The madness along the Atlantic crosses the Pacific

Today the Australian government demonstrated how poor their grasp of macroeconomics is and how badly they are managing our economy. In response to the very destructive floods that have ravaged the most populated states on the east coast (Queensland, NSW and Victoria) and wiped out billions in income-generating assets and businesses, they decided to increase taxes to “pay” for the reconstruction relief. This is at at time when the economy is slowing, inflation is moderating and the banks cannot get enough treasury debt to satisfy their prudential requirements. Further, it is at a time when there are 12.5 per cent of willing labour resources lying idle and long-term unemployment is rising. I noted in yesterday’s blog – Its grim on both sides of the Atlantic – that things are really bleak in the UK (now contracting again courtesy of its government policies) and in the US (about to contract courtesy of its government’s mismanagement). In both cases, the malaise is being caused by a dysfunctional ideology being imposed by policy makers onto very fragile economies. Well it seems that the madness along the coastlines of the Atlantic has crossed the Pacific. The imposition of a flood levy is a nonsensical and destructive policy act.

I have been thinking about the US President’s State of the Union speech today and three contextual factors were in the background when I read the Transcript.

First, there was an interesting article in The Australian the other day (January 25, 2011) – Ricky Gervais’s fundamental error was to attack God – which argued that the reason the Americans were so insulted by the hilarious hosting by Gervais of the Golden Globe film and television awards in Los Angeles the other night was nothing to do with his slagging off at actors or the corporate interests that ran the show.

Instead, it was the final remark he made:

Thanks for everyone in the room for being good sports, to NBC and the Hollywood foreign press, thank you for watching at home. And thank you, God, for making me an atheist.

The article went on to articulate the opinion of one of the TV network bosses – “only a Brit would be naive enough … no, arrogant and stiff-necked enough, to flip off God in a family-oriented TV show that is going into the American heartland on the sabbath”.

I liked Gervais’ response “Just because you’re offended does not mean you’re in the right. A lot of people are offended by mixed marriages, it doesn’t mean they are right.”

Apparently Americans think “bum humour” is hysterical and can cope with that but the meagre mention of religion in a sarcastic way inflames them. The argument presented is that “real Americans” clearly take their “Christianity … [more] … seriously” than outsiders. A former Washington Post TV critic was quoted as saying:

British Christians carry their beliefs lightly, but forget others do not … But imagine what would happen if Rolf Harris drew a cartoon of the prophet Mohammed with big ears on the Royal variety show. It’s easy to urge Muslims to take a joke but, aside from those seeking political advantage, a lot of British Muslims would be genuinely upset.

Yes! So what? It doesn’t mean any of them are right!

The report concluded by saying that “God, apparently, cannot take a joke in America”. I found the report interesting given I was bemused as to why there was such an outcry. It was obvious Gervais is a comedian. Jokes are funny. God wasn’t upset because he doesn’t exist!

Second, I was listening to an historian talking about his new book on the radio the other day (I work a lot with the radio on – sort of multichannelling). The interesting part of the interview that caught my thoughts was his discussion of the role of religion in matters of state in the US compared to the UK. At present I am on a bit of a Tudor-England theme in my reading etc – reading a lot of historical stuff about Tudor England – the machinations, intrigues, marriages etc – just as a diversion from the other things I read. It was a very influential period in terms of framing modern institutions that still have relevance.

This was also the historians point. He was saying that the reason religion plays a low profile role in British politics goes back to Henry VIII and the creation of the Church of England and notwithstanding his daughter Mary’s attempt soon after to reinstate the papacy (and hence Roman Catholicism), England retained the “official religion” and the strong identification of the state with it. After all Henry VIII declared himself god’s representative on Earth. So there is very little scope for the “Church” to be political in the British scene.

Conversely, the argument ran that when the US colony broke from the British and established their own constitution it was so fiercely determined to separate church and state that it gave the extant religions the scope to comment freely and compete with each other for supremacy. Religion also became a business. The manifestation of all that has been the lurid and fanatical role that religion seems to play in the US in public policy, a phenomenon which is clearly absent in the UK and certainly in Australia (and probably Canada) despite our shared backgrounds. So you see religion being a political force in the US whereas in other English-speaking countries that took the British route (more than less) the role of the church in politics is very muted if not absent altogether. It was a more complex argument than that but that was the essential point being made.

It helps us understand, in part, how US politics has ground to a halt and very dubious characters can rise to power.

Third, this all really came home to roost yesterday when I read the headline on ABC News – Woman hangs dog for chewing on Bible – what! Didn’t she feed the dog enough or something. Apparently, “God told her to do it”.

So it was in that context that I considered the State of Union Address which I do not intend to analyse in detail today because it is so appalling and I want to talk about the stupidity of the Australian government for local media reasons.

The Economist Magazine produced this WordCloud of the Speech (one of many available).

I chose to run my own word frequency analysis and in Obama’s speech the words “unemployment” – “unemployed” – “poverty” – “jobless” didn’t come up once. However, the words “cuts” – necessary to spending (10); “deficit” in a negative way (10); “rein” – in the deficit and debt (2); and “debt” – as in buried under a mountain of … (1).

I live with a person who’s research life involves the doing computer analysis of texts (in her case Elizabethan plays) and so I have learned a bit about the way different uses of words reflect ideologies and more.

The President’s speech was as neo-liberal as you can get (in a non-technical – be nice to your citizens way).

The thing I found interesting was that it was really acknowledging that America has lost its mojo – which seems to be defined in terms of the old cold war politics of international competition for product space. This is the IMF vision of the world. The idea that a national government might want to actually focus economic endeavours on domestic activity was totally absent.

Jobs were only good if they enhanced the export potential of the nation – and I note that the old communist enemy – China – was praised for doing everything better than America – “Just recently, China became the home to the world’s largest private solar research facility, and the world’s fastest computer … China is building faster trains and newer airports” and etc.

The old cold war constructs were invoked “this is our Sputnik moment”.

Did the President reflect on why China might be “out competing” the US? Answer: no! Reason 1: they pay very low wages and suppress union activity – but that cannot last forever as the workers will revolt and claim a greater share of real output. Reason 2: the Chinese state is not imbued with the neo-liberal fiscal conservatism and have a strong commitment to the development of public infrastructure. When the recession hit their export revenue, the Chinese government pumped massive amounts of state money into the domestic economy, knowing that rising unemployment would threaten political stability. They kept their economy growing strongly throughout.

Had the US President provided the same type of fiscal commitment to jobs and public infrastructure when the recession escalated – the religious conservatives would have called him a socialist – and worse – he would have believed it. But he would have not been responsible for the massive decline in American well-being that is manifest in the entrenched unemployment.

While his talk was about the future – the urgency is the present. The President noted that while “the stock market has come roaring back” and “Corporate profits are up” that “we have never measured progress by these yardsticks alone”.

Exactly, and his government has reduced the possibility that our generation will generate “opportunities for a better life that we pass on to our children”. In fact, the US government is overseeing a situation that will undermine the opportunities for future generations.

The speech was full of contradictions – in one part the President was claiming that “No workers — no workers are more productive than ours. No country has more successful companies, or grants more patents to inventors and entrepreneurs. We’re the home to the world’s best colleges and universities, where more students come to study than any place on Earth” then when he tried to get real he admitted that:

… as many as a quarter of our students aren’t even finishing high school. The quality of our math and science education lags behind many other nations. America has fallen to ninth in the proportion of young people with a college degree.

Many other nations out compete the US on treating their people better.

But that aside, the US will never win the “Race to the Top” if they hold out policies like reducing “the corporate tax rate for the first time in 25 years – without adding to our deficit.” Or pitching all your hope on “doubling our exports by 2014”.

But when you hear the President argue that all the future plans he has for the nation will not be achieved if the US is “buried under a mountain debt” and that the they are choking from the “legacy of deficit spending that began almost a decade ago” – you realise that nothing changes. The ideologues are in power and the old style politics are cruelling the brilliant vision that he outlined earlier in the speech (with respect to education, climate change, public infrastructure – including public transport, etc).

When you realise that he is worried about “the fact that our government spends more than it takes in” and that this is in his words “not sustainable” you realise that nothing is going to change. The future he claims is about “painful cuts” – including salaries, programs etc. He emphasised that the so-called bipartisan Fiscal Commission was the beacon for this government (their analysis is “crystal clear”) for cutting public spending.

As an aside, I just love the way they call this commission and others like it “bipartisan” – when it is clear that only one economic ideology is reflected in its work and research methods. Being purely neo-liberal is not bipartisan. It is a stacked deck from the start and its conclusions should be largely disregarded.

But what really struck me was his statement about how to “win the future”. He said that:

We shouldn’t just give our people a government that’s more affordable. We should give them a government that’s more competent and more efficient. We can’t win the future with a government of the past.

That was the clincher for me. The US has to ditch its past way of running the government. It has to get rid of all its neo-liberal advisors who led the nation into widespread private bankruptcy and has left it with rising long-term unemployment, increased inequality and rising poverty rates.

The two defining characteristics of US politics (as far as I can see it from the outside) are the strong influence that the religious conservatives and the Wall Street bankers play in lobbying policy that suits them. It is short-terminism exemplified and often involved destructive policy trade-offs to secure the necessary votes (including the practice of tacking on stupid bits of law which have no relevance to the substantive piece of legislation just to get the vote of some crazy religious-based member).

The US government of the past – say the last 30 years – has been driven by neo-liberalism and religious fundamentalism – a really acrid combination of hypocrisy and dysfunction. The only way that the people will get “a government that’s more competent and more efficient” is if it starts to run its macroeconomy in a way that maximises the potential of all of its citizens. That requires – at a most basic level – for fiscal policy to be sufficiently expansionary to ensure that there are enough jobs for all those who want one.

Mass unemployment is the largest inefficiency in a monetary economy. Pleasing rhetoric when you have whole states with more than 20 per cent of its willing labour resources idle and persistently so – does not reduce that.

Cutting budget deficits at this time will also not reduce that.

But the President did finish by saying “God to bless” everyone and the United States of America – which I imagine is part of the problem.

Madness crosses the Pacific – the Australian government’s flood levy

Consider the following graph taken from – ABS data – which shows the proportion of total unemployment that is long-term (above 1 year of unemployment).

Average duration has now risen again and is 34.7 weeks. These averages hide very disparate regional outcomes. Some communities have very high unemployment and rising poverty while other (high income) areas have low unemployment.

I would never refer to an economy where long-term unemployment is rising as being close to full employment. I would never call an economy which has 12.5 per cent of its willing labour force idle – either unemployed or underemployed – as being close to full employment. Please read my blog – Australian Labour Force data – bad news again – for for my latest Labour Force commentary.

The fact that politicians are obscene enough to try to convince us that such an economy is nearly at full employment tells you about their worth.

A swathe of recent data confirms that the economy is slowing down notwithstanding all the hype about the minerals boom. The slowing economy is largely the result of the fiscal stimulus being inadequate in size and being withdrawn far too early for fear of inflation. The results are evident in the National Accounts data – see my commentaries in recent quarters via this link

The economy is not growing fast enough to eat into the rising pool of jobless and underemployed. Please see my commentaries in recent months via this link.

Further, inflation is moderating – please see my commentaries in recent months on movements in the CPI via this link.

Other supporting data – credit demand; housing; construction; trade; etc are all telling the same story.

When an economy slows and there is still significant excess capacity (in idle labour and capital) then fiscal policy should be stimulatory. This is just an application of a basic macroeconomics principle – spending equals income. Private spending in Australia is fairly flat (notwithstanding all the talk of an investment boom this year). Net exports are not contributing positively to economic growth.

That – ladies and gentleman leaves only one source of spending (aggregate demand) to arrest the slowing economy – the government sector. The problem is that the ideologues have induced the government to start cutting that back (in growth terms) which is why the economy overall is starting to tank.

Put that together with the fact that the Eastern states of Australia are enduring one of the worst natural disasters in our recorded (white) history in the form of widespread flooding that has wiped out massive amounts of productive capacity (in areas that contribute significantly to real GDP growth and hence income generation) and left whole communities without essential public infrastructure.

Combine all that with the fact that the Australian government is totally sovereign in its own currency and has no revenue constraint. Meaning it can muster idle resources that can be bought for Australian dollar outlays and put them to productive use whenever it has the desire to do so. In fact, given how governments invade our freedom with a range of laws and regulations, the only reason we put up with them is because we expect them to do exactly that – ensure all productive resources are contributing and that all citizens have access to a stable income which they can use to advance their own well-being.

We expect government to provide productive public infrastructure – productive in a broad sense – that it not only enhances the ability of private enterprises to make gains but it also makes our lives as citizens more fulfilling. We should never appraise public infrastructure just in terms of its subsidy to private profit.

Anyway, what does that tell you? It tells me – as one who understands the way the macroeconomy works and the way the monetary system operates – that now is not the time to be increasing taxes.

It tells me that now is definitely the time to be increasing the deficit.

It tells me that a blind adherence to fiscal rules as if they are hard and fast statements of wisdom is very dumb indeed.

Unfortunately, it tells our national government none of the above. The madness has crossed the Pacific.

At the National Press Club in Canberra today, the Prime Minister gave the official Australian government response to the flood disaster. A key part of the response was the announcement that it would introduce a new income tax – a scaled percentage flood levy – “to pay for the damage”.

You can read the full speech HERE.

Among the points in her speech worth noting, she said:

In order to think clearly about the best way to rebuild we need to understand not only the costs to the economy and the Federal Budget, but the growing capacity constraints on the economy, as well as the importance of the Government’s long-term reform agenda.

The economic costs begin with the immediate cost of damage and destruction of property.

Private homes and cars have been wrecked, business equipment ruined, public ferry terminals and highways have been damaged, even the ocean floor of Moreton Bay itself needs cleaning up.

That is a huge, one-off cost – simply replacing the things the floods have destroyed. These costs will be shared by people and families, by firms and insurers, by all levels of Government.

Okay, so far good. The costs to the Australian government will be the material things that need to be re-built or repaired. Actual real resources will be required to fulfill this object. The costs to a national government of any program it introduces are only the real resources that it deploys in the delivery of that program.

Costs are never meaningfully represented by the numbers that appear in the budget allocations. They are just $ representations of the current market value of the real resources being mustered. If there are real resources available for sale in the currency of issue then any sovereign national government can “afford” to purchase them and to utilise them to advance public purpose.

Any other representation of the “costs” is erroneous.

PM Gillard then made the mistake:

… the best preliminary estimate of the direct cost to the Federal Budget of this summer’s flood disaster is just over $5.6 billion.

So that is the immediate Budget challenge, to find over $5 billion.

As noted above, this estimate is not the relevant cost that the government should be calculating. The relevant questions should be – are there enough workers available to implement the programs without causing inflationary bottlenecks in the labour market? Are there enough raw materials – timber, concrete etc available for use in the reconstruction?

There is no “immediate Budget challenge … to find over $5 billion”. The Government can find that with the stroke of a key on a computer terminal. It issues the currency. It can “find” its own currency whenever it wants to.

The PM is lying to the Australian public by trying to make out that they do not have this capacity.

Further, are there idle labour that could be brought in to help in the rebuilding? Answer: hundreds of thousands of workers are available who are currently idle – more about which later.

The PM went on to acknowledge that the disaster was impacting badly on levels of economic activity and this “disruption continues into the future” and will reduce real GDP growth significantly, although she failed to acknowledge that the economy was already slowing prior to the disaster.

The point is as above – a slowing, damaged economy where private spending is insufficient to drive growth requires fiscal support.

The PM seemed to see things differently:

But we still have the advantage that our overall economy is strong and that means we have the capacity to pay as we go.

With our growing economy and rising national income, we can pay for rebuilding now. And if we can, we should. We should not leave the task of finding the money until future years.

The national government has the “capacity to pay” for the reconstruction which will also help boost the ailing private sector. But to say that imposing a new tax on the private sector will not reduce the likely growth rate is nonsensical.

She followed this up with claiming that “(s)olely borrowing to rebuild Queensland is a soft option I am not prepared to consider”. What has soft or hard got to do with anything? Answer: nonsense.

The question is: Does the Australian economy require higher levels of nominal aggregate demand growth at present and can the spending required to rebuild the damaged areas be accommodated within the overall inflation constraint? Answer: Yes (definitely) and Yes (easily).

So the last thing we should be doing in this case is to introduce policies that will impact negatively on aggregate demand.

The PM said:

My Cabinet’s job is still to make the decisions which will bring the Budget back to surplus in 2012-13.

In a growing economy, we pay as we go.

Bringing the “Budget back to surplus in 2012-13” is not the Federal Cabinet’s job. The Cabinet’s job is to manage fiscal policy (spending and taxation) to ensure that the economy is working to advance the well-being of all Australians. Whether that requires a budget surplus or a budget deficit depends on the circumstances.

All the circumstances at present and into the distant future tell me that a deficit will be required and larger than is currently the case. The indicators tell me that the pursuit of budget surpluses will actually undermine the performance of the Australian economy. It is the policy ambition of mindless vandals driven by some ideological conception that surpluses are good and deficits bad.

I also agree that budget deficits fall in “a growing economy” because the automatic stabilisers do mean “we pay as we go”. But the facts – as admitted by the PM in her speech is that the floods will reduce economic growth in the coming quarters. Further, the present tepid growth is inadequate to make a dent in the pools of idle labour.

Interestingly, in trying to be cute the PM said:

The floods have not washed away piles of hundred dollar notes. They’ve put holes in roads, buckled rail, broken up sections of ports, wrecked factory equipment, washed away fencing on farms.

So we’re not just going to need money, we’re going to need concrete and rubber and steel – and more importantly, we’re going to need carpenters and bricklayers and road gangs.

Perfect. The money comes “costlessly” via the treasury spending – crediting various bank accounts. There is never a shortage of that “resource”. The real costs are all the real resources that will be required – Road gangs etc.

My assessment is that there will be a huge amount of low-skill and localised work available to rebuild the “thousands of kilometres of roads and rail” and all the other tasks that will be required. It is often claimed by the conservatives that the idle labour is “structurally” unemployed because it is unskilled or living in the wrong place.

That myth cannot be sustained in this situation. There is a massive reconstruction effort that can deploy tens of thousands of unemployed workers on a Job Guarantee – at the federal minimum wage. The work will be local and in the most populace states.

Given that we have been seeing volunteers with no specific skills already working on the task, it is obvious that the Federal government could hire these workers and put them to work close to their homes with minimal training. So even if these are low-skilled workers there is no excuse at all not to hire them for the reconstruction effort.

Trying to claim that the reconstruction effort will exhaust our labour resources is clearly a lie. One of many lies that I heard from the PM today in her speech.

It gets worse however. The tax will not cover the full estimated damage to public infrastructure. So the PM has decided to cut spending across a number of programs (many of which are targetted at “green” initiatives). So their aim is to make the impact on the budget neutral.

But the reality is if the economy slows the automatic stabilisers will move against the Government’s surplus ambitions anyway.

You might also enjoy this column from Fairfax economist Peter Martin which was published on January 26, 2010 in the Melbourne Age – Wrong way, go back. It reflects on the Federal Treasurer’s (Wayne Swan) grasp of sound macroeconomic theory.

In the context of the Treasurer “softening us up to accept a levy to pay for Queensland’s recovery” Martin provides some beautiful quotes from the same Treasurer:

Swan … told a press conference yesterday that the costs imposed by the floods would be enormous, and “the fact is, the money has to come from somewhere” … The alternative of pushing out the budget’s projected return to surplus in 2012 was unthinkable.

“The Commonwealth made it very clear when we acted to protect our economy from global recession that when growth returned above trend we would move our budget quickly back to surplus, not because it is some vague objective, but because it is the responsible thing to do.”

Martin wondered whether it was a case of “Responsible no matter what?” and provided an interchange between the Treasurer (Swan) and a TV interviewer (Koch – or in the vernacular – Kochie):

“… we’re getting back into surplus in three years, Kochie.”

Koch probed, “Come hell or high water?”

Swan replied, “Come hell or high water, but we’ve got the judgment to handle these situations.”

This interview occurred in August 2010 (around the national election) so the reference to “high water” was somewhat unfortunate or very perspicacious.

The point is that the Australian government are ideologically obsessed with getting the budget back into surplus without having the slightest feel for what that means in the current context of the economy and the relationship the budget has with the major spending sectors (external and private domestic) with which it interacts with.

The levy (tax) will further reduce private spending in Australia at a time when it is already struggling to recover from the crisis and households are trying to reduce their record levels of indebtedness following the pre-crisis credit binge.

Responsible economic management must involve filling the spending gap not making it worse.

Conclusion

I have to rush now – ABC radio want to talk to me about the flood levy (read tax). They have to seek “balance”. Yeh – 10 neo-liberal commentators and 1 me!

But the oceans are for producing beautiful waves to ride and should not to be used as transmission conduits for destructive ideologies.

As an aside, I am feeling a bit better today but missed riding my bike this morning.

Tomorrow, a guest blog from Victor Quirk will appear. I am off in a plane again and will be tied up from early to very late with commitments. Back on Monday but over the weekend the Saturday Quiz will be available for your entertainment.

That is enough for today!