Ignorance leads to bad policy

Today (and yesterday – being Tuesday in Australia now) I have been travelling. If you grow up and live in Australia everywhere except the local beach is a long way away. Sometimes it would be very convenient to just to be able to buzz up to San Francisco from LA or from New York to Washington or from Brussel to Paris. Australians never enjoy that sort of proximity. So travel is part of our growing up. I am used to it but hate it. Anyway, it always allows me to catch up on reading (especially fiction), listen to a lot of music and write a lot. Today’s blog focuses on recent events in Australia but the truth is that the principles raised are universal. You hear the same debates and responses all across the globe. The theme today is how ignorance leads to bad policy – my usual theme. But I am a persistent type and I am observing (via my blog statistics) that as I pursue this repetitive strategy – grinding it out every day – more and more people are coming to the site and many (most) are probably staying (IP address analysis). I have managed to keep the gold bugs at bay – they target easier victories – and the standard of debate is generally high. So my role is to keep offering it up and watching the numbers grow. I am in Boston now and will be talking about fiscal sustainability to hedge fund managers and bankers. Penetrating their world is a good thing. And then on Thursday, I board the jet and retrace my tracks – but then I will be close to the beach again. You mostly can’t have it both ways.

Australia’s new Prime Minister has started modifying the Government’s position on climate change and demographics. In this article (June 27, 2010) – Gillard shuts door on ‘big Australia’ – we learn that the she is:

… is breaking free from one of her predecessor’s main policy stances by announcing she is not interested in a “big Australia”. Former prime minister Kevin Rudd was in favour of population growth, with his government predicting it to hit around 36 million by 2050, largely through immigration.

But Ms Gillard has indicated she will be putting the brakes on immigration in order to develop a more sustainable nation … [she said] … “I support a population that our environment, our water, our soil, our roads and freeways, our busses, our trains and our services can sustain.”

And not before time either.

But the reason I drew attention to this article and policy shift is to demonstrate how skewed the policy debate becomes when there is no understanding of the basic operations of the monetary system. In this little example, we heard very soon after the PM made her statement from the serious-sounding Urban Taskforce Australia. This body is in fact just a front for property developers who prey on all landscapes in Australia (and elsewhere). They were in haste to put out a media release today soon after the Prime Minister had made her statements. Talk about vested interests.

They UTA said that

It would mean the economy would be 15 per cent smaller than it would otherwise have been …

They also pointed out that the tax base would be smaller and prevent the government from spending to develop adequate infrastructure. The sort of infrastructure the developers get for free and then lever off. But of-course all the discussions about tax bases are erroneous. The federal government will be able to create public infrastructure if it desires. It doesn’t need to raise taxes to do so because it is sovereign in the Australian dollar. Although I have been away for 24 hours and things might have changed. I just checked the news – still sovereign.

So ignorance of these matters is leading to a lot of public deception that we need a large population to have first-class infrastructure. We have all the real resources available in Australia to enjoy high levels of service delivery from public infrastructure. The developers clearly want a large population because they make more money. But the arid continent we live on is unable to support many more people than it already is straining with. If the public understood that the arguments being used by various lobby groups are just self-interested lies then the population debate would be more productive.

There is no reason the economy has to be 15 per cent smaller. If our education system is improved rather than trashed as it currently is and firms are encouraged to invest in capital intensive productions then rising labour productivity can easily make up for the smaller population. But our policy structures encourage private firms to engage in a race to the bottom – casualised work where workers have little incentive to invest in human capital; low wages, low productivity etc. If we keep following that strategy our productive potential will continue to drag and we will shrink.

There was also a lot of talk today in the media about how this smaller population policy will cause the labour market to constrain our growth potential through chronic skill shortages. I did a radio interview today (it is still Monday as I type) on Central Station (Sydney) with SBS Radio who asked me to talk about the impact of the PMs decision to cut back our “big population” aspirations on skill shortages. I had four minutes before my train to the international terminal came so I had to be quick. But my response was clear.

Since when should we rely on immigration to provide labour resources when we currently have upwards of 14 per cent of our willing labour supply idle in some way – either unemployed, underemployed or hidden unemployed? What has become of our priorities that we allow the business sector to demand we add new citizens when we don’t even use the talents of those we already have living here?

In the true full employment era (post WW2 to the mid-1970s), vacancies always ran ahead of unemployment and firms had to really be creative to attract labour. They had to offer interesting jobs which had embedded training opportunities to ensure they “moulded” the labour to the job-specific skills required. This was a time of great dynamic efficiency and skill development. Further, the public sector was a significant employer and offered substantial skill development capacity to the economy.

With the privatisations and public sector cutbacks of the 1980s and 1990s that skill development capacity was lost. It was claimed the private sector would pick it up. It never was going to. That was one of the litany of neo-liberal myths that supported their campaign to get their greedy hands on the public wealth at rock bottom prices.

Further, the persistently high rates of labour underutilisation during this period, meant that the private sector had their choice of the skills and they soon got out of the habit of “chasing labour”. They were no longer under pressure to structure jobs in an interesting way and offer integrated training opportunities with each paid work slot. Dynamic efficiency declined and we started to see skill imbalances.

Now the private employers think the easy way out for them is to import skills directly and forget about the millions of workers left behind by fiscal austerity over the last 30 odd years.

What the government should be doing is forcing the private sector to offer training or die of labour shortages. The private sector needs to get back to the culture that prevailed in the 1960s when they had to train or go broke.

And please don’t conclude I am an immigration phobe! I am not. I just think we should maximise the potential and not waste a single skerrick of the capacity of the people who currently live here. We should also always be mindful of the plight of refugees and take them in regardless rather than locking them (including their children) up in prisons on remote Australian islands.

Then you read this from the Sydney Morning Herald’s main economics writer Ross Gittins (June 28, 2010) – Gillard has little room for compromise on tax which considers the likely compromise with that the Government will make with the bully-boy and greedy miners over the mis-named resource super profits tax. The RSPT is really just a resource rental charge on miners who object to the notion that the Australian society would dare want them to reduce their huge profit margins a little to pay for the right to mine the real resources – our real resources.

Some over zealous but not very perspicacious advisor in the government (probably one of ex-PM’s staffers who have now shown how incompetent they always were – given his demise) decided to call it a super profits tax which immediately distorted the public debate and had various mining bosses screaming that Australia was on the path to communism. If only!

Anyway, in the May federal budget the government driven by its obsessive desire to get the budget back into surplus – without any recognition of what that means in an environment where we run continual external deficits. They haven’t worked out that by trying to run budget surpluses they are forcing the private domestic sector (via liquidity) constraints to run deficits and thus undertake increasing levels of debt. The only other outcome is that the the private domestic sector invokes behaviour to resist taking on more debt and the result then is that the economy tanks in the face of declining aggregate demand and the government fails to achieve its surpluses as the automatic stabilisers do their work.

That sort of recognition is never disclosed in the official papers surrounding these budget ambitions. I am sure that if the Treasurer (now Deputy PM) was confronted with that sort of scenario he would not be able to tie the sectoral balances together in any coherent manner.

In that context, Gittins then considers any move to renegotiate the RSPT – renegotiation here is code for the miners getting their way and reducing the tax take that the Government had expected – will undermine the fiscal strategy announced by the Government in the May Budget.

Why? Gittins says:

Because … the resource tax is part of a package of tax changes. That package is essentially revenue-neutral and thus detachable from the budget. Virtually all the proceeds of the tax would be used to pay for the other alleged reforms in the package: the cut in the rate of company tax, the instant asset write-off for small business, the various superannuation concessions, the resource exploration rebate, the standard tax deduction, the discount on tax on interest income and contributions to the planned state infrastructure fund.

And so, according to Gittins “dropping the tax wouldn’t leave a hole in the budget, but it would mean dropping all the political goodies it would have paid for.”

The concept of a hole in the budget is a very curious construction. Please read my blog – We are in trouble – squirrels are falling down holes N – for more discussion on this point.

I consulted the definition of a hole:

* an opening into or through something
* one playing period (from tee to green) on a golf course; “he played 18 holes”
* an unoccupied space
* a depression hollowed out of solid matter
* a fault; “he shot holes in my argument”

To see why the hole terminology is not very helpful when applied to the budget of a sovereign government (that issues its own currency) we need to really understand what a budget deficit is.

Every day the government credits private bank accounts (directly or via cheque issuance) to pursue its socio-economic program. Each day, they also collect tax revenue by debiting private bank accounts (or writing receipts over counters to payees). The tax revenue is accounted for but “doesn’t go anywhere” in a physical sense.

A deficit arises when the spending exceeds the revenue and the net result is an addition of net financial assets (bank reserves). In achieving this outcome, the government hopes that its spending will boost aggregate demand (“finance” the leakages from the income-expenditure system), and, hence maintain high levels of employment and material prosperity.

The only hole I can see is one that needs to be filled. That is the spending gap – the leakages from the income-expenditure system – that are created when there is a CAD and/or a desire by the private sector to save. Budget deficits should aim to fill that hole in and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses.

If budget deficits are underwriting income growth, then workers can enjoying secure employment and achieve their saving desires – which will enable them, should they wish to use purchase some golf clubs and play a few “holes” in their leisure moments. Sounds good.

I won’t go on except to say that MMT shoots “holes” in the mainstream economic theory because the latter is not stock-flow consistent.

So the only question that the government needs to answer is whether the current budget stance is consistent with the other spending aggregates in the economy (external and private domestic) and whether taken together the level of aggregate demand (spending) is sufficient to achieve true full employment and other outcomes consistent with enhancing the welfare of all citizens.

In this context it may be that budget position is correct although with around 13.5 per cent of our willing labour resources being wasted and an on-going current account deficit you would surely conclude that more not less fiscal support is needed for the spending system in our country. But as a matter of logic – changes in the composition of taxes which are neutral with respect to the overall fiscal position may be beneficial in improving equity and perhaps, even improve the overall mix of resource usage.

A compositional change such as that proposed by the Government is also clearly be political in nature. The Government thought it was on a sure winner adding the mining tax and offering lower across-the-board company taxes. The mining tax is fine but the Government also didn’t have the necessary stamina to stand up to the onslaught of the rich and very greedy mining lobby. Now they are compromising.

But the interesting point in all of this is that the government, which previously thought the trade-offs were in the best interests of the nation is now arguing that they suffer because the mining tax revenue might be lower. If the trade-offs were beneficial then why kill them just to get the deficit into surplus – where it will stay for a short-time as the fiscal drag catches up on an already slowing economy and drives it back into deficit.

This is a classic example of a sovereign government playing the balanced budget game because it thinks that is what we want. We do want it but only because we have been poorly educated and intimidated by 3 decades or so of mindless neo-liberal diseassembling. Sometime in the future a government is going to show some leadership and stand up early in a elected term and re-educate the population about their responsibilities and the way fiscal policy in a fiat currency system can help them fulfill the expectations we place on them.

But before they do that they are going to have to learn about their capacity in a fiat monetary system themselves. Layers of learning are needed before we are going to get out of this nonsensical cycle of under-achievement from our governments.

Gittins reinforces the public ignorance every time he writes. He goes on to say that:

Combine the voters’ desire for strength of character with the budgetary arithmetic and you see why Gillard has little scope to reduce the revenue raised by the resource tax. Cut too much from expected collections and you look weak in the face of powerful vested interests and you have to cut back your promised tax goodies to fit.

That is how tragic it has become. We elect governments that we think are showing “strength of character with the budgetary arithmetic” without knowing that: (a) the arithmetic that has motivated the fiscal policy changes is usually ignored and misunderstood – here I mean the basic accounting arithmetic that 1 – 1 = 0 where this refers to the inescapable fact that a government surplus = $-for-$ = a non-government deficit – and if the non-government sector is running an external deficit then this translates to a private domestic deficit; and (b) that allowing the government to run surpluses is permitting the government to do what all the conservatives and gold bugs and other assorted cretinous elements in the debate always claim they hate – we are giving the government carte blanche to net destroy our private wealth and undermine some of our income earning opportunities.

I want the government to always use its fiscal capacity to support the wealth accumulation of the private domestic sector and to ensure that the largesse is more equally distributed so that all citizens can be included. The last thing I want is a government to deliberately and patently undermine these wealth accumulation processes first of all and then by invoking unnecessary fiscal austerity programs to disproportionately damage the lower income citizens who are always the first to be hit when the business cycle turns down or government go on cutback missions.

What Gittins should be challenging is why these powerful vested interests are powerful. Their power doesn’t come from any intrinsic importance to our well-being. If the current crop of miners don’t want to dig up the booty then the government should simply cancel their leases for failure to act and offer them to other firms that will. Personally, I would leave a lot of the wealth in the ground – for example, coal and develop renewable energies etc. But, given that is not going to happen, the government has all the power here – just tell the mining firms to f**k off.

Further, the bond markets only have power because they have somehow managed to con the public into believing they are an essential cog in the operations of government policy. They are not! They are largely unnecessary and governments should change their operations and eliminate the voluntray institutional machinery that they have put in place to “discipline themselves” (what a nonsense that is). Every 3 or so years we – the people – the voters – will determine whether the government has been conducting fiscal policy to our advantage. The bond markets should never have that capacity.

If we ran education campaigns to inform people that the bond markets are really the largest public welfare recipients and are largely unproductive anyway then things might be different. If that understanding was broadly shared then everytime some pompous twit from the financial markets came on TV calling for welfare cutbacks for the poor so that the government could balance the budget the resulting public debate would be fundamentally changed.

Then I read this classic by the former editor of the conservative Australian Financial Review (a daily financial newspaper) and now superannuation lobbyist, Gerard Noonan which was published in the Sydney Morning Herald (June 28, 2010) – Sovereign risk? No, superannuation is at risk, thanks to mine bosses.

He notes he has been overseas and was amazed when he returned:

So it was something of a shock to return to Australia recently to find all anyone could talk about was executives of very rich mining companies bleating about a tax that they themselves had asked the Henry tax review to impose. The miners had argued to Henry that they preferred a profit tax to the crude royalty system that each state imposes on the amount of minerals they dig up and sell.

These minerals are, of course, part of the common wealth – that is, they belong to us all. We are happy for miners to dig the stuff up and sell it for a substantial profit. But there is a limit to how much profit any company is entitled to make out of common resources, and they should pay an appropriate amount back to the country of origin.

So that sounds appealing. I would say the same. The miners dig holes and fill them in again. Sort of the activity the top-end-of-town thinks dominate public employment schemes. I always have a laugh when I think how brazen this industry is. It employs a small percentage of the population, contributes about 4 per cent of GDP overall yet think they are the most important industry in the economy. We could close them down and adjust to the loss of real income relatively painlessly over time. They are just a massive propaganda machine driven by inflated boorish egos.

Anyway, Noonan continues:

It was almost breathtaking to hear and read the extraordinary assertions made by some mining executives and fellow travellers in the finance industry about how a properly constituted tax would affect their investment plans. And in doing so, they had the chutzpah of raising the spectre of sovereign risk. If anyone seriously thinks a fair tax represents sovereign risk, they are kidding themselves. Try real sovereign risk: the sort of sovereign risk faced by countries that do not look to their fiscal bottom lines. The PIIGS group of countries – and add in Britain and California, both with huge debt problems – will have to endure decades of difficulties juggling their books to pay even modest pensions to their retiring citizens.

Okay, he was going alright up until this point. The mining companies have been making outlandish statements in the press and spending millions flooding the TV screens each night with totally false advertisements. They have been claiming that they will withdraw their investment and that will lead to the government defaulting on its debt because it will not be able to raise enough tax revenue. I have saved a few of their advertisements as the sort of modern day equivalent of the Nazi propaganda that was prevalent in the early 1930s.

But then Noonan goes right off the rail and conflates EMU nations with a sovereign nation (Britain) with a US state (California). The EMU nations have run up against the bond market constraint because they ceded their currency sovereignty to the “monetary system” (or the ECB in this case). They also set in place fiscal rules (the Stability and Growth Pact) that could never cope with a large aggregate demand failure of the sort they have had to endure in the last 3 years and then sought to impose them anyway. You just had to sit back and watch this craziness as the days ticked by and the crisis deepened. Their response to the crisis worsened their outcomes and both – the crisis and the response – were purely ideological creations.

The crisis came about because of the neo-liberal financial market deregulation agenda and the creation of the monetary union. The response has been driven by the same destructive ideology. The bottom line is that the design of the monetary system is unworkable. That is clearly evidenced by the recent conduct of the ECB.

In the public domain, the ECB is a self-promoting paragon of neo-liberal virtue. The type of sanctimonious position that makes any reasonable person sick. They have been claiming they will not budge from their inflation fighting policy responsibilities and that there would be no bailouts in contravention of the relevant Lisbon treaty clauses. Meanwhile the crisis worsened as the design flaws in the monetary system played out in a the only way they could. The real economy stagnated and went backwards; governments were preyed on by the bond markets; and now there is a looming private banking crisis.

But what is very interesting and unlike the hysteria surrounding the “sovereign debt” crisis part of the story, there hasn’t been much press coverage about what the ECB is now up to. Despite saying there would be no bailouts the ECB is now buying huge amounts of GIPSI debt to ensure the funding crisis in the EMU is contained. While I am happy they are doing that – inasmuch as anything that is done within the context of that flawed system is compromised – there are sinister overtones. The ECB is now an incredibly powerful institution without peer in the EMU. They stand between the system collapsing or muddling through. And they can force austerity onto citizens throughout the member nations but never face the judgement of the voters.

The way the system has evolved to patch itself up is thus very anti-democratic and dangerous.

Contrary to the EMU, Britain has no such crisis. The only crisis it is facing it the damage that the austerity package announced last week will wreak on its economy and the disadvantaged. It beggars belief that they think they will start growing robustly when the major spending support is being savaged. And if you saw any footage of the Chancellor making his speech you realised that they are enjoying it. The conservatives get a pathological joy of imposing their destrictive ideology onto the disadvantaged.

At the height of the last conservative government in Australia as they were cutting into the rights and entitlements of the poor, the top echelons of the Department of Employment was dominated by sociopaths who delighted in the most disadvantaged citizens suffering.

And then we turn to California. Yes it is more like an EMU nation because it doesn’t issue its own currency. But it is part of a federal system and enjoys considerable fiscal transfers from the federal government. Not enough that is for sure but more than is currently available within the EMU. California’s problems could be easily addressed. The Federal government could just introduce a demogrant – a per capita transfer to each state. The feds have the financial capacity to do that because they are not revenue-constrained. And the impact on aggregate demand would be substantial. But they will not do this because they think they have run out of money!

Noonan certainly thinks the Australian government has run out of money. He said;

In my puzzlement, I wondered what had happened to the previously announced superannuation changes … were they still around, and what had happened to the 2 per cent corporate tax cut that the government also promised as part of its package to help ease the transition to the higher super payments?

No, all still in place. However, the ability of the government to fund the corporate tax cut – which in turn was partly aimed at easing the impact of a gradual superannuation increase over the next decade – was being jeopardised by petulant mining companies.

What happens to the mining tax is not at all relevant to the other policy ambitions that the government has announced – as I explained above. The Australian government can afford to spend what it likes. They can never run out of spending capacity.

Whether they want to spend without draining via taxes or reducing some taxes and not offsetting with other revenue depends – as I explained above – on the state of overall spending in relation to the real capacity utilisation rate in the economy. But there is never a lack of capacity to spend or forgo tax revenue.


Its been a “fun” day and night sitting in the plane – listening to Bill Callahan and Steel Pulse and Peter Green on my mp3 player and reading financial reports and monetary theory journal articles. I did manage to get started on a novel by Henning Mankell a Swedish crime writer of some reknown.

p.s. I use fun liberally.

That is enough for today!

This Post Has 38 Comments

  1. “Every day the government credits private bank accounts (directly or via cheque issuance) to pursue its socio-economic program.”

    Would MMT guarantee a 1 to 1 conversion into currency?

  2. @Fed Up – a government credit into your bank account (via your bank’s reserve account) is “currency”. You only accept bank notes and coins because they’re convenient for micro-transactions. When we all have our Oyster cards it’ll be more convenient to swipe them for buying a chocolate bar.

  3. Frank Ashe, I would actually call a “gov’t credit” a debt instrument because it can be defaulted on or partially defaulted on.

    It seems to me it is a lot easier to put a “currency tax” on bank accounts than on actual, physical currency.

    I mention this because some people think that a “currency tax” would have helped with The Great Depression and could be used in a two currency system (one for the rich and another one for everyone else).

  4. …Kevin Rudd was in favour of population growth, with his government predicting it to hit around 36 million by 2050, largely through immigration.

    But Ms Gillard has indicated she will be putting the brakes on immigration in order to develop a more sustainable nation …

    …But the arid continent we live on is unable to support many more people than it already is straining with…

    Bill, every immigrant is an existing person who consumes real resources wherever he or she lives. I’m guessing the countries most of the immigrants come from suffer from far greater resource depletion and environmental damage than Australia. So immigration does not constitute an increase in world resource consumption (or only to the degree that Aussies are greedier than others). Mrs. Gillard’s policies and your lament are either guilty of a fallacy of composition or of nationalism. This is environmental policy being carried out on the backs of immigrants which is pretty deplorable in my humble opinion. Sustainability should be measured on a per person basis, not in aggregate.

  5. In fact, being politics, it’s probably a case of xenophobic immigration policy รค la Arizona disguised as environmental sustainability. It doesn’t get much more cynical than that.

  6. Which is not to say that I don’t see what you are getting at, especially after reading the rest of your post. It’s the politics that bothers me, not your economic argument.

    regards, Oliver

  7. Dear Oliver

    You said:

    Mrs. Gillard’s policies and your lament are either guilty of a fallacy of composition or of nationalism. This is environmental policy being carried out on the backs of immigrants which is pretty deplorable in my humble opinion. Sustainability should be measured on a per person basis, not in aggregate.

    I totally agree with your point. Certainly, the Government changed leaders to shore up the declining support and one of the areas they were becoming vulnerable in was “border protection”. The small population debate is one vehicle that the racists use to cover their tracks.

    I also agree that the public debate hasn’t come to terms with the environmental refugee problem yet and as I understand it it is going to redefine the way advanced nations think about their borders. Millions not hundreds are going to have be resettled.

    And that means we are all going to have to have a serious population debate – including in Australia. Using vulnerable people as a lever to advance the greed of a particular sectoral group which (a) undermines any notion of proper urban planning and environmental use; and (b) ignores the plight of the existing poor and disadvantaged in our country is not a sensible way to conduct that debate.

    If Australia is to accommodate millions more – which it ultimately will have to – we will need to totally redesign our cities, improve public infrastructure, redistribute real resources quite dramatically from rich to poor, and generate many more public sector jobs than what we currently desire to do. Running budget surpluses and thinking that is the way to achieve these ends is not the way to go.

    So my position Oliver is that this requires a fundamental shift in the way we construct the our views of the economy, community, land use and the role of the public sector. Ultimately, the environmental refugee problem will become so great that we will all have to engage in these debates. But an ad hoc policy at present will only undermine the fortunes of most while advancing the small minority.

    best wishes

  8. Thanks, Bill. I had no doubts your position was more nuanced and reflected than my knee-jerk reaction may have suggested. I’m somewhat sensitive to the subject. The mrs. specialises in migration studies… Oliver

  9. Bill,

    When I read the Noonan article, I had the same reaction as you: I was with him on the mining argument and then was rolling my eyes with the reference to sovereign risk for Britain. At least in saying California rather than the US he was almost right, although I’m sure he wouldn’t appreciate why.


  10. Dear Oliver,

    referring yo your statement,
    “Bill, every immigrant is an existing person who consumes real resources wherever he or she lives. I’m guessing the countries most of the immigrants come from suffer from far greater resource depletion and environmental damage than Australia. So immigration does not constitute an increase in world resource consumption (or only to the degree that Aussies are greedier than others). Mrs. Gillard’s policies and your lament are either guilty of a fallacy of composition or of nationalism.”

    I could not speak for other immigrants except immigrants from my home country (Malaysia) to Australia. Malaysia does not face with any real resource depletion problem. Most of Malaysian immigrants to Australia are not escaping from real poverty, most of them are white color workers seeking higher salary because our govt has adopted neo-liberal policy for the past 20 years. This has limit the numbers of professionals that could be absorbed into our labour market as it was able to do before. Our Govt has adopted supply side policy in the labour market where education is still largely funded and many scholarships still provided up to graduate level but with no job guarantees, hence most of bright young graduates with degree in Physics, Math, Bio Technology etc could not find employment that met their qualification or fit their interest. Before 1990s, prior to massive privatisation, these graduates at least could be absorbed by govt agencies, linked corporations or universities/ research centre that was created specifically to cater to their qualifications. Nowadays most of hard science graduates are working at call centres, doing marketing for banks or insurance company with lower pay (salary that deemed competitive by multinational standard).
    So I would say that most immigrants from Malaysia are victims of the neo liberal onslaught, and they should be considered as political immigrant.

    There are also many corrupt politicians from South East Asian, including Malaysia (with dual citizenship or permanent resident status in Australia) who bought massive lands and mansions in Australia to hedge against political tsunami if they loose power in their home countries. We have many pictures of their mansions, cars and yachts in Australia circulated in blogosphere. But since according to the unspoken neo liberal ideology that, “money is neutral” and “there is no free lunch” or could be translated as “no wealth is ill gotten wealth”, I could see why Australian govt could condone this behaviour and even welcome this massive influx of ill gotten wealth by certain people.

    BTW, I just speak on behalf of “immigrant” from my country and not refugees from Iraq, Afghanistan etc trying to avoid real danger.

  11. Dear Oliver,

    There are large influx of immigrant to Malaysia as wells, but what befall them once they arrived not as what been promised to them.
    Since most of Malaysian are unwilling to work 18hours/ day non stop with meagre pay, the immigrant are very much welcome to our country but they are not treated humanly, private corporations with coordination from our neo-liberal govt brought many immigrants and govt allowed for corporation to pay them less than USD200/months regardless of how many hours they work, and once they not in demand any more they’ll be sent home or left on the street to be rounded up by our Police.

    The immigrants in Malaysia has resulted in corporations not any more have interest in capital investment using technology that would increase productivity per labour, but they went back to pre-colonial Malaya, where they return to more manual labour intensive operations.

    Again, I have nothing againts the poor immigrants but from my observation they’re much better of if left with their family at their homeland and other rich nation could help them with development as what Marshall Plan effectively done before (even in Malaysia we have many successful Marshal Plan projects before), rather than they’re be ‘legally’ trafficked as ‘modern slave labour’ with no human rights . . .

    Again, I can only speak on behalf of my country

  12. I don’t think there is any problem with immigration. Australia is a big country and can and should accommodate many more people in my opinion. The world population is not going to decrease in the near future, so the average temperature is likely rise whether or not Australia allows more immigrants in.

    I think, for some Australians, it is not about immigrant per se, it is about where these immigrants are coming from. In the recent past most immigrants have been coming from non-European countries; therefore many Australian thought leaders (for example, Bob Birrell) are creating fear among the general public that – these immigrants may take Australian jobs, they are going to be a burden on Australian tax-payers, they are terrorist etc..

    They are trying hard to paint immigrants coming from Afganistan and Sri Lanka in boats to be terrorists. What they fail to or don’t bother to honestly tell the Australian public that in last 20 years (post-appartheid) Australia has let in many racist (and possibly terrorist) South African’s and Zimbabwians into Australia and many immigrants from these countries came in aeroplanes and not in boats.

    I am fed up with this Labor governments double standard. Julia is just catering to the right-wing elements of the Labor party. I think it will be difficult for Labor to retain power in the coming elections.


  13. Bill,
    The problem I see (rightly-or-wrongly) with population growth around the globe, ignoring its distribution, is being able to provide enough food at a reasonable price. I understand that in the UK, it takes more than the whole land area to grow enough food for just the city of London. I haven’t come across many people trying to solve this problem, but I have had an idea about the nature of the problem.

    Farming is a two-dimensional activity. If farming was three-dimensional then that would help solve the problem, so we could pack more production into each bit of land area.

    I understand that mushroom farms can be stacked one on top of the other (maybe I’m wrong). As the saying goes they “are kept in the dark and fed s..t”, (like the rest of us) normally, but when exposed to light contain high levels of Vitamin D as well. If we can find the right varieties to provide a nutritious staple diet, and if we can learn to process them efficiently to provide variety of taste, we can replace the high-rise buildings in the “square Mile” of the City of London (where the bond market lives), with high rise mushroom farms.

    Kind Regards

  14. Bill,
    Re: “…kept in the dark, and fed s**t”.

    That’s it. Those neo-liberal, flat-earth theorists amongst the ranks of banks, bond markets, and their willing political accomplices – should hence forth be called ‘neo-liberal mushroom farmers’.

    Are we going to be (wo)men or mushrooms?

    Kind Regards

  15. Dear Anas Jalil, I was mainly trying to point out that everybody, whether local or immigrant, consumes energy and real resources so that limiting immigration only shifts the problem somewhere else but doesn’t help solve it. I have no detailed knowledge of either the Australian or Malaysian environments, although I have been to Malaysia several times. I remember quite vividly, both from the Peninsula as well as Borneo, the endless amounts of trucks loaded with tropical lumber and the miles upon miles of palm oil plantations one passes which, not too long ago, will have been prime forests. The oil companies are also quite visible, everybody knows Petronas towers for example. Malaysians may only consume a small percentage of resources themselves but they sure know how to extract them.

  16. Dear comrade MMTer,

    below are quotation taken from James Kenneth Galbraith’s book, “Money Whence it came where, it went” published in 1975. reader should be noted that this was written under the context of gold standard not real fiat currency but it still relevant to our cause.

    the Austrian’s and even neo-classical believe that managed economy had brought fascism to power (you could read it in the Road to Serfdom by Hayek), this is further form the truth
    During the world’s recession in 1930s and the failure of the market forces to solved real economic problem as what advocated by mainstream economist at that time had pushed Nazi into power by democratic means, because at least Nazi provided alternative to the deadlocked although yet to be proved when Hither claimed that he could solved German’s economy. So the truth was the failure of neo-classical economic policy that had brought fascism into power.

    JK Galbraith wrote (pp 237)
    By the mid thirties there was also in existence an advanced demonstration of Keynesian system. This was the economic policy of Adolf Hitler and the Third Reich. It involved large scale borrowing for public expenditures, and at first this was principally for civilian works – rail roads, canals and the Autobahnen. The result was a far more effective attack on unemployment than any other industrial city. By 1935, German unemployment was minimal. ‘Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred’ . In 1936, as prices and wages came under upward pressure, Hitler took the further step of combining an expansive employment policy with comprehensive price controls.

    The Nazi economic policy, it should be noted was and ad hoc response to what seemed over-riding circumstance. The unemployment position was desperate. So money was borrowed and people put to work. When rising wages and prices threatened stability, a price ceiling was imposed. Although there had been much discussion of such policy in pre-Hitler Germany, it seem doubtful if it was highly influential. Hitler and his cohorts were not a bookish lot. Nevertheless the elimination of unemployment in Germany during Great Depression without inflation – and with initial reliance on essential civilian activities – was signal accomplishment. It has rarely been praised and not much remarked. The notion that Hitler could do no good extends to his economics as it does, more plausibly, to all else.

    Thus the effect of ‘The General Theory written by Keynes was to legitimize ideas that were in circulation. What had been the aberrations of cranks and crackpots become now respectable scholarly discussion. To suggest that there might be over-saving now no longer cost a man his degree or his promotion. That the proper remedy for over-saving was public spending financed by borrowing was henceforth a fit topic for discussion – although it continued to provoke their bitter rebuke. The way was now open for public action”

  17. Dear Oliver,

    Where are you from? ๐Ÿ˜‰

    Yes you are correct and now we are importing immigrant from poor countries to work at the plantations .. . . .

    With the coordination by our Govt, the “ARMY of UNEMPLOYED” available to be exploited by us, as what coined by Marx to maintain the repressive unfair capitalist system, extend beyond our national border.


  18. And if you saw any footage of the Chancellor making his speech you realised that they are enjoying it. The conservatives get a pathological joy of imposing their destrictive ideology onto the disadvantaged.

    I happened to come by an David Cameron speech at the illustrious TED thing. One could believe that such place you can’t pull of just anything. But Cameron had no problem starting of with a ridiculous global public debt counter.

    Then he hit the punch,” this is the most important fact to bear in mind in politics and that is we have run out of money. We have vast budget deficits …


  19. Bill and other MMT scholars,

    Consider this argument if you will. Our government is voluntarily bound by a requirement to fund (or match) any budget deficit through borrowing from the private sector, that is by issuing bonds and notes.

    This situation leads to a separation of two of the economic functions of government. The monetary function (issuance of currency and management of the general price level) is performed by the central bank. The fiscal function (decisions about taxing and spending) is performed by the treasury and parliament.

    In some ways this situation is analagous to the separation of legal powers between the police, the parliament and the judiciary. Like the economic functions mentioned above, this separation is entirely voluntary – it would be entirely possible for a country to have a single body responsible for all aspects of the law – making the law, enforcing the law and passing judgement on transgressions of the law.

    However history tells us that such a situation is defenseless against severe corruption and abuse, and few people would seriously advocate it irrespective of how much more efficient or effective it may appear to be in prosecuting the law.

    Likewise, for the economic duties of the state. No matter how much it may seem that the requirement to issue bonds is a hindrance to public purpose, it serves an important function that is actually greater than any benefit to be gained by disregarding it to achieve a particular short-term goal.

    So what is the important function of bond issuance and bond markets?

    The main function of the bond market is to provide the indication of the risk-free interest rate (ie the yield on government bonds). It’s useful to think of these yields as being composed of a real interest rate (compensation for delayed spending) plus the expected rate of inflation (compensation for reduced purchasing power). By far the more volatile of these components (over the long term) is the inflation part.

    Hence bond yields provide important information about inflation expectations. As one of the primary causes of inflation is persistent budget deficits, bond yields can rise in times of fear or uncertainty about deficit spending with the potential to cause inflation. In this way the bond markets can act as a check or restraint on inflationary deficit spending.

    So what is the problem with bond issuance and bond markets? As far as I can see, the primary MMT objection to these markets stems from a misconception of what they are. MMT writing seems suggest that the bond markets consist of a dozen or so, faceless and elected traders in a dealing room somewhere in Sydney pulling strings and influencing the direction of the entire nation in all manner of ways, entirely for their own benefit.

    The reality is so far from this. No individual trader or group of people could have any such influence over bond rates for any length of time. Bond yields are simply the aggregate opinion of thousands of investors representing the interest of probably millions of individuals.

    The only reason that government bond yields in a fiat system would rise to levels that would actually inhibit government issuance, would be if there was (or was fear of) severe inflationary problems.

    When I see writing that repetitively points out that governments are not revenue constrained, they can issue as much currency as they wish, I always think “so what, everybody knows that?”. Of course they can, but the question is, should they?

    To return to the original analogy, perhaps we could increase the conviction rates for violent criminals if we allow police officers power of immediate conviction and sentencing. That might achieve certain narrow aims, but at what cost?

    Likewise, we could abandon the government budget constraint, but what exactly would that achieve, and what would be the unintended consequences?

    Bill, I fully recognise that you will probably disagree with almost everything I’ve said. However for me, this is the “last mile” as I have seen you write. Although in truth I’m probably closer to the starting line than the finish.


  20. Dear Gamma,

    you said
    “Hence bond yields provide important information about inflation expectations. As one of the primary causes of inflation is persistent budget deficits, bond yields can rise in times of fear or uncertainty about deficit spending with the potential to cause inflation. In this way the bond markets can act as a check or restraint on inflationary deficit spending.”

    but your logic could not explain why, despite the continuous accumulated huge public debt in Japan for more than a decade now, Japanese govt is continue paying very low interest for its debt.

    and this is the latest news regarding new Gilt issuance by UK Govt (30-year Debt)
    The Gilt was over subscribe as Investors placed orders worth 13.8 billion pounds against 8bill pounds of gilt. The issue was priced at re-offer 100.121 which equates to a yield 4.243%, reflecting the strong order book size.

    Clearly this low interest payments and over subscription are contrary to what those terrorists are saying, like this one by Jon Moulton, chairman of Finncap
    Clearly, bankers, fund managers and even many, among those deficit terrorists themselves are bidding for those gilts. . .

    I just wonder maybe the deficit terrorists don’t even believe those crap public debt theory by mainstream economists but they just play along and use it to terrorize the general public so that not many people will bid for the gilts and they could’ve bought more for themselves.

    That guy from Finncap just made that statement against UK govt deficits one day prior to the issuance date, I’m suspicious . . .

    but there is one thing in particular that I agree with this terrorists, “He described the global system as a “giant experiment”. “Everyone is running deficits, everyone’s debt is at high levels,” . . .yes this is a global experiment indeed and i think at the end we shall see 1) the superiority of fiat currency, 2) the collapse of monetary policy and 3) the resurgence of fiscal activism. but to reach that stage maybe we might first see massive suffering among populations if this terrorists and their ‘useful idiot’ economists still running the system.


  21. Dear Gamma,

    you said
    “Consider this argument if you will. Our government is voluntarily bound by a requirement to fund (or match) any budget deficit through borrowing from the private sector, that is by issuing bonds and notes.
    “This situation leads to a separation of two of the economic functions of government. The monetary function (issuance of currency and management of the general price level) is performed by the central bank. The fiscal function (decisions about taxing and spending) is performed by the treasury and parliament.
    In some ways this situation is analagous to the separation of legal powers between the police, the parliament and the judiciary. Like the economic functions mentioned above, this separation is entirely voluntary – it would be entirely possible for a country to have a single body responsible for all aspects of the law – making the law, enforcing the law and passing judgement on transgressions of the law.”

    seriously I believe those analogy had never been use before to describe why central bank should be kept independence from Govt. . .
    even Milton Friedman himself has suggested subordinating the Fed to the Treasury department, you could read it here, this paper written by
    Anna Schwartz, http://www.shadowfed.org/wp-content/uploads/2010/03/anne_schwartz_042009.pdf.
    Schwartz made an interesting point by saying that even Milton Friedman, the prophet of free markett did not think much of central bank independence.

    You said,
    “However history tells us that such a situation is defenseless against severe corruption and abuse, and few people would seriously advocate it irrespective of how much more efficient or effective it may appear to be in prosecuting the law.”

    We need not to look into the history, just look at our current situation where the central banks in Europe and US are colluding with financial managers against the public interests.


  22. Anas,
    D**n straight, the markets’ expectations of inflation are based on flawed models and assumptions. I am just learning about macro-economics and monetary theory, yet the markets seem to know less than I do. I got 5/5 in the last Saturday Quiz, and only one of the questions was a guess, so i figure I can get upset about the myths these people are peddling to us ordinary people.

    Kind Regards

  23. Anas,
    I have recently seen a documentary about the rise of Hitler in Germany. It said that HItler became Chancellor as a result of pressure from the industrialists and bankers who, as you say, needed a way to break the deadlock in the German economy. They believed that ultimately Hitler was a ‘funny little man’ but had the confidence to act in their interests. They believed that ultimately they could control him.

    They were wrong! When his public works ended and the rearmament began in ernest, and when this threatened to bring about inflation (rightly ot wrongly), Hitler declared that businesses were not to raise their prices, and were not to increase the wages of their workers. At this stage, they all knew that anyone who disobeyed him would ‘disappear’ so no one daired to. Clearly, in a civilised society, this is no way to control inflation.

    Perhaps this documentary was wrong, but I tend to believe that something like this was likely to be what happened.

    It is dangerous, in my opinion, to see the Nazis as in anyway successfull, as it is easy to achieve their aims to control the public, by killing them if they disobey. Bear in mind also that Mussolini had already done these things before Hitler, so it was not really Hitler’s idea. The threat of inflation was probably real, given the pace of growth needed to wage the war which Hitler intended. If Hitler’s aim had been peace, I believe inflation would not have been an issue as the pace of growth would have been much more sustainable.

    Kind Regards

  24. Charles,

    Inflation is difficult because it is very sensitive to the production model, and this is something that economics stays away from. How substitutable are the goods? How many more services can service providers supply without raising their costs? Remember, each person’s rising input costs is someone else’s rising per unit revenue. How is easy is it to pull labor and capital away from the rest of the economy and into the high cost areas? Will the infusion of resources be as productive as the existing pool or 1/2 as productive? What about the roles of contracts that limit price increases? Which industries tend to have these contracts and which do not? And are the ones that have the contracts going to be the ones who are supply constrained?

    That is something for which we don’t have good models, or even very good data. And the level of inflation we see will depend heavily on these factors. A perfect is example is the different inflationary effects of the oil shock period on the G20 economies. Alternately, look at the effects of export income on China. Inflation has been muted, due to the institutional structure in place. What about the effects on credit growth? Will a decrease in business investment offset the increase in household purchasing power? Are unions strong enough to capture cost of living adjustments? Trying to capture this in a model is tough, and no one knows how to do it well.

    It could very well be the case that identical policies, even on a reaction function basis, will lead to different inflation outcomes in different nations.

  25. RSJ,
    I don’t pretend to undertstand the details you refer to, but my limited understanding of macro-economics, and my understanding of WWII history tell me that Hitler was specifically warned that inflation was beginning to be a problem, which is why he acted in the characteristically fascist way he did and simply tell people not to pay any more or else. The normal rules and details of economics (which apply to democratic nations) can easily be eclipsed by fear and terror.

    Your point about different economies, in different positions, is not an obstacle to fear and terror – “lest we forget”.


  26. Dear Charles J,

    Those are not my words, it was written by the legendary American economists John Kenneth Galbraith himself.
    During the WW2, US had adopted exactly the same policy as what applied by the Nazi, that is price control in the face of full employment. And JK Galbraith was put in charged by Roosevelt as head of the Govt price control team. According to Galbraith, full fledged Keynesian policy was applied by US govt only by accident due to massive war spending. Galbraith said, Keynesian policy had successfully solved to unemployment problem but it could not solved the problem arised by full employment, that is the threat of inflation, hence the US govt then resorted to price control as what implemented by the Nazi. The result of US’ price control was the same as Nazi’s price control.

    Charles pls be careful, there are many documentary out there produced by the people sharing the same free market ideology as those deficit terrorists and they’re not interested in the truth but just to portray that Govt could not formulates and never had formulated any good policy before, if the policy was successful it must be something bad has been done behind the scene. Why there is no documentary showing how massive govt spending and price control that was adopted in America during the war had able to solved the unemployment problem, increase US’ output capacity and these policies do not resulted in hyper inflation? Clearly this idea does not fit with their ideological believes.

    i’m not advocating price control here, but just to make a point that fiscal policy is far superior than monetary policy or ‘market forces’ to solve the unemployment and many real economic sproblem.


  27. Gamma,

    So 1-2% of GDP has to be redistributed and government spending constrained to provide investors an incorrect and irrelevant signal about “inflation expectations”?

    Please look at the correlation between 10 Year Treasury bond yield and consumer price index (or other inflation-related indices) at “forecast-chart”

    This piece of useless information is rather expensive. I would immediately spend 1-2% of GDP more on developing new technologies reducing our dependency on fossil fuels.

  28. Dear Gamma:

    Your comparison between separation of government branches and economic functions are interesting. I would however characterize history as showing lack of democracy as indefensible, not a lack of separation. Ultimately all branches of the government should be accountable to the electorate – judiciary approved by congress, police chiefs appointed by mayors etc. In the end everything goes back to voters. You can argue against direct voter control over everyday decisions – that there should be instead a layer of representation where we elect someone to manage the details. However suggesting that democracy gives better results the more representatives you add to the chain seems like it would break down at some point. Each layer of representation is less accountable to the people than the last one. So really it’s a trade-off between accountability (good) and micromanagement (bad).

    However – the central bank’s job right now is pretty simple. They raise or lower interest rates. This directly affects a huge number of voters, but they can’t directly vote out the managers of central banks. How is this a good thing?

    Bond traders may number in the thousands but they still remain a tiny fraction of the population. They are not elected, nor appointed by anyone elected. They are simply people with money trying to make a profit – pure self interest. Now obviously most voters are also driven by self interest – they elect representatives who they think will serve them best. The crucial difference is that everyone can vote – it’s free and simple! Not everyone can trade in bonds, though – especially the poor and unemployed. So the entire government being held “accountable” to a small, rich minority driven entirely by profit motive will lead to very skewed results.

    In the end voters should decide what hurts them and what doesn’t. If a government spends too much and causes inflation, the voters can decide whether or not that’s a bad thing – based on how it directly affects them. Why cede this power to anyone else? Because the public doesn’t know what’s good for them? No. You have to trust them to figure that out. That’s democracy!

  29. Anas,
    I understand what you mean, but I doubt the method of price control was truly the same for the US as for Germany. The US did not even have to have resort to conscription, unlike Germany. The US people wanted to co-operate with their government, and did not have to be coerced with fear – unlike German peoples. The psychology of what was going on is not captured by economic theory I suspect.

    Kind Regards

  30. Sorry Anas,
    I also believe (as an article of faith at this point) that fiscal policy is sufficient to control inflation within the framework of MMT, but I also believe that with so much pathology going on during that period in Germany and Japan, it is much better to talk about the US example in isolation, where we know that pathology was much less an issue. Most people do not even know about Germany’s economic history, so it should not be a barrier for discussing US economic history. If you can prove something about the US example, then the German example seems irrelevant, but maybe i’m wrong again.


  31. Anas Jalil: “Galbraith said, Keynesian policy had successfully solved to unemployment problem but it could not solved the problem arised by full employment, that is the threat of inflation,”

    Are you sure that’s what he said? Wars are inflationary, so I am surprised at the statement that the threat of inflation during WWII was caused by full employment.

  32. Dear Min,

    Yes he did say that,
    You could read in his book published in 1975, the title is “MONEY, WHENCE IT CAME, WHERE IT WENT”. in Chapter 17 (War and The Next Lesson).
    having said that he praised Keynesian policy as the only effective policy available to solved real economic problem at that time.

    Much of the book’s content has been made as a series of 9 episodes documentaries.

    I give you the link for the documentary, (pls not each episode is divided into six part) IN EPISODE 7 (part 5/6) YOU COULD WATCH HOW THE POLICY WAS IMPLEMENTED BOTH IN GERMANY AND USA DURING THE WAR

    Episode 1 (The Prophets & the Promise of Classical Capitalism)

    Episode 2 (The Manners & Moralisms of High Capitalism)

    Episode 3 (The Massive Dissent of Karl Marx)

    Episode 4 (The Colonial Idea)

    Episode 5 (Lenin & the Great Ungluing)

    Episode 6 (The Rise & Fall of Money)

    Episode 7 (The Mandarin Revolution)

    ePISODE 8 (The Fatal Competition)

    Episode 9 (The Big Corporation)


  33. Dear Charles,

    Yes, I agree with you, fiscal policy is sufficient to control inflation within the framework of MMT. and MMT is the best solution that we have now.

    Even Keynes himself severely condemned the price control, he suggested the Govt to raised taxes to curb against inflation

    by the way pls watch this documentary by JK Galbraith regarding the war time economic;

    Episode 7 (The Mandarin Revolution)


  34. Dear Min,

    I’m from Malaysia and i could testify that after our country gain independence in 1957 and with the helping hand of other great nations such as USA with it Marshall Plan and other countries (UK, Australia, Canada etc) helping us under the Colombo plan using fiscal policies, we really did benefited much from those fiscal plan.

    The policy suggested by those plan was then copied massively by our government in 1960s up to 1970s and has successfully uplifted many Malaysian from poverty to middle income level in less than one generation. With still no significant industries as of now, we could provide free healthcare and free education for everybody. Without free education formulated by Colombo Plan my mother could not become a teacher since my grandfather was a small padi farmer without owning any land and with 9 children. And my father, later went to USA to reads Economics in 1970s was the son of small fisherman with 10 siblings, and 2 of his siblings now are engineers, 4 teachers, 1 doctors, 1 nurse, and 1 is agriculturist. From those 10 only 2 is working with private corporations. All this thanks to fiscal plan formulated by sound economic policy.

    But in 1990s the westerners has came again but this time with different plan it their mind, the new plan was MASSIVE PRIVATISATION and HUGE TRANSFER of PUBLIC GOODS to PRIVATE HANDS . . . the result was then massive corruption that we never see before.
    And financial crisis of 1997 . . . now we no longer have 100% free education and free healthcare as before though we are richer than before.
    And most of our hard science graduates now are either moving out form our country or working at the call centre or as marketing executive for the banking sector.

  35. Owh one more thing.

    My father told me that the required reading for all Malaysian govt officers in the 70s was a small book by John Kenneth Galbraith published in 1962, the title is ECONOMIC DEVELOPMENT IN PERSPECTIVE.

    Retired govt official who are condemning the massive privatisation done by our Govt still quoting form this particular book.


  36. Hery CK Lui has also written about the Nazi’s system of public finance. They didn’t actually borrow the money, “Nazi economic experts understood that sovereign credit creation for purposes of job creation posed no inflationary threat and that it would be a far more responsible policy than the conservative approach of tax increases and welfare cuts to balance government budgets”.

    Interesting discussion re: Galbraith and wartime price controls. Its important to note a point that economist David Colander has made, “The lesson most economists learned from World War II was that Keynesian aggregate demand policy worked. The fact that the expansion of aggregate demand had been accompanied by major controls over wages and price … was lost on the majority of the profession.”

    Initially Galbraith and his colleagues at the OPA thought selective price controls on critical items would be sufficient to keep inflation in check. However they quickly learned (in a rather large field trial involving the entire US economy) that the economy was too complex for price inflation to be managed by selective price controls. It was too easy for producers to shift their costs to uncontrolled items if the Government wasn’t controlling all prices at once. Within a few months, Galbraith admitted to himself he’d been wrong and in April of 1942, issued “the general maximum-price regulation”.

    It actually worked pretty well, there’s no other way that in the last full year of the war (1944), GDP could grow by 28% with 1.2% unemployment with inflation at only 3.5%. But like the 35mph and universal military conscription (even Galbraith had to go in for a draft physical- rejected as too tall– when he left the OPA), it would never be tolerated today. However Colander, Abba Lerner and William Vickrey proposed market anti-inflation plans (MAP) that could provide the benefits of an incomes policy without the need for government price setting (you could exempt small business without the loss of much efficiency). Colander again,
    Vickrey saw MAP as the institutional change needed to guarantee that a true full employment – roughly 2 to 3 percent unemployment – could be reached in a way that was institutionally compatible with a non-inflationary economy. And it could do so in a way that was fully consistent with existing institutions.

  37. RSJ,

    I couldn’t agree more with many of your comments about inflation. In general it’s a poorly understood phenomenom, with complex and sometimes unpredictable causes. Glib generlizations like “inflation is always a monetary phenomenom” or “inflation never occurs with underutilised resources in the enonomy” or my own “budget deficits cause inflation” are pretty much useless without considering a raft of other circumstancial information.

    For every argument as to the root cause of inflation in any particular instance there are numerous counter-arguments. For example, some people suggest that the inflation in the 1970s was “caused” by the oil price shock, but this is unsatisfying in many ways. For example, inflation was actually on the way up as early as 1971 in Australia, well before the OPEC oil price increase. Why was this? And why did some countries suffer very high and persistent inflation (Australia, USA) while in others it was shorter-lived and much lower (Germany).

  38. Grigory said:

    “In the end voters should decide what hurts them and what doesn’t. If a government spends too much and causes inflation, the voters can decide whether or not that’s a bad thing – based on how it directly affects them. Why cede this power to anyone else? Because the public doesn’t know what’s good for them? No. You have to trust them to figure that out. That’s democracy!”

    Interesting post altogether, but just on your final point.

    There are many things which act as a check on government actions, either explicit or indirect. Do you believe that media or private commentary that is critical of government is unnecessary? After all, we have our say once every 3 years, so perhaps we should remove this power that has been “ceded” to the press? I don’t think you would advocate that.

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