The Australian government is demonstrating to all of us that they are mishandling fiscal policy. The background is simple. Australia saw its growth vanish and unemployment start rising in December 2008 as the financial crisis spread into the real economy. The government responded, mostly correctly, and introduced a swift and significant fiscal stimulus. The economy resumed growth, the rise in unemployment was pegged (although there wasn’t enough done to generate sufficient jobs growth), and the budget deficit rose. Before the private sector had demonstrated it could take up the spending slack and support the growth process, the Federal government became obsessed with “returning the budget to surplus”, erroneously thinking that this would separate them, politically, from the Opposition. They were wrong. The imposition of fiscal austerity has caused economic growth to slow and tax revenue growth to fall well below projections (declining world commodity prices have also not helped). First, the government abandoned their surplus promise realising that the revenue side was not going to improve sufficiently. Now, they are implying they need to hike income taxes to cover the “revenue shortfall”. If they ever had any credibility as responsible fiscal managers then it is safe to conclude they have none now. Their continued claims about maintaining a “strict fiscal policy” (read: procyclical fiscal stance) are not only moronic but they are also leading to policies which are killing growth and employment.

I am taking the easy way out today. I have a number of meetings today and also several deadlines coming up for work that I am doing. As a result, I decided to re-cycle some work I did on Friday (early), which was written for the Fairfax press daily newspaper – The Age – as a commissioned Op Ed contribution. Friday was ridiculous when I think back – I had to squeeze more than Archimedes would recommend if I was dealing with liquid into the time available. So today, what comes around goes around – to my favour. The Op Ed was 800 odd words on a complex topic so today, by way of reference, I thought I would add a few sentences to the 800 words to provide more explanation of the points. The background was that a few high profile firms announced fairly large job cuts last week in Australia which lead to a stream of media headlines and calls for government assistance, both short-run in the form of cash bailouts and longer-term, more protection (tariffs etc). The macroeconomics of the situation, however, has not been seized upon by the media, which goes to the heart of the problem. The debate tends to focus on aspects of an issue, which are less important, and, ironically, in this case, are changes which are largely beneficial (structural change), but, ignoring the issues which cause the most damage (those relating to output gaps).

On Monday (January 7, 2012) – The culpability lies elsewhere … always! – I wrote about the unacceptably large forecasting errors from the IMF derived from models that informed their input into bailout packages etc, which in turn set the fiscal austerity agenda and as resulted in millions becoming unemployed. I was interviewed about this today by the ABC National Radio program – the World Today – and told the journalist that if errors of this size occurred in medicine, the practitioner would be jailed for professional negligence. A summarised transcript from the World Today programme is available here – Eurozone jobless rate hits record high. A few snippets from a 10 minute interview! I did another interview today about a paper that came out recently from the RBA, which largely admitted its forecasting record was inferior to what we might have gained from assuming a random walk (unemployment) or simple historical averages (real GDP growth). You have to see this incompetence not in terms of some technical boffins waxing lyrical in a research paper about a range of technical measures of their errors but rather, in terms of the damage that the policy that has been informed by these errors. Today we received more evidence of that damage in the form of the ABS publication – Job Vacancies, Australia (November 2011). The evidence is clear. Our economy is faltering because policy settings have been wrong. They have been wrong because the policy setting paradigm is wrong and this has led to the use of models which deliver predictions that cannot be sustained given the underlying dynamics of the monetary system that this ideology chooses to ignore.

The St Louis branch of the Federal Reserve Bank offers – FRED2 – which is an excellent repository of US statistics as well as a nifty graphical analysis tool. I use it regularly and even though it is just a collection of data available elsewhere it is very convenient. The same organisation also publishes what it calls its – PAGE ONE Economics Newsletter – (the so-called “back story on front page economics”) which is designed to be used by students as a means of educating them in economics. Any reasonable assessment of the material presented in these newsletter is that they are unadulterated nonsense. The most recent edition (published January 13, 2012) – “Choices Are Everywhere: Why Can’t We Just Have It All? – exemplifies how these major institutions choose to mislead those they seek to elucidate.

The Australian version of the “fiscal cliff” is about poor people living on income support waking up on New Year’s Day when everyone is full of bonhomie for their fellow Australian and finding out that recent legislative changes made by the supposed pro-disadvantaged government, which have now become active, will leave them, in some cases, $A120 worse of a week. That is, they are losing a considerable proportion of their income. The way I judge public policy is not by how rich it makes the highest earners and asset holders in our midst but how rich it makes the poorest members of society. A policy framework that deliberately targets the most disadvantaged and makes them poorer is a sign of a failed state. The recent legislative changes reinforce the Australian government’s refusal to provide sufficient income support for the unemployment despite it being widely accepted that they are being forced to live well below the poverty line. The Government’s justification is that they need to pursue a budget surplus and have deliberately undermined the capacity of the economy to generate enough work as a result. The relentless attacks on the poor in this country violate my pubic policy assessment rule and indicate we are indeed a failed state.

Last week marked a turning point in Australian politics when the Australian government finally admitted that they had made a monumental political misjudgement by promising to deliver a budget surplus in the next fiscal year despite an economy that was not capable of generating sufficient revenue to render that promise realistic, much less, economically responsible. They didn’t actually admit all of that but that is what has happened in the last week. The Government has abandoned its promise to deliver a budget surplus in the coming fiscal year as tax revenue collapses around them. The reasons for that collapse relate to the slowing Australian economy, due in no small measure to the fiscal contraction already forced on the expenditure system. There was never a need for that fiscal contraction and it was obvious that the Government would fail to achieve its promised surplus. That was obvious. But the problem was that in trying to pursue the surplus they have undermined our prosperity and caused labour underutilisation rates to rise with the commensurate lost national income. They are now being pilloried on the political front for breaking their promise. The fact they made that promise suggests their political acumen is as bad as their economic management.

I was looking back through snippets I save (like a magpie) today and remembered that I hadn’t written anything in response to this Financial Times article (October 12, 2012) – UK needs to talk about helicopters – which demonstrates that a good argument can be housed in a faulty analytical structure. The reference to helicopters comes from Milton Friedman and is popularly known as “printing money” and dropping it on the populace from high. The practice – is described as the ultimate heresy for central bankers. From an Modern Monetary Theory (MMT) perspective, there is clearly no need for a sovereign government to issue debt to the private sector. Given the political issues relating to debt buildup, it would be preferable if governments moved away from that practice altogether. Whatever accounting arrangements they put in place with the central bank to ensure that its spending desires were reflected in appropriate credits going into the banking system are largely irrelevant. The inflation risk is in the spending not the monetary operations that might accompany it.

Last week the former RBA governor, Bernie Fraser said that Australia was suffering from the “stupidity of government” by pursuing a budget surplus in present circumstances. He described our fiscal policy approach as being “just plain dumb”. It seems that the politicians are reflecting the standards that are now apparent in our educational system. The nation was shocked today with the news that we are not as smart as we like to make out. This Sydney Morning Herald story (December 12, 2012) – Australia’s disaster in education – is representative of many articles and discussions across today’s media offerings. The reports said that our children achieved “disastrous results in the latest international reading, maths and science tests”. The shock that the nation is experiencing is large today, about as large as the collective indifference to the damage that two decades or more of poor fiscal policy practice has been. We have allowed our governments to run down public infrastructure in pursuit of budget surpluses. We have let them deliberately reduce the capacity of our schooling system so that we can no longer keep pace with international standards. We have believed that this strategy exemplified responsible fiscal policy. It just shows how dumb our society has become. It also reveals, once again, the failure of the neo-liberal policy regime that dominates.