The zombie economics of austerity in Australia (updated again)

Yesterday’s Fin ran a piece from Stephen Kirchner and Robert Carling of the Centre for Independent Studies, under the headline “Give austerity a chance” which was a pretty accurate summary of the contents. It’s paywalled, but you may be able to read it by clicking here. The piece relies almost exclusively on the work of Alberto Alesina and his colleagues, promoting the zombie idea of expansionary austerity. As I pointed out here, the most influential of these pieces by Alesina and Ardagna, is riddled with errors, at least as it applies to Australia.

Although Kirchner is a blogger himself, he and his co-author could be forgiven for missing my post. But Alesina’s work is probably the most-refuted piece of economic analysis put out (though never published in a peer-reviewed journal) in recent decades. It’s been demolished not only by the usual suspects like Krugman and DeLong (and me), but by the Economist, the IMF and even by one of Alesina’s own co-authors, Roberto Perotti.

Charitably assuming that Kirchner and Carling had managed to miss just about every publication on the question of austerity in the last year, could they not have spent 30 seconds with Google before hitting “Send”? A search on Alesina+austerity reveals a torrent of criticism, none of which they mention.

It is hard to know which is worse – the possibility that Kirchner and Carling, presented by the CIS as expert economists, were ignorant of all this, or the alternative hypothesis that they knew it and decided not to mention it. Either way, it’s an appalling breach of elementary standards of research.

I’m pretty sure the facts have been brought to the attention of Kirchner and Carling. The honest thing to do would be to write to the Fin pointing out that the work on which they relied was, at best, highly controversial. If Kirchner, Carling and the CIS are unwilling to do this, we can draw the conclusion that they cannot be trusted in anything they write.

Update Sinclair Davidson at Catallaxy has a lengthy reply, but the sole substantive criticism is that contrary to my parenthetical remark, Alesina and Ardagna did finally publish a peer-reviewed paper in 2010. But the work that was actually influential was done back in the 1990s. I’ll republish my blog post pointing out what a shoddy job that paper in describing developments in Australia. Davidson’s piece is notable for the lack of any substantive defence of Alesina’s work, and also for this , offered in response to my observation that the research in question had been comprehensively demolished by the IMF among many others

Fancy that – cutting edge research into a highly politicised aspect of public policy is “controversial”. Does Quiggin think AFR readers are so dumb they wouldn’t realise that?

So, next time you read an opinion piece from the CIS you can safely assume the caveat lector “This research is probably discredited, the authors almost certainly know it, but, if so, they’re not going to tell you”.

No one expects opinion pieces to be “fair and balanced”, but if you are going to rely on work that has been subject to serious and credible criticism, you should at least point out the main criticisms and (if possible) say briefly why you think they don’t stand up. As an example, Wilkinson and Pickett’s The Spirit Level produces some striking evidence of relationships between inequality and bad social outcomes.. This work has been subject to a lot of criticism, not fatal in my view, but enough that it needs to be mentioned. I did this when I cited the work in Zombie Economics and then at greater length here

Further update While still not disputing any of the substantive points I’ve raised, Davidson digs deeper on the question of whether the original Alesina and Ardagna work was published in a peer-reviewed journal. The work was published in Economic Papers, which does not take unsolicited submissions. Rather the editors commission pieces, or you can propose a piece to them. That is, this is, as the webpage says, a policy forum, not an academic journal. Standard practice for publications of this kind is for the editors to approve (or return for revision, or, very rarely, reject) the pieces they’ve commissioned. This isn’t peer-review in the normal sense. I’ve always assumed that Economic Papers follows the standard practice in this respect, but Davidson is welcome to check it out, if he cares enough.

As a PS, I couldn’t resist checking a 700-comment thread on the US elections. I shouldn’t link, but I will. While there is plenty of not-so-innocent amusement to be had, what struck me was that most of the commenters appear to be creationists – the handful holding up the flag for evolution are getting hammered.

128 thoughts on “The zombie economics of austerity in Australia (updated again)

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

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

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

  4. kelly

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

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

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

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

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

  7. @Alan

    A comparison with other countries is not the key issue.

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

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

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

  8. PrQ says:

    “While there is plenty of not-so-innocent amusement to be had, what struck me was that most of the commenters appear to be creationists – the handful holding up the flag for evolution are getting hammered.”

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

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

  9. John Re post 19.

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

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

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

  11. RBAs Philip Lowe addressing CEDA.

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

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

  13. @Peter Kirsop

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

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

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

  14. @Chris Warren

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

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

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

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

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

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

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

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

  15. @Ikonoclast

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

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

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

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

  17. @Ikonoclast

    I think most will accept that:

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

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

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

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

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

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

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

    1) wages increases < labour productivity

    2) labour factor share in GDP falling

    3) increase hours of labour.

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

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

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

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

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

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

    Other pundits look to “increased productivity”.

    In any case your key thesis is that:

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

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

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

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

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

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

  19. @Chris Warren

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

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

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

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

  20. @may

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

  21. @Chris Warren

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

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

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

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

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

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

  23. @Ikonoclast

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

    @Tom

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

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

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

  25. @Ikonoclast

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

    @Tom

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

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

  26. @Chris Warren

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

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

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

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

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

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

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

  31. @Freelander

    Rog and Freelander

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

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

    Iceland are doing considerably better than Greece.

    Chris

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

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

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

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

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

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

  34. Rog

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

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

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