In terms of the inflationary impact of infrastructure investment, you have failed to respond to Stevens’ point about the difference between managing short-term inflation impacts and the more difficult job of counter-acting longer-term structural inflation.

There is a very sound case that Howard and Costello have mismanaged fiscal policy by using it in a pro-cyclical fashion. They have masked their irresponsibility by using the nonsensical argument that the tax cuts are not inflationary because the budget is being kept in surplus. Tax cuts fuel consumer spending without any concomitant increase in supply. That is why they pose a greater threat of longer-term difficult-to-manage structural inflation that investing in infrastructure.

In saying this, I think the state governments have been just as lax in failing to address supply issues. New South Wales, for instance, surfed the wave of the property boom for years, gladly sucking in stamp duty and spitting it out in non-productive pump priming.

The point is Rudd’s Labor would be on strong ground, if it has the guts to do so, to pass up the opportunity for more tax cuts and paid more attention to infrastructure – both industrial and social.

The argument that was being made was that the tax cuts are inflationary and the alternative was infrastructure spending, implying that that was non-inflationary.

You have now admitted that, as Stevens said, infrastructure spending is also inflationary. It then comes down to the question of which is worse – tax-cuts inflation or infrastructure inflation.

Potential scenario – AUD keeps rising, Turkey backs off on it’s Kurdish incursion rhetoric causing oil prices to fall from current highs, it rains at least averagely next year in the Murray-Darling causing falls in grocery prices. All having a deflationary effect. If that happens, what is so bad about not collecting so much tax revenue? Inflation is currently under control, no reason why it shouldn’t continue to be so.

As to “social” infrastructure, I would be interested to hear how you define that. I would have thought that investing in our skills capacity through improved education increases our long-term ability to grow without stoking inflation pressures.

In any case, there are social goods in improving our health and education systems beyond dry arguments about productivity.

Grace and Nayum, et al, appear to be saying that reducing taxes is inflationary and building infrastructure isn’t.

Stevens obvioulsy agrees that infrastructure building is inflationary – “trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on the way through.”

Spending on infrastrucutre in a labour supply constrained economy creates wage inflation pressure, additional to the demand for limited goods and services. Tax cuts are not only spent on domestic goods, they are also spent on imports, saved, invested, reduce debt, etc.

So you tell me – which is more inflationary – tax cuts or infrastrucutre investment (and maybe a comparison of the inflationary effects of social versus productive infrastructure spending)?

And note that Stephens was talking about GDP increasing infrastructure “longer term supply capacity”, not social infrastucture (which is what I assume the left would want the money spent on) which adds little to GDP.

Yep – building new infrastructure in a labour shortage scenario is not inflationary.

I’ve learnt something today they never taught me in economics at three different unis!!! No wonder education is up the kyber!!

Err, Razor, maybe then you went to a different school than Glenn Stevens, the RBA governor. Asked at his last parliamentary testimony about government spending on infrastructure, he said:

“If the spending is putting in place genuine infrastructure, that does two things. It
adds to demand in the short term, but it also adds to supply in the long term. Without wanting to endorse or otherwise particular projects, I think it is reasonably clear that we need more supply
of infrastructure over time for the economy to grow; otherwise we will be capacity constrained
permanently. So it is a matter of putting in place that longer term supply capacity and trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on
the way through. If we can manage that then the economy has good growth prospects in the
medium term because of the additional supply capacity that has been put in place.”

Lindsay Tanner are well across these issues. Let’s hope Labor responds well.

Kim, Lindsay Tanner is too busy looking after his own bacon in Melbourne doing ridiculous YouTube videos slagging the Greens off and pumping up Family First. I kid you not.

I guess the other question is; how could that money be used in a way that’s not inflationary? Presumably it has to be sequestered away somewhere and not used to fund schools/hospitals/roads?

Yep – building new infrastructure in a labour shortage scenario is not inflationary.

I’ve learnt something today they never taught me in economics at three different unis!!! No wonder education is up the kyber!!

BBB

And the infrastructure: libraries, labs, lecture theatres, hospital wards, machines-that-go-bling, nursing homes – well, that would all be put on the never-never. The builders and subbies and the suppliers of materials wouldn’t be paid. They’d all see it was in the national interest to leave their invoices unpaid, for how long?…Well let’s say 3 years, shall we?

Welcome to voodoo economics, 2007 style.

Sounds a bit like the “IOU chits” that Whitlam wanted to issue to public servants in lieu of wage cheques, when the Senate was delaying Supply late in 1975…..

But please, show me how you can ramp up seriously ramp up health and education expenditure, as Nahum presumably would prefer, without ‘Pushing more money into [the] economy’.

BBB

Interestingly, Nahum gives us this: “Pushing more money into an economy that is nearing full capacity is going to add to the pressure for interest rate rises.� immediately after getting stuck into Howard for not spending enough on health and education. Weird.

Not really BBB – unless you misunderstand the difference between investment and consumption. We have the second highest interest rates in the OECD (behind only NZ) despite the economy growing at just 3 pct per annum. Why? Because the economy has run out of spare capacity. Why? Because governments in Australia, at both federal and state level, have under-funded investment on infrastructure and education.

For ideological reasons, Howard has underfunded the states (leaving them hooked on gambling revenue to fund essential services), while hogging an ever increasing pile of commodity-driven revenues to pay for income tax cuts that are spent on consumer goods.

Ergo, consumption is running ahead of the economy’s productive capacity.

Interestingly, Nahum gives us this: “Pushing more money into an economy that is nearing full capacity is going to add to the pressure for interest rate rises.” immediately after getting stuck into Howard for not spending enough on health and education. Weird.

BBB

Please.

(chirping) . . .

Nayum Ayliffe – 2008 Nobel Prize for Economics for redefining “redistribution”. Previously redistribution had been defined as:

re·dis·tri·bu·tion /ËŒridɪstrəˈbyuʃən/ Pronunciation Key – Show Spelled Pronunciation[ree-dis-truh-byoo-shuhn] Pronunciation Key – Show IPA Pronunciation –noun
1. a distribution performed again or anew.
2. Economics. the theory, policy, or practice of lessening or reducing inequalities in income through such measures as progressive income taxation and antipoverty programs.

Now, according to Ayliffe – not taxing somebody is a redistribution. Why didn’t we think of this before?

Brilliant!!!