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.

It’s worth putting the negotiations in a different perspective.

The crisis can tell us a lot about two inter-related processes, both of which are now coming to a head. A declining empire is faced with unpalatable choices, and its political class shows its true colours.

It’s all quite neatly encapsulated by Michael Perelman, who opens with a striking quote from Joseph Schumpeter:

“… public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare — all this and more is written in its fiscal history.” He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. “the budget is the skeleton of the state stripped of all misleading ideologies.”

Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.

In a similar vein, there’s Jodi Dean, who I think is wrong to surmise that Barack Obama is rapt with delight about the situation, but otherwise makes some telling points. Where she errs is to imagine a ruling class frenzy, as if the “executive committee of the bourgeoisie” were plotting around the White House cabinet table. What I suspect is much closer to the truth is that the fight over priorities and political advantage is laying bare the underlying logic of US government and politics.

What we’re seeing is a governmental edifice that can no longer ensure a reasonable standard of living for a fast growing number of its citizens, and whose fiscal reliance on the rest of the world is now becoming more evident. At such a moment, denial and ideological smoke and mirrors shape politics, even if, as Perelman suggests, the real nature of the US polity is revealed in the fiscal numbers themselves.

But I don’t think the politicos are wholly aware of that – it’s something akin to the sort of partisan maneouvring and ideological obfuscation that might have characterised the elites of the Roman Empire as it began to implode in the 3rd or 5th centuries.

Hockey didn’t get off to a good start on Monday night on Q&A, when he repeatedly appeared not to understand that a reduction in small business tax rates is not “spending”. Will he be able to get by without any clangers? Will he actually say anything substantive?

This is an open thread for instant commentary, reaction, links and analysis.

Update [by Kim]: Hockey avoided questions on detail by flicking a pass to Andrew Robb, though he did sack Ken Henry in response to one question.

Peter Martin has posted the Coalition’s list of savings, for what they’re worth, which probably isn’t much.

According to the government, he needed to identify at least $15 billion in spending cuts to fund the promises he’s already made. According to just about everyone, he needed to outline some substance on policy, and how he would return the budget to surplus – it’s a fundamental requirement of his discredited “debt and deficit” message. And since he’s opposing a wide range of measures already factored into the government’s numbers, the onus is even more strongly on him to deliver.

Perhaps it’s inconsistent with his claim that the Treasury numbers are unbelievable to actually outline a fiscal policy. Or, as we heard tonight, perhaps Joe Hockey will tell us all next Wednesday.

Abbott should have flicked the switch to policy positivism. Instead all we got was carping, negativism and a speech almost entirely dominated by attacks on Kevin Rudd’s record. I kept waiting for him to outline something substantive, but to no avail. We were drowned in nostalgia for the Howard era, and the strange assertion that we’d been saved from the GFC by the resources sector alone – apparently the reason why he wants the election to be fought on the Resources Super Profits Tax. Economic management, Abbott style, it would seem, is all about fat profits for the mining industry, and a free ride from China’s demand for energy.

What remains to be seen is whether Abbott will ever have anything to offer Australians, aside from the twin claims that life was much better under Howard, and that Rudd is a spendthrift. Evidently, no matter what the Rudd government did, he was always going to run his “great new tax on everything” scare campaign, even if the RSPT isn’t the best candidate. But we’re still hearing nothing but negativism from Action Man Abbott. The recitation of total nonsense about the size of government always being smaller under the Coalition (only one of the demonstrable lies Tony told) won’t cut the mustard.

NB: Previous budget reply discussion <a href="here.

Elsewhere: The Twitter hashtag for the Budget Reply is, naturally, budgies.

Update: Still Life With Cat, Bernard Keane.

Update: I thought Abbott’s attack on the public sector was worth a post of its own.

Update: Ben Eltham – Someone Lend This Man An Economics Textbook.

For those who don’t want to wade through all of it, Bernard Keane has analysed Abbott’s address at Crikey:

Yesterday’s economics speech by Tony Abbott was a major disappointment, confirming rather than reversing the impression that the Opposition leader and economics don’t have much more than a nodding acquaintance.

Keane’s on the money in suggesting that it’s thin gruel, when you strip away the decontextualised Keynes quote and the statistics. Its sole take away message appears to have been contained in the twin claims that the 1997 Asian Currency Crisis was a bigger threat to the Australian economy than the Global Financial Crisis (demonstrably untrue, but in the Abbott style of “our crisis was bigger than your crisis”) and that Tony is not actually the ghost of B.A. Santamaria but rather imbued with the values of Peter Costello and John Howard. (It would be interesting, of course, to discuss precisely what constituted the values of Peter Costello and John Howard.) So, it’s really an attempt to reassure the business horses who were stampeded by Abbott’s recent thought bubbledom.

For what it’s worth, I thought Joe Hockey made a better fist of defending a very shaky brief on Lateline last night than his Leader, though Tony Jones was able to expose the contradictions in what passes for reasoning among the Coalition – the Liberals stand for low taxes, but on the other hand, we might need an awful lot of levies because of Labor’s terrible wasteful spending. What Hockey did show, as did Abbott, is that the cupboard on either substantive policy measures or the savings that would need to be identified to make the ‘debt’ line more than rhetoric is bare. It’s certainly not impossible for the Liberals to advance a fiscal policy from opposition, but they’re always waiting; waiting for Henry, waiting for the Budget. As with health, this mob don’t have much of a clue what they might do if they were elected. They just know they’d like to be.

Elsewhere: Public Opinion.

Update: Ben Eltham in New Matilda.

In other Queensland election reports at PPT, the latest Galaxy Poll is more bad news for Labor, the Leaders’ Debate was a bit of a fizzer, some think John Wanna may be a game-changer, and the two major party campaigns launch today.

Update: The Labor boat starts to leak.

Quiggin picked up on recent remarks by Lindsay Tanner about discipline in the budget process. “Efficiency dividends” are much in the air at the moment, and Tanner appeared to be arguing that the cause of fiscal probity required a razor to be applied to public sector spending, with the goal of eventually returning the budget to surplus.

While Quiggin agreed that the latter goal was desirable, he suggested that “waste” wasn’t a high proportion of commonwealth spending, and argued that it made more sense to scale back the next round of tax cuts. The scheduled tax cuts are highly regressive, and give little or nothing to low and middle income earners. Nor is bracket creep a huge concern at the moment, and the rivers of revenue to be distributed have receded rapidly.

The government seems to be scaling back, or delaying a number of its commitments. While pension increases are apparently electorally sacrosanct, measures like maternity leave are on hold. Julia Gillard’s response to the Bradley review is a good example of this process at work. The government has accepted most of the review’s recommendations, but pushed out the implementation dates for those requiring large additional expenditure. The higher education sector is being told to hold its horses.

There’s something like a replay of the perennial tax cuts vs. services conundrum going on here. But it’s got an interesting new inflection when the quantum of money available is much reduced – focusing in on the economic benefits of spending against permanent tax increases for the upper middle and high end of the income spectrum. I’m inclined to think that there’s some residual defensiveness about the “economic conservative” label at work here. What, one might ask Kevin Rudd, would a social democrat do?

To a large degree, most of this debate is highly ritualised. I thought Bernard Keane had a very interesting point to make today in a long Crikey piece where he argued that decision makers who are gleefully imposing a story or narrativising both events and their preferred solutions may be as much in the dark as the rest of us. The increased unpredictability of events, and of prescriptions as well as diagnoses in a time of crisis really foregrounds the artefactuality of sense-making work as people try to reduce uncertainty and simultaneously ensure that their preferred perspective becomes “common sense”. Aside from the really dire possibilities facing us all from a system which has precisely been characterised by distributed decision making and thus – by design – up until now resistant to centralised control, it’s been a fascinating study in both the sociology and social psychology of policy making.

It’s in no one’s interest, of course, to admit that they don’t quite know what is going on or that they’re frantically trying to impose a frame on the world economy for the intertwined purposes of politics and policy. It may be that we need different tools for understanding the social aspects of finance and market behaviour. It may also be that we need more research on exactly what drives “confidence” from a perspective which takes into account the fact that markets and investment decisions are far from random if driven by logics other than purely economic ones – what exactly is going on, for instance, when Geithner’s proposals send the Dow plummeting? It’s got to be both more complex and more interesting than the usual story (his presentation was poor, “investors”/”markets” were “spooked” by a “lack of detail” etc…)

One threshold such studies would need to overcome would be the notion that “the economy” itself is a reified sphere with perhaps only tenuous or tendential connections to the social and the cultural. Another would be the enforcing of the borders of explanation which are erected around events, and which often refer back to purportedly “natural” equilibria and explain far too much actual activity as in some way deviant. We need to re-embed the economic within the social, as both an analytical and a political project. As SocProf points out, Karl Polanyi can teach us how to do this. So I’d like to experiment a bit and characterise this post as a longish introduction to hers, which I’d now encourage you to read…

Speaking of Peter Martin, he’s posted a couple of interesting links on the same topic today – to Ross Gittens’ claim that Malcolm Turnbull’s opposition is “humbug” and to a study Treasury is said to be relying on to support the contention that bonus money will be spent.

There’s been a bit of press coverage this morning, and no doubt it’s a worthy thing to stimulate debate by proposing substantive policy measures rather than just advancing critique. It may be an even worthier thing to shift the terms of the debate, regardless of the merits of the proposed policy directions. We don’t see enough of this sort of initiative.

But I do wonder if the economists stop and think about the political feasibibility of their proposals.

The Rudd government does appear to have developed more backbone in holding or advancing a policy line in the face of attack. One good example was the risible attempt to talk a “Khevlani affair” out of nowhere, which probably got lost in the Julie Bishop noise (her one original contribution apparently being to think it very clever to argue that there’s a “whiff of Whitlam” about the Rudd government.) Trying to articulate together a bit of dog-whistling about the Middle East and memories of State Banks and the Whitlam era with the deficit/debt line was always a complex message and rather dumb politically at that, and I suspect that the Liberals are trying to persuade themselves of the Whitlam comparison in the hope that the Rudd government will be short lived (apparently forgetting Gough was re-elected to a second term.) What was really at issue was a technical (and rather neat) solution to a problem state governments have with bonds in accessing debt. Wayne Swan may have been reading the Fin Review last weekend and noticed unnamed bankers and execs bemoaning the fact that he worried about what Malcolm Turnbull said at all, as “no one else did”, but in any case, he made it clear that if he decided an infrastructure bank was a good idea, he wouldn’t be deterred by the opposition’s politicking.

Now, no doubt one could have all sorts of fun thinking up possible opposition attacks on the proposals of the eight economists, but that’s not the only political point here. They also have to pass muster through the gate of the government’s own political imperatives. While super is in the policy review mix, it would be a difficult sell to cut super – even temporarily and with the promise of more cash in hand from wages. Super, after all, is one of the pressure points – along with household wealth – where the global financial crisis really does have an immediate impact on voters’ psyches. And the temporary nature of the proposal is also problematic – I can hear employer associations screaming already that they’d have to maintain wages at the higher level employees had enjoyed and pay more in super when contributions rose. “Here, have some more money to spend for a while, but then we’ll force you back into saving it” – not the easiest of inducements, I’d have thought.

I’m refraining from comment on the merits of the proposals themselves – except to observe that I think some sort of independent fiscal policy is a fundamentally anti-democratic idea. And I’d also suggest that technocratic worthies have hardly distinguished themselves over the last little while – whether here, in America or elsewhere. But, again, this is just not the sort of thing any government is going to do.

It may well be that the economists in question think it’s better to advance such ideas in their policy purity before the game of sifting and compromise starts being played, but conversely, whether or not that game even begins is surely dependent on the initial political appeal and defensibility of such ideas.

Elsewhere: Joshua Gans and Catallaxy.