Australia is in the midst of a federal election campaign (the election is September 7, 2013), which while short by, say US standards, is no less asinine. The sophistication of economic commentary from both sides of politics is non-existent even though every day there is a mountain of such commentary. It is a very trying period and I have been trying to avoid engaging with it as much as possible bar the almost daily press interviews about the latest announcement of release. Here are a few examples of what a sane economist like me has to put up with. The problem, of-course, is not that my sensibilities are being upset. Precious me! The real problem is that the public are continually being confronted by economics editors, professors and others who provide misleading and/or incorrect economic analysis, which distorts the way in which peope (who vote) think and act. We are really in flat earth territory at the moment and the future generations will not think of us very kindly for both our ignorance and the damage we leave for them.

Last week, the Australian government issued an – Economic Statement – which provided updated estimates from Treasury (since the May 2013 Budget) of the state of the economy and the budget position. The good news is that the Government is allowing the deficit to rise after a year of contraction as part of its obsessive and impossible pursuit of a budget surplus this year. The bad news is that the Government is not allowing the deficit to rise enough and as a result unemployment is forecast to rise significantly above its already high levels. The reason? It is still trapped in its obsessive budget surplus mania even though the reality is forcing them to postpone when they claim they will deliver that outcome. The conclusion? The Treasury clearly is reeling from its massive forecasting errors (revenue is $Axx billion down of what they forecast in the May 2012 Budget and $AxX billion down on what they forecast in the May 2013 Budget). It is also realising that they cannot fight against a significant private sector spending slowdown.

The debates that are played out in the parliaments around the world at present about the state of public finances are not new. The debates, which are amplified by the media who typically do not understand the issues involved yet mostly take a conservative position because they can sell more products (papers, on-line access etc) that way, appear to be pressing and all sorts of emergency language is used. The characters who write these doomsday scenarios mustn’t ever reflect on what they say from one day to another relative to the historical record. Their arguments against the use of budget deficits and invoking doomsday scenarios regarding public debt reduction are not new. Given many of these conservatives are also into the bible (pushing evangelical diatribe) they might have reflected on – Ecclesiastes 1:9 – which noted that “What has been will be again, what has been done will be done again; there is nothing new under the sun”. Indeed not. One character in history with a penchant for religion (Mormonism) however had some insights in the operations of government budgets and public debt. He was also a long-time former Chairman of the Board of Governors of the US Federal Reserve System.

The Fairfax press published the latest opinion piece from one of its economics editors (Ross Gittins) over the weekend (July 20, 2013) – The budget facts that Canberra isn’t telling you. If the stated facts are what Mr Gittins thinks apply to a sovereign economy such as Australia, then it is fortunate that Canberra is staying quiet. He claims that the fiscally prudent position is for governments to run a balanced budget on average every decade. He also says that the government doesn’t really have to do anything other than let the automatic stabilisers achieve that outcome once the structural settings are in place. The problem is that these sort of mindless fiscal rules are rarely going to achieve appropriate outcomes, when the latter is expressed in terms of full employment objectives and other real outcomes. In the current context, where there are major private sector balance sheet risks and an ongoing external deficit of around 3.5 per cent, the pursuit of a balanced budget would be an act of vandalism. Further, given the non-government spending dynamics, it is likely that continuous budget deficits will be required into the indefinite future.

I read an interesting research paper from staff at the New York Federal Reserve Bank (published March 2013) – How Much Do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data – which reported on an innovative study of the links between problems within individual banks and the investment performance of firms that deal with those banks in the context of highly concentrated banking sectors. While the study uses Japanese data, the findings are relevant for all nations, given that banking is typically highly concentrated across all advanced nations. The interesting conclusion that I draw from the study is that short of bank nationalisation, the findings provide support for the creation of public banks which utilise the currency monopoly enjoyed by government to provide a more stable environment for business firms during times of crisis in the private banking sector.