What is government waste?

A few things came up today which I thought I would write about – albeit briefly (but then that is all relative I suppose). In general I am scaling down blog activity on Fridays. But today the Australian government released a final evaluation report on one of its big fiscal stimulus infrastructure projects. The Report attracted the typical biased headlines – massive government waste. Over in the UK, the wreck of News Limited’s News of the World proved – once again – that the private sector cannot be trusted to self-regulate resonating what we learned from the financial crash but seem to have forgotten already. These two observations are related and so today I consider the notion of government waste.

First, I thought this insight from Geoffrey Robertson – – resonated with what is going on at the moment:

News of the World proved that self-regulation was bound to fail, whenever cutthroat circulation was at stake, to instill any sense of ethical conduct, or even respect for the criminal law, in the business of tabloid infotainment

Self-regulation is one of those neo-liberal myths that has allowed capital to run rife and create havoc in the world without many repercussions for the top-end-of-town.

In the same way that the UK Press Complaints Commission set up in 1991 is a joke – a chimera of oversight which operates to allow the government to claim they are acting in the best interests of society without doing anything – it is clear that regulatory oversight of the large Wall Street bankers failed to stop them undermining public purpose.

There needs to be stronger oversight that will actually lock people up. In the specific case of NOTW scandal it remains to be seen how many of those who actually benefited financially – and I mean in more significant ways than the actual operators – go to jail. The number will not be large (if more than zero).

Second, there was an interesting article in the Melbourne Age today (July 8, 2011) – Current a/c deficits don’t deserve bad rep – which reported on a speech made by a senior RBA official who said that “(b)ig current account deficits can actually be a good thing”.

The official called for a “more nuanced analysis of current account positions, rather than a simple focus on headline numbers”, which mainstream economists tend to focus on and conclude that deficits are bad.

If the trading component of the Current Account is in deficit then in real terms local residents are enjoying net real benefits at the expense of other nations. I will come back to the notion of “real” soon.

The article also noted that “(o)ver the past 50 years there was an average deficit of 3.1 per cent of GDP” and so you see that the typical outcome whereby the national government would run a budget deficit was the reason that the private domestic sector was able to save in net terms.

The Australian Treasury is forecasting that “Australia’s current account deficit will be four per cent of gross domestic product (GDP) in 2011/12″ which means that for the private domestic sector to net save overall and start reducing its debt levels (which reached record levels prior to the crisis), the budget deficit has to be at least 4.01 per cent of GDP over the same period.

This also means that the external sector will continue to drain aggregate demand from the national economy.

The Budger Paper No. 1 – 2011-12 carries an Appendix of historical budget outcomes and the forward estimates.

The budget deficit was 4.3 per cent of GDP in 2009-10 and with the Federal Government now in austerity mode (courtesy of the so-called “mining boom of our lifetime” which continues to be so small that the external sector drains growth) the forward estimates for 2010-11 are 3.6 per cent then 1.5 per cent of GDP in 2011-12.

You can imagine that with the private domestic sector now not spending and trying to reduce debt and the external sector deficits averaging 3.1 per cent of GDP, the fiscal austerity plans of the Government will reduce growth and become unsustainable as a result of the adverse movements in the automatic stabilisers.

Simple arithmetic tells you that.

Real versus nominal efficiency

While on the topic of News Limited (which is in shame now over the NOTW scandal) – its local rag that parades as a “respectable” daily newspaper – The Australian – carried a story today (July 8, 2011) – BER waste tops $1.5 billion.

The Australian is heavily biased in its reporting towards promoting free market values and never ceases to run mindless beat-up stories about government inefficiency and the need for more deregulation – especially when it benefits the American (who used to be an Australian) owner’s interests. There reporting during the last federal election was a disgrace with one opinion piece after another wheeled out each day promoting the election of the conservatives.

So today’s report comes as no surprise because it seeks to perpetuate the notion that the Federal Government’s Building the Education Revolution program – which was a key component of the Government’s fiscal stimulus intervention – was a waste of money.

The claim that the BER “has wasted $1.5 billion in eastern states” is music to the ears of the free market lobby – many of which benefited from handouts associated with the fiscal stimulus packages and who generally enjoy a range of corporate welfare payments (direct and indirect) courtesy of the federal government.

Leaving aside the obvious ideological bias, the report is plain wrong in terms of understanding what waste is. It seeks to promote a concept of “waste” that has no meaning in a fiat currency system. I realise what I am about to write will appear to be counter-intuitive and difficult to accept at face value. But many of the myths promoted by the deficit terrorists play on intuition – which is a very poor substitute for thorough understanding.

The news article says that:

MORE than $1.5 billion has been wasted in the eastern states under the federal Government’s Building the Education Revolution schools stimulus program, with the nation’s two biggest states failing to provide value for money under the program.

The third and final report into the BER, conducted by former investment banker Brad Orgill, has found Victorian and NSW, have not delivered value for money for public schools under the program with public schools charged an average of up to 60 per cent more for school buildings, despite no differences in quality.

The article then quotes a range of building costs “per square metre for all classrooms, halls and libraries delivered” and compares them across the nation (by state) and type of education provider (private/public) under the BER program.

The data is taken from the Building the Education Revolution Implementation Taskforce: Final Report – which was published this morning by the Government. Be careful if you want to read the report – it is a large file.

The accompanying Government Press Release is also interesting. Juxtaposing the News Limited spin on the Final Report (selective reporting of statistics etc) with a broader reading of the actual Final Report is a salutary exercise.

It will confirm that The Australian is not interested in balanced reporting.

For overseas readers, The Building the Education Revolution (BER) was a large-scale public stimulus program that provided involved over “23,670 construction projects” being “delivered by 22 government and non-government education authorities” to build new school infrastructure particularly in primary schools. The infrastructure was in the form of new classrooms, halls and libraries.

The Final Report shows that “completions are at 92 per cent with 98 per cent of funds having been committed”. The projects saved the construction industry from a severe downturn during the worst of the crisis. Typically the construction industry is an early victim of a recession. In the 2008-10 period, the construction industry in Australia actually boomed courtesy of the fiscal stimulus.

Please read my blog – Fiscal stimulus and the construction sector – for more discussion on this point.

Despite the claims by the deficit terrorists that the BER was a total disaster the Final Report finds that:

BER has however also been the subject of valid complaints from approximately 3% of school communities.

In other words, a very small percentage of projects generated valid issues.

But all these details aside – what about the substantive claim that the Federal stimulus was waste because in some states the provision of a school building cost less than in other states – and that private operators were pocketing “rents” from the scheme unnecessarily?

First, from a macroeconomic perspective, the fact that unemployment and underemployment rose several percentage points during the crisis and are still well above the pre-crisis levels is evidence that the overall fiscal stimulus was insufficient in its impact on aggregate demand. In that sense, the waste of the stimulus are the lost jobs that arose because the Government were too cautious.

So – categorically – the stimulus was not large enough nor has been maintained for long enough.

Second, the pocketing of “rents” (that is, payments which were above those necessary for the tradespersons to supply their labour) have distributional implications. Some private operators definitely made a significant amount of money from the BER program and probably more than they would have made in normal circumstances for delivering the same services. I reflect on the abnormal nature of the circumstances below.

But the only relevant question arising from a skewed distribution (relative to what?) is whether the fiscal stimulus could have delivered more jobs per dollar than it did if the distributional benefits of the stimulus were different. I have no doubt that the Government could have created hundreds of thousands more jobs than they did if they had have targeted jobs in a different way.

For example, in this blog – 90,000 jobs for 42 billion is a bad strategy … – I reported on CofFEE estimates that if the Government had have introduced a Job Guarantee and paid the workers the current national minimum wage (with holiday pay etc) it could have hired 557,000 full-time equivalent workers for around $8.3 billion per year.

Instead they out-laid $A42 billion for an estimated 90,000 jobs. The reason they didn’t pursue a better targetted job creation strategy lay in their ideological dislike for such schemes. The very same ideology that the conservative press is being motivated by to criticise any government fiscal intervention.

But the substantive point here is that the deficit terrorists are not focusing on a lack of job dividend. Rather, they just claim that government intervention is always undesirable (unless it is lining their own pockets). That bias was evident in this News Limited report today.

Third, for a sovereign government that issues its own currency there is not meaningful concept of waste that is specified in terms of $A net outlays. This is a controversial point I suspect.

Take two projects: A and B. They both deliver a building of similar dimensions and quality in different regions. Contractors providing building A charge twice as much as the contractors who provide B and the government officials lack oversight to determine why? The buildings are delivered on time and appear to be satisfactory against the specification.

Question: Is there any waste in Project B relative to Project A?

Answer: From a Modern Monetary Theory (MMT) perspective, there is no waste.

Both projects use the same quantities of real resources and transform those resources into a similar real output. There is no waste that matters in the sense of resources going astray.

The fact that the Government paid the Project B contractors twice as much in nominal terms ($A) does not constitute waste unless we were already at full employment and the nominal demand that was created in the Projects (wages, salaries, equipment purchases etc) was pushing up against the inflation ceiling.

Presumably, the contractors in Project A and B distributed the income earned in a way that added to aggregate demand, which then stimulated further employment and output via the spending multipliers.

The Final Report did find some quality issues and in that sense the real resources are being transformed into an inferior outcome. But these were small issues in a very large program.

Some might argue that paying Project B contractors twice as much stops the Government from spending on other worthy programs and that is waste in the sense of an foregone benefit. My reply is obvious – there are no financial constraints on the Federal Australian government and by spending X more $As on Project B the government is not reducing its capacity to pursue any meaningful and beneficial project.

Politically they might be constrained but then that is another debate altogether.

The only time they would be constrained in real terms would be at full employment and then the need for a large-scale fiscal intervention would be absent.

Please do not assume that I think the national government should be throwing millions towards unscrupulous building contractors. The argument I am making is more substantial than that and takes us back to first principles.

In general, governments should spend and tax to advance public purpose. I do not think pushing millions into the hands of dodgy builders was a good strategy but the waste I have in mind is the foregone employment that was involved because their fiscal stimulus was not as well designed as it might have been.

That is not the concept of waste that that the mainstream media is headlining today nor what the deficit terrorists focus on.

Reflections on the government stimulus rescue

At the time the Government introduced the fiscal stimulus the deficit-terrorists starting to search for examples of what they called waste.

I recall this insight from the Sydney Morning Herald’s economics commentator Ross Gittins who said his article (March 3, 2010) – Rudd pays for avoiding recession:

Years ago a central banker explained to me that, in his bank’s efforts to keep the economy from being blown off track, it was never a good thing to be too successful. Really, I said, why not? Because if you’re too successful at eliminating evidence that the economy had a problem, it won’t be long before people are questioning why you took the steps you did when, clearly, there was never a problem.

I agreed with that assessment. I was interviewed a lot during that period about the need for the stimulus and the waste that was self-evident. It was always hard explaining to the audience the point I am making here.

It was clear that some parts of the stimulus intervention were poorly thought out – for example, the now-scrapped insulation program. It wasn’t a very good program because it didn’t create very many jobs at the bottom end of the labour market.

The design of any fiscal stimulus should be all about maximising the number of jobs that are created to minimise the damage to the labour market arising from the slowdown in private spending. Putting insulation into ceilings and allowing all sorts of unskilled private operators to reap large profits was not a very sensible strategy.

But we also had to appreciate – historically – that large-scale stimulus interventions of the type taken by the Australian Government – which in international terms was early and large relative to GDP – are very complicated and you can expect some administrative inefficiencies. Imagine if the private sector had to ramp up investment spending within a 10-12 weeks – what do you think would be the outcome of those projects?

It is also clear that the neo-liberal era has been marked by a major reduction in Federal Departmental capacity to design and implement fiscal policy interventions – given the obsession with monetary policy and the major outsourcing of “fiscal-type” government services to the private sector. Many of the major Federal government policy departments are now just contract managers for outsourced service delivery.

So with the voluntary reduction in “fiscal space”within the federal government over the last 20 years or more it is no surprise that the overall capacity of the government machine to implement complicated nation-wide infrastructure programs has been diminished.

The Final Report of the BER Taskforce supports this assessment:

Across the country the number of state government employees stating their occupation as ‘civil engineer’ has practically halved over the last 30 years, from 4,480 in 1976 to 2,547 in 2006. The same trend has occurred for architects. This has diminished state governments’ in-house capability. In addition, there has been a marked de-professionalisation with a reduced focus on specialist skills (engineers and architects) relative to generalists, including in title designation. The only state government that can claim to have all the attributes of an informed buyer of capital works projects currently is the Queensland Government.

That was a major lesson for the future from the fiscal interventions. We can no longer deny that fiscal policy is required to address serious swings in private spending. The crisis has shown that monetary policy is – categorically – an ineffective tool in dealing with aggregate demand failures of the sort we have witnessed in the recent years. In that context, governments must develop forward-looking capacity to ensure that it has project implementation skills when they are required.

Also while complex fiscal interventions will not be perfect in design or execution you have to consider what would have been the case if we had have followed the Chicago school (or the Harvard school) line – and left it to the private market to sort the mess out. It is clear to me that we were facing a repeat of the Great Depression such was the damage to the financial system and the plunge in real output in the major economies.

Finally, the Australian downturn was less severe than we thought at the time of the intervention. It is easy to look back with the benefit of the 20-20 vision and think that the Government acted too quickly to arrest the slowdown. But the major point is that at the time the stimulus packages were designed and announced, the Government believed we were on the precipice of another Great Depression. The international events demonstrate that the crisis has been very severe. So the government rightly assumed that there would be major idle labour skills available to be brought back into productive work. That was a reasonable assumption and the fact that the downturn hasn’t been as bad as that demonstrates that the fiscal stimulus has been very effective.

The fact that the labour market has still not recovered some years after the first deterioration began is evidence that the fiscal intervention was not sufficient.

Further, as noted above I would have concentrated the stimulus on efforts to provide public sector jobs to the most disadvantaged workers who bear the brunt of unemployment and underemployment. They are still idle and without sufficient income. It would have delivered much more to the economy than competing for tradespersons with other “private” demands for those services, however, weak they were at the outset of the crisis.

As an aside, to close the circle on the opening thought on self-regulation, the BER Final Report noted many deficiencies in the private sector trades:

The Taskforce has observed a number of construction industry wide issues6. These include:

- inadequate use of technology to deliver coordinated project design documentation;

- the potential for conflict of interest of private certification if aligned to the delivery managing organisation;

- substandard workmanship which may be a result of low completion rates of trade
apprenticeships; and

- a trend to generic skills for project managers rather than technical qualifications backed by significant hands on construction experience.

The de-skilling of the private sector is another story for another day. But the fact is that private work for private contractors in Australia is also very shoddy. The neo-liberal degradation of our principle training institutions over the last 30 years are catching up with us. We should always remember that the public sector was the main training institution in Australia through apprenticeships in the large infrastructure departments.

Many of those tasks have been outsourced or privatised and the training capacity eliminated by profit-hungry private operators.

Conclusion

Meanwhile, the US President – in entering “debt reduction” talks with the Republican rabble in Congress just confirms he wants to be a one-term president. They will play him for all his stupidity.

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    29 Responses to What is government waste?

    1. Nathan Tankus says:

      while i reject measuring the public sector by private sector notions of efficiency, i think this post goes too far to the other extreme. in real resource terms project a does cost much more because those contractors are able to redirect much more real resources (and interest payments/capital gains) towards themselves using the additional cash they have been paid. You can argue that with effective demand so low they are generating more demand and thus more employment while not taking goods from others, i still think that project cost more in real resource terms. if the government pays for a building to be constructed and then gives me the deed to the property and the building that costs society lots of real resources even if that building wouldn’t be built otherwise.

    2. Mike says:

      “Meanwhile, the US President – in entering “debt reduction” talks with the Republican rabble in Congress just confirms he wants to be a one-term president. They will play him for all his stupidity.”

      He may be “dumb” but he will mostly likely be running against “dumber” in the next election, as he did in the last one.

    3. Neil Wilson says:

      “i still think that project cost more in real resource terms.”

      Economically if it doesn’t crowd out then it doesn’t cost more, it is actually more efficient in real terms – since real resources that would otherwise be idle and wasted are used in a particular time period.

      Politically there is a ‘fairness’ issue in terms of distribution – but that’s because the programme was badly designed in the first place.

      In the old days the British MoD really didn’t care how much they paid for tanks, etc as long as the money went to British firms and was distributed within British society. It worked economically but led to political and distributional issues.

      We’re back to Keynes’ hole digging. It works, but there are many better ways to design counter-stabilisation programmes.

    4. Lefty says:

      Interesting, the constant comparison of so-called cost efficiency differences between public and private schools in recieving their respective BER projects. The attempt to link the federal government with “wasteful” spending by public schools ignores the fact that building standards in public schools are set by individual STATE government policy – the feds have little jurisdiction here. Never let facts get in the way of a good ideologically motivated beat-up I suppose.

      Another fact deliberately ignored by those opposed to the BER is that every school in the country has recieved useful facilities that we would never have recieved otherwise – facilities that will go on serving us for decades, being used in the education of generation after generation of children. Seems like a worthwhile investment in the future to me.

      And despite all the claims of shoddy jobs as far as the eye can see, as an employee at the coalface of public education – I’m yet to see a bad one myself.

    5. Craig Austin says:

      Government waste is “opportunity costs”. Failing to optimize government debt levels lead to excess capacity, reduced throughput, poor labor utilization, and opportunity costs. The cost of suboptimal debt levels is the missed opportunity to spend on R&D that can subsidize next generation technology for the private sector.

      frame the language, change the game – whoa…i just made that up. could be my tagline…but i will consider selling the copy rights. http://www.DollarMonopoly.com

    6. /L says:

      @Mike
      He may be “dumb” but he will mostly likely be running against “dumber” in the next election, as he did in the last one.

      You mean that would be Obamas hope, Americans will elect the least dumb to be the next president?

      Well I wouldn’t bet on it.

      But before we see the next line-up for the final much will happen. How know maybe even some serious Democrat will challenge the incumbent weak Democratic president.

    7. Andrew says:

      The Australian haven’t posted a single comment I’ve submitted. Interestingly the Age have posted 90% of my comments.

      I ain’t no saint, but it’s obvious wot a bunch of deceitful, lying $&@?s Murdochs lackeys are.

    8. Min says:

      ” if you’re too successful at eliminating evidence that the economy had a problem, it won’t be long before people are questioning why you took the steps you did when, clearly, there was never a problem.”

      I am reminded of the passage in the Dhammapada the goes something like this:

      The inferior man is blamed,
      The average man is blamed,
      The superior man is blamed,
      There is none who is not blamed.

      As the US stimulus shows, even steps that are only marginally successful are blamed for doing too much. (!)

      While the banker has a point, the conclusion is wrong. As the Dhammapada indicates, you are going to be blamed anyway. Might as well do the right thing.

    9. MamMoTh says:

      If project A and B are the same, but project A costs twice as much as project B then there is waste even though the government is not financially constrained, since the government could have carried out 3 projects B for the same money, or 2 projects B and spent the rest on another project.

    10. Tom Hickey says:

      “If project A and B are the same, but project A costs as much as project B then there is waste even though the government is not financially constrained, since the government could have carried out 3 projects B for the same money, or 2 projects B and spent the rest on another project.”

      Doesn’t follow if the government is not financially constrained to say “the government could have carried out 3 projects B for the same money, or 2 projects B and spent the rest on another project.” The amount of money is not a consideration or limitation unless it results in excessive demand that leads to price instability. For example, in a developing economy in which there is demand deficiency due to low worker incomes and chronic unemployment, the government may wish to use human labor instead of technology, e.g., in road construction. I believe that Bill has recommended this approach even though it is “inefficient.” Government is concerned with overall effectiveness in meeting public purpose rather than economic efficiency.
      The only actual government waste involves real resources, and the other big consideration is whether government unfairly competes with the private sector, which it can very easily do and win with a zero cost of capital. The malinvestment argument applied to government is a canard. The “malinvestment” that the government has to watch is misuse of funds, like fraud and graft.

    11. Neale M says:

      “Current a/c deficits don’t deserve bad rep”

      The particularly poor education of the public in Australia (are we any different to elsewhere??) to things economic especially current accounts and budget balances is a failing of the Economics community and this ignorance is exploited by politicians come election time.
      Likewise the notion of Government waste given that the important thing is generally to direct cashflow into the general economy. Many people do get their back up however by public finances being (unreasonably) directed into the pockets of the relatively few. To this end I’d have to agree that profiteering from such government ventures as the BER (beneficiaries being Leighton and only one or two others), NBN fitout (overcharging for tenders) and pink batt (fraudulent operators popping up to take advantage of free money) is unacceptable though not necessarily ‘wasteful’ per se.

    12. Neil Wilson says:

      Mammoth,

      That’s private sector accounting, not public sector accounting. In the public sector the cost of money is near zero and you cannot get rid of the cost of waste from your balance sheet by ‘slashing costs’.

      It is the job of the private sector to be ‘efficient’. The job of the public sector is merely to be ‘effective’. Ying and Yang.

      The challenge is to design systems where the private sector can ‘crowd out’ the public sector by being more efficient without being less ‘effective’. Then naturally the areas that remain in the public sector are those the public sector can produce at the required level of ‘effectiveness’ more efficiently than the private sector. And that will vary over time due to the private sector’s persistent bi-polar emotional condition.

      Systems using a buffer stock design look to me like the way to go – projects that can be shelved and dusted down as required.

      .

    13. Aidan says:

      The Australian Treasury is forecasting that “Australia’s current account deficit will be four per cent of gross domestic product (GDP) in 2011/12″ which means that for the private domestic sector to net save overall and start reducing its debt levels (which reached record levels prior to the crisis), the budget deficit has to be at least 4.01 per cent of GDP over the same period.

      The private domestic sector has no desire to net save overall. The RBA’s attempt to force it closer to a net saving position by raising interest rates is pushing the dollar artificially high as banks fund their loans through the carry trade instead.

      A net saving private sector is neither natural (except in recessions) nor desirable. Why is it taking you so long to get this?

      Third, for a sovereign government that issues its own currency there is not meaningful concept of waste that is specified in terms of $A net outlays. This is a controversial point I suspect.

      It is only a controversial point because you have reached an incorrect conclusion. Once you recognise your error the point will cease to be controversial.

      Take two projects: A and B. They both deliver a building of similar dimensions and quality in different regions. Contractors providing building A charge twice as much as the contractors who provide B and the government officials lack oversight to determine why? The buildings are delivered on time and appear to be satisfactory against the specification.

      Question: Is there any waste in Project B relative to Project A?

      Answer: From a Modern Monetary Theory (MMT) perspective, there is no waste.

      If that is true then it means there is a defect in MMT that needs addressing.

      Some might argue that paying Project B contractors twice as much stops the Government from spending on other worthy programs and that is waste in the sense of an foregone benefit. My reply is obvious – there are no financial constraints on the Federal Australian government and by spending X more $As on Project B the government is not reducing its capacity to pursue any meaningful and beneficial project.

      Politically they might be constrained but then that is another debate altogether.

      I put it to you that you have this the wrong way round – spending inefficiently on Project B prevents the money from being diverted onto other projects, whether or not the rest of the economy is at capacity. Politically they might choose to run it below capacity but thats another debate altogether.

      The only time they would be constrained in real terms would be at full employment and then the need for a large-scale fiscal intervention would be absent.

      There are two problems with that statement. The first is that the full employment could be the result of the large scale intervention. The second is that capacity constraints could be reached before there’s full employment – for instance there may be many workers available, but none who can operate a backhoe.

    14. Craig Austin says:

      The federal government creates money, or government liabilities, through public spending. Once dollars are in circulation all user transactions net to zero because all asset transfers are offset by a corresponding liability transfer. At the end of each year taxes transfer dollars back to government which reduce government liabilities. When both parties sum their totals the issuer debt is dollar for dollar equal to the users savings. The operationally reality of our monetary system is that government operates independent of it’s users by creating money when it spends and destroying money when it taxes. Government deficits of the issuer results in savings by the currency user as a matter of accounting. http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.html

    15. Will Richardson says:

      Aidan, it may be the case that the private sector’s net saving is low, but with Australia’s very high private debt that can’t go on forever, at some stage private debt funding limits are hit; consumption falls and de-leveraging/saving will happen, especially when your property bubble bursts and interest rates are going up. Over the course of a business cycle the private sector saves, you are just currently at the top of your asset/debt inflated housing bubble.

      Say Australia goes to ‘saving’ 7% gnp like in the UK once we hit the private credit buffers, some of the leakage in net exports will fall as spending/imports fall, say around 2% so your current account nearly balances, then the public deficit would need to go to 7.5%. Probably it would need to go more if your unemployment goes to UK levels and no doubt our private net saving desires are considerably higher but are frustrated by the austerity fruitlessly and destructively trying to cut net public spending.

    16. Chaos says:

      Tom Hickey says: “The only actual government waste involves real resources … The malinvestment argument applied to government is a canard. The “malinvestment” that the government has to watch is misuse of funds, like fraud and graft.”

      Waste of real resources is malinvestment, too. So if government is wasting resources that could be better used that’s waste. however, this is not exactly a defence of private investment because it can cause a lot of that sort of waste too. However, there is a big difference, the waste is limited (somewhat) by prices and limited income; but government can buy anything right? As long as the currency is accepted and the only limit for resources will be the cost of imports (which will be more or less affordable depending on the exchange rate).

      Also in this context, government CAN ‘crowd out’ private sector, because it can outbid private sector always, and buy more of the resources if these were limited. So you can, somewhat, build a case about government waste, if there was full employment and capacity utilization (but I think I’ve read fom most MMT authors, that if that was the case, government should actually withdraw and let private sector do, so it’s just a political problem, as usually…).

    17. Tom Hickey says:

      Chaos, I agree that government “can” waste real resources. It does this all the time in a huge way through the military and black ops, for example. Government “can” also crowd out the private sector anytime it wants, not only by outbidding the private sector since government has unlimited funds, but also because the private sector cannot compete against government’s cost of capital.

      But Austrians typically charge that because government “can” do this, it should therefore do nothing because it “might,” which does not follow. I have yet to see a cogent argument turning the “can” or “might” into a “has” or “is” based on data. It is a canard.

    18. Craig Austin says:

      Sorry about my last comment that posted. That was meant for another blog. Yes it was a cut and paste :-)

      About government waste, the way to reposition “waste” is frame it as “investment”. If another currency issuer (china) wants to save in your currency it’s not only harmless it is desirable because then you don’t have to use up your resources on making consumer junk. Who cares who makes a toaster as long as you can buy one. Now to displace china’ s savings our federal government needs to spend. Spend on what? R&D that can subsidize next generation technology for the private sector. Not only is the US the policeman of the world’s seas but it also needs to lead the world in technology innovation. Don’t let critics bog you down with their language – deflect and redirect. Agree with them – steal their thunder. Public sector is terribly inefficient. No doubt about that. Look at these non-performing mainstream academics who have failed to understand the fundamentals of monetary policy. For extra measure tell them how efficient the private sector is at removing non-performance. Steve Jobs canned the entire mobileme leadership team because the platform didn’t scale. “Change the frame. Change the game.” Check and mate! Served up complements of DollarMonopoly.com

    19. Aidan says:

      Will Richardson says:

      Aidan, it may be the case that the private sector’s net saving is low, but with Australia’s very high private debt that can’t go on forever,

      Whether it can go on for ever is irrelevant! If we get to a stage where it can’t go on, then we can do something else (and Bill’s already told us what). But in a healthy economy, the private sector’s desire to invest usually exceeds its desire to save.

      at some stage private debt funding limits are hit; consumption falls and de-leveraging/saving will happen, especially when your property bubble bursts and interest rates are going up

      The fact that we currently use debt backed currency makes it very unlikely that private funding limits will ever be an obstacle. It is true that the RBA and other Central Banks can put up interest rates enough to force the private sector to net save, but it is not the sector’s normal behaviour.

      Over the course of a business cycle the private sector saves, you are just currently at the top of your asset/debt inflated housing bubble.

      Firstly you’re three years out of date – we’re near the bottom of the cycle at the moment, even though the RBA has trouble recognising it.

      Secondly, the private sector saves, but the idea that over the course of a business cycle the private sector net saves has no basis in reality. You only have to look at Britain to see how ridiculous it is.

    20. Panayotis says:

      Public waste of is not an outcome of public spending preferences per se. It is the outcome of private interests with comparative advantage that seek to deregulate economic activity and in the case of private demand failure, cause public behavior to enforce corporate welfare measures that accept overspending in distorted allocations resulting in negative externalities. Furthermore, private interest with comparative power seek to ‘capture” public behavior that accepts overpricing/bribes in order to collect rents. Wasting resources regardless of the unemployment level means less resources in the future at a higher inefficiency and this reduces public welfare. Similarly, collected rents regardless of the unemployment level means income inequality against productive resources and relative price distortions and this lowers public welfare. The unemployment waste is the first issue and a problem of public purpose failure to control effective demand but the spending waste is a significant issue and must be addressed and understood as a private sector problem imposed upon the conduct of fiscal policy!!!

    21. Neil Wilson says:

      “But in a healthy economy, the private sector’s desire to invest usually exceeds its desire to save.”

      And your evidence for that statement is?

      The sector balances show very clearly that overall the private sector is accumulating financial assets in the currency area – otherwise the liabilities of the government sector wouldn’t be going up.

      The US and UK graphs are very clear about this, and so is the accounting.

    22. Chaos says:

      Aidan has got a point with this comment, but I suspect not for the same reasons I think: “If that is true then it means there is a defect in MMT that needs addressing. … I put it to you that you have this the wrong way round – spending inefficiently on Project B prevents the money from being diverted onto other projects, whether or not the rest of the economy is at capacity. Politically they might choose to run it below capacity but thats another debate altogether.”

      It’s waste in the form of inflation for the private sector, spending more money or the same project means rising prices and private sector will feel that. If this is constrained to few projects it may not be a big deal, but certainly there is a lose of purchasing power for the private sector if it’s done in a massive scale.

      And it’s bad for the government too, because this sort of inefficiently means it could have to tighten fiscal policy before archiving full employment and capacity utilization to control price stability and purchasing power for the public.

    23. Hamish says:

      I’ve been thinking along the same lines as Chaos. Government consistently paying over the odds for work would have to be inflationary as you have more money chasing the same real goods, and could hurt the private sector if contractors start expecting the same sort of money from everybody else. Property in Australia is already stupidly inflated in value, specifically land values, we don’t need rising construction costs on top of that.

    24. bill says:

      Dear Aidan (at 2011/07/10 at 13:47)

      You have repeatedly accused me of not having any understanding of reality and this comment is one of many along those lines:

      … but the idea that over the course of a business cycle the private sector net saves has no basis in reality. You only have to look at Britain to see how ridiculous it is.

      I would suggest you reflect on the available National Accounts data, which you can get back in coherent form to at least September quarter 1959 for Australia (and then before that if you want to do some extra research). Then compute the sectoral balances – budget balance, current account and the private domestic sector.

      You will then see that the notion that budget surpluses and private domestic sector deficits being “normal” (as you impute) is not a well-founded proposition. In fact it is only (as I have noted) a very recent empirical reality. For most of the period since the second world war the government has been in deficit, the current account has been in deficit and the private domestic sector has been in surplus (that is, net saving). It is only in the neo-liberal period has the private domestic sector “invested more than it has saved”.

      That is not my opinion – but rather reflects the facts. Once you have done that empirical research you can then relate MMT to understanding how that happened even though private investment was at times very strong during that long period.

      best wishes
      bill

    25. Tom Hickey says:

      Chaos, as I read it you are essentially saying that the constraint is not affordability but real resources and price stability, which is what MMT says. Am I overlooking something?

      From the vantage of allocating real resources, government spending mobilizes resources for public use, while taxation reduces the ability of the private sector to access resources. This allocation between public and private is governed by the political decision-making process.

      From the fiscal vantage, government expenditure increases non-government net financial assets and taxation withdraws net financial assets. Changes in non-government NFA affect effective demand.

      Good budgeting works within these boundaries to distribute real resources efficiently and effectively between private and public, on one hand, and also to offset non-government saving desire in terms of sectoral balances, so as to maintain full employment along with price stability. Both the availability of real resources and the consequences of fiscal policy have to be considered in budgeting. The budgeting process through which expenditure is appropriated and taxes levied provides a discipline that fosters efficiency and effectiveness, but while necessary for good governance, this is not sufficient. Appropriate regulation, management, reporting, review and auditing, and controls are also required.

    26. Chaos says:

      “Chaos, as I read it you are essentially saying that the constraint is not affordability but real resources and price stability, which is what MMT says. Am I overlooking something?”

      Not really, but the term ‘constraint’ is a little bit ambiguous, because the ‘waste’ can happen before it becomes a problem. A waste by the means of devaluing the purchase power of the currency beyond desirable levels (for example, if wages, savings or fixed income don’t increase as much, which is not unusual), driving prices up only benefiting a few people (contractors, for example).

      But I don’t think the private sector is better with this at all, and we know because the huge housing bubble that happened in a lot of countries (and is still happening), with an huge expansion of credit and inflating the prices to unsustainable levels (not only of real estate, but in a lot of other things because the extreme liquidity that nowadays is still causing volatility in prices because of speculation).

      In both cases is a matter of politics, governance and regulation (as can be seen for example in Germany there wasn’t a housing bubble because it has huge incentives, regulatory too, against it) as you mention. I’m not saying MMT is wrong at all, as it’s a description of how the system works it can’t be; but that does not mean that in practice the same as always can’t happen (terrible governance and corruption which leads to disaster).

      I think a lot of the problems that arise “selling” MMT to the public is because of perceived (and a lot of times, correctly) danger of the political utilization of policy (this is why, for example, while we could finish national bond issuing for all monetary sovereign nations, it can be perceived that it’s a good political constraint), and natural counterbalances are needed. An stable economy obviously can’t happen while we don’t have the necessary checks and balances and governance system, with or without MMT.

    27. Aidan says:

      Dear Bill,

      You have repeatedly accused me of not having any understanding of reality

      That is an outrageous slur! Your understanding of reality is much better than that of many economists -so I do seriously consider what you’ve said, even though I don’t always agree with it.

      and this comment is one of many along those lines:
      … but the idea that over the course of a business cycle the private sector net saves has no basis in reality. You only have to look at Britain to see how ridiculous it is.

      And I stand by that comment. It is disheartening to see such a large proportion of what you write repeatedly rendered worthless by a single incorrect assumption!

      I would suggest you reflect on the available National Accounts data, which you can get back in coherent form to at least September quarter 1959 for Australia (and then before that if you want to do some extra research). Then compute the sectoral balances – budget balance, current account and the private domestic sector.

      You will then see that the notion that budget surpluses and private domestic sector deficits being “normal” (as you impute) is not a well-founded proposition. In fact it is only (as I have noted) a very recent empirical reality. For most of the period since the second world war the government has been in deficit, the current account has been in deficit and the private domestic sector has been in surplus (that is, net saving). It is only in the neo-liberal period has the private domestic sector “invested more than it has saved”.

      Nice try! The historical situation is very different from the present day reality. People are no longer so debt averse, and the cheap land is gone so they have to borrow much more if they want to own a home. Directors of corporations know they can give better returns to shareholders if they’re more highly leveraged, and the shareholders expect it. It’s easier to buy shares, so people have many more investment options. And back in those days nobody had heard of CFDs or their spread betting equivalent, and the carry trade didn’t usually play such a big role in setting the value of currencies.

      It’s not as it was, and nor will we ever revert to those conditions. From time to time we will find ourselves in a situation where the private sector net saves, but we should never try to support that situation when we’re not in it.

      The important thing is that it should not be considered in isolation. Peter Costello may not have been the best treasurer, but his policy of running a surplus was quite sensible as it allowed interest rates and inflation to both be low. The Rudd tax cuts were bad for the economy as they triggered an inflation rise which the RBA wrongly attributed to full employment (hence their current policy of sabotaging any economic success with interest rate rises which, thanks to the carry trade, have sent our dollar sky high). It was only after the private sector started net saving that public deficits became sensible policy.

    28. Neil Wilson says:

      “And I stand by that comment. It is disheartening to see such a large proportion of what you write repeatedly rendered worthless by a single incorrect assumption!”

      The graph for the UK is here Aidan and it doesn’t support your statement. You are grossly mistaken.

      http://www.3spoken.co.uk/2011/06/uk-sectoral-balances-q1-2011.html

    29. RayW says:

      “But many of the myths promoted by the deficit terrorists play on intuition – which is a very poor substitute for thorough understanding.”

      Excellent!

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