Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Tomorrow, the Australian Bureau of Statistics will release the June-quarter National Accounts for Australia. In the lead up to this release, we get some information about the components of national expenditure and the contribution to the final real GDP growth result that will be released tomorrow. Last week, we learned, courtesy of the release – Private New Capital Expenditure and Expected Expenditure, Australia, June 2013 – That seasonally adjusted new capital expenditure and fallen by 2.3 per cent in the year to June 2013. This is off an extremely high base and suggests that the investment boom associated with the mining sector is winding down, albeit steadily. Today, the ABS released the latest – Balance of Payments and International Investment Position, Australia, June 2013 – which showed a widening Current Account deficit (by 7 per cent) with the surplus on the trade part of the account falling by 2 per cent. In volume terms, it is estimated that the external deficit would reduce real GDP growth by 0.04 percentage points. That is, a modest spending drain from the domestic economy.
In today’s Melbourne Age (September 3, 2013), there was an article by the economic’s editor – Labor’s problems will soon be Abbott’s woes – which was anticipating what the next government will face after the federal election that will be held on the coming Saturday.
The sub-title told you immediately that his readership was being lead down a particular ideological path. In font, just smaller than the main article title, we read:
The country’s deep problems, such as a budget stuck in deficit, will not change just because the government changes on Saturday.
Note the terminology – “stuck in deficit” – like stuck in mud, which unless you’re a salt water crocodile who loves lying deep in those muddy banks along the rivers in Arnhem land, sounds distinctly bad.
And, “deep problems”, with the only descriptor being a budget deficit.
The reader is alerted immediately to the idea that a persistent budget deficit is not only a problem, but a deep problem.
The reader would not have to read any further to get the message and in that sense the damage to the democratic process, which presumably relies on an electorate being informed by acceptable knowledge and evidence, is done.
I should add that the journalist in question, Tim Colebatch is considered by conservatives to be progressive, which in the parlance of Australian politics mean he is pro-Labour.
That is a reflection of how distorted the public perception is. While Tim Colebatch’s articles are not manic in the same way that most of the articles that come out of the News Ltd publications are, he, nonetheless pushes a mainstream macroeconomics line with respect to budget deficits, which is in defiance of the basic operational features of our monetary system.
To be progressive from an economics perspective these days seems to mean that you can tout neo-liberal conceptions, which exploit all the metaphors used by conservatives who are anti-government by ideology. That is how bad things have become.
The article begins by noting what the opinion polls are telling us – that the Labour government will be dead after Saturday evening and conservative coalition will be back in power at the federal level with a considerable majority in the lower house.
This is the born-to-rule coalition of city conservatives (who call themselves liberals) and rural conservatives (who when not acting as socialists in putting their hands out for every pro-farming regulation or subsidy are extolling their hatred for gay marriage or, for that matters, gays in general among other “social liberties” they abhor.
The article then recounts how the previous conservative government (1996-2007), which ran surpluses in 10 out of 11 years was blessed with strong world growth conditions. The current Labor Government (Rudd/Gillard being the two Prime Ministers) have not enjoyed such conditions:
We look back on the Howard era as years of prosperity, and they were. But, in part, we prospered because global growth averaged 4 per cent a year. The Rudd/Gillard years have been more difficult, in part because global growth slumped conservatives of 2.9 per cent a year.
In Howard’s last six years, global output grew 30 per cent. In Labor’s six years, it has grown 19 per cent. That makes a difference to what the government and the economy can do.
While Tim Colebatch is writing within a word limit, which I am not, the important salient fact that he doesn’t mention about the pre-crisis era is that the growth was driven by an unsustainable buildup in private debt.
The strong growth in tax revenue that allowed the conservatives to run surpluses without destroying economic growth was unsustainable given that the non-government sector would eventually realise that balance sheets were so precarious that they would have to return to more normal patterns of spending and saving.
Before the non-government sector reach that realisation, the greed and corruption of the financial engineers and planners had pushed so much debt into the hands of so many that had no way of staying solvent.
As a result, the financial system crashed and required massive government support to avoid a total collapse.
The point is that this era of budget surpluses was atypical in the extreme and should not be used as a benchmark for assessing the policy position that a national government might be adopting in more normal times – such as now.
It means the national income growth and hence revenue growth for national government will not be driven by manic private sector credit binges into the future. A much more balanced approach to sectoral contributions will be required.
Which focuses attention on the last sentence in the quote above – “(t)hat makes a difference to what the government and the economy can do”.
The implication is that conditions in the future will constrain what the government “can do” and these conditions are related to the growth in tax revenue that the national government might experience.
Tim Colebatch says that the tectonic plates of world economic activity are shifting – the US and Europe are starting to grow and “the outlook has worsened for China, India, Indonesia, and the developing world”. This means that, for Australia, which is now heavily influences by Chinese economic fortunes, “the risks are shifting closer to us”.
He also says that private capital investment growth (as noted in the introduction) is declining and that there might be a substantial decline in the coming years.
I interpret these points as suggesting there are risks for economic growth in terms of which sectors might drive growth. I don’t think that is the interpretation that Tim Colebatch is seeking from his readers.
This is because he then focuses on the implications for what the government “can do” in these circumstances:
… the budget is stuck in deficit because of deep problems that will not change just because the government changes. Revenue in the Howard government’s last six years was 25.4 per cent of GDP; in Labor’s six years it has been 22.7 per cent, and on Treasury’s projections, it will not return to Howard-era levels for years. And 2.7 per cent of GDP is $43 billion a year.
So linking back to the earlier discussion about normality and the atypical nature of the pre-crisis decade or so, the ratios he quotes are meaningless in terms of what the Australian government, as the monopoly-issuer of our currency, “can do”.
First, the Australian government issues its own, non-convertible currency and floats it on international foreign exchange markets. Further, it does not issue government debt in foreign currency denominations.
Please read the following introductory suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.
Second, in that monetary environment, there are no financial constraints on the Australian federal government. The actual constraints are real – that is, the real resources that are available for purchase in Australian dollars.
The Australian government can buy whatever is for sale in Australian dollars at any time it chooses, which is not to say that it should spend, as in the pejorative and loaded parlance of the conservatives, like a drunken sailor.
Please read my blog – The full employment budget deficit condition – for more discussion on this point.
What it means is that a national, currency-issuing government has to net spend (which might be a negative or positive outcome, that is, deficit or surplus) in-line with what the non-government sector is doing. National income changes will always ensure that if the non-government sector is saving overall (that is, not spending its total income in any one period), then the government sector will be in deficit (that is, spending more than it is extracting in tax revenue).
The fact that the Australian government is now likely to run budget deficits for the indefinite future is not a deep problem and is not something that we should assess as being poor fiscal practice.
In fact, the real problem in the economy – mass unemployment and underemployment, which is approximately 14 per cent of the total available library resources, not to mention the poverty that accompanies this wastage – indicates that the budget deficit should be, around 2 o 3 per cent of GDP larger than it currently is (as a conservative estimate).
The “deep problem” in Australia is this wastage of labour and the degradation of public infrastructure that the surplus fetishes, acquired by both the Conservatives and progressive political elements, has engendered.
Tim Colebatch just reinforces the “validity” of those fetishes in the eyes of his readership, which perpetuates them as a political reality.
He might say that the political reality is the true constraint. Sure enough politicians make fiscal decisions. But then why not come out and say that all sides of politics have adopted a viewpoint that mass unemployment and underemployment is the new acceptable norm rather than dressing this ideological position up as having something to do with a tax base that is returning to historical proportions after being inflated for a decade or more by unsustainable credit-fuelled consumption growth.
Which brings me to an interesting conversation I had over lunch today – talking economics as usual, even if in between other more important issues like design, the Essendon Football Club drugs scandal, whether the dry season is nearly over or whether I’m just acclimatising to the tropical heat are the topic of conversation.
The economics discussion centred on the distinction between an operational understanding of the way the monetary system works and the politics that one might bring to their understanding of those technical details.
I’ve made this point before but it is often overlooked in the discussions about policy. There is nothing right-wing all left-wing about the descriptive components of Modern Monetary Theory (MMT) insofar as they explain the essence of the functionality of the monetary system.
So, for example, if a nation has an external deficit, and the private domestic sector desires to save overall we know, that at the current level of national income, the government budget must be in deficit. There are no ifs and buts about this.
That conclusion does not reflect any political (ideological) perspective unless one wants to become overly “post-modern” and quibble the concepts such as the national accounts are in themselves subjective and tainted by ideology. That point we all disappear up our own well-known orifices!
I prefer the clean air and avoid as best I can getting involved in discussions with post-modernists and quickly divert the conversations when such a prospect arises to discussing how many contested possessions player number 15 on team A had last weekend – always a realist.
The point is that within this framework of understanding, a person might prefer to sustain mass unemployment as an ideological value. They might believe it is beneficial to have large pools of unemployment suppressing the capacity of workers to enjoy wages growth, which would make it easier for the owners of capital to extract a larger share of real income growth.
Clearly, I don’t share that view, and consider full employment to be a primary goal of national government policy. I hold that view not only because it involves less waste (the puritan in me) but also because it empowers individuals to realise their potential and promotes social mobility, which breaks down prejudices and the rent-seeking capacity of the elites (economic rent, that is).
Both positions reflect starkly different ideologies. But they could both share the same understanding of the way modern monetary system operates.
However, the politics would be quite different because the neo-liberal would have to do publicly admit that they were deliberately suppressing the capacity of the government to maintain full employment because they liked to have a pool of unemployed and the disadvantaged that the occupants of that pool will endure.
Imagine what the public would do to a political party that made such admissions.
Instead, they come out with the smokescreen that the government has run out of money or is in deep trouble because the nation is stuck in deficit and deficits are bad and a whole manner of bad things are going to happen if they don’t cut government spending now and so it goes.
They lie to hide their ideological preferences because they know the preferences would be repugnant to a greater proportion of voters than currently support their metaphorical manipulation.
The fourth estate then perpetuates the lies.
So we go into this election in the smokescreen and most of us have no clue of how distorted and misleading the economic narrative is.
We vote on a lie. This is not one of the characteristics that the great Greek philosophers considered to be an essential foundation for democracy.
But then the neo-liberals sorted the Greeks out, even if it took a few thousand years to do so. They have been fixed right up!
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.