In keeping with the blog tradition of bringing you tomorrow’s talking points today, I thought I’d look a bit further than the current election campaign and consider the implications of a Bush victory. On past form, there’s no reason to suppose that a second term will lead Bush to abandon his tax cuts, or to propose any significant net reduction in expenditure. At least not when there’s an obvious alternative, that only a few shrill Democrat economists and some incredibly out-of-date Republicans would ever object to. The US government has at its disposal and endless source of costless wealth – the printing press that turns out US dollars. Hence there’s no need to do anything tough like raising taxes or cutting Socil Security benefits. The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation.

As a first line of defence, the views of these economists can be criticised. There are plenty of Keynesian critics of monetarism who’ve pointed out that there’s no simple or automatic relationship between the money supply and the rate of inflation, and probably there are some who’ve been incautious enough to deny that there is any relationship at all. In any case, in the new era, the dynamism of the US economy is such that everyone wants to buy US dollars as fast as the Treasury can print them (ignore any recent observations on currency markets that might suggest otherwise).

Still, these are only delaying tactics. What will really be needed is a set of talking points showing that inflation (properly referred to as price appreciation or something similarly positive) is actually a good thing. In the hope of bringing the debate forward a bit, I’ve advanced a few.
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Until fairly recently, macroeconomic policy (the management of unemployment, inflation and the exchange rate) was the central concern of economic policy. Since the early 1990s, and particularly under the Howard government, these concerns have shifted to the periphery.

The Hawke government abandoned targeting of the exchange rate with the floating of the dollar, but Keating in particular continued to regard the current account deficit as an important policy target, at least until the early 1990s. Excessive concern with the current account deficit was widely seen as one of the factors behind the policy miscalculations that produced the 1989-92 recession. The counterargument, put forward most prominently by John Pitchford, was that, in a deregulated market, the current account balance is ultimately determined by the corresponding set of borrowing and lending transactions, and that these should not be a concern of macroeconomic policy. This view is now fairly generally accepted. Even though the current account deficit is as large in relation to GDP as it was in the 1980s, only a minority of commentators[1] express concern about it.

More significantly, the government abandoned the idea of using fiscal policy to manage the economy, and ceased to take an active role in the determination of monetary policy, leaving this entirely to the Reserve Bank. Although the Reserve Bank, unlike other central banks did not take the view that it should be concerned solely with inflation, the resulting policy regime was one in which inflation targeting was the primary focus, and unemployment was, at most, a matter of secondary concern.
Finally, the government abandoned Labor’s target of an unemployment rate of 5 per cent, and declined to set an alternative target.

fn1. I’m a member of this minority

I’ve spent the last five days in Israel, at a summer school on the Economics of Risk. Judging by the wrtings of visitors who’ve spent a similar amount of time in Australia, I ought by now to have formulated both an incisive analysis of Israeli society and a comprehensive plan for resolving the Israeli-Palestinian conflict. I haven’t done either, but I do have a few rather trivial observations to make.
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I’ve read a number of recent articles the burden of which is that the doctrine of terra nullius was a straw man invented by Henry Reynolds (sorry no links, but Christopher Pearson in the Oz states the point and lists others).

My own memory is that this doctrine was enunciated, both in name and in substance, by Justice Blackburn in a major case about 1971, which wasabout the beginning of Reynolds academic career. I’m prepared to believe that I’m wrong about the name, but I can’t see how the substance of Blackburn’s decision could have a basis significantly different from what we now call the doctrine of terra nullius . Maybe Ken Parish or some other well-informed person can set me straight.

Update: Commenter Dan has all the relevant info, so read the comments thread. Blackburn actually used the phrase “desert and uncultivated” which is taken in all the subsequent discussion to be synonymous with terra nullius.

My conclusion: Pearson and others are talking nonsense. The Blackburn decision made the validity or otherwise of the terra nullius doctrine a vital concern. Reynold’s research showed that this doctrine was not asserted as part of the British claim to sovereignty over Australia. Of course, the evidence can be read in ways more favorable to a terra nullius view, but there’s no sense in which this view was a straw man invented by Reynolds for the purpose of demolition.