Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Since last week’s Federal Budget was released there has been an hysterical response from the Opposition, the media and the Government in reply. Claims of forecast errors, forecast manipulation and more have been in our faces every day. The temporary Opposition Leader even suggested that we need a new independent body – the Parliamentary Budget Office (PBO) to discipline government and stop it lying about the medium term forecasts and its economic policies. The comical side of this very sad week has been provided by the Shadow Treasurer’s struggle with averages. It was so hilarious that I am actually enjoying his attempts to sound as if he knows anything about macroeconomics. He doesn’t but that doesn’t stop him. But overall, once again I think the debate reflects a poor understanding of how the economy works.
First, lets deal with the PBO. The temporary Opposition leader (TOL) said in his budget reply that:
… honesty in fiscal policy would be served by the creation of an Australian version of America’s Congressional Budget Office, which has for many years provided the Congress with objective and impartial advice and analysis on fiscal policy and the effects of new policies … We would establish a Parliamentary Budget Office which would be:
– Chartered to provide Parliament with independent, objective analysis of fiscal policy, including long-term projections of the impact of various measures on the economy, employment, real interest rates and debt levels.
– Responsible to the Parliament rather than the Executive, much like the Auditor-General or Commonwealth Ombudsman.
– Staffed with economic, accounting and actuarial experts, and overseen by a director with an independent tenure.
He said that the new organisation would “contribute greatly to a better-informed debate about fiscal policy alternatives and the consequences of different choices and trade-offs.”
The Congressional Budget Office was created in 1974. Its Director is appointed by the two Congress house leaders after receiving recommendations from the Committees in those houses. The position is for four years but can be held multiple times. While the CBO is claimed to be partisan it appoints economic advisors from the outside. For example, it recently appointed Nouriel Roubiani the US economist who has achieved considerable notoriety in recent years following his comments about the debt build-up. But in his public work he demonstrates a failure to understand the role of government in a modern monetary system. So the CBO will be advised by just another neo-liberal and their assessments will reflect that.
Would the Opposition be happy if I was appointed to the PBO and conducted macroeconomic assessment according to the modern monetary view? I doubt it. I would assess that the policies of both sides of politics would not stack up because neither has shown the slightest interest in pursuing a genuinely low unemployment (full employment) policy with solid regard for equity.
It is clear that the PBO, if created, would reflect the same dominant economic ideology that the Treasury suffers from. So what gain is there?
Moreover, there is not the same institutional context in Australia. We do not have a President that has to negotiate with our Parliament to get funds to pursue his/her political agenda. Our Prime Minister and the cabinet, while not creatures of the Australian Constitution are part of our Parliament and stand scrutiny every 3 years or so.
I am not sure why the TOL didn’t say his model was based on the Canadian system which does have a PBO. That isn’t clear to me at all but is immaterial to the general points I want to make here.
So what is all this debate about?
The justification for the creation of the PBO is based on the view that governments lean on their bureaucracies to give them the answers they want. In doing so, they may introduce policy (for example, Work Choices) that violates our national interest. This is clearly possible and the previous federal regime made an art form of politicising the bureaucracy and expunging from it influential viewpoints that it didn’t agree with.
The Australian (News Limited) is making a huge running on this issue. I guess Rupert is upset that his Asian Wall Street Times was monstered by the Treasury Head earlier this week and wants to use his outlets to retaliate. Although News Limited doesn’t need an issue like the Treasury Head attacking on of its papers to maintain a consistent neo-liberal anti-government intervention line. That is a common theme. It has just intensified recently.
Ultra right commentator Des Moore wrote in The Australian that the recent Federal Budget has “led to widespread questioning regarding the need for easily the largest deficit ever ($53 billion), the believability of the forecasts and whether subject to political influence.”
While the Government in reply claimed that its was taking independent advice from Treasury, I agree with Moore that this claim that that the Federal Treasury is independent is nonsense. It is neither independent of the elected government, a point that its boss made on Wednesday but it also reflects the dominant neo-liberal ideology which then colours everything it does. I know Moore wouldn’t agree with that line … him being on record as believing Work Choices should have been taken further by the previous government.
Moore (a former Treasury insider) makes a good point:
The budget papers are presented to parliament by the Treasurer and Finance Minister and they are responsible for the material within them. While all governments rely extensively on Treasury advice in framing budgets, ministers do not always accept that advice. It is quite possible that this year’s budget forecasts were a combination of Treasury modelling and discussions between senior ministers and Treasury officials. Indeed, it would be surprising if no such discussions occurred. That does not necessarily mean Treasury was given firm directions: there is more than one way of skinning a cat.
While Moore is trying to make a case that the Treasury operates like the BBC program Yes Minister, the fact that Treasury is not independent is a sound foundation for political accountability. We will judge this Government on its performance at the next election. We do not elect Treasury officials. The election process will determine whether we think the Government is acting in our national interest. If we think they are not then they are history.
There are too many non-elected and therefore non-accountable economic institutions that damage lives and get away with it. The RBA – the IMF – the World Bank to name the most important.
In terms of Work Choices, in November 2007 we sorted that out. We did … and we sent the little rodent and his nasty lot to the boondocks. Of-course, the incumbents have not exactly ditched Work Choices. They have kept much of its attack on working people and dressed it up as something “labour”. The new legislation is neo-liberal in spirit and provides less but still too much power to employers. It should be comprehensively reviewed and changed. But that is another blog altogether. The point is that if we (as a collective) do not like the changes enough then the Government will be history.
Continuing the theme, that the Treasury is not independent, The Australian editorial comment Henry’s argument exceeds credibility put matters bluntly “The Treasury secretary is not a minister and should shut up”.
Once again I have agreement with the conservative press on this issue. The writer said:
KEN Henry is less irritated than outraged by journalists who ask embarrassing questions. For years, he opposed the release of Treasury data on income tax bracket creep to The Australian because he opposed Freedom of Information requests that may embarrass ministers or officials. The same arrogant self-importance was on display on Tuesday when the Treasury secretary criticised commentators who question budget estimates that the economy will grow strongly at an annual rate of 4.5 per cent a year from 2011-12.
The FOI policies of the last federal regime were appalling and made us close to a police state. Not only was the press prevented from accessing key research documents produced by government departments which would have allowed us all to make ongoing assessments of the veracity of the policy evolution but researchers were also stifled in their ability to access data which would allow them to make independent assessments of government policy. It remains to be seen whether the current regime is any better but certainly on data it seems to be releasing more information to researchers. Fingers crossed.
But on FOI, I don’t get the impression that the policy has changed all that much … yet!
Anyway, while the Treasury does get “it wrong regularly” as The Australian editorial notes, there is no reason why a PBO would do any better. It is likely that they would be employing the same ideology and the same technical approaches.
The solution is to empower the independent research community which spans all ideologies and thus reflects a cross-section of the possible opinion.
Increasingly, academic researchers have been compromised by the sort of clauses that are inserted in government contracts forbidding certain types of research (on so-called privacy grounds) and/or allowing the government departments to manipulate the final published outcomes (in a multitude of ways!). Further, there has been a creeping sense of fear among academics that they should not comment publicly.
The whole concept of tenure was based on the idea that academic researchers provided the defence of the public interest against political forces intent on furthering their own interest. So it was the academy that kept the government of the day honest. This has sadly gone now.
Universities have been starved of funding and managerialism within has taken over what used to be broad-based participatory democracies. I am talking generally here and saying nothing specific about my own university. My circumspection is not out of fear – I say what I like – but it just isn’t germane to this blog.
The previous regime even forced the universities to engage with Work Choices (AWAs) or forego essential funding. It was a crude blackmail effort! It worked for the time they were in power.
But the solution to a more empowered society is to restore the independence of the academy. Among other things, including internal university reforms, there is a crying need to provide adequate funding for truly independent research centres to undertake critical scrutiny of the public debate from all sides. This would go some way to restoring the role that academics were meant to take before the neo-liberal attack on the academy began.
Anyway, today’s offering on the PBO takes the debate one step further into absurdity.
The failed former NSW Treasurer (FFT) waded into this debate today with his article Budget honesty now for the future in today’s Australian newspaper. I have noticed with some disinterest in recent weeks how bitter Costa has become in his attacks on the Government. The main theme is that he was right in forcing neo-liberal type economics on NSW and anyone who does any different is a dangerous out-of-control Ruddbot. The NSW data doesn’t bear testimony to that claim but anyway that is another story.
Costa disagrees with Turnbull on the need for the PBO. He says:
Turnbull’s proposal … would be a waste of effort and resources. The US experience doesn’t translate to Australia. The Congressional Budget Office plays a critical role in the US because of the nature of the constitutional checks and balances built into the US political system.
He is referring to the way in which the President has to negotiate with the Congress to get funding for policies. The PBO plays a role in this process by providing another opinion. So as I noted above, this type of institution does not sit well in our non-Presidential system.
But the FFT says:
In the Australian context what is required, and this budget highlights more than ever, is an independent statutory body that looks after the interests of future taxpayers: an intergenerational budget office … The federal Government and many of the states have already recognised the future impact of an ageing population on government expenditure. Objectively, paying for the services required by an ageing population is our greatest challenge. The puffed-up hysteria about human-induced global warming has diverted government attention from this critical and real challenge.
Crazy stuff! Out with the PBO and in with the IBO (intergenerational budget office).
This proposition is based on the erroneous intergenerational debate that was used by the previous federal regime to justify their unjustifiable budget surpluses.
Clearly he is right that our federal system is fiscally imbalanced and the “The states, which deliver the bulk of the services to the ageing population, are very aware of the emerging funding problems they face.”
However, this is a great time to eliminate the states from our over-governed system and better align the big spending responsibilities in service delivery with the sovereign government. Then we eliminate all the issues about whether the State government can raise debt, whether it will keep its AAA rating and all the rest of the nonsense. Then the national government would be assessed in its own right without being able to shift blame to the states.
I agree that government attention has been diverted from the “critical and real challenge” (as the FFT notes). It just happens that the real challenge is real not financial if we are considering the federal level spending imperatives that may or may not arise in the future.
I agree that the states will face fiscal challenges because they are not sovereign in the currency and are more like households in the sense that they have to “finance” their spending. They are different to households though, in the sense, that they can tax and borrow cheaply. But that aside, the states should be eliminated and their current policy responsibilities taken on by the federal government which is not revenue-constrained.
The federal government faces a different constraint – the availability of real resources. As long as we don’t use up all the real resources now then the federal government will be able to buy them for use in the future. There will never be a financial constraint stopping this. The question about what will be made available in the future and to whom, assuming there are real resources, is a political one and will be resolved accordingly.
Well conceived, planned and implemented climate change initiatives are required now – and I exclude the ETS approach from the well-conceived category outright. Policies in this space may help us enhance the future real resources available to the generations to come.
Further, deficit spending now is crucial to create full employment and to fund our educational institutions properly so that they can generate as much wealth now for the future. Undermining the income producing activities of our economy now is the best way of vandalising the future.
Running surpluses now will also undermine the capacity of the future generations. Real investment in capacity building now is the best thing our national government can do for the next generations.
Creating an IBO which will tell us that budget deficits are undermining our kids futures will not help one bit. That would damage their future.
The IBO idea is based on the erroneous conclusion that budget deficits will create unsustainable debt burdens, higher future taxes and interest rates and all the rest of that meaningless drivel. I hope readers of this blog will have sufficient understanding to know that these views reflect a failure to understand how the actual economy operates.
Alternatively, the proponents of these idea do understand how the system actually operates but realise that the general population that votes does not. And given they want policy skewed towards the top-end-of-town they know that widespread deregulation, extensive privatisation, public-private partnerships, and corporate welfare is the best way of achieving that end. It worked for them for a few decades now – why not keep pushing the line.
CofFEE Public Policy Lecture Podcasts
The first of our podcasts on our public policy lectures on Macroeconomics is now available.
Macroeconomics for beginners – Part 1 covers the entire second lecture which was presented by Randy Wray and me last Wednesday evening. Comments welcome.
The Saturday Quiz will be available sometime late tomorrow afternoon – if I can think up some questions.