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.

Conclusion

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.

Saturday Quiz

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.