I mentioned last week in this blog post - The dislocation between the PMC and…
Crikey, why is it is honourable to deliberately increase unemployment?
Knighthoods are handed out as part of the anachronistic Commonwealth honours system. They are an ultimate symbol of cultural snobbery in the UK and cultural cringe in the former British colonies, such as Australia. The Australian government effectively abandoned the system in 1983 because it insulted our sense of independence even though the Monarch of England remains our head of state (why?). It was formally abandoned by agreement with the British government in October 1992. But the creepy conservative government that took over again in September 2013 decided to reinstate the system of imperial honours, specifically to resume the award of Knight and Dame in March 2014. This demonstrated how out of touch the conservatives were. The criticism reached fever pitch a few weeks ago – on Australia Day (January 26, 2015) when it was announced that Prince Phillip (the Queen of England’s husband) would receive a Knighthood, the nation’s highest honour, from the Australian government. Why? Because our Prime Minister is unbelievably stupid but that is another debate beyond of the topic of today’s blog. This UK Guardian article – How giving Prince Philip a knighthood left Australia’s PM fighting for survival – will fill you in on that decision if you are interested. Now a so-called media watchdog, the Australian media site Crikey thinks the Federal Treasurer should be awarded a Knighthood if he can further undermine economic growth and deliberately cause unemployment and underemployment to rise further, not that they said it like that.
For overseas readers the term Crikey is rather outdated Australian slang which means an “expression of astonishment” (Source). Similar old slang expressions are Blimey (stone the crows) and Strewth!
But Crikey is also a media organisation that runs a subscription news service that they claim – “acts as a vital check and balance on the activities of government, the political system and the judiciary”. It claims to be a bulwark in providing “public scrutiny” of important developments in Australia.
It claims to be “a showcase for information that might otherwise remain suppressed” and to be transparent in what it does. It claims be about “fair and open … journalism” as opposed to what?
Its revenues comes from subscriptions and advertisements so it is just another commercial operation.
It also uses the language of neo-liberalism to discuss fiscal policy issues thus emotively misrepresenting to its readers what is really happening – so much for being a source of truth.
It also perpetuates the standard mainstream economic myths about fiscal policy, which means it is deceiving its readership rather than providing them with knowledge and accurate reporting.
On that basis alone, I would not recommend subscribing to the service.
Their latest commentary (January , 2015) – Remember Labor’s ‘skyrocketing debt’? The Coalition’s is much worse – is demonstrative of this appalling lack of understanding of the reality of the topic that their commentator is claiming to be an expert in.
The article also assumes Crikey’s usual – “we are breaking big news” here – they like to think of themselves as the news service that breaks stories that other media agencies either haven’t understood the importance of or are unwilling to report.
There is nothing ‘breaking’ at all about the financial data they report (it is part of the standard reporting cycle of the Department of Finance in Australia) and the controversial aspects of the data are actually ignored by the article.
Last week, the – Australian Department of Finance – released the – Australian Government Monthly Financial Statements December 2014 – which allows us to see the full fiscal accounting data for 2014.
These are monthly statements going – Back to 1999.
The following graphs will aid the discussion.
The first graph shows the Annual Change in Commonwealth Net Debt ($A millions) as at the end of December in each of the years shown.
The previous federal government (Australian Labor Party) was in office from December 2007 until September 17, 2013. The current conservative government took office in September 2013.
The previous government had to deal with the GFC and initiated two large stimulus packages in 2008, which ultimately showed up as a rise in net debt, given the unnecessary practice of issuing debt to the private sector to match the fiscal deficit.
The change in public debt is just an accounting record of the fiscal deficits in the respective periods under these unnecessary institutional rules. There is nothing of particular interest in the graph from a macroeconomic perspective although from a political perspective (which is the intent of the Crikey article) there is clearly interest.
The fiscal deficit rose for two reasons:
1. The GFC triggered the fiscal automatic stabilisers and tax revenue declined sharply and welfare payments rose. That cyclical effect, which is built into the fiscal balance outcome would have pushed the government deficit up even if the government had sat on its hands and let the crisis unfold.
The cyclical effect tells us that the final fiscal outcome is typically driven by the spending (and saving) decisions of the non-government sector (external sector, households and firms). It is not an outcome that the government can particularly control or target and nor should it.
It reflects the state of the real economy which is where the policy targets should be expressed – that is, high employment growth, sustainable output growth and the like. The fiscal balance will just act as a measuring gauge for what is going on in the real economy and as no intrinsic interest or importance in its own right.
2. The discretionary fiscal stimulus packages manifested in the form of increased spending, mostly on infrastructure.
The ALP government then went crazy and bent to the pressure from the conservatives regarding the deficit and the associated build up of net debt. The sky was about to fall in – or so it was claimed.
So by 2013 it had cut hard into public spending and the result was a decline in net debt. The problem with that strategy was that the public spending cuts embodied in their pursuit of austerity led to a slowing economy and rising unemployment.
By the time the conservatives took office on September 18, 2013, the economy was in a poor state with real growth well below trend and declining fast, inflation falling, employment growth below the growth of the labour force and unemployment rising.
The fiscal manifestation of that real disaster was further declining tax revenue for the Commonwealth government and a failure to stem welfare payments despite their vicious efforts to penalise those on income support.
The result was obvious – the fiscal deficit has risen and with it net debt has risen much more in the last year than in the previous two years.
The current government could have accepted that it inherited an ailing economy as a result of the obsession of the last government with pursuing fiscal surpluses at a time that the external sector was draining overall spending and private domestic spending was insufficient to support even a trend rate of growth.
But it had demonised the previous government and during the 2013 federal election campaign had relentlessly told the public that there was a fiscal and debt emergency, which required immediate treatment. If left untreated interest rates and inflation would explode, the goverment would run out of money and the rating agencies would cut our AAA rating.
All nonsense of course but it was a smokescreen to allow them to engage in their ideologically-motivated cuts in public net spending, which backfired because the private economy was slowing fast.
So the fact that the net debt has risen in 2014 is highly political – it shows that the government was lying when in opposition about the debt emergency (nothing much has happened – interest rates have declined and inflation is falling).
It also shows that the government is incompetent by its own twisted and wrongful logic because it promised to significantly cut the fiscal deficit and net debt.
It hasn’t succeeded – (thank goodness) – because the austerity-oriented policy mix has further undermined real growth and tax revenue. I say thank goodness because the situation would have been worse had they been able to cut as hard as they wanted to. They have been held up somewhat by a hostile Senate.
The next graph provides further detail. It shows the monthly change in $A millions in the Commonwealth net debt positions (what is owed compared to what it owes) from December 2007 until December 2014. The data is derived from the monthly balance sheets (with the June data observation in each year being linearly interpolated due to the lack of reporting in that month).
The blue columns coincide with the previous federal government (Australian Labor Party) and the red columns show the current conservative government.
The horizontal lines are the average monthly change for the two periods.
So even with the GFC on their hands, the previous Federal government added less debt on average to the stock than the current conservative government even though the current regime has claimed the ALP was hopelessly profligate and poor economic managers.
The current government never talks about the GFC. They always talk about the movements in debt because they know the public are less able to understand the intricacies of fiscal balances.
But even on their own logic the conservatives had added more public debt per month on average than the previous ALP government.
That is the intent of the Crikey article and in that sense it is correct. The conservative government are incompetent liars and hypocrites.
But that is the only positive thing the Crikey article adds.
If you bother to read it you will see phrases/words such as:
1. “a hefty increase” in debt. What separates a hefty increase from a non-hefty?
2. “the Coalition will have blown out Labor’s debt” – blown out – as if out of control or something.
3. “improvement in the budget bottom line” evidenced by falling debt.
4. “continuing debt blow-outs”.
A fiscal balance can neither improve nor deteriorate. The fiscal deficit can rise and fall but adding qualitative descriptors to those movements like improve or deteriorate make no sense as it stands and reflects the flawed notion that a rising deficit is bad and vice versa.
We can only add these qualitative descriptors when we consider what is simultaneously happening to the real economy – real GDP growth and unemployment, for example.
So a fiscal deficit that moves from 2 per cent of GDP to 4 per cent of GDP might be ‘bad’ if it is being driven by automatic stabilisers that reflect a rapid decline in output growth and employment and a loss of income (leading to falling tax revenue).
But then the same shift (from 2 to 4) could be ‘good’ if it associated with discretionary government policy action aimed at increasing overall spending and output, which increases employment growth and national income and reduces unemployment and poverty.
Same direction of movement, same quantum but totally different outcomes and interpretations. That is why context-free descriptors such as ‘improvement’ or ‘deterioration’ which only relate to whether the fiscal deficit is falling or rising are meaningless and only used by those who do not understand the concepts fully.
Of course, these terms are central to the language of the neo-liberals (aided by the mainstream economists) who want us only to focus on the financial ratio while suppressing any discussion of the real economy.
The Crikey article doesn’t mention unemployment once
The Crikey article then waxes lyrical (trying to give the impression it understands things beyond the hysterical political commentary that other media outlets engage in along with the politicians) about the fact that:
Of course, this debt increase is not of any immediate economic concern. A case can be made that Australia’s borrowings in recent years have been much too low given negative real interest rates and the need for investments in productive infrastructure.
Australia’s net debt is only about 15% of its gross domestic product, even with the recent surge under the Coalition. That is well below levels in Switzerland, Canada, Germany and the UK - all of which have triple-A credit ratings and no problem.
Which is as asinine as it gets.
The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.
Under those circumstances the government can always service its nominal liabilities and the public debt ratio is an irrelevant focus of attention.
At any time of its choosing, the government could cease to issue public debt and continue deficit spending at will. It might have to change some regulations and statutes which have been put in place to give the impression that the debt issuance is funding its net spending, but that would be merely legislative activity.
Remember the government just borrows back what it spent in deficit in a previous period. Bond sales draw on private saving which is just a reflection of past deficits.
Further, as noted above, these financial ratios are just signals of what might be going on in the real economy.
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 if you need a refresher.
The Crikey article then considers the future. It says:
If declining revenues and increasing outlays continue, greater debt must be the result. With the government now under unprecedented pressure, can Hockey effect the drastic measures needed to turn this around?
If he can, he deserves a knighthood.
Which takes us back to the beginning.
If the Government was able to cut discretionary net spending harder than the automatic stabilisers were pushing it up then the damage done to the real economy would be dramatic at this stage of the cycle.
Unemployment would rise sharply – further than it already is – and national income would fall. We would certainly enter a recessionary period.
How is it that such vandalism would deserve our highest honour – quite apart from the stupidity of having an honours system anyway?
Conclusion
You can see why I wouldn’t subscribe to the Crikey media service under any circumstances.
All of its self-promotion aside, this article reduces the public’s understanding of these important matters rather than enhances it.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.
We had a major core kernel server meltdown today and after bringing the system of virtual servers back to life there were some services still needing extra treatment.
One was the libraries that deliver the maths question.
It is now fixed.
Sorry for the inconvenience.
best wishes
bill
I made comments 11 and 15 below the Crikey article in question. The journalist’s response indicated that he has no understanding of how our monetary system works.
No worries, Bill. Computer technology is still in its infancy, notwithstanding some ridiculous claims to the contrary.
Bill, I have heard both Blimey and Crikey used in the UK, and Strewth used in Yorkshire though not elsewhere in the UK, the latter of which may simply reflect my own personal experiences as I have spent half my life in Yorkshire.
Of course the US has no such award as knighthood, but I’ve been watching the mostly (but not always) GOP effort to “credentialize” its favorite think tank denizens and others by creating awards (with lots of money attached) to make them appear as authorities whenever they speak. This allows these people easy and continuous access to our nation’s airwaves, where these titles are often shortened to this- or that- “expert” … [insert name here]. Since few have the time to “re-background” these “experts” — “the TV people must have already done that anyways” — whatever emerges from their mouths afterwards is assumed to be the best and the brightest our American exceptionalism can create. Most of the stupidity you hear from Americans arrives to them in a fashion such as this. Whether it is war, economics, or morals, you can bet there are dozens of right wing “experts” telling the American people what to think on a daily basis.
[And note, whenever someone says there’s no left left in America, what they really mean is that there is no funding methods or sources that can compete with this in terms of putting left wing ideas on the table.]
Dear Larry (at 2015/02/04 at 21:40)
Australia is still but a colony with the Queen at the head and her husband being given our highest honour!
The conservatives would love to ditch the dollar and reintroduce the pound.
best wishes
bill
Prediction for 2016: Professor William Francis Mitchell will receive an Australian knighthood from the grateful hands of Tony Abbott “for his outstanding contributions to macroeconomic theory, his tireless advocacy of full employment and poverty reduction, his merciless demolition of neoliberal ideology, and his willingness to share his vast expertise with the general public”.
Bill, First Dog on the Moon has Abbott being dumped but the Australian edition of the Guardian in general is more guarded. It does look as though his days are numbered. The only response to that can be, Hooray!
Can bloggers, please, with professional economic savvy help The Greens save people from starvation in the UK from this year, both in or out of work, poor pensioners, and new pensioners left with nil state pension by the flat rate pension?
http://www.anastasia-england.me.uk
I am not a member of any political party. Just a voter with nil benefits, nil state pension for life even after a lifetime in work paying National Insurance and a works pensions that is the average for women from public sector jobs, at lowest 4 per cent income. Disabled. Chronic Sick. That TUC say over 60 and all these no chance of getting work. Being incontinent also means unable to work (most of the time changing in the bog).
The Greens upon interview on BBC’s Radio 4 said their automatic and universal Citizen Income, with minimal admin as universal and automatic of £72 per week to all, had not been costed as they have a very small office staff of volunteers.
So The Greens have now abandoned the one hope for help for the poor, with a state due to reduce to 1930s levels, before the 1948 welfare state.
The Tories say the welfare state costs £220 billion a year, yet the money going to the starving is reducing by the billions each year, with Jobseekers Allowance reduced from about £8 billion in 2010 to today only around £5 billion.
As you can see the bulk of the £220 billion is going on admin and not to the poor, in or out of work.
The Greens say the Citizen Income would cost £280 billion a year.
But if all the conditionality ended, all the £220 billion wasted on admin today, both state and private, including all the work programmes / workfare, when sometimes the private firms do not pay corporation tax, would pour into the economy, to local businesses and high street shops.
There is no need of Jobcentres, if the libraries (especially branches out in the community so no bus far cost to get to) were kept open, where you can read newspapers either in print or online to get a job.
I never got a job from the jobcentre back in the 1970s and have heard this said again and again to this day.
In fact the Jobcentre, with its hours long sign-ons that deny the basic rate of a toilet and a drink of water even to the old and sick, spends all admin’s time in cutting off benefit, rather than being a recruitment consultants.
As 75 per cent of all taxes come from stealth taxes and VAT embedded in our daily lives, even on food, and such ‘luxuries’ as a headstone for your beloved passed over, then all the Citizen Income money would be a round robin of funding.
As The Greens’ Citizen Income policy is gone, then I presume the Greens’ sole party offering huge numbers of men and women any state pension in life at all, is also gone of their policy to grant:
– Full Citizen State Pension, without conditionality of National Insurance record.
This would have been £113.10 for all, plus the top ups from the mis-sold denial of SERPs that is one of the reasons for people getting flat rate government official forecasts as low as £55 per week with no tops up fromn SERPS and Pension credit (savings) is abolished and Pension Credit guarantee credit gets far more complex conditionality, so even current old pensioners will lose yet another benefit).
A full SERPs history, in blogs, has been said to be around £165 per week. Is it, please?
So total Citizen State Pension would have been around £278.10 (whatever the full SERPs record would have paid on top of the state pension of £113.10).
The government has £30 billion windfall from less interest on national debt (that wrongly is called a deficit, which UK has had for 300 years to no ill effect).
And the National Insurance Fund has a £30 billion surplus (source House of Lords Library) since 2013.
The Australians are suffering Abbott, thinking he was better than Labour in Australia and are rueing the day, and Labour are back in the finance heartland of Victoria.
Our Labour has become Tory Lite. The Greens and other socialist parties are SYRIZA lite.
SYRIZA within the same week as victory saved poor Greeks, giving them access to life sustaining drugs become too expensive and gave back the lost pensions to the poorest pensioners, including farmers, that had been taken by the EU. Lives saved from day one of SYRIZA’s government.
Will you help the UK from starvation and freezing to death in unheated homes?
Bill, Bill, BILLY ! Lighten up, willya ?!
That piece was a semi-satirical exposé of the hypocrisy of the current Government. It was not in any way, shape or form decrying the debt level. The opposite, in fact.
Here are the clues:
1. The term “skyrocketing” was in inverted commas to indicate this was someone else’s term, not Crikey’s.
You claim “adding qualitative descriptors to those movements like improve or deteriorate make no sense as it stands and reflects the flawed notion that a rising deficit is bad and vice versa.”
Absolutely correct. Couldn’t agree more. The article assiduously avoids pejorative terms such as deterioration, disaster, danger, emergency, fiscal hole, debt mess – all used continually by economics writers between November 2007 and September 2013. (Although it does once or twice slip into the worst descriptor of debt imaginable – “Labor’s”.)
2. “improvement in the budget bottom line” (your point 3. Under the second graph) were Mr Abbott’s words, not Crikey’s.
3. The opener referred to “the embattled Abbott government” – a reference Crikey readers would have understood to the knighthood imbroglio which you summarise superbly, above.
4. A link was provided to an earlier article on this topic. This is actually the third in the series, which regular readers would know. Hence this piece did not repeat all earlier definitions, clarifiers and caveats.
5. The closer – suggesting Mr Hockey might deserve a knighthood – was a whimsical return to the opener to end things with a smile. Fail? Okay, I cop that on the chin and will consult colleagues more widely in the future.
Now, to your questions, Bill:
1. “a hefty increase” in debt. What separates a hefty increase from a non-hefty?
In popular journalism, these are the descriptors for monthly rises in debt:
Up between 0.01% and 1.0%: insignificant
Up between 1.1% and 2%: small
Up between 2.1% and 3%: marginal
Up between 3.1% and 4%: significant
Up between 4.1.1% and 5%: large
Up between 5.1% and 6%: substantial
Up between 6.1% and 7%: hefty
Up between 7.1% and 8%: huge
Up between 8.1% and 10%: ginormous
Above 10%: staggering
The actual rise was 6.6% for the month, so hefty is correct.
Your implied question 2. “the Coalition will have blown out Labor’s debt” – blown out – as if out of control or something.
In popular journalism, Bill, these are the descriptors for rises in debt over the year:
Up between 0.01% and 1.0%: barely shifting
Up between 1.1% and 3%: increasing
Up between 3.1% and 5%: mounting
Up between 5.1% and 10%: escalating
Up between 10.1% and 20%: burgeoning
Up between 20.1% and 30%: surging
Up between 30.1% and 40%: blowing out
Up between 40.1% and 50%: spiralling
Above 50%: skyrocketing
The actual rise was 37.5% for the year, so blown out is correct.
Please note that none of these implies threat, or emergency, or disaster, or catastrophe. They are quantitative rather than qualitative. Free of any value other than size.
Questions for you, Bill:
1. You quote two paragraphs from Crikey which you claim are “as asinine as it gets.” But then write, “The public debt level relative to GDP is not a matter of economic concern ever if the government in question issues its own currency and only issues debt in that currency.”
Isn’t that precisely what the “asinine” paragraphs are saying? Reference is made approvingly to Germany which now has net debt at 53.5% of GDP and to the UK with 92.2%, compared with Australia’s below 15%.
I have argued elsewhere that Japan’s public debt level relative to GDP at 149.5% is not a matter of economic concern.
Where is the disagreement here?
2. Just on this, Bill: “The article also assumes Crikey’s usual – “we are breaking big news” … There is nothing ‘breaking’ at all about the financial data they report (it is part of the standard reporting cycle of the Department of Finance in Australia) …”
Are you sure, Bill?
Can you point to any article or broadcast in the mainstream media in calendar 2014 which has analysed, or even just reported, that year’s blow-out in net government debt?
Thanks, Bill. Happy to discuss.
Cheers,
Alan Austin
Larry,
No! We need to support our Brendan and Joe in their hour of need. Whereas Abbott and Hockey are neo-liberal and stupid, Malcolm Turnbull is neo-liberal and smart! He’s electable. Abbott isn’t.
Alan Austin,
Bill does not require my defense, nor does this conversation require my input – but here it is regardless!
Simply stated, you misunderstand Bill’s point, and focus on his delivery. The crux of your misunderstanding arises here:
Of course, this debt increase is not of any immediate economic concern. A case can be made that Australia’s borrowings in recent years have been much too low given negative real interest rates and the need for investments in productive infrastructure.
…
Where burgeoning borrowings will impact taxpayers is in the interest payable. Before the election, Abbott told the Economic and Social Outlook Conference in Melbourne that the Gillard government was “spending about $20 million a day just to pay the interest on what it has already borrowed”.
With due respect, your premise (that, in a manner easily digested by the average reader would fathom, we “borrow”) is incorrect, and your conclusion ( that it will “impact taxpayers … in the interest payable”) is therefore also incorrect.
The question to be asked is, why are economics writers so obsessed with numbers but not even passingly interested in people. Bill is. In my view, the beauty in this blog is not always the theory backed by hard data and historical fact, but rather this:
A fiscal balance can neither improve nor deteriorate. The fiscal deficit can rise and fall but adding qualitative descriptors to those movements like improve or deteriorate make no sense as it stands and reflects the flawed notion that a rising deficit is bad and vice versa.
We can only add these qualitative descriptors when we consider what is simultaneously happening to the real economy – real GDP growth and unemployment, for example.
Thanks and best,
J
Dear Alan Austin (at 2015/02/05 at 2:34)
If your article was intended to be a “semi-satirical exposé” of the topic then I suggest you brush up on your comedic skills. No-one I know who read the article considered it to be satire or any proportion of the same.
You deny using neo-liberal language and claim the terms like “improvement” were quotes.
Yet you still wrote things like “continuing debt blow-outs” and “the deficit in the underlying cash balance in December was $98 million worse” and “the deficit in the underlying cash balance in December was $98 million worse” – why is a rise in the deficit worthy of the descriptor “worse” – these statements were not direct quotations of anyone. They were your own words.
It is the way neo-liberals talk and write. All these terms “blow-outs”, “worse” are neo-liberal descriptors that have no foundation in a proper understanding of the monetary system. They perpetuate the myths and deceive the reading public.
The reader would consider you were part of the mainstream commentary as a result of this language.
When you gave your assessment of the current debt levels you used the standard neo-liberal qualifier not of any “immediate economic concern”, which means of course that at some medium- or longer-term it will be of concern. If you wanted the reader to understand that public debt is NEVER a concern at the federal level you would not have used the term IMMEDIATE. That is the language of the neo-liberals who have perpetuated the myth about intergenerational burdens.
Finally, you provide my readers with a lexicon of descriptors you say are used “In popular journalism”. Popular journalism is the problem that I thought Crikey was attempting to address – at least that is what your organisation alleges is its role.
Popular journalism uses language that reinforces the neo-liberal myths about the economy and allows politicians, business leaders and right-wing think tanks to lie about policy impacts etc. I would have thought an alleged progressive organisation would eschew these “popular” descriptors and instead seek to educate the public on why such terms are erroneous and damaging.
Your self-defence while appreciated is not convincing.
best wishes
bill
Hmmm …
Tough room.
Maybe satire is not my forté.
Okay, before responding fully, may I please ask you this, J and Bill:
If I as an Aussie abroad bought some Australian treasury bonds or treasury notes or infrastructure bonds, would your Government pay me interest?
Could I transfer those Aussie dollars into Euros and spend them here in France?
Where does that money come from?
Is it true that your Government now spends $39.3 million per day on interest, some of which goes overseas?
Thanks, J and Bill.
More soon.
A demain,
Alan A
One more thing briefly, Bill, until tomorrow, my time:
Regarding your criticism: “The article also assumes Crikey’s usual – “we are breaking big news” … There is nothing ‘breaking’ at all about the financial data they report (it is part of the standard reporting cycle of the Department of Finance in Australia) …”
Are you sure?
Can you point to any article or broadcast in the mainstream media in calendar 2014 which has analysed, or even just reported, that year’s blow-out in net government debt?
Thanks, Bill. Happy to discuss.
Cheers,
Alan Austin
Bill, with regards to the “intergenerational burden”, allow me to get something off my chest.
If I hear one more neo-liberal spout off about the debt we leave our grandchildren, I may have to be restrained.
If our leaders cared about the welfare of future generations, they would enact laws to curb pollution and protect the environment. Instead they advocate curbing regulation, and leaving the environmental problem to solve at the hands of the “free market”.
If they wanted our grandchildren to live better lives, they would strive to protect scarce natural resources such as clean water and fossil fuels, rather than subsidize the industry to promote even faster exhaustion of our true natural resources.
They would promote policies that improve health care and make it accessible to everyone, rather than mandating private health insurance, private pharmaceutical corporations and health care providers that increase corporate profits and dividends to wealthy investors, but result in health care that is increasingly inaccessible to the middle class.
Instead, they sermonize protecting and saving an imaginary “resource” that is neither finite nor limited, of which supply can be expanded without limit by a sovereign government.
Their arrogance and hypocrisy knows no bounds, and is exceeded only by the public’s gullibility.
Bill –
If debt is never a concern at Federal level, which of these statements is/are false:
1) More government debt increases the stock of reserves.
2) Excessive inflation is a concern.
3) To avoid excessive inflation, the RBA pays interest on reserves.
4) Doing so costs money.
5) When the economy is at capacity, that money can not be put to a more productive use.
6) Therefore when the economy is at capacity, debt is a concern at Federal level.
Aidan,
It’s Bill who sets the economics quizzes on this blog! If you want to have ago you’ll have to start your own! I fear you may be out of your depth taking on Bill like this on his home ground too!
Yes , Federal deficits can be a problem if the economy is running too close to full capacity and demand-pull inflation is occurring. That’s not the case at the moment. Deflation is the looming issue, with rising unemployment and falling rates of inflation. There’s plenty of scope for fiscal stimulus. Now is not the time to be worrying about government budget deficits – especially if the proposed method to reduce those deficits involves reducing spending and raising taxes.
Alan Austin,
“Are you sure? Can you point to any article or broadcast in the mainstream media in calendar 2014 which has analysed, or even just reported, that year’s blow-out in net government debt?”
I am sure. Please do not assume that none of the readers of your comments can use Google.
Please check the following article on ABC
“MYEFO: Budget deficit forecast for 2014-15 increases $10 billion to $40.4 billion
By political correspondent Emma Griffiths
Updated 15 Dec 2014, 5:52pm”
A sarcastic comment made by the shadow treasurer Chris Bowen was also mentioned.
Aidan,
” To avoid excessive inflation, the RBA pays interest on reserves.” – and it doesn’t have to.
Imagine imposing tax on net bank lending and speculative capital inflow. The same end result throttling credit expansion. But raising interest rates has its own stimulatory effect by increasing the income of bond holders. Also – in our case it will destroy the class of borrowers who borrowed enormous amount of money to buy houses. That’s why I am not concerned at all about high positive real interest rates in Australia (nominal above the level of inflation). Negatively geared baby bummer investors won’t allow this to happen because when this happens the housing bubble will finally burst.
“Therefore when the economy is at capacity, debt is a concern at Federal level.” That’s why fiscal space can be created by increasing taxes. For example on the mining sector so that it doesn’t expand too fast and dig holes which can swallow the whole nation. Certainly a better solution than imposing austerity during a downturn because maybe in 10 years time maybe never the Government might need to make a decision offending Gina and her friends.
petermartin2001,
Bill’s experience with setting quizzes and explaining answers means he should have no trouble with mine. If I’m out of my depth we’ll soon see, and indeed the process of seeing should increase my depth.
You may not have noticed it, but you’ve directly contradicted Bill. He’s referring to all possible cases, not just the case at the moment. As he said If you wanted the reader to understand that public debt is NEVER a concern at the federal level you would not have used the term IMMEDIATE.
___________________________________________________________________________________________
Adam K,
Imposing new taxes is one solution, but it too has an economic cost.
Thanks, Adam K,
Interesting piece.
Yes, that and quite a few others about the deficit have been run through the year.
But anything at all on Australia’s net government debt?
Thanks, Adam.
Cheers,
AA
Aidan,
This is incorrect. You are confusing deficit with debt. It’s true that deficit spending in excess of productive capacity can trigger inflation, but this isn’t necessarily so for high debt. A high debt can be carried year to year with no change and no further deficit. Technically, these concepts are described as stocks and flows in economic terms I believe.
Also bear in mind that consumer spending can trigger inflation just as public spending can. I don’t follow why inflation fears are commonly associated with public spending but not private–from an overall economic standpoint, spending is spending and it competes for scarce goods regardless of the source.
Dear Aidan (at 2015/02/05 at 12:11)
Thanks for the Quiz. I won’t go through it line by line because we would falter at Question 1.
One of the elementary errors that students of economics make in their early years is confusing stocks and flows. The distinction is one of the basic things that needs to be grasped.
Gross debt levels are just an historical accounting record of past fiscal deficits. Debt levels are stocks of outstanding liabilities, which mean they are measured at a point in time.
A long history of small deficits would lead to a ‘large’ stock of gross debt. So what? Nothing of significance unless you are interested in accounting.
Fiscal balances are flows and are measured as so many currency units per time period. The flows add to total expenditure (deficits positively, surpluses negatively).
The stock manifestation of those flows is the change in debt levels.
But what matters for total economic activity (national output, income etc) are flows of expenditure, not stocks of wealth or liability.
Inflation is not the outcome of an excessive stock of anything. That is one of the errors that critics of QE made when they thought the build up of bank reserves would suddenly create inflation. The reserves are stocks.
Inflation is the result of excessive flows of nominal spending (that is, too many currency units) in relation to the real capacity of the economy to produce output in response.
Firms typically respond to nominal spending changes with output changes but when that capacity is exhausted they become price adjusters rather than quantity adjusters.
You might say that if the debt is very large then the interest payments become large and these are flows of income. Which is when the government could step in and manage yields. Further, some of that flow will go to saving and imports, which reduce the pressure on final output (given they are leakages from the expenditure system).
So Aidan, you fell into the elementary trap that gets many economics students when they are starting out.
best wishes
bill
ps I note Jeff has just pointed this out as well. Thanks to him.
Morning Bill. Morning all.
Thanks again for this feedback.
The purpose of that Crikey piece was to look at debt outcome through 2014 against the Government’s promises. The second paragraph states that directly, as does the teaser below the headline and the paragraph down page which begins “This gets extremely uncomfortable for Abbott, Hockey and their backers when pre-election promises are recalled.”
It was semi-satirical in that it used the leadership woes following the knighthood as the opener and closer. It was not a serious call for a gong for Joe Hockey.
Nor was it any way an argument for less debt. That was stated directly in the paragraph which begins “Of course, this debt increase is not of any immediate economic concern.”
The next sentence was explicit: “A case can be made that Australia’s borrowings in recent years have been much too low given …”
Whether or not the author believes there may be economic concern regarding debt levels in the future is not relevant to the piece and ought not be read into it either way.
The quantitative terms would seem quite appropriate – reduce, increase, hefty increase, blow-out, rise, burgeoning, shift, double – and ought not be interpreted as more than descriptors of size and movement.
Most, if not all, of the value laden terms are from others. “Skyrocketing debt” and “improvement in the budget bottom line” are from the prime minister. The heading was from a sub editor and reflects the focus of matching outcomes with promises. Pretty sure he or she was not intending to endorse any policy position. (My own suggested heading, incidentally, was “If debt was ‘skyrocketing’ under Labor, what is it doing now?”)
I accept your observation that the term “worse” used in the third and fourth last paragraphs is mine. But suggest again that these are applied to reflect shifts – in the underlying cash balance and the fiscal balance – from the Government’s perspective. The observations relate to outcomes in those two balances different from expectations in the direction the government did not want to see.
Finally, Bill, just on this: “The reader would consider you were part of the mainstream commentary as a result of this language.”
What mainstream commentary? Have you seen anyone else analyse – or even acknowledge – the debt blow-out, er, dramatic increase, anywhere in the mainstream media in 2014?
Thanks, Bill.
Cheers,
Alan A
Crikey was always rubbish. Staffed by pretend progressives, some of whom sound remarkably like spooks.
I’ve been trying to gain some understanding of MMT. In MMT terms, why would declining tax revenue be a problem for the govt when it seems taxation is just a tool and the revenue collected is not actually used for anything?
Oh, and on that note, my ATO assessment now tells me where my tax dollars are spent. Is the Govt. lying here or am I totally mistaken with my understanding of tax?
Yep, AK
The government is lying in that statement although they probably do even realize it. The conservative party, (as well as much of the ALP and even treasury) do not understand the difference between a state government (like WA) and the national one.
This misunderstanding is the best explanation for decades of policy failure.