It is my Friday Lay Day blog and it is going to be relatively quick. There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it…
Friday lay day – why not just subcontract out democracy!
Its the Friday lay day blog – and we will be brief today. There was a proposal aired in the ABC’s The Drum series (March 26, 2015) by an ABC finance journalist suggesting that – Maybe we need to subcontract the budget process. My response was “why don’t we just subcontract out democracy to a dictator and be done with it”!
The proposition from the journalist (Jonathan Green) is that:
Given the management of the federal budget has become so mired in politics, maybe it’s time to subcontract the central issue of structural fiscal balance to some independent statutory authority.
The claim is that “our Government has moved from a body whose inclination to budget surplus and low debt was encoded in its very genetic material, to one happy with the more recent concession that net debt of about 60 per cent of GDP was pretty much a job well done, a “pretty good result” if you will”.
The current Government actually realises, despite its fiscal surplus nonsense, that it would be stupid to attempt making net public spending cuts right now given the poor state of the economy. There is a lack of spending in the economy at the moment as evidenced by the rising unemployment rate over the last 18-24 months.
Green is correct in pointing out the hypocrisy of the current government given their massive shift in rhetoric from just before the 2013 federal election (where they gained office) and now.
He says of the Prime Minister and his government:
And so with jobs (his) and governments (theirs) on the line we have watched the swift and flexible transition in official sentiment around the current position of the federal budget. From the much discussed “debt and deficit” disaster-laden “budget emergency” that confronted us during the 2013 campaign (a firmly held view that led to the attempted severity of the 2014 budget) to the current moist aerations around the 2015 budget, in which the Prime Minister has declared his earnest hope that the year’s fiscal centrepiece will be “much less exhilarating” than its predecessor.
It is obvious that there never was a “debt and deficit” emergency. That was a lie they told to gain office and the ignorant Australian voters were duped by it. It didn’t help that for several years before that the then Labor government continually raved on about their intention to get back into fiscal surplus.
While the date for that achievement kept getting moved forward as their fiscal cuts further damaged economic activity and their tax revenue collections, the damage was done in terms of any semblance of truth being aired in the political debate. All sides of the politics supported the fiscal surplus ambitions.
Green is completely wrong, however, when he quotes the former secretary of the Treasury who claimed that:
Unless we recharge our fiscal buffers we will find ourselves increasingly vulnerable to global shocks.
He said this in the context of the ageing society and the dangers of losing fiscal sustainability.
Please read the following introductory suite of blogs – Fiscal sustainability 101 – Part 1 – Fiscal sustainability 101 – Part 2 – Fiscal sustainability 101 – Part 3 – to learn how Modern Monetary Theory (MMT) constructs the concept of fiscal sustainability.
The idea that running fiscal surpluses, somehow, allows the government to more easily meet “global shocks” is a nonsense. It is simply untrue.
A currency-issuing government, like Australia, can always run any sized deficit, irrespective of its past fiscal history, if circumstances in the non-government sector warrant. So if the global shock precipitated a major collapse of non-government sector spending, the government sector can always step in to expand its own spending to ensure the employment losses (overall) are minimised and real GDP growth is not compromised.
There will be specific sectors that suffer such a shock (because they lose spending and therefore sales) but in macroeconomic terms the government can always attenuate these damaging spending cycles.
Running a fiscal surplus today does not provide the government with any extra capacity to run a deficit tomorrow, just as running a fiscal deficit today does not reduce the capacity to run larger or smaller deficits tomorrow.
To say otherwise is to admit an ignorance of the capacities of the currency-issuing government.
But that is Green’s starting point – his ignorance.
Blithe to that ignorance, he thinks there is something profound in his question:
So the question: can we trust any government constituted under the cynical logic of modern politics to do the best thing for the country when it comes to the apparently simple, black and white – or rather black and red – issue of structural fiscal balance?
Why is a fiscal balance at the federal thing the “best thing for the country”? There is no answer to that question other than that the appropriate fiscal balance depends each period on the circumstances at hand.
Sometimes a fiscal balance might be appropriate – for example, if the private domestic sector is trying to save, say 2 per cent of GDP, and the external surplus is 2 per cent of GDP and there is full employment of productive resources.
Then a fiscal balance would be appropriate, as long as the desired mix between public and private use of the productive resources was deemed desirable.
But the situation in Australia at present is that there is an external deficit of 4 per cent of GDP, more than 15 per cent of the available workforce either unemployed or underemployed, the household sector is carrying record levels of debt, and real GDP is well below its trend rate (and the rate that will bring down unemployment), then a fiscal balance would destroy the economy.
It would withdraw spending from the economy, further undermine sales and cause real GDP to decline and unemployment to rise.
There is no credible economic theory to support the use of a fiscal balance either at all times or as an average over some economic cycle (however, you would measure that).
So once again we have a journalist that is just assuming away the issue and using as his starting point an ideological proposition that would be destructive in most circumstances.
With that said, he then proposed the solution to what he think is the political sabotage of sound fiscal policy:
So here’s an idea: as we trust the Reserve Bank with the administration of monetary policy, might it not be possible to subcontract the central issue of structural fiscal balance to some independent statutory authority?
Duly constituted. Authoritative. Supervised, like the RBA, by a committee of the Parliament, with a strictly limited responsibility to move the budget to within a comfort zone surrounding balance.
It might suggest to government that revenue needs to be raised by a certain percentage, or conversely that cuts of a certain severity need to be made: the choices would be political, but there would be no escaping them, and the blame, fundamentally would lie outside of politics, in independently expressed fiscal reality.
I have dealt with this sort of issue before. Please read my blog – Democracy, accountability and more intergenerational nonsense – as an example.
Even the so-called “Budget” offices like the Congressional Budget Office in the US, or the Parliamentary Budget Office (PBO) in Australia, which are advisory bodies diminish our democracies.
While these bodies claim to be ‘independent’, the fact remains that they are creatures of government. Further, irrespective of the major political party in power, these organisations tend to appoint people who share the same dominant economic ideology that the Treasury suffers from. So what gain is there?
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.
The justification for the creation of an independent fiscal authority 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 that violates our national interest.
This is clearly possible and the successive federal regimes have made politicising of the bureaucracy and expunging from it influential viewpoints that it didn’t agree with an art form.
While the Treasury is not independent and reflects the dominant neo-liberal ideology which then colours everything it does, the same would happen with a so-called independent fiscal authority.
It might be possible to give it a ‘legal’ independence but not an ideological freedom.
The solution is not to create another public institution but to empower the independent research community in universities 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 defense 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.
When the current government was in power they forced Universities to adopt the hated labour market rules (WorkChoices) or lose their funding.
The solution to poor economic policy understandings and 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.
Sub-contracting out the process of economic policy so that the government of the day can just blame nameless bureaucrats is an assault on democracy.
We want the politicians that are elected to act in our best interest and our support will be conditional on that. Otherwise, it is a slippery slope.
Jonathan Green thinks that that would “liberate the national conversation”. I think it would destroy the semblance of democracy that currently exists (witness the Upper House or Senate blocking fiscal austerity legislation in Australia) and would not change the neo-liberal bias.
Groove out to John Kypiaye
This is what I have been listening to this morning. From the great British guitarist – John Kypiaye – the track “Epilogue” is from the CD red, gold and blues and is an example of a fusion between jazz and reggae.
John Kypiaye plays in Linton Kwesi Johnson’s band and the Dennis Bovell Dub Band.
He is one of my favourite guitar players, but it is a long list.
So we groove out as we hope there is hope – after all this economic stupidity that the world is caught up in at the moment.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.
This Post Has 9 Comments
For sure it is not enough that we have a psychopath for a Prime Minister.
We now have a financial journalist from the ABC (shame) advocating privatisation of fiscal and monetary management. And for sure financial journalist have a reputation for being perspicacious in their pronouncements,don’t they? Don’t they?
Look,why don’t we just privatise the whole bleeding government,local,state and federal. I’m sure the Chinese would buy into that.
At present I’m keeping my fingers and toes crossed that the NSW sheep show some spine and give the Tories the old heave ho tomorrow.
That way the federal LNP just might show some spine and give the Rabid Rabbot a dose of Calici and/or Myxo.
“My response was “why don’t we just subcontract out democracy to a dictator and be done with it”!”
Isn’t that the end game? We’re already seeing the ‘Solomon Fallacy’ played out across all the major democracies.
The Greek Finance Minister is seriously proposing that the Eurozone is discretionarily funded by the European Investment Bank backed directly by the ECB. Nobody elected to these positions. No possibility of getting rid of them if they somehow fail to live up to the beneficence ideal.
And that is after seeing what Wise Men (and it normally is men), who have fallen somewhat short of the Solomon ideal, do when the people decide to change direction and elect somebody different.
All of the left are in love with the idea of having Very Clever People just like them running things in perpetuity without any possible interference from democracy. The right have always wanted that.
I always thought that an autocracy in league with big business that removes all possibility of replacement was the very definition of Facism, but perhaps I didn’t read the books carefully enough.
A few Tony Benn quotes again. I was never a fan when I was younger, but boy do I get it now.
– “Every generation has to fight the same battles for peace, justice and democracy. And there is no final victory nor final defeat.”
– “If democracy is destroyed in Britain it will be not the communists, Trotskyists or subversives but this House which threw it away. The rights that are entrusted to us are not for us to give away. Even if I agree with everything that is proposed, I cannot hand away powers lent to me for five years by the people of Chesterfield. I just could not do it. It would be theft of public rights.”
That was a really neat tune! Is your favourite guitar players list on here anywhere?
Hilarious, Bill. And then if we don’t like what we are getting, we just cancel his/her contract. Brilliant. (Kidding.) I agree with Neil about Benn, though I don’t quite agree that we are in the position where we have effectively subcontracted out democracy yet. On the other hand, maybe we should all read Evgeny Morozov’s The Net Delusion: How Not to Liberate the World (2011). When younger, he thought the net was going to be a great democratizer. Now, he thinks it may already be working in the opposite direction. Unless we sit up and remain vigilant. Not undistinct to the point Neil is making re Benn.
Is Neil really supporting someone ready to champion any radical group that wanted to impose its will by protest and threat, from Arthur Scargill’s National Union of Mineworkers to the Militant Tendency.
By the mid-1970s it was common to label the UK ‘the sick man of Europe’. The growth of
GDP between 1950 and 1973 averaged 2.4 per cent. This contrasted with growth rates of five per
cent in Germany and four per cent in France (Crafts, 2002: 44). At the time the UK had a large
state sector with nationalised industries accounting for around 11 per cent per cent of GDP and
eight per cent of employment. The returns on investment in the nationalised industries were
depressingly low. Earnings before interest and tax are estimated to have ranged between -0.4
per cent and 1.1 per cent in the period 1972-82 (Brittan, 1984:128). In part this was because
Governments interfered with the prices set by the nationalised industries in a futile attempt to
hold down inflation. In 1975 inflation in the UK peaked at around 22 per cent. Accumulated
government subsidies, capital write-offs and other payments to the nationalised industries from
the mid-1950s are said to have totalled nearly £8 billion. http://www.forfas.ie/media/productivity_chapter12.pdf
I personally don’t intend to name what followed during privatisation as a triumph of free enterprise over nationalisation. There were human costs to accompany the various other economic changes that resulted. Indeed, two statistics possibly sum it all up: By 1997 as a result of the privatisation programme the nationalised industries accounted for only around two per cent of GDP and public sector employment had fallen by over 1.5 million.
By the same token, Neil’s reference to Tony Benn has to be read in conjunction with the latter’s support for radical groups that wanted to impose their will by protest and threat, from Arthur Scargill’s National Union of Mineworkers to the Militant Tendency. Whether you agree with his politics or not Mr. Benn happily associated with symbols of anti-capitalism; which is all well and good, as long as the economy that they represent can produce the wealth and liberty that is necessary to satisfy the hopes of the population.
To expect to do this without confrontation and conflict is beyond credence. In other words can a progressive economy flourish without bearing the harsh formalities of the market?
Tony Benn had it right. Law Professor Mary Wood, in her book shows how government appointed authority entities have used permits to circumvent laws designed to protect the ecology for future generations.
George W Bush appointed his oil industry cronies to head these authorities.
“The truth of what happened in the halls of EPA (USA, Environment Protection Agency) during the Bali Conference would come to light seven months later. On December 5, 2007, just two days after the Bali conference began, EPA Administrator Stephen Johnson had presented a proposed endangerment finding to the White House Office of Management and Budget. The twenty-eight-page document concluded that human carbon emissions, in fact, caused global warming. It detailed the enormous risk of harm from climate change, including exacerbated storms, flooding, heat waves, wildfires, drought, eco- system damage, temperature extremes, rising sea levels, and a host of other damages. Most importantly, the document made a clear endangerment finding under the CAA. That one finding, had it been issued, would have triggered CAA regulations Jason Burnett, Associate Deputy Administrator of EPA, had helped develop the endangerment finding in response to the Massachusetts v. EPA litigation. At 2.10PM on December 5, he had sent the formal proposed endangerment finding a an e-mail attachment to the White House. According to an investigative report by the Philadelphia Inquirer, White House aides knew what the EPA finding would be. They also realized that if they opened the attachment, it would become public, record. So, they never opened it. Instead, the White House called Administrator Johnson and instructed him to not issue the finding. Johnson complied with the request”.
Our politicians regularly neglect their Public Trust obligations and use delegation of powers to do so.
Gogs, Neil’s Tony Benn quotes don’t have to be read in any other context than Bill’s commentary on democratic control, however flawed that democracy, over economic policy. The rest of your commentary is thus off topic, as well as superficial.
Gogs raises a really important point I’ve been hoping to understand and it may not be something bill can totally answer.
Unless the public service is efficient and able to be productive rather than a drag on the economy what does MMT propose? Is that beyond the scope of MMT and if so is that a political and market drive issue?
I’m genuinely curious as its my biggest concern with just adding to goverent spending to balance economies.
I understand in Keynesian times of economic depression it’s required no matter what but how do we solve that in the bigger picture.
I’d love to hear any input at all on this bill even if its just outside MMT scope. 🙂
Thanks for your blog as always.
If you support the notion that the efficient use of resources is influential in setting the living standards of a nation, vis-à-vis rivals, it is a small step to acknowledge that how those resources are allocated is crucial.
It can be argued that the NUM of Arthur Scargill’s reign sought to prejudice this process by exerting militant action on a democratically appointed government.
Some argue that the autocratic control of a monopolistic industry is anti-competitive – whether that control resides in management or trade union. Either way, the incentive to drive the business (or industry) forward may be diminished. I am open to the argument that government interference is just as blameworthy.
But if you were to ask the question innocently, the majority of opinions would favour competitive pressures to produce the greatest efficiency. Notice I am not here talking about profit incentives.
Like Jason H, there are many people who want enlightenment that reaches beyond the denunciation of capitalism, much as it is deserved. The alternatives are also not flawless. They too have drawbacks that need to be fully explored and safeguards discussed.