Fiscal sustainability 101 – Part 1

Greetings from Amsterdam where I am spending the next few days talking about what drives spatial changes in unemployment at a Tinbergen Institute regional science workshop. The spatial econometric work that I am outlining tomorrow provides the conceptual framework for the construction of the Employment Vulnerability Index, which received a lot of press earlier in the year. But while I was flying over here I thought about the concept of fiscal sustainability which is now getting a lot of press. So this is the first of a multi-part series on what constitutes a sustainable fiscal policy. Its that time again. Time to debrief!

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W comes before V

The talk at present is that while we are hoping for a V we might have to accept a W. Its all about shape. The shape of the future. The shape of the recovery! In Post-Lehman World Will Mean W-Shaped Recoveries we read that Japan’s former economic and fiscal policy minister, Hiroko Ota said that “The worst is over but I can’t say the economy is heading for a recovery at all”, Japan’s recovery may be W-shaped instead of V-shaped. There are some very real reasons why W might rule over V. They all relate to the lack of understanding of the characteristics of a fiat monetary system and the opportunities that such a system presents the sovereign government. Unfortunately, the ignorance (or wilful neglect) among policy makers may force millions of people to endure unnecessary hardship.

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Today’s mantra – 13.4 per cent wasted labour

Today’s ABS Labour Force data confirms one thing. Whatever else the commentators say about the figures are not as bad as expected or that employment is still growing or whatever – there are 13.4 per cent of the willing and available labour resources not being fully utilised by this economy. Around 657 thousand have no jobs at all and another 866 thousand have a job but want more hours and cannot find the work. 1.5 million wasted workers is an appalling state that demands urgent action – like direct public sector job creation. Each day that we waste the capacity of those workers is another day of income and opportunity lost down the drain. It should be the absolute number one policy priority. And what it tells me is that the budget deficit is way to low as a percentage of GDP at present.

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Animal spirits – optimism that may not last

Its winter here in Newcastle! Today my shark-o’clock morning surf expedition was freezing! Full wetty and still cold! But for northern hemisphere readers pleased be warned that freezing means a water temperature of 19 degrees celsius and air temperature of 14 celsius. Anyway, the sudden sensation of cold reminded me of my mortal origins. One thing led to another and I was soon thinking of animal spirits! This is what JM Keynes said drives the business cycle up and down. And today (and yesterday) we have been reminded of the role that sentiment might play in economic life. The news is probably good and suggests that this downturn might be more moderate for Australia than the global experience would have indicated. But it might also be bad. Ahh, economics!

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Public ownership rules airport rankings!

I saw this story in the Melbourne Age today World’s best airport named. I knew it wouldn’t be Sydney or Melbourne where I am often in and out of much to my displeasure. So I scanned the list. Sure enough a whole lot of airports some of which I regularly fly and know to be excellent in terms of ease of use, charges and available facilities. Anyway, I had intended to write a blog today about trends in world foreign exchange markets (see digression below) but the airport rankings attracted my interest because I am also thinking about infrastructure provision at present.

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A holiday pot pourri – unions, jobs and education

I saw this in The Australian (on-line) front-page today – “POLL: Do unions have too much power?” So the campaigns are emerging: deficits, debt and union power. Seems like we are back in the 1970s when the conservatives last ran the union power campaign. The topic is apposite given the Government’s reaction last week to union requests to eliminate some of the nasty elements that remain from Work Choices. I laughed when I saw the poll – who are they trying to kid. Anyway, the current Government is playing hard cop with the union movement exploiting the lack of capacity of the latter to fight back.

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Salary caps on CEOs?

In today’s Melbourne Age there was a headline that attracted my attention – Hurling invective at CEOs over salaries is a bit rich. The writer from the conservative Institute of Public Affairs was reacting to a speech made by the President of the ACTU this week who proposed a salary cap on executives. The writer, Chris Berg claimed this was just whipping up some “traditional class conflict”. He asked: “who seriously believes that the level of CEO pay in Australia had anything to do with the subprime crisis that set off this whole mess?” Well, I for one think that the growth in executive pay was linked to the crisis. Here is the point.

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