{"id":14390,"date":"2011-05-05T16:47:45","date_gmt":"2011-05-05T06:47:45","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=14390"},"modified":"2011-05-05T16:47:45","modified_gmt":"2011-05-05T06:47:45","slug":"when-ideological-blinkers-lead-to-denial","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=14390","title":{"rendered":"When ideological blinkers lead to denial"},"content":{"rendered":"

\t\t\t\t\nLet’s start with some facts:\n\nFact 1: When private spending falls, economic growth will falter unless an increase in net public spending fills the gap.\n\nFact 2: Even if a government chose not to fill the gap, and instead did nothing, its budget deficit would rise as economic activity fell due to the operation of the automatic stabilisers (tax revenue falling, welfare spending rising).\n\nFact 3: After a period of rising public deficits, if private spending remains flat, cutting the budget deficit will damage economic growth.\n\nFact 4: When there is an external deficit (net exports negative), if a government runs a surplus, the private domestic sector must be running a deficit and accumulating indebtedness overall. If the private domestic sector resists that dynamic, then growth will falter and unemployment will rise.\n\nFact 5: The central bank sets the interest rate.\n\nWithin this context, with growth slowing, the private sector saving ratio rising, the external sector draining growth and labour underutilisation rates around 12 per cent, the last thing the Federal government should be doing is cutting net spending in next week’s Federal Budget.\n\nBut it is the very thing they are proposing to do. They have been captured by the deficit terrorists and cannot see beyond the “surplus is good” mantra. At the moment, the pursuit of austerity will be very destructive.\n\nNews Limited journalists have become obsessed with the deficit and continually demand higher surpluses. They also seem to be oblivious to the on-going developments in the economy.\n\nThis article, May 3, 2011 – Deficit is driving up the Australian dollar<\/a> – from The Australian newspaper’s economics editor, Michael Stutchbury is no exception. Stutchbury regularly writes the same column twisting it a bit here and there but the message is always the same – the budget deficit needs to be a budget surplus.\n\nIn this article (rant) , he writes:\n\n\n

\n…. the more fundamental story is that Canberra’s structural budget weakness is helping to drive the Australian currency to its new post-float high of $US1.10.\n\nThe deficit blow-out to be revealed a week from tonight will mean that the budget’s bottom line is perhaps two to three percentage points of gross domestic product – or perhaps $40 billion – structurally looser than demanded by the mining boom, our record high export prices and a jobless rate heading below its “natural” 5 per cent level.\n\nInstead of being close to $50bn in the red, the budget already should be building up a solid surplus buffer to stabilise the mining boom economy.\n<\/blockquote>\n\n\n\nAt least this is a twist on the usual argument presented by opponents of deficits that in open economies they lead to a collapse in the currency.\n\nI suppose anything will do when you are obsessed.\n\nI will come back to some of the other components of this quote later but what are the mechanisms that Stutchbury thinks relate the budget deficit to the appreciating $AUD.\n\nHe mounts the case that “the floating dollar and the budget bottom line need to fully play their role as the economy’s front-line “automatic stabilisers”” and by which he means that when private spending growth is strong and the economy approaches capacity, public spending growth should moderate. At the same time, if the growth is sourced by an export boom then the exchange rate will also appreciate to ease inflationary pressures and stifle some of that “externally sourced” growth.\n\nI agree with all of that except then you have to examine the facts.\n\nIf growth is insufficient to fully employ all available resources … AND …if the external sector is not adding to growth … AND … if private spending is still dragging …. then you do not move the budget position towards surplus much less into surplus.\n\nThe facts sheet about the Australian economy does not include a statement that the external sector is a net contributor to economic growth in Australia at present. The most recent National Accounts showed that the external sector was still a drain on economic growth. Please read my blog – Australian National Accounts – I wouldn’t say the economy is great<\/a> – for more discussion on this point.\n\nStutchbury can go on about how strong the economy is but a boom in one sector that doesn’t feed through to the rest of the economy is not a signal that the budget deficit should be cut.\n\nFurther, unless the external sector boom overall (that is, its contribution to growth) is sufficient to fully accommodate any desire to net save by the private domestic sector then the public balance has to stay in deficit for growth to continue. Australia’s external performance is not anywhere near that level at present.\n\nStutchbury also continues to run the line that the Government:\n\n\n
\n… splurged too much again during the financial crisis with its excess budget stimulus.\n<\/blockquote>\n\n\n\nWell that should have resulted in strong growth being maintained and no rise in unemployment and underemployment. The reality is the opposite. Growth slumped and remains subdued and labour underutilisation rates rose by nearly 50 per cent (combined unemployment and underemployment). The reality is that the fiscal stimulus was inadequate and has been withdrawn too early.\n\nHe also mounts a very curious “insurance-type” proposal which is contrary to sound fiscal management.\n\nApparently, he thinks the budget position now should constrain growth so that the exchange rate will not rise as far. He claims that this would make the demand shock arising from the “unravelling of the global commodity price bubble” less “messy” – because we would already be stifling growth as a result of the fiscal drag.\n\nBut a government’s role is not to undermine economic growth “just in case” the growth becomes too strong and pushes the economy up against the inflation barrier. At present core inflation is low and the Reserve Bank maintained its target rate (yesterday) for the 6th month in a row.\n\nWith idle labour and signs that the economy is contracting – now is not the time for the Government to be stifling growth even further.\n\nIs there evidence for my position?<\/strong>\n\nWe received two pieces of economic data that also confirms my position that economic growth is faltering.\n\nFirst, the Australian Bureau of Statistics released the Retail Sales<\/a> data for March 2011 today and the results apparently “surprised” economists – all except this one!\n\nThe main highlights of the March 2011 data were:\n\n\n