Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
The Australian Broadcasting Commission is undergoing dramatic cuts to its budget and shedding programs and valuable staff. The ABC office in Newcastle (Australia’s 7th largest city) has been downgraded to ‘regional’ status from metropolitan status to allow the government to cut its funding even further. It is curious that when they wanted to cut University funding they declared the University of Newcastle to be a metropolitan university and therefore not qualified to receive special regional bonuses. Where the ABC should cut staff, however, is in the area of economics and finance. They have become so inept at analysing what is going on that they are now just passive mouthpieces for private sector consulting firms who pump out macroeconomic nonsense weekly, which distorts the public debate. Today, the top ABC news story is – ‘Budget is burning’, warns top economist. It is a disgrace.
Let’s establish something first. This is what a fire engine looks like:
Firefighters drive this sort of truck all over the place to put out fires that might look like this:
Neither has anything to do with a fiscal balance which measures the difference between government spending and its revenue.
The sophistication of the images is superior to the sophistication of the reporting in this regard.
The sort of stuff that Access Economics puts out is the equivalent of the propaganda that any totalitarian regime puts out. It assumes away all the important considerations and reinforces a simple message that goes to the heart of the population’s insecurities and ignorance.
The situation that the ABC report is covering is this (in Modern Monetary Theory (MMT) terms):
- Australia suffered a fall in private spending as a result of the GFC.
- GDP growth fell and unemployment rose.
- In 2008, the federal government introduced a major fiscal stimulus which saved the economy from recession and GDP growth returned quickly and unemployment started falling.
- Hysteria from conservative think tanks and politicians, business lobby groups, reinforced by a captive neo-liberal media made it politically difficult for the government and they set about on an austerity campaign to get the fiscal balance back to surplus.
- It had previously been is surplus only because the private household sector had run up record levels of debt which kept spending growth going at the same time as real wages were largely flat.
- The fiscal austerity duly undermined economic growth and unemployment started to rise again – now at levels above those seen at the worst months of the GFC period.
- Compounding the fiscal cutbacks, Australia’s terms of trade have fallen substantially as mining products are in oversupply (the famous cobweb cycle in operation) and that has further hit our national income.
- The flat employment growth and falling national income has reduced the tax revenue that the government was expecting and as a result the fiscal deficit is now much higher than it anticipated.
- The deficit is also higher because the Senate (our upper house) is not controlled by the government and refuses to pass austerity measures that were announced in the May fiscal statement because they consider them to be excessive and highly unfair (see below).
- Overall, all that is happening is that the deficit is rising as the cycle turns down as it always does. Trying to cut further net public spending in this sort of climate will only exacerbate the problem.
- The problem is a lack of growth and rising unemployment – the fiscal balance just reflects that malaise.
- The solution is for the government to increase the discretionary fiscal deficit by increasing spending and/or cutting taxes. There is significant scope for increasing public spending on job creation programs, public health, education, infrastructure and environmental initiatives such as renewable energy.
- There is no fiscal emergency other than an urgent need for higher deficits.
Here is the history of the Australian Bureau of Statistics (ABS) broad labour underutilisation series (monthly) which adds together the unemployment rate and the underemployment rate. At August, the level was 14.6 per cent and when the data comes out later this week for the latest quarter, the rate will have risen – probably close to 15 per cent.
This is a very sluggish economy with a severely under-performing labour market. It is little wonder the fiscal deficit is rising.
You would learn none of that from reading today’s press on the topic. The private consulting firm released its latest report on the fiscal situation. This firm has a track record: (a) of beating up deficits as bad; and (b) making huge forecast errors.
Please read my blog – A Budget that reduces growth and increases joblessness – for no sound reason – for more discussion on this point. You will see how poorly Access Economics is at forecasting fiscal outcomes, yet people pay money for their reports.
I guess when the national broadcaster gives them credibility with headlines and no critical scrutiny then it would be easy for people to be duped into believing this was valid information.
Further, even if the reports of the increase in the projected fiscal balance are accurate (and clearly the deficit is rising) the conclusions drawn and the language used to reinforce the messaging are totally erroneous.
The ABC report on this latest report invokes many of the erroneous metaphors that seduce readers into believing that there is an emergency in relation to government fiscal policy.
1. “budget is burning”
2. “Big blowout in federal deficit”
3. “$4.9 billion worse than Joe Hockey’s most recent forecast of $29.8 billion in May” – worse implying a smaller deficit is better.
4. “$35 billion deficit blowout”
5. “the budget needs repair”
They can join the list we published in our paper last year – Framing Modern Monetary Theory – and summarised by the following table.
These references to fires and blowouts invoke a sense of emergency and collapse and the references to repair suggests the fiscal balance is akin to a patient in a hospital that needs surgery or a car that is broken and needs fixing.
The intent is obvious – it serves the neo-liberal austerity agenda which is helping to redistribute real national income away from workers towards profits and increasing income and wealth inequality in our societies.
Clearly, the Australian economy is in trouble. With China likely to slow further and our export income cut as a result, the austerity bias in government policy will further damage economic growth and force unemployment up.
The ABC conduct in relation to macroeconomics reporting is appalling.
1. There was never any attempt to explain to readers what the purpose of fiscal policy is and the way it works to fulfill that purpose.
2. The ABC article never mentioned unemployment as it was telling readers how big a problem the fiscal position presents.
3. Readers were encouraged by the sensationalist headline and subsequent use of erroneous language to believe the goal of fiscal policy is to run a surplus and departures from that are a sign of an emergency.
The Fairfax reporting today – see Former Treasury official: Budget deficit to blow out by $35 billion – was similarly irresponsible.
It told readers that Access Economics was “ringing alarm bells” – again the fire or emergency warning metaphor. We read that the situation is “deteriorating” and the reference is to the fiscal balance exclusively.
There is no mention of rising unemployment in that context or in the article in general.
It had a graphic using the terminology of the Access employee – “Budget deficits as far as the eye can see” – with no attempt to indicate why that might actually be a good thing in the context of non-government spending decisions and likely future actions.
It is an appalling piece of reporting and the journalist should be ashamed of himself. Eh Gareth!
The related commentary by the Fairfax economics editor, Ross Gittins today (December 1, 2014) – Why Joe Hockey’s budget flopped so badly – is also full of myths.
I agree with him that the May 2014 Fiscal Statement from the government was deeply unfair, in that it attacked the most vulnerable in our society – the agenda that the government was too eager to put in place.
But the inequity was not the only thing wrong with the exercise. At a time when private spending was not growing sufficiently to reduce unemployment and the external sector was draining growth via the current account deficit, the last thing that the government should have been contemplating was a cut in the fiscal deficit.
The fact that it has attempted a very large fiscal retrenchment at a time when unemployment is rising demonstrates its incompetence.
The fact that it tried to craft this retrenchment by pushing all the adjustment (of falling incomes and rising unemployment) onto the poor and disadvantaged and other vulnerable groups demonstrates the government’s venality.
While deploring the inequity, Gittins still seems to agree with the move to austerity. He claims that:
… we have to accept some hit to our pocket if the government’s budget is to get out of structural deficit …
First, what is a structural deficit?
There you learn that the government fiscal balance is the difference between total revenue and total outlays. If total revenue is greater than outlays, there is a surplus and vice versa.
It is a simple matter of accounting with no theory involved. However, the fiscal balance is used by all and sundry to indicate the fiscal stance of the government.
So if there is a surplus it is often concluded that the fiscal impact of government is contractionary (withdrawing net spending) and when there is a recorded deficit it is concluded that the fiscal impact is expansionary (adding net spending). That is correct as far as it goes.
But the complication is that we cannot then conclude that changes in the fiscal impact reflect discretionary (that is, chosen) policy changes. The reason for this uncertainty is that there are automatic stabilisers operating. To see this, the most simple model of the fiscal balance we might think of can be written as:
Fiscal Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)
We know that Tax Revenue and Welfare Payments move inversely with respect to each other, with the latter rising when GDP and employment growth falls and the former rises with GDP growth. These components are the so-called automatic stabilisers
In other words, without any discretionary policy changes, the fiscal balance will vary over the course of the economic cycle. When the economy is weak – tax revenue falls and welfare payments rise and so the fiscal balance moves towards deficit (or an increasing deficit). When the economy is stronger – tax revenue rises and welfare payments fall and the fiscal balance becomes increasingly positive.
Automatic stabilisers attenuate the amplitude in the economic cycle by expanding net gpvernment spending in a recession and contracting it in a boom.
The fiscal balance thus has two conceptual components: (a) the cyclical component indicating the impact of the automatic stabilisers; and (b) the structural component (indicating the discretionary fiscal stance of the government).
The structural deficit/surplus is therefore the fiscal balance that would be recorded if the economy was at full employment and the cyclical component was in balance (that is, equal to zero). That is, tax revenues were at their cyclical maximum and cyclically-sensitive spending, such as, unemployment benefits were at their minimum.
In other words, it would be a manifestation of the discretionary impact that the government chooses to have on total spending. A structural surplus would signify that the government was intent on reducing or draining spending (and hence slowing down the economy) and a structural deficit would indicate that the chosen position of the government would be to support growth with positive net spending.
A structural surplus would only be appropriate if:
(a) the combination of external sector net spending (exports greater than imports adjusted for income flows) and private domestic net spending was sufficient to generate full employment alone, and the economy was in danger of an inflationary upsurge; and
(b) the balance of economic activity between public and private goods was more or less deemed to be satisfactory.
If (b) was not satisfied and there was a desire for more public goods and services, then the government might consider increasing taxes and therefore draining the capacity of the private sector to spend, so that the government would have more ‘real’ spending space to increase its provision of such goods without causing inflation – given that the economy would be operating at full capacity.
Such a situation might warrant a smaller surplus or a fiscal deficit.
But a structural surplus will never be responsible, if the combination of external sector net spending and private domestic net spending is insufficient to generate full employment. Under those conditions, which are normally found in advanced economies, the structural balance will always have to be in deficit – on-going and of various magnitudes depending on the strength of the non-government spending.
Second, the question that goes begging in the Gittin’s claim is: Why do we have to get out of a structural deficit?
Please read my blog – The full employment budget deficit condition – for an answer to the question.
Essentially, if our aim is to generate full employment then, given the private domestic sector spending (and saving) decisions and the external sector contribution to total spending, there will be a unique fiscal balance that is required to ensure total spending is sufficient to achieve that aim.
That balance might be a surplus, a zero balance, or deficit. It all depends on the context.
The correct desired outcome is that the cyclical component of the fiscal balance be zero – for then the economy is at full employment.
In the Australian context at present (and typically) the private domestic sector is unwilling (for good reasons) to spend enough to make up for the shortfall in contribution from the external deficit and create enough demand to create full employment.
In fact, things are getting worse, as evidenced by the rise in the unemployment rate.
I support cuts to the ABC economics and finance reporting. They should concentrate on areas that they have expertise and are willing to be investigative and creative.
Merely repeating the press releases from various consulting companies who seek market advantage on their competitors by sensationalist headlines is not the role of the national broadcaster.
The ABC journalists in this area rarely ask a challenging question or dig deeper to root out ideology. They just passively pass on the message – metaphors and all.
Fairfax press has deteriorated dramatically over the last decade and is largely a mouthpiece for these consulting companies that seize headlines as a way to boost their market appeal. Their reports have little to do with knowledge dissemination.
Election in Victoria
My original homestate elected a Labor government on Saturday, categorically tossing out the conservatives. They came in with a mandate to create jobs, revitalise technical education, improve public transport and to advance other priorities.
They now have a chance to restore faith in the Labor brand that has been severely damaged by the previous Federal government. We don’t want any more neo-liberal trickery. Please get back to doing what governments are elected to do and that is advance public welfare and stand against the vested interests that seek to unfairly gain income and advantage at the expense of the masses.
That is enough for today!
(c) Copyright 2014 William Mitchell. All Rights Reserved.