A surplus of stupidity

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.

62 thoughts on “A surplus of stupidity

  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. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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?

  8. 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?

  9. 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.

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

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

  12. 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.

  13. 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.

  14. @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.

  15. 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.

  16. 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.

    Well overseas investors clearly like our fundamentals.

  17. 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.

  18. 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.

  19. @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.

  20. 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.

  21. @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.

  22. 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!

  23. 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.

  24. @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.

  25. 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.

  26. @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.

  27. 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.

  28. @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?

  29. @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?

  30. 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.

  31. 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.

  32. 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.

  33. @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.

  34. 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.

  35. 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.

  36. 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.

  37. 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?

  38. 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”.

  39. 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.

  40. 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!

  41. 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.

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


    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.

  43. “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.

  44. 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.

  45. “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.

    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.

  46. 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.

  47. 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.

  48. “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.

  49. 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.

  50. 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.

  51. @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!

  52. @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.

  53. 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

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s