We learned last week that Joe Hockey plans to cut $70 billion from government spending (as he has to do to fund Tony Abbott’s Direct Action and parental leave policies, and to make up for all sorts of foregone revenue through opposition to various taxes). Hockey claims, unsurprisingly, that this is not a bad thing. Why is it not a bad thing macro-economically? Because getting the government out of the way will stop “crowding out” private sector investment.
A first point to make might be that presumes government has no impact on aggregated demand (and investment is premised on the expectation of future demand).
But, before you pile on Hockey, note that Julia Gillard’s stated reason for the whole “return the budget to surplus in 2012-2013″ thing also accepts the same logic.
Now, we might also like to question whether it’s the quantum of investment that’s the most important thing, or where the investment is going. That’s one thing that concerned Keynes. (Obviously, there has to be a certain quantum of investment, and I’m not saying otherwise.)
Here it’s worth understanding the difference between Gross National Product (the sum of all goods and services produced) and Gross National Income (how much of that value stays in the country). In Australia, there’s a pretty sizeable gap between GDP and GNI, which goes some way to explaining why there is limited “trickle down” from the resources boom. The other issue (or rather, one of them) with a surfeit of investment in resources is the effect it has on the exchange rate, which has obvious negative impacts on the rest of the joint, particular other export industries.
Note also that the self-interest of the mining industry is far from identical to the interests of the economy and Australia. Though they’ve done a very good job of convincing a lot of people otherwise.
Monetary policy is of very limited use in rebalancing things for a number of reasons, including the relationship between interest rates and the dollar.
So, you would think fiscal policy might help. It might be that something like…. a Resources Rent Tax would be a good idea. Or government spending to stimulate the rest of the joint.
But, of course, that, we’re told would be bad. Crowding out, etc.
Here we need to have a look at the rest of the equation – not just investment, but also demand and the anticipation of future demand and thus profit.
Fortunately, Philip Pilkington has written an excellent post on just this topic at Naked Capitalism.
I particularly like this:
Now, I can already hear the inevitable Austrian chime in. “Arg! You lying Keynesian totalitarian scum! The government didn’t need to invest to employ those five workers; another capitalist could have done so. You’re just a crypto-communist who wants the government to control our lives and tell us what to do! You hate freedom and liberty, ahhh! <3 Ayn Rand 4eva!”.
Now, I think you should read the whole thing (and not just the funny bit), but here’s the conclusion:
As we can see, profits actually come from some fairly unusual sources. Government spending up to the point of full employment actually increases profits, while workers’ savings diminishes them. This ties into the MMT argument that government should offset workers’ desired savings. As we can clearly see from the contemporary situation, this happens in an almost automatic manner; as the private sector saves and pays down debt in the current uncertain environment, the government goes into deficit in order to float profitability.
We should also note that capitalist economies are not perpetual motion machines. Many people seem to have a vague inclination that capitalist economies are somehow ‘self-generating’ and, for example, that government spending or private debt-financing are exogenous or external factors. This is clearly not the case. Money enters the economy through either government spending or private sector indebtedness. These then wash through the economy and eventually turn up as profits. These facts need to be front and centre when public policy is considered.
One of the big conundrums of social democracy is that measures to increase profit are also (up to a point) in the interests of workers, precisely because we live in capitalist economies. One of the ways to deal with, if not dissolve away, that conundrum is to pay attention to the distributional question of the balance between return on capital and return to labour, and the effects of fiscal policy on the business cycle. That’s not really happening now.
It should be though, because the joint is looking pretty stuffed.
Nostrums about debt and deficit need to be crowded out by some actual fact about how capitalist economies work.
The question of when Labor returns to surplus may well be academic. The odds of a by-election dramatically shortened this morning.
Ah Kim, you expect everyone to wade through Bill Mitchell’s voluminous blogs on Modern Monetary Theory before participating as well as Philpott at Naked Capitalism.
1. government deficit – currently every self funded retiree is buying government bonds. The government issues bonds to cover its deficit. Although politicians decry “government deficits” our financial markets need government borrowing to set the base interest rate.
2. government activity crowds out the private sector. In the Australian experience government activity has kickstarted private activity.
Successful Australian companies like CSL and Cochlear are the result of CSIRO and government organisation research.
Many of Australia’s tradesmen were trained in government departments. Our miners don’t train apprentices they hire experienced tradesmen.
3. GDP vs GNI The corporate profits in Australia are the largest portion of GNI in history. Workers are on historical low share of the GNI. Australia is becoming a very unequal society with the rich getting rich and the middle class and poor getting poorer.
4. Return to surplus. A stupid hope that will damage the livelihoods of the many vulnerable Australians who are underemployed, casually employed or on welfare.
When I am in charge I will get Professor Bill Mitchell, CoFFEE – Newcastle University, to supervise return to a full employment economy
So…….exactly what are you saying?
That the much-pilloried poster named Andos was perhaps not quite the raving lunatic many said he was.
And that the school of thought he was advocating might not be complete hocus-pocus and fraud but a valid set of observations as to the actual functioning of the monetary systems used by modern economies, including our own?
Apologies if i have misunderstood something Kim – I only read this blog infrequently.
Sorry, Boy from Flynn, I was away for quite a while, and I’ve missed the comments you refer to from Andos, so consequently couldn’t say anything meaningful about his perspective.
@2 – billie, I didn’t read all of Bill Mitchell’s stuff, and I don’t think a huge knowledge of MMT is necessary to evaluate the broader point. I did find Philpott’s post very illuminating, and quite a pleasurable read.
The issue should be about the actual deficit spending. Personally I think a nation should have a lot more to show for 200 plus billion. Hey, but it saved a number of (governments own figures) jobs. It works out to something around 400, 450 thousand for every job saved.
Hey, but it was all about getting the money out there quick. Well, they should of dropped it out of planes and held weekend parties and such.
The present government is a disgrace that in the years to come will rightfully wear the tag of managment morons and economic knuckleheads.
from http://economix.blogs.nytimes.com/2011/08/09/budget-cutting-as-an-experiment-in-austerity/
According to http://www.aihw.gov.au/publication-detail/?id=6442468044 $60 billion was the expenditure for cash payments in the welfare sector.
I’d hazard a guess and say that there’s some of that saving that the Coalition needs right there.
Paul Krugman would advocate the Greek Government spending more. Paul Krugman had been advocating the Japanese to print more money for the last eleven years and after thirteen “quantatative easings”. Paul Krugman never actually bothers to say how much money should be spent, borrowed or printed. In Paul Krugman land, it’s never enough until it magically works. Krugman economics is true voodoo (faith) economics at work.
I think Paul Krugman has personal issues, I also think he would like to see a world most people wouldn’t. I get the feeling he wouldn’t mind a total collapse of the current economic system. If he can’t be on top of the pile nobody can!
Probably spoilt as an acheiving child, and a good thrashing would’ve of done the world of good.
Naomi Klein in The Shock Doctrine says that Bush II oversaw small government in the USA. Government services were outsourced to private contractors, the government departments became too small to oversee the contracts to evaluate whether they had done the job contracted and there was accountability on spending. Thus in the Iraq war when the US Army moved out they were replaced by contractors supplied by Halliburton, owned by Vice President Dick Cheney. Halliburton supplied the forces in Iraq with munitions, food etc
The Liberal Party will follow the US Republican playbook and gut the public service. Government functions will be undertaken by mates who will not be held responsible or accountable. There will be limited auditability of their functions because they will be “commercial-in-confidence”.
Private operators have made the following more expensive
- privatised electricity system in Victoria
- privatised immigration detention facilities
I’d be slow to throw around the phrase “economic knucklehead”.
There’s a little thing called the multiplier effect. That is, x number of people stay employed, they will continue to spend y, which means that there is a constant level of economic activity and other jobs aren’t imperiled by falling demand. Conversely, a rise in unemployment starts a cycle which leads to more, as aggregate demand falls. The whole point of the post is the positive counter-cyclical contribution of government spending in all this.
Ok, Rob b, you’re going into moderation. We’re interested in arguments here, not your personal opinion of Paul Krugman or speculation about his supposed real opinion or childhood.
Argue the point and be civil or find somewhere else.
(S)he ought to be modded for this string alone:
Probably spoilt as an acheiving child, and a good thrashing would’ve of done the world of good.
The good ole multiplier effect. It’s a good theory, and so is the royal roulette system. You just keep doubling up on black/red until you win. The theory unfortunately comes up against house rules. The house has a bet limit. The world of economics also has rules. One being you can only spend/borrow that which somebody is willing to lend.
When your biggest lender (China in this case) is telling you there’s a problem, you have a problem.
If spend, borrow and print, ala the money multiplier effect, was such a rock solid theory, Africa (and a couple of others) would be the jewel in the world economic crown.
Nations don’t create wealth by fiddling around with means of exchange. The means of exchange is just that, and its only value is the value people place in it. Nations create wealth with production and trade. Think 1970, now think china and America, now think present day.
The “civil” prosecution rests its case.
acheiving
I before E except after C
Sunny Jim @ 1:
“The question of when Labor returns to surplus may well be academic. The odds of a by-election dramatically shortened this morning.”
If MMT is correct – it’s leading proponents insist that it is a DEscription of the actual functioning of modern monetary eonomies, characterised by floating exchange rates and non-convertable fiat currencies, while the PREscriptions advanced by it’s typically left political-leaning adherents are something else entirely – then no government Labor or otherwise is likely to succeed in returning a surplus for a considerable distance into the future.
As a matter of basic national accounting, for the total government budget position to be in surplus, the overall private sector must be in deficit – running down savings, liquidating assets and racking up more and more private debt. Or there needs to be a very large and sustained external surplus. The private sector in Australia appears to have reached a debt saturation point and is unable to continue spending more than it earns – so as a matter of accounting, the government budget will remain in deficit and attempting to slash government spending in order to “fix” the deficit will be both futile and damaging.
I am not an economist but if someone can demonstrate in lay terms that these simple accounting realities (sectoral balances) – they are not theories or opinions or political positions of any kind – are wrong or fraudulent, I would like to hear how and why. Seems to make basic common sense to me.
Rob b seems to believe what he reads in the newspapers.
Australia has done far better than other countries in the past 5 years. This summer all the tourists in western Europe were Australian and even the ever snooty Parisians and Venetians smiled nicely as they explained things slowly in English and took our money. Its actually so bad that prices for coffee and food were not subject to their standard summer surcharge so that its more expensive to travel in Oz now. ie Breakfast, lunch, dinner and transport was Eu35 and morning tea and gourmet pie lunch for 2 in Oz is $47.
Economists say that Australia should be comparing its economic performance with Canada because both countries are similarly blessed with minerals that the extractive industries want to feed the demand for commodities in China and India. I will see if I can Google it.
According to the OECD at conference in Sydney Sept 2010 Australia did better than Canada on many measures http://www.oecd.org/dataoecd/28/56/46180007.pdf. [maybe its politic not to bite the host] but Australia had lower female participation in workforce and higher obesity rates than Canada
Billie, Australia did perform much better than America and Europe. The two major reasons are that Australia is a primary producing nation, and not heavily financial sector reliant. Australia still at least to this point trades stuff. The word stuff meaning something tangible that can actually be used for consumption or for making other tangible stuff.
Australia was also starting from a much better financial position. Yes, debt does matter, and Australia having no sovereign debt, allowed policy makers a much greater flexibility. I’m ambivalent about the Australian GFC deficit spending, I doubt it made much difference or was even needed, however it follows what is accepted as mainstream economic policy at this time, so its something that probably would’ve have taken place no matter the look of the government.
I don’t have a problem with debt or deficits. In fact debt is a necessary tool throughout the business cycle. I have a problem with waste, and I have a problem with financial stupidity. People shouldn’t borrow for depreciating personal items, and government should borrow money for items in the best interest of the nation as a whole.
Pink batts for example are a personal property issue. People either choose to purchase them or they don’t. I don’t care and neither should the government care. Perhaps the government should offer to build people a pool or tennis court, maybe even a granny flat. Where does it end?
When we buy something, we forgo something else. That’s another economic house rule. Pink batts or perhaps life changing subsidised medicines etc. I know what I would choose, and I’m sure all responsible people would choose the same.
Thanks Bob b.
Pink Batts benefit the dwellings they were installed in. The occupiers are warmer in winter and cooler in summer so they use less energy for heating and cooling which may reduce the demand for electricity which may reduce the coal extracted and burnt to produce the electricity, ie less carbon in atmosphere.
Pink batts were installed by young men climbing in rooves. these young men would have been unemployed. because they remained employed they rented flats, ate out, bought clothes, food and spread the money they earned through the economy. When the work ran out they moved onto other jobs as the building industry picked up.
There could have been better supervision of the program by the Department of Infrastructure but it had been disbanded and department of environment didn’t have the experience base.
“People shouldn’t borrow for depreciating personal items, and government should borrow money for items in the best interest of the nation as a whole.”
So true, but governments aren’t people and should play by macroeconomic rulebook. The government did not borrow to stimulate the economy, it ran down its surplus. We will have to agree to disagree about whether pink batts were in the national interest. The alternative was to spend money on nation building infrastructure but there would have been no money spent in Victoria and New South Wales for 4 years while planning approvals were sought and gained. As 2/3 of population live in these states, programs that let the most populous states wallow in recession would be political suicide. So what the pink batts program spread mney through all regions of Australia quickly when it was needed most.
To repeat governments are not people and do not face teh same consequences for their actions. When a person overborrows they have a problem, a government controls the Mint. When there is the threat of high unemployment the government can lower interest rates to make it easy for business to employ more people, or it can create jobs. Pink batts was about job creation
Billie, the pink batts was about giving people “free” stuff in the hope of buying votes. Why pink batts? The PR department could run some crap spin linking free stuff with an important issue of the day. It what it is, but its not good policy, and it’s not the best interest of the nation. It was badly thought out cynical politics. Pure and simple.
I believe your arguments could be made for thousands of items, and any number of industries. It’s not the governments role to be using tax payers money improving peoples personal investments with non-essential items. Generations of people paid for their own batts and survived, the present would’ve as well.
A government is always in the black because it has a mint? How’s Zimbabwe doing? They now have a billion dollar note. They must be rolling in it.
Bob b, the unemployed don’t pay tax or buy a whole range of products from cars to biros. Multiply that by a few hundred thousand and there’s a lot less cash in the till and a lot more people on the dole.
There is a possibility that if the Australian Government had not run down the surplus and the economy we had done into recession we may have gone into deficit anyway, or at least reduced the surplus substantially
How so? Substantially reduced taxation on the income side and substantially increased government payments for unemployment benefits, and other family related payments as increased numbers of people became eligible, plus increased health expenditure. The effects of this impact on the Budget would have been felt for several years – a substantial increase in unemployment would not have been unwound quickly – we know that from previous recessions.
So you get a choice – a reduced surplus by government intervention, or a reduced surplus if the government didn’t intervene.
The choice the government made resulted in fewer people losing jobs, a useful investment in improved community facilities and reduced utility bills for people who had the pink bats installed.
Doesn’t look much of a choice to me.
before Toxic Tony took control of the Liberal Party there was bipartisan support for reducing global warming and supporting renewable energy so this energy saving projectwas well supported.
You should suggest more worthy projects, remembering that roads, rail lines, airports in the most populous parts of this country have a 4 year lead time and are capital intensive and do not absorb unemployed young men who could have mobilised to march on Canberra if they connected and organised.
Maybe a good thing the government didn’t issue Blackberries as part of the stimulus, eh?
dear billie
thanks for taking up the cudgels – i just haven’t got the heart for it. your point about the importance of “timing” in the delivery of effective relief to people & economy is well made. repeatedly.
Rob B at 15 seems to think “the multiplier effect” means “printing money”, so i wonder what value the currency of your ideas will have after they’ve been through the exchange rate mechanism of that receptor.
so again, i say gratefully: keep up the good work.
yours sincerely
alfred venison
One of the smart things that Rudd did in response to the GFC was to make one-off payments to people on low incomes instead of tax cuts for the rich or increases in welfare payments. It was smart because it directed money to people who were likely to spend it quickly in Australia rather than people who were more likely to either save it or spend it overseas. It was also smart because it was a one-off thing with no expectation it would be repeated or simply become a feature of the normal tax or welfare system.
The other related problem is that the need for stimulus/cooling down is varied. Right now we need something that stimulates job growth for the unskilled without adding to shortages of people with specific skills. We need something more targeted than increasing/reducing the deficit or increasing/reducing interest rates.
Ahh, thanks Flynn! Glad someone remembers me.
When you think about the global economy with an appreciation of MMT, the savage cuts being made to government spending in Europe, the UK, the US… is pure insanity.
Were you talking about something like this, Flynn @ 3?
http://larvatusprodeo.net/2009/07/07/i-hate-retro-acts/#comment-144237
A recession (two negative quarters of growth) is a natural part of the economic cycle. A recession cannot be avoided, it can only be delayed – a hangover can also be delayed by drinking more alcohol – for a period of time.
alfred venison “Rob B at 15 seems to think “the multiplier effect” means “printing money”, so i wonder what value the currency of your ideas will have after they’ve been through the exchange rate mechanism of that receptor”.
The reasoning (the gold reward) for stimulus spending is to induce the money multiplier effect. So where does this money in a depressed economy come from? Higher taxation? In a depressed economic environment, I don’t think so. Borrowing? Certainly, at least whilst the juice can be paid. The third and final option is of course is the African option or what is now so intelligently named quatatative easing ie the printing press.
To answer your question, simple refer to a three year gold and us dollar chart. Though, if you see yourself as a keynes type I wouldn’t bother. I also wouldn’t bother with a career in areas dealing with finance, as in making a profit. The intangible theory type places is just what you need.
dear Rob B (@31)
“stimulus spending [is] to induce the money multiplier effect. So where does this money in a depressed economy come from? Higher taxation? ”
In fact, yes. for a start, just making the rich & corporations pay the fair share they’ve been avoiding (with institutional & political help from all sides) since reagan/thatcher would be a good start. try that for four decades & we might turn the ship of state around – it only took four decades of cutting taxes from the rich & corporations to debauch it this badly. read warren buffet lately?
borrowing?
why not – let the state make credit & set the terms. “Congress shall have the power to coin money [&] regulate the value thereof” – a real bank of america. again.
Print money?
and why not? money is always backed by the state anyway, but we give the profit of creating & using this money to the banks, not the country. so why not take it back & create as much as we need to do the things we need to do? (climate, anyone? society?) maybe that’s worth a try – after all, other ideas, that don’t work, get tried again & again.
“simpl[y] refer to a three year gold and us dollar chart. Though, if you see yourself as a keynes type I wouldn’t bother.”
and I won’t – for the record, i’m emphatically not a “keynes type” – i’m social credit (from alberta) – go figure!
yours sincerely
alfred venison
A “social credit” type from Alberta?
Hehe, That may be.
But certainly not a “grammar” type.
Damn, a walking, talking “Socred”! I thought they were extinct!
“Ahh, thanks Flynn! Glad someone remembers me.”
Hi Andos.
I think the time is coming when our policy makers will not be able to avoid engaging with the ideas behind MMT. The belief that returning a government budget surplus no matter what is the only responsable economic course, is so entrenched in our political culture and in the minds of the electorate that policy makers feel compelled to take whatever measures they deem necessary in order to deliver something that will be very difficult – or more likely impossible – to deliver. If the private sector is no longer willing or able to keep racking up ever-ballooning debt and the external sector can’t be permanently in a very large surplus, then any course of action taken to directly “cut the deficit” will fail and damage the economy.
The massive credit-boom years of the private sector willing to be in deficit – thus allowing the government budget to be in surplus – are over.
The facts have changed – but we have not yet changed our minds. So I feel that a collision with reality is coming.
dear anyone
the present crowd of bozos that constitute the forty year old alberta (conservative) government make the 35 years of social credit under bill aberhardt & ernie manning look good – real good.
for all their fuddy duddy christian moralizing at least social credit collected the royalties from the oil corporations which the present lot haven’t been able to manage in two decades, eh!
yours sincerely
alfred venison
A return to the Coalition could be just the thing, I’ve noticed all week ALP cheerleader David Koch every day this week crediting the Howard/Costello government as the big reason why we weathered the financial crisis.
I’m disappointed to hear that Andos was pilloried here.
Rob B, it is not the amount of money that is spent that is the issue, it is the effect that expenditure of money has. And if it the multiplier you are referring to is the money multiplier, it is a myth.
Two quarters of negative growth is only a technical recession as defined by the political media, not economists. A better rule of thumb is a 1.5%-2.0% increase in unemployment over 12 months
I think events have proved Martin Parkinson correct. A budget that was stricter would have Australia close to recession now.
you only ensure the budget is in surplus if the economy is coming back to rude health. however if it is weakening for what ever reason then attempting to overcome the automatic stabilizers will merely ensure a slowdown does turn into a recession.
The Structural side of the budget is more powerful than the cyclical side on the economy but it is vica versa in terms of revenue and spending for the budget.
Kochie can cheer on anyone he likes but the Howard/Costello surplus – ie the Australian private sector’s deficit – had less to do with either that government’s economic management or the mining boom, and more to do with the biggest private sector credit boom in history which ran more or less coincident to the mining boom (though the link was largely unnoticed by most).
In any case, under the monetary system we operate a federal government surplus is not something that is “accrued” and spent later – there is nothing there. The surplus is merely an accounting identity indicating a net drain (and “destruction”) of $AUSD from the economy by the government. It is not in any way a savings account or a stock of money that is being built up and spent later. Both surplus and deficit are snapshots of point-in-time flows, not stocks.
Boy from Flynn @39
No gold reserves? No currency holdings? No Future Fund?
Grigory: no.
The Australian dollar is not backed by anything else, such as gold or US dollars. That’s history. It is a representation only of itself.
The concept of the fiat currency system we use (fiat=Latin:”let it be done”, in reference to something being created from nothing) is somewhat difficult. I must be very brief as I have to leave but consider that you have a house being built. The builders must measure everything in the unit of measurement – centimetres – in order to be able to make things come together.
So where did the centimetres come from?
Will the builder ever come to you and tell you that work has been delayed because they have run out of centimetres? That work must now stop until a new shipment of centimetres turns up?
Of course not – the centimetres are an abstract concept. They do exist, just not in the normal physical sense. Or imagine points on a scoreboard in a cricket match. Where are the points coming from as the score climbs? Is there a big chest out the back filled with points? Do they quiver with fear when Ricky Ponting comes out to bat because he might score all the points and the game would have to stop?
The Australian dollar is an abstract medium essentially similar to the centimetres and the scoreboard points. It’s obviously more complex than just that, but that’s it in a nutshell. I’ll have to leave you with that for now.
Huh?
Ah well, simple is as simple does, I guess . . .
Perhaps you should leave the fantasy tales to Stephen Donaldson.
So you display zero understanding of the concepts behind the actual day-to-day functioning of the monetary systems of modern economies (huh?), yet you know enough to be able to dismiss it out of hand?
As you say, simple is as simple does.
Well, having waded through all these comments I have concluded that none of you know much about economics but Rob b knows less than anyone.
Not to worry Pappinbarra Fox,
There’s more to life than economics. Dismal science anyway.
Boy from Flynn deserves some credit for introducing a note of levity on the thread. Writing fantasies about centimetres and cricket points and stuff . . .
Boy from Flynn is exactly right. Ask yourself where does today’s money come from? Sure you can say the customer, earned it from working, etc but before all of that, where did it come from?
Emphasis on today’s money, not the evolution of money.
Here is a bit of a YouTube Primer http://www.youtube.com/watch?v=pozWUCrP37E