The average (median) worker does not earn the (arithmetic) average wage

Eryk Bagshaw, recently[1] appointed economics correspondent for Fairfax, is certainly aware of that. In fact, mentions it right near the end of this scare story about the effects of Labor’s rejection of the second-stage of the Morrison government’s legislated tax cuts. But that didn’t stop the Fairfax subeditor running his article under the headline “Average full-time workers to be $1000 a year worse off under Labor”

To spell it out, the trick here is that Bagshaw is looking at workers who earn between $90,000 [the arithmetic mean of wages for full time workers} and $120,000. He estimates that there are about 1.6 million such workers. That’s a bit over 10 per cent of the workforce (about 13 million people). As he admits, the median full time wage is well below this, and the median wage for all workers lower again. Once pensioners and welfare recipients are taken into account, it’s evident that Bagshaw’s “average workers” are well towards the top end of the income distribution.

This is amusing since I had a previous run-in with Bagshaw over this very issue of headlines. On that occasion, Bagshaw was scathing about a sloppily written ACTU press release, which ended up with a totally inaccurate headline. I don’t think a defence of innocent error is available here. Bagshaw’s story is written in a way that would lead any casual reader to make the same inference as the subeditor. Moreover, there’s no obvious reason why workers receiving between $90K and $120K should be of more interest than any decile of the workforce. Certainly they aren’t average in any meaningful sense. So, without the misleading phrasing, the story would probably have been spiked.

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MMT and the scope for seigniorage

The central idea of Modern Monetary Theory (MMT), as I understand it, is that, rather than worrying about budget balances, governments and monetary authority should set taxation levels, for a given level of public expenditure, so that the amount of money issued is consistent with low and stable inflation. In this context, the value of the net increase in money issue is referred to as seigniorage. To the extent that seigniorage is consistent with stable inflation, it is achieved by mobilising previously unemployed resources.

A crucial question is: what is the scope for seigniorage? In particular (expressing things in MMT terms), is the scope for seigniorage sufficient to permit the introduction of ambitious programs like a Green New Deal without the need for higher taxes to prevent inflation.

The recent episode of Quantitative Expansion in the US provides some evidence here. Contrary to the dire predictions of some critics, QE did not lead to runaway inflation. This is consistent with the view, shared by MMT advocates and mainstream Keynesians, that, in the context of a liquidity trap and zero interest rates, there is substantial scope for monetary expansion.

How much is “substantial”?

According to the St Louis Fed, the monetary base grew from around $800 billion to just over $4 trillion between 2008 and 2016. That’s an increase of $3.2 trillion, which is a lot of money. Expressed in terms of GDP, though, it doesn’t seem quite as large. Over eight years, $3.2 trillion is $400 billion a year or around 2 per cent of US GDP ($20 trillion).

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Ten Year Plans

The Morrison government has just announced what it calls a climate policy, promising expenditure of $2 billion. I’ll have more to say about this later, but I want first to point out that the promised expenditure is to be allocated over ten years, at an average rate of $200 million a year. That’s only marginally more than the government spent on advertising in 2017-18, which is appropriate, I suppose, for what is basically a PR exercise.

The big problem here is the new practice of announcing expenditure amounts over 10 years. There was a time when promises of this kind were made in terms of annual expenditure. Sometime in the 80s or 90s, the norm shifted to four-year programs, on the basis that this was the period covered by Budget estimates. The fact that it made promises look bigger was a handy side benefit.

If four-year spending figures were problematic, announcing programs for ten years is simply ludicrous. The likelihood that anyone in the current ministry will still be holding office, or even in Parliament in ten years time is very small, as is the probability that any expenditure program will continue unchanged. If we can budget 10 years ahead, why not 100 or 1000?

What makes the joke even worse in this case is that the policy is obviously designed to last, not for ten years, but for three months, until the election in May. If Morrison ekes out an undeserved victory, the denialists on the backbench will almost certainly want to kill off this piece of gesture politics. If he loses, the LNP will certainly dump the policy and may even offer something serious.

In the meantime, it’s a mistake to treat this as a policy – it’s an announcement you make when you don’t have a policy.

Prebutting the CIS: Lifters and leaners, yet again

Robert Carling of the Centre for Independent Studies has just released a paper, with the title “Voting for a Living“, an even more offensive reprise of Joe Hockey’s “lifters and leaners” rhetoric of a few years ago. The Oz (no link) ran a report by  with the opening claim

The top fifth of households by ­income are almost entirely supporting the bottom 60 per cent of earners

Of course, this is absurd. The actual CIS paper centres on the fact that 60 per cent of the population receive more in benefits and public services like health and education than they pay in taxes, while the top 20 per cent pay more in taxes than they get back. The claim then is that the parasitic 60 per cent are voting for a redistributive state. That’s a long way from “almost entirely supporting”.

If this sounds familiar it’s because  Creighton made almost identical claims in 2014. I rebutted them at the time, in a piece for the Guardian. The key point is that,  since government spending and taxation must be approximately equal[1], we collectively get back from government what we pay in, whether this takes the form of cash payments or public services. So, if services are provided more or less equally, those with an income below  (above) the mean will get back more (less) then they put in. Add in the fact that, thanks to income inequality, mean income is higher than median, and you get the Carling result automatically.

The current version of the paper extends the 2014 analysis in a couple of ways. First, it has a broader coverage of revenue (including GST) and expenditure (including health and education). Second, it includes a claim that the position of the median household has shifted since the 1980s, from being roughly in balance to being net recipients. However, a closer look suggests that all of this change occurred between 1983 and 1993 that is, under the Hawke-Keating government. And, since there’s no data before 1983, we can’t say much about longer term trends.

The other notable change is that the report is even clearer in stating that there is no legitimate basis for asking high income earners to contribute to society as a whole, for example to reduce income inequality.

Shorter Carling and Creighton:  High income earners pay more tax than everyone else and that’s bad.

All this contrasts strikingly with last week’s rightwing talking points, making much of the relatively limited growth of inequality in Australia due, almost entirely, to the redistributive policies introduced under Hawke and Keating. The Oz was all over this, and one of their sources was none other than Robert Carling


fn1. A couple of qualifications on this, which work in opposite directions. Some government spending  is financed by growth in debt and income other than taxes, which means that, on average, by the Carling calculation, we get back more then we pay. On the other hand, some spending categories, such as defence, aren’t included, which goes the other way.

Turnbull’s class war

The right is fond of decrying as “class war” any proposal that would benefit Australian workers and low income families. But, we finally have a genuine “class war” election in view and it has been launched by Malcolm Turnbull, with his attempt to tie future governments into massive income tax cuts for high income earners.

The good news here is that, despite some wavering, Labor held its nerve, opposed the second and third stages of the package and voted against the entire bill. Some people (I imagine the kind who call themselves “hardheads”) were worried that defeating the entire bill would be hard to explain to voters. They didn’t apparently consider how they would campaign against regressive policies they had already voted for (or maybe they supported those policies).

In any case, voters in Australia finally have a clear choice. Massive tax cuts for companies and high income earners, or a progressive tax system that provides the revenue we need to provide decent public services. It seems that a majority of younger voters, at least, know where they stand (more on this soon, I hope).

Fortune favours the brave (updated)

Most of the political commentariat were convinced that Bill Shorten had got things badly wrong by announcing his policy on dividend imputation immediately before the Batman by-election. It was even more striking that, despite the pressure, Shorten didn’t cave into demands for changes to the policy. Michelle Grattan, for example, described the policy as an “own goal“. After Labor’s easy win, she backed off a little bit, but still claimed that Labor “has a selling job“. M

Maybe so, but I’d say the government is the one that has scored goals for the other side.

(Update 27/3) As predicted, Labor has tweaked the policy to exclude pensioners. That blunts the remaining lines of attack, but doesn’t cost much money, since the benefits go primarily to high-wealth self-funded (but massively tax-subsidised) retirees. By waiting until after the Batman by-election and the latest Newspoll, Labor looks gutsy (even Dennis Shanahan in the Oz conceded this) and Turnbull looks even weaker than before

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Financing a UBI/GMI

A couple of months ago, I wrote a post making some observations on the closely related ideas of a Universal Basic Income or Guaranteed Minimum Income. The most important was

Observation 1: Any UBI scheme can be replicated by a GBI with the same effective marginal tax rates, and vice versa

I meant to follow up with a more detailed exploration of financing issues, but all sorts of other things intervened. However, I’ve now prepared a draft, which is over the fold.

Comments and criticism much appreciated

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