Nicholas Gruen recently did an opinion piece for the Australian Financial Review pointing out that Labor sold itself short, turning strengths into weaknesses. The main example he used was the BER, to which I’ll return shortly.
I heard Brian Loughnane, Federal Director of the Liberal Party, say that they had picked up concern in the community about debt, waste, taxes and the boats prior to the election. Gruen says that Labor should have dealt with this concern before going to the polls. I tend to agree with him.
The argument about debt is patently ridiculous. Recently I saw a graph in the Business Review Weekly showing OECD average debt approaching 100% of GDP. Ours at 6% would scarcely register.
On taxes, again there was a graph in the BRW showing our tax load as a percentage of GDP at a little above 30%. We come in just above Japan, the US and South Korea. Japan and the US have economies of scale not available to us and have been running large deficits, arguably living beyond their means. Continental countries like Germany, The Netherlands, Italy and France come in at about 40%, let alone the Scandinavian countries.
There is no danger of our public sector becoming bloated. It’s amazing we provide the level of services we do with our fiscal take.
The Orgill Report on the BER (Building the Education Revolution) found only a 5 to 6% premium paid for the speedy implementation of the program (previous discussion here). Only 2.7% of schools complained. Some of the complaints were about a lack of consultation over school needs rather than cost.
55% of the complaints came from the NSW government sector, representing 22% of schools. The program there was criticised for a ‘one size fits all’ approach, but it did deliver the stimulus program faster than elsewhere, thus meeting the need for a timely stimulus more adequately.
JohnL’s guest post (discussion here) showed that claims of supposed Queensland “whistleblower” Craig Mayne were nonsense.
You will recall that Joseph Stiglitz told Kerry O’Brien:
If you hadn’t spent the money, there would have been waste. The waste would have been the fact that the economy would have been weak, there would have been a gap between what the economy could have produced and what it actually produced – that’s waste. You would have had high unemployment, you would have had capital assets not fully utilised – that’s waste.
Gruen’s outfit Lateral Economics have done a study (press release here) looking at the cost of the stimulus program according to a methodology developed by the OECD. This shows that 36% of the expenditure came straight back to the government in the form of taxes. The opportunity cost of the BER buildings was a little more than the cost of the materials. This leaves out the value of the building to education and the social and psychological value of the work as such.
This methodology would seem to go some way to quantifying the point Stiglitz was making. I’d be interested to hear what any economists think.
Meanwhile voting in our locality took place in West Ashgrove State School. Ironically the booths were set up in a brand spanking new school hall/gym. It didn’t look like waste to me.
The argument about debt is patently ridiculous because as a country with full monetary sovereignty there is no risk of default what-so-ever.
Japan and the US aren’t “arguably living beyond their means” by running deficits; they are also countries with full monetary sovereignty. Arguably, the US is living entirely beneath its means with an unemployment rate approaching 10%. Nearly 30 million people without work? I’d argue they should be spending a whole lot more.
Brian: I said shortly after Abbott was elected as leader of the opposition that Abbott’s key strategy was to tell “the great big lie about everything”. He was merely following a strategy that the right has used with considerable success in the US. If you tell the lie often enough enough people will start to feel there must be something in it – which explains the rising number of people believing Obama is a Muslim and poor people without health care being conned into thinking they would be worse off if the US had the equivalent of our medicare.
To some extent, the great big lie can be fought by using the sort of argument advanced by people like Stiglitz. It certainly helps if you can get most of the experts supporting what you are doing. However, many voters won’t bother to read a lengthy argument, may not be able able to understand or may simply feel that experts get it wrong anyway.
What I think Labor should have done is adopt the “just great big lie about everything” approach. Greet each new Abbott lie and distortion with the same slogan and back it up with facts that either refute the lie or point out the distortions. Two can play the repeat repeat repeat tactic and Abbott was particularly vulnerable to the great big lie charge.
I would agree with Andos. The total government budget and the total private sector financial balance are a reflection of one another. Unless there is an enormous external surplus then for the government to be “in the black”, the private sector as a whole must be “in the red”, running down savings, liquidating assets and racking up debt.
This is not a theory, nor an opinion nor a political stance – it is a fundamental fact of national accounting. An inescapable reality.
However, the implications arising from said fact are so alien to most people’s deeply conditioned thinking – memes – that proponents of the idea will be either generally be ignored or treated as tinfoil helmet wearers, just as Andos is treated here.
It is still hard to understand how Labor with all their talent, managed to stuff up a message of success. If they had gone for a job interview and been unsuccessful, the conclusion would have been that they need to practice their answers to tricky questions, improve their dress, look at people in the eye, come across more confidently and remember names, avoid waffle etc. Q&A, led by no other than Malcom Fraser, effectively said this last night. The Murdoch factor was also mentioned by Fraser as a huge impediment to Labor’s success.
Flynnboy, I think he’s in good company with people like Stiglitz and Krugman.
Actually what I wrote in that part of the post was a take from an article by Phil Ruthven, who’s anything but a Keynseian.
If the US inflates away its deficit, future investors may not be quite so keen to buy US sovereign debt.
Labor’s failure was overwhelmingly related to poor communication and poor internal management.
I agree with John D that they allowed Abbott to get away with murder by not counter-acting his myth-making on deficits, debt and waste.
No doubt swayed by their damned focus groups, Labor seemed determined not to defend the role of running deficits in a global recession.
All they needed to say was “the surplus is there for a reason. It’s our rainy day fund. This is a rainy day.” When the skies (partially) cleared, they could say “we saved tens of thousands of jobs, businesses and livelihoods.”
Instead, they allowed themselves to get up with the myth about good economic management being all about running a surplus irrespective of the global circumstances.
Again and again, they chose to fight on Abbott’s chosen territory and failed to deflect outright lies and distortions with carefully chosen facts.
It makes me despair how the Coalition has succeeded (at least in electoral terms) through its wholesale import of the Republican Party’s tactics of outright obstructionism, deceit and questioning of the legitimacy of the election government.
But the really sinister aspect in all this is the role of News Corporation, both globally and locally, in spreading lies and misinformation in an effort to engineer election outcomes that favour Murdoch’s corporate and ideological interests. Fraser referred to this insidious corruption of our democracy TWICE in Q and A last night, but Tony Jones just let it through without a mention.
As a former journalist, I have to say this is the obvious big untold story to run right now – the role of the media in all of this. But who’s going to run it???
Well Fraser won’t be invited back.
Nobody’s going to run it – even his competitors are scared of him, and as for the ABC, well as Tony Jones demonstrated you don’t want to get offside with your probable future employer.
Laura Tingle has made reference several times to NewCorp’s campaigns, the last time on Insiders on Sunday. But she’s not headlining it in her articles and if she did it’s likely to appear on page 8 of the Fin Review.
Why did so few onlookers, presumably all “good people”, choose to remain on the sidelines when The Great Big New Lies were being given so much airspace? Many did issue statements which would seemingly have cut the rug from under the feet of those pushing those lies but did not diligently pursue these in the interests of Australia generally. Many of the blogs like this one have consistently and very accurately pointed out what was happening but got little space in the general public.
It was interesting to see the audience reaction on last night’s Q&A. Most of it seemed to reflect the very different viewpoint of Victorians, but there were some puzzling reactions when the discussion was around the role of the Murdoch press. I’m saving some time later in the day to watch it again so see exactly how it ran.
I’d also love to know a bit more following on Malcolm Fraser’s comment that one of the leaks did not come from any of the presumably identified sources, and whether the inference was that it may have come from within Liberal sources or whether Malcolm knew the leak was false.
Amazing what spin, dishonesty, negativity, slogan-chanting and a compliant media can ‘achieve’ in terms of manipulating public opinion.
Yes, it is no surprise, but sickening, that The ABC News has so studiously avoided reporting the Fraser comment about the source of at least one of the election leaks. Particularly, when they are not averse to cross promotion, generally.
The only matter of interest is apparently his opinion that both sides have a crappy candidate selection process. Der. Anyway, the transcript of last nights q&a will be up at 2.00 today.
http://news.smh.com.au/breaking-news-national/fraser-slams-libs-candidate-selections-20100830-147hg.html
Nice original post … thanks Brian …
Not sure that last night’s Q&A audience was representative of the Victorian swill, it was a hand picked audience.
I do not look forward to Murdoch dictating my political leaders to me.
I am surprised at the complicitness of the ABC in supporting the lies, surely if journalists just repeat lies they are just GOSSIPERS.
I have been surprised at one Liberal lady who is overwhelmed by the government debt when they is in hock beyond her eyeballs engaged in highly speculative land developments.
“I do not look forward to Murdoch dictating my political leaders to me.”
Billie, I think he already has.
A few points:
1. @10,mediatracker: re the “non-labor leak”, the comments I’ve heard on the net (i.e. take with a grain of salt) have been that the military brass were upset they didn’t get the reverence they felt deserve when a 30-something advisor turned up in place of the PM. Even if it’s not true, it shows other non-Labor leak sources can be entertained. But our media is too lazy to dig out other possible motives for a leak.
2. I too was impressed with Malcolm Fraser on QandA. He put forward the best defence of the BER I’ve heard. Jessica Rudd was also pretty good with her defense of father’s legacy.
3. I hope those holding the Balance of Power consider the “Great Big New Lie”.
Yes, the last 3 years of Labor has been hopeless – at promoting the good job they’ve done.
Maybe Bitar himself did not understand the arguments by Stiglitz et al.
“Flynnboy, I think he’s in good company with people like Stiglitz and Krugman”
I’d say he’s more in the company of people like Bill Mitchell, Randy Wray, Warren Mosler and Jamie Galbraith (the son of the late J.K.Galbraith, as you probably realise) though he’s probably somewhat sympathetic to Stilglitz and Krugman as well. I can’t speak for him of course.
I’m in strong agreement with your overall argument Brian. It’s just that I agree with Andos’ position that the debate – including the progressive side of it – can never be fully informed of all possibilities and problems so long as it continues to be constructed to exclude some of the most basic functions of modern economies. A highly talented mechanical engineering teacher will nonetheless do his students no favours if he continues to teach that a 2010 model car has a carburettor. It does not, it runs off an electronic fuel injection system – a completely different thing altogether. To fully understand the modern car, it is necessary to first recognise the fundamental diferences between what’s under the bonnet of the old versus the new.
Virtually all economic debates begin with the premise that what’s under the bonnet of a 2010 Camry is identical to what is under the bonnet of a 1970 Torana. Until it is broadly accepted that this is not correct, little real progress will be made.
Waste is present everywhere in our economy; I am not referring to government waste which everyone(particularly the Libs and the MSM) likes to talk about, I am referring to consumer waste: Have a look at our rubbish tips that pollute our environment. A large proportion of the goods that are purchased today are not purchased out of necessity but out of impulse buying. Impulse that will only last a few days, weeks…
Corporate waste: look at the amount paper that is being wasted on things that nobody will read or travel that could have been avoided, food wasted after corporate functions. Not to mention the millions spent on adverstising campaigns.
This is the waste that free-marketeers ideologues do not want to talk about.
2 rules of thumb.
1. Labor is shit scared of the media, absolutely paranoid, because they know whatever they say on any given topic will be subject to the maximum possible negative spin.
Anybody who has had contact with the ALP knows that they walk in fear of the media.
Yet despite that criticism that they did not present their case well is only minimally true.
Major examples include the BER, NBN, stimulus.
Many times they presented the facts strongly only to have their case swatted away by the great big lie, media noise or straight out misinformation.
I can recall Gillard for example swatting Opposition media/Liberal stories about BER alleged ‘waste’ over the fence for six, more than once, and the media deliberately downsizing her response.
Ditto Conroy on the NBN and numerous examples, lots and lots, where expert credible [if you count umpteen economists and the IMF for example as credible] analysis on the stimulus was disregarded in favour of Tony bleating ‘grape fig newt tacks’ along with some spinner from the IPA or similar.
2. The opposite applies to the COALition.
Nearly all of the election negative spin directed at the ALP could have been equally validly directed at the oppo.
On the NBN the oppo had nothing to offer and did so in terribly poor miscommunication.
On the stimulus they offered meaningless mantra and Laurie effectively demolished that twice, once with Joe and then again with Tony.
Minimal impact.
The story that the oppo hired their accounting firm weeks before their excuse for doing such was thought up was kept to a whisper by the media.
A couple of days ago Tony Jones opened a conversation with Bob Katter with the observation that Tony Abbott managed to go through th campaign without any ‘major mishaps’.
Huh!!??
I’m listening to ABC National as I type and an example has just popped up.
Tony is introduced as ‘Leader of the COALition’ [minus the capitalization of course] and then Tony says “We are no longer the opposition but … blah blah blah”.
Really, if we want to have something vaguely approximating democracy in this nation we gotta do something about the media.
Just to add to the above.
As I listen to Radio National I reckon I heard them say that the AEC now has the COALition ahead on 2PP [can anyone verify that, that they said that I mean?].
So I go to the AEC site.
ALP are ahead.
hannah’s dad,
Read the commentary towards the end of the hung parliament thread (number 4).
The AEC website says that 81% of the vote has been counted. CHILL
Do not be swayed by News Corp propaganda trying to rush a result before the vote counting has finished
Sorry misread Hannah’s Dad. Now the ABC dances to News Corp propaganda
Andrew Reynolds
I presume you are referring to this from Lefty E?
“Its cool, Andrew: the National Press Club just got well and truly set straight on their latest “LNP in front on 2PP” nonsense. I think it is an issue when innaccurate stories are spread in this sensitive environment”
Lefty’s last sentence seems appropriate.
Either that HD, or simply do an end run around their spin, so that the vote cannot be unduly influenced by their posturing.
Some of the proposals I’ve made on electoral reform here would render their efforts moot. In particualr, the sortition/DD model I suggested would radically subvert their ability to influence governance, both by creating a better informed public and making candidate selection a far more a deliberative process. It would also make influence peddling a lot harder.
Less radically, PR-based systems would also subvert this process.
It’s a commonplace to want to go after the broadcast and print media, but it’s actually quite hard to reconcile effective action with freedom of the press, much as we know that this rubric is utterly abused by the Murdochracy and their ABC. Saying “we ought to do something” when it’s not clear what we could do, much less implement it against these creatures without a hue and cry to make the minini9ng thug campaign look like a child’s tantrum doesn’t really get us very far.
Fraser says something about Murdoch, crowd laughs, Fraser: “Do you think that’s funny?”.
Does anyone remember Dennis Potter’s interview with Melvyn Bragg when he was dying of cancer?
Fran,
Its a ‘commonplace’ because its both true and important.
And there are things that can be done, or really past errors that should be undone.
Murdoch should never have been allowed to gain his virtual monopoly, a monopoly that if I understand the essence and thrust of the US anti-monopoly laws would not be legal in the USA.
Such laws could have been introduced here, not just for the media monopoly but for their general worth in other areas as well.
Or at the very least such laws, and the reasoning behind them, could be put on the political agenda.
“Freedom of the press’ is a furphy.
Always has been.
Freedom for one [or a few] family to countrol the agenda and flow of information to the public is directly at odds with the ‘freedom’ of that public to be reliably and objectively informed.
“Censorship’ exists in the Australian media already, it is not an issue.
The only questions relate to who will have control of what levels and what nature of censorship.
There are alternative forms of the ‘who’ that are available.
For example:
-community ownership, sort of like credit union institutions.
Ownership does not have to be oligopoly capitalist.
-breaking up the few existing empires.
Perhaps of minimal potential but at least fragmentation would give journos some choice of employment and allow them greater freedom [ie less censorship] in what they write if they know their future employment is not restricted to only tweedle dum and dee.
Now that it is clear that the ABC is merely a reflection (albiet with a softer focus and slightly broader range) of News Ltd, and taking HD’s point that Labor is scared of a media that is dominated by Murdoch interests, what is to be done?
Labor had no stomach for any sort of media reform when it had a 17 seat majority and a PM with sky high approval ratings, so there’s no chance even if they do form government.
That’s a great clip, Stephen.
To try and get away from the rhetoric on this, there is an interesting questions as to where fiscal balance should lie.
If you take the no debt approach, then you need a balance of assets to ensure that any fluctuations in receipts are covered. What that achieves and how that’s better than the current idea of “balanced over a business cycle” is unclear.
The other one is the no deficits approach which you would think have to mean eating into many of the measures which provide “automatic stabilisation” (i.e. the vast majority of the federal budget), or higher taxes which the advocates of no deficits seem to abhor. Again, how this achieves something better is unclear.
For measures which have totally uncertain results, it’s strange they seem to resonate so strongly with the public (that is assuming a totally rational population).
Thanks, Flynnboy, you’re absolutely right about the basic level of understanding in economic debates here. I like Robert’s response:
“If the US inflates away its deficit, future investors may not be quite so keen to buy US sovereign debt.”
If investors didn’t want to buy US treasury bonds, then treasury could simply stop trying to sell them; Congress could still spend as much as it wanted to. I’m not sure what ‘inflating away’ a deficit implies, but I fail to see how 30 million unemployed Americans is profitable for anybody (except, of course, to keep those nasty wage costs down). Inflation becomes a problem when there is no spare capacity for production to meet demand. Again, with 30 million unemployed Americans there is a whole lot of spare capacity to go.
When we’re talking about measuring waste, let’s talk about the cost to our society and economy of unemployment. This is a good starter: http://bilbo.economicoutlook.net/blog/?p=7308 “The daily losses from unemployment”
Andos @31, that’s a point I’ve made time and again when defending the Labour government against RWDB attacks. The cost of unemployment is almost incalculable. And the draconian treatment of the unemployed is a national scandal, imo.
Two of the most disgraceful acts of bastardy against the unemployed are forcing them to divest themselves of every cent of savings and using a partner’s gross income to calculate the benefit to which an unemployed partner is entitled.
This happened to my son who lives with his girlfriend. She lost her job leaving him to support her and pay all her bills as well as his own. Like a fool, she was honest about their living arrangements, and her benefit was calculated on his gross income.
Consequently, her unemployment benefit wasn’t even enough to cover her share of the rent, let alone power, food, phone, fuel and a loan she’d taken out; all of which fell to my son, (who had his own debts) to pay from a very modest take home wage.
Luckily, I was able to help him until she got another job, but it nearly drove him to a nervous breakdown.
People should be allowed to retain a decent savings buffer, say $10,000, against unforseen expenses. It would also allow them to re-enter the workforce without a huge debt burden.
Speaking of measuring waste, Willam Bowe at The Poll Bludger reckons that Senator Fielding’s chances of gaining the final senate seat in Victoria are improving.
Austin said:
As someone famous once said — it’s the vibe!. Most people aren’t economists and aren’t even engaged with economic ideas. Instead, they tend to reach for anthropomorphic metaphors and analogies to get a handle on things, even though economies are very different from individual human beings.
Just as a human being who is “in debt” sounds morally inferior to someone who has “money in the bank”, so too an economy that is “in debt” sounds more fragile than one that is “in surplus”.
Growing up in West Ryde the whole neither a borrower nor a lender be thing was probably the most commonly repeated of cliches, even if most of our neighbours had mortgages. Borrowing money was spoken about in terms that were essentially Faustian. If you borrowed money it was like surrendering your soul — you were a kind of slave and only when you had paid off your debts could you walk about with your head held high. Every month we would gather around the table and count off how many payments were left on the Falcon, and when my father spoke of trading it in my first and second questions were — but won’t this mean we will have to wait longer to pay off the debt? Wouldn’t it be better to pay it off first?
I recall then the first credit cards came out, there was general angst about what this said about public morals and the role of banks in subverting them.
So it is not surprising that the conservatives in particular reach for this metaphor. It is very powerful because it speaks to culture rather than insight. The economics of the household budget, harnesses at once the fears and insecurities of everyday life and the peril it poses to hopes of something better.
One may say much the same about waste.
That’s why Abbott said that he wanted to manage the economy like the average Australian household managed their budget. He didn’t know or forgot to mention that they are, on average in massively geater debt than the government, and that if he had had his way their debt would be greater still.
Of course, it’s not only economics this works for. The asylum seeker/national security thing really invites people to think about what would happen if a mob of home invaders landed on your doorstep. Nuclear power? Would you like one of these in your backyard? This is not a question that is regularly asked of coal plants. But I digress.
One of the more important things that ought to be done is to bring this anthropomorphic metaphor into disrepute. States, unlike human beings, have an infinite working life. They aren’t planning to retire to the country, or even to stop growing. Moreover, the mere fact that they are in debt doesn’t mean that banks and instituitions won’t lend to them, or refinance debt. Individuals can be declared bankrupt, but in practice, states cannot — at least, not for long.
The real question with debt is whether it is raised for purposes that have a commensurate benefit, and whether this debt can be serviced by the pool of beneficiaries of the goods supplied by the debt. If the pool of beneficiaries extends 50 years into ther future, then servicing the debt for fifty years may well be good policy — and indeed, it may be equitable in intergenerational terms. Why should the burden of creating an asset to people living in 2060 be disproportionately borne by those alive in 2010?
One of the more bizarre things about the virtue of budget surpluses is that really, they are an example of excessive taxation. If one really believes that money is used most efficiently when in private hands, why would one not condemn a surplus? Whether by accident or design, a government that acquires a surplus has levied the population more than was necessary to deliver its services. That is surely inefficient, or it ought to be in the minds of neoliberals. But again, to your average adherent of the anthropmorphic metpahort, it sounds like prudent budgeting — putting aside a bit for a rainy day and all that, except that in this case, the state is taking your average person’s rainy day money and using it for something else.
If we had an engaged media, the politicians would be asked to warrant that one.
AIUI Adrian it was Fielding, the DLP or a Liberal (McGauran) and in some ways, of these three, I’d prefer Fielding, precisely because he is utterly inept and laughable. He would annoy the coalition enormously.
Ha-Joon Chang in the Independent
@32. Please check out Centrelink’s website. A couple can have $389,500 in assets (could be all cash)if a non-homeowner, and be eligible for Newstart.
Did your local lefty liar tell you otherwise…hoping to get your vote on 21st August? losers vote ALP/Green;always have and always will.
http://www.youtube.com/watch?v=ABtlI2Wk3Ws
“The argument about debt is patently ridiculous.”
Yep, Brian, and never was it more clearly shown than by the Chaser team.
While not as sophisticated as Bill Mitchell’s approach, I had a note on the costs of unemployment at Club Troppo – http://clubtroppo.com.au/2010/08/20/the-stimulus-and-the-costs-of-unemployment/
There is no danger of our public sector becoming bloated. It’s amazing we provide the level of services we do with our fiscal take.
Our public sector is already bloated. I work with them here in Canberra, and you could ditch a third of them and not lose any productivity. The only slight problem lies in identifying the third to ditch.
I sincerely hope that the APS worker bees at the coalface in the regions (like Sydney, Melbourne and Brisbane) are more productive than their bosses down here.
It’s all a bit reminiscent of one of Diamond’s variables in “Collapse“: perhaps we need to try and change our political cultures obsession with financial cost… er, I mean profit. Afterall, geographically markets are now everywhere and all encompassing.
The Mad Katter’s right: we need a “paradigm change!”
["Well if it feels good, there's a good chance it must be bad."]
@ PeterTB, 40: what exactly do you mean by productive? Productive for who? Productive relative to what or whom?
what exactly do you mean by productive
I’d be happy to define productive as attending the requisite hours and producing something – anything – beyond planning their next leave absence.
@37 Since you’re so knowledgable, you should be able to roll up on the behalf of Jane’s son and gf and sort Centrelink out.
Read the comment proper before you broadcast your ignorance.
Flynnboy & Andos:
Is there really that much new in the mechanical concepts underlying Modern Monetary Theory (MMM)? After all, countries with their own fiat currency have always been able to produce as much of it as they wish. How, or whether, they choose to use that freedom is surely more of an operational detail than any kind of paradigm shift.
I accept that traditions from non-fiat times are probably the main reason governments with their own fiat currencies still issue securities to finance deficits even though, as MMM rightly contends, they don’t actually need to do so. Only a small part of past deficits have been funded via central bank monetisation, and none as far as I know through the straightforward issuance of currency by a government. To this extent, implementation of a MMM approach would indeed whenbe revolutionary.
It’s not, however, as if plenty of countries haven’t previously utilised the liberty of being able to create their own money at will. I wholly accept that MMM adherents are well aware of the dangers of excessive use of this capacity (and certainly have no intention of going down such roads), but it is still true that the great hyperinflations of the past were all instances of governments doing just that.
So, yes, governments with their own fiat currencies do have a lot of fiscal and monetary room to move, certainly much more than is generally acknowledged. However, monetary mechanics don’t address the vital question of whether any given expenditure is likely to do more good than harm.
That question, it seems to me, is best viewed separately from the way in which the expenditure is financed. Blurring the two not only risks undermining the required clarity on both these counts, it also risks disturbing the public’s perception of what money is, and why it has value. My guess is there’s a very wide gulf between their subliminal operating metaphor for money (which is probably just as much an inherited, ill-defined tradition as is government’s tendency to finance their deficits through debt issuance) and the underlying reality of fiat money. Is that something we really want to casually mess with?
Indeed, I sometimes wonder if the greatest danger isn’t that MMM enthusiasts become so caught up in the nominal world (as, Lord knows, we all often do) that its elastic but irrevocable connection with the real world occasionally gets lost in translation. That real world, perhaps regrettably, is a good deal less malleable.
One last thought. Can’t a reasonable argument also be made that the artificial straitjacket of issuing debt to fund deficits provides a political discipline that, despite all its occasionally irritating qualities, may better serve our long-term interests than the alluring open-endedness of MMM unleashed?
Hi Andos.
I think the number one stumbling block is that the conclusions arising from the insights into the basic functions of the system we have had in place since 1971 are just so counter-intuitive and fly in the face of the conventional wisdom.
“It is very powerful because it speaks to culture rather than insight. The economics of the household budget, harnesses at once the fears and insecurities of everyday life and the peril it poses to hopes of something better.”
“That’s why Abbott said that he wanted to manage the economy like the average Australian household managed their budget. He didn’t know or forgot to mention that they are, on average in massively geater debt than the government, and that if he had had his way their debt would be greater still.”
This is where my point logically leads. That the Australian governments budget does not function remotely like a household budget is a completely unacceptable proposition to most, despite it being fact. Attempts to manage it as such are doable in the short term but never in the long term. Regardless, this is exactly what the public expect and policy makers who trangress this conventional “wisdom” are certain to be regarded by the electorate as grossly incompetent and will be swiftly shown the door.
As long as we continue to conceptualise the government budget as a household budget, the public debate will remain trapped in a timeless limbo of days and systems long since consigned to history.
Denmore@7: whenever the big stories break, you can trust the media … to gaze into their own navels. Never mind you, readers, what about us poor journalists?
The media were of no help at all in helping us understand what the issues were. Non-Murdoch media busied themselves with billycarts, earlobes, a failed leader from three elections ago, and other nonsense. Dig up a newspaper from five weeks back – any one – and tell me how much of the coverage holds up now. Every PM from Whitlam to Rudd had to court Laurie Oakes: Gillard didn’t and this ‘doyen’ bellows like a heifer with its head stuck in a fence.
I would have loved some news from Hobart. There is a thesis and a bestseller to be written on the amazing win by Deborah O’Neill in Robertson – aren’t the journosphere supposed to be the ‘first draft of history’? Don’t you dare pretend that the media had better things to do than cover that.
The media were no help because they didn’t focus on issues people cared about, except when pre-digested for them via polls (focus groups do the sort of information gathering that journalists used to do: discuss).
Every time a journo asked Gillard if she was frustrated at the media asking her inane questions, they were doing what Densmore would have them do: focusing on themselves. In the process, they were failing utterly to do any sort of fourth estate role. Yes this was a failure of media, but there is no story in the media itself: this only compounds the problem. Well written stories about real issues are the only symptom that the media is getting better, and once it does it will be more respected, better patronised by consumers, and worthy of the kind of verbal onanism Densmore would seek to encourage.
Ingolf:
The straight jacket of political discipline that you seem to find so comfortable means that in the real world we have millions and millions of people without the chance to earn a living. Needlessly.
Do you think an unemployed person cares if you threaten their ‘sumbliminal operating metaphor for money’?
It shocks me the casual acceptance of the terrible costs visited upon people in our society for the benefit of so few.
“despite all its occasionally irritating qualities, may better serve our long-term interests”
Whose interests do you think the ‘occasional irritation’ of long term mass unemployment serves?
Hi Ingolf.
I simply feel that the public would benefit from a more accurate understanding of the basic nature and function of the machine that we elect our leaders to operate. As long as we frame the debate as how best to manage a household budget, we will forever be confusing what was with what is.
The point is – this confusion is not without consequence.
I am less concerned with the unnecessary practice of issuing debt to fund expenditure in excess of tax revenue and more concerned with the long-term effects of the public’s demands that our policy makers treat the government budget as the budget of a prudent household that always strives to accrue savings.
Until we understand what the thing we choose to call “money” is and how it is created (and destroyed) and the relationship that exists between government and private sectors, it will always seem perfectly sensible to us that we need to demand that our policy makers conduct themselves in such a fashion, putting aside savings for a rainy day.
Without such basic insights, it will never occur to us that this might not be beneficial at all but could actually be harmfull.
In the absence of a large external surplus, the government sector can only run ongoing and expanding budget surpluses so long as the private sector is desiring to do the opposite. It is easy to note that the Howard government surpluses were matched by a corresponding private sector deficit, manifest as the largest run-up in household debt in history. When we look back down the timeline, we see that this situation is very abnormal. I wonder what thoughts would cross the public’s mind if they knew that the historical norm is for the government to run fluctuating (usually smallish) deficits most of the time?
The other historical norm is for the private sector to be a net saver, as Fran alluded to. But this is only possible for us as long as the government acts as a net spender – but how are they to do this while we collectively demand the opposite? After the biggest private sector debt binge on record, sooner or later we must go back to being net savers again. And then we have a problem – as a matter of accounting, the government sector and the private sector cannot both run surpluses at the same time. The attempt can only squeeze liquidity from the economy, setting up a recessionary bias.
So our collective misunderstanding of the government budget as a household budget leads to calls for courses of action that sabotage the future – all for the want of a few basic insights.
That’s why I think it’s important that the public debate progresses beyond the flawed analogy of a household budget, embraces the basic reality that is the modern fiat money system, understands that surplus and deficit are not two unrelated things but are two intimately related halves of a single identity. Not all misperceptions are harmless.
Fran wrote: “States, unlike human beings, have an infinite working life. They aren’t planning to retire to the country, or even to stop growing. Moreover, the mere fact that they are in debt doesn’t mean that banks and instituitions won’t lend to them, or refinance debt”
What happened to Greece, Spain, and the others – you may eventually be lent more money, at much higher interest rates, on condition that you manage your economy on dictated terms.
“Borrowing money was spoken about in terms that were essentially Faustian. If you borrowed money it was like surrendering your soul”
Soul? Is there some Catholic guilt involved too: ‘you shouldn’t have indulged yourself and you’ll have to pay for it later’?
That said I’d be one of those people who would feel uncomfortable about a government printing money without any check. (Could we do without mucking about with taxation, and just have the government print the money it wanted to spend?) It’s important for individuals not to spend their lives in debt, we should all live more frugally/sustainably, and it just seems natural to make some correlation with managing the community’s finances too – there’s no such thing as a free lunch.
@37, I have provided this link to the Centrelink site.
Having $5,500 or more in liquid assets if single, or $11,000 or more for a married couple or single person with children means you will not receive the dole straight away, or in other words until you’ve spent your nest egg.
Assets which are not assessed under the assets test – exempt assets – include:
* your principal family home and any permanent fixtures such as wall-to-wall carpet and wall heaters, and either:
o up to 2 hectares of privately used surrounding land on the same title document as the home, or
o all land greater than 2 hectares on the same title document as the home if you are eligible for the new rules for farmers and rural homeowners.
Flynnboy, you have not persuaded me of anything, unfortunately. Private households/businesses cannot print money but they can invest their money (in a variety of assets) or take out loans. I really don’t understand the point you’re making.
Hi Flynnboy,
Thanks.
No argument that a better understanding of the “machine” would be a good idea. Not only amongst the public, but also amongst the politicians and all the professional advisers. Indeed all of us. As you say, much confusion abounds.
Nor would I argue that the government budget is akin to a household budget, or for that matter a business one. Not only are its purposes somewhat different, so is its timescale and the nature and quality of its income. I have no problem at all with a government running frequent smallish deficits, particularly if the spending is done tolerably well from a long-term societal perspective.
Still, it’s worth remembering that confusion can also arise from using the “financial balances” approach. There’s a danger, I think, of occasionally blurring the boundaries between these balances and savings in the more conventional economic sense.
“Financial balances” are just residuals, the net result for any entity or sector after investment has been subtracted from savings. If one focuses too closely on these derived figures, it’s easy to forget the larger activities from which they’re born: gross income and expenditure, gross savings, credit growth or contraction, gross investment and fixed capital consumption and the resulting net savings. All the things that constitute a real, living, breathing economy can all too easily end up being sidelined. Not to mention the infinitely complex interrelationships that in turn lie behind each of these aggregates.
As an example, I think it’s risky to draw the conclusion that the run-up in private sector debt in Australia was simply the mirror image of the surpluses run by the Howard government. After all, more or less equally impressive increases in private sector debt occurred elsewhere in the world with governments that ran persistent deficits, like the US.
The private sector, if its gross savings are merely sufficient to cover its gross investment, is in fact saving (how much depends on the size of the gross savings and investment). That investment is accruing to its capital account, and (presuming the investments on balance are productive) will produce income into the future. It doesn’t need to produce a “financial balances” surplus to save. Nor does it, therefore, need the government to be running a deficit in order to do so. This is an example of what I mean about the potential dangers of looking at “financial balances” in isolation. It can all too easily give a misleading and simplistic picture.
None of which is to say they’re not a useful tool. They are, in my view, not only to better understand interrelationships (both internal and external) but also to avoid hoping for impossible things.
Anyway, that’s more than enough for me for now. Thanks again for the long and interesting response.
Ingolf, when you have time, could you flesh out what you mean by “risky” a bit more? In particular, I would like to know what kind of relationship exists between private sector debt/ government surplus. There is a relationship between the size of the private sector and the amount of tax which goes to the government and there is probably some kind of indirect relationship between the amount of money the government is spending on infrastructure and the cost of doing business etc. But I think you and Flynnboy are talking about something different…
This would in fact be what most people would understand when they think of “household spending”. In fact even wrt mortgages, real estate being hopefully a performing asset the key point is investment and in particular the effectiveness of investment. How capital is allocated and what it returns.
Getting bogged down in monetary alchemy is perhaps interesting for the US as they have the global reserve currency, but Australia really needs to Keep It Simple, IMO.
No-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o!
Joe, I simply meant that while it’s true by definition that government surpluses (in the absence of a positive external balance) must mean negative private-sector financial balances, this is but one factor influencing the degree of debt taken on by the private sector. In the five years to December 2007, for example, general government debt (i.e. including states and local government) in Australia came down by a total of about $43 billion while private sector debt went up by slightly over $1 trillion.
The broader point I was trying to make is that all these economic variables are bound together in an immensely complex and dynamic web. There are accounting identities (such as “financial balances”) which are by definition true, but they don’t necessarily tell us all that much about what’s going on behind the scenes, or the direction of causation.
For example, when an economy is experiencing a credit boom, government deficits will be much reduced or even turned into surpluses due to a combination of reduced automatic expenditures (like unemployment benefits) and, more importantly, great streams of revenue from all the boom related economic activity, income and profits. The reverse applies, as we’ve recently seen, when credit boom turns to bust. In both cases, I think the causation runs more from credit influenced private sector activity to the government financial balance than the other way around. Only more though, not entirely. Government decisions obviously also have an immense influence on the private sector.
So, I was really arguing for a more holistic perspective, one a little less wedded to particular tools and perspectives and more open to the remarkable interactive complexity of credit-based mixed market economies.
Thanks for the discussion Ingolf. It’s always good to exchange veiws and insights with someone who has had exposure to the same thing but may have reached somewhat different conclusions.
I used the run-up in household debt in Australia merely as an example. As we know, this is not the same thing as total private sector deficit but it does give us a hint as to what has been going on.
I don’t think it changes the fact that the government sector and private sector are unable to both deleverage at the same time and that there are consequences for attempting such.
Anyway, we are certainly living in interesting times at the moment. As I watch events unfold, if I consider that the facts have changed or if I have misunderstood them in the first place, then I will likely change my mind.
Thanks again.
“Flynnboy, you have not persuaded me of anything, unfortunately. Private households/businesses cannot print money but they can invest their money (in a variety of assets) or take out loans. I really don’t understand the point you’re making.”
Hi Joe. Only net sovereign government spending (deficit spending) can add net financial assets (Aust dollars) to our system. Lending by banks adds nothing net to the system.
“I think the causation runs more from credit influenced private sector activity to the government financial balance than the other way around”
I certainly agree with that Ingolf. The Howard government surpluses did not “force” the private sector into deficit – the private sector as a whole simply desired to go whoopee with credit, mostly I think as mortgage debt.
But I think the basic thrust of MMT – and I’m interested in your opinion here Ingolf – is that as long as the external sector is in deficit (a more or less permanent situation with us) then of the two remaining sectors only one – the government sector, or more specifically the sovereign government – is capable of adding the net financial assets to the system needed to facilitate economic growth. After all, their spending is the only source of the creation of the fiat currency we use.
If the government sector is draining net financial assets from the economy by running a surplus, growth needs to be powered by increasing private sector indebtedness.
How are we to grow if there is a net drain of $AUSD out of circulation over an extended period? If more is draining out through the external sector than is coming in and the private sector is desiring to accrue net savings (the historical norm) while at the same time demanding that government act “prudently” and drain more out than it puts in – where is the liquidity for growth to come from? How do we keep growing on a shrinking pool of $AUSD?
Note how our policy makers are responsive to the public’s demand to budget as though they were a prudently saving household. See the major parties falling over each other to promise to deliver a bigger surplus in a shorter space of time than the other. I have only been gone a few hours and it’s the first new post on the blog when I get back.
This is why I think it’s critical that we move beyond the notion of regarding the federal budget as being a household budget. If the public knew that the federal government’s spending is what gives birth to the currency we all use, they might think differently.
Roger Jones @ 44 (please note Bean Counter @ 37) and Don Wigan @ 55 have just been fished out of the spam bucket.
Don in your case it may have been the exclamatory “no!”
Looks like an interesting film coming out, “Kingdom of Survival”. Link to the trailer and an interview with Noam Chomsky. Joe Bageant is going to be on “Q and A” next week.
The Kingdom of Survival
Sorry I’ve been so long getting back to you, Flynnboy; I was out for much of the day.
The financial system, and economic activity more generally, isn’t as reliant on government deficits as one might think.
When a deficit is monetised (in other words, when the RBA buys securities from the government and provides them with new cash), there’s certainly a net addition to the monetary base, and thereby to financial assets more generally. Equally, if it runs a surplus and uses the proceeds to pay off securities held by the RBA, then the monetary base (and financial assets more generally) are to that extent reduced.
However, Australian government securities are only one of the assets purchased by the Reserve Bank (RBA) and they now tend to represent quite a small part of RBA assets. In August this year, for example, only $4.9 billion out of total RBA assets of $78 billion. By far the largest chunk is in holdings of foreign exchange and gold (total $48 billion). The RBA also holds state and local government securities as well as private sector securities, some outright and some via repurchase agreements.
So, if the federal government is running persistent surpluses, the RBA need only expand its purchases of other assets to offset the loss of government securities so that the monetary base stays stable, or (more usually) continues to grow over time at what they regard as an appropriate rate. It’s not reliant on a constant supply of government securities to maintain the monetary base. (Prior to the mid to late 1980s, they did play a far more important role, often representing 50% or more of total RBA assets).
In the US, by way of comparison, the role of government securities on the Fed’s balance sheet is still much more important. Most of their assets are either Treasury securities or quasi government securities like those issued by or backed by the GSEs. The principle is the same, however; in the depths of the crisis, the Fed took a lot of private sector assets onto their balance sheet. If the day were ever to arrive when the US government was running consistent surpluses, and the monetary base was in danger of shrinking for lack of supply (improbable scenario, I know!), the Fed could simply be authorised to purchase other assets (foreign exchange, gold, private sector assets etc etc) instead.
It’s perhaps also worth remembering that back in the days when governments were a tiny part of the economy, and the monetary base was gold and/or silver, economic activity also proceeded perfectly well.
As for the effect of government deficits which are not monetised (historically far, far more common, of course), it certainly does add to net financial assets. The government in effect provides the means (via the deficit spending) for the private sector to purchase the government securities they issued to “finance” the deficit. The cumulative result of all of this in Australia now stands at $147 billion in outstanding government securities (up from $61 billion two years ago). Still, it’s not that significant when set against, for example, net household assets of about $4.5 trillion.
So, while the government has an exceptionally important role to play (for all kinds of reasons), I think it’s also important not to overestimate our reliance on it when it comes to things like financial assets. Or indeed economic activity more generally.
None of all this, by the way, is intended to be a comment (favourable or otherwise) on government deficit spending. That’s an entirely separate discussion.