( that is a technical term!)

    Tax as a % of GDP are at levels we haven’t seen since Keating was PM.

    If you wanted a balanced budget then the government would have had to take even more from GDP than it has.

    It appears the failure of policies you espouse in Europe has led to no reflection at all.

  24. wilful
    December 21st, 2012 at 13:24 | #24

    John Humphreys :
    I’m amazed that anybody is still running the “failure of market liberalism” line. Nearly all the problems of the last few years are linked to government intervention (moral hazard, monetary policy, dumb regulations), and given that government is larger than ever, it is crazy-strange to pretend that we live in a “liberal” world.

    And black is white, and the sun rises in the west.

    Lehman brothers was all about too much regulation.

  25. December 21st, 2012 at 13:34 | #25

    Mark the Graph emphasizes the point about revenue.

    I do hope John isn’t alluding to the CRA myth which I have disposed of elsewhere.

  26. Mel
    December 21st, 2012 at 13:39 | #26

    @John Humphreys

    “Nearly all the problems of the last few years are linked to government intervention (moral hazard …”

    Do you mean the moral hazard created by limited liability corporations? Do you want to do away with limited liability?

  27. December 21st, 2012 at 13:41 | #27

    Nick Gruen is absolutely splendid on this topic at Club Troppo

  28. Katz
    December 21st, 2012 at 14:09 | #28

    John Humphreys. The only known stopped clock that is never correct.

  29. Edumak8
    December 21st, 2012 at 17:39 | #29

    @Monkey’s Uncle
    And they certainly will do…but noting that some economic commentators have not completely ruled out there may be a small surplus yet.
    Regardless of the coming plethora of articles and dissections of what is, was and might have been it seems sense has prevailed, so raise a glass and toast the silly season!

  30. Mel
    December 21st, 2012 at 21:12 | #30

    Amusingly, the libertarian think tank CATO used to run the line that the Community Reinvestment Act, which John Humphreys et al argue was one of the bogeymen that caused the GFC, was unnecessary because it didn’t encourage any additional lending. See here for example:

    “Absent government intervention, would low-income communities find themselves cut off from access to lending services despite the potential presence of creditworthy borrowers? For advocates of the Community Reinvestment Act (cra), the answer is a definite yes.

    Despite wide acceptance of the claims made by cra’s advocates, those claims are conceptually and observationally unfounded. Economic theory and empirical evidence indicate that the reason for recent growth in lending to low-income neighborhoods is not cra, but the effectiveness of market forces in breaking down the types of financial barriers that were prevalent when cra was enacted. In reality, deregulation and new technologies have promoted competition and precipitated a great broadening of the credit market. As a result, cra is not necessary to ensure access to credit by all segments of our economy.”

    http://www.cato.org/sites/cato.org/files/serials/files/regulation/2000/10/gunther.pdf

    Funny that.

  31. December 22nd, 2012 at 10:48 | #31

    oh dear,

    Sam Wylie does a catallaxy at Core Economics on this topic.

    Shows a distinct lack of understanding of the topic

  32. Graeme Bird
    December 26th, 2012 at 07:52 | #32

    Swan didn’t abandon anything. He was never going to run a surplus ever. He was never capable of running a surplus ever. Its really a character thing.

    Its a pity we have rolled over, given up, and bailed out, in the face of banker bamboozlement. Because it means we don’t have proper monetary policy. We only have adjustments in the amount we wish to subsidise the financial sector. As a result there is this idea around that monetary policy doesn’t work. This is a wrong idea, the reality is that we don’t practice monetary policy.

    We practice a situation where we either subsidise them more, and when we don’t subsidise the banks more, the banks have set it up, that they can then rifle through the pockets of those who have variable rate mortgages. Its a tails they win, heads we lose situation. Now if we had monetary policy we would be able to see that fiscal policy is useless and monetary policy always has an immediate effect, which can be appropriate once in awhile.

  33. Graeme Bird
    December 26th, 2012 at 08:01 | #33

    John Humphries has to be one of Australias worst offenders when it comes to aiding and abetting the bamboozlement of the public by the bankers. He went so far as to invite JC to write in support of the bailout. Well of course there had to be SOME SORT of bailout back in 2008. But it ought to have been to the favour of the public. Which means sending out huge amounts of cash from the mint, but at very high interest rates. This is what a bailout used to mean. This time around it manifested as straight stealing followed up by a continuous rolling thunder of stealing via unlimited low interest rate funds. Sometimes the funds can be turned around for an immediate profit in government bonds since the bankers are so privileged that they can borrow for a lower interest rate then the government will itself borrow out. There are actually a wide range of ways they steal off the public (in the NATO countries) and they are way too numerous to go into. There was never an excuse for any of this. The answer was always new cash, plus a reinstitution of reserve asset ratio policy to stop the new cash from being too inflationary. Even better still this could be coupled with a one-sided partial jubilee.

    Actually if there is going to be fractional reserve banking, which there ought not, but if there is, it would be appropriate that the bankers know that as soon as they allow a recession, they have to cop a one-sided partial jubilee. The recessions are their fault. They are the ones lending for inherently wealth-destroying undertakings.

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