Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
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!