With the debate now over (more or less) I caught up on my backlog of reading today. I store articles from all over in a database and then access them when I have time. So on this very wet Sunday, I was working on two papers for an upcoming field trip to Kazakhstan on an Asian Development Bank contract, and, in-between, I read some (so-called) analysis. The basic conclusion is that none of these economics journalists portray the slightest understanding that we are no longer living in a convertible currency system (ended in 1971) and that most national governments issue their own currencies within a flexible exchange rate environment. If a car mechanic tried to apply the art that was practised before electronic ignitions and computerisation to our cars they would go out of business very quickly.
The latest ABS data release on Australian National Accounts: Financial Accounts, which came out on September 25 and showed that the final cash deficit for the was about 26.8 billion for $2008-09. Ho hum, so what?
The ABS said that the:
… The net change in financial position for national general government was -$11.1b … At the end of the quarter, national general government had total liabilities of $271.6b and total financial assets of $244.0b.
Of-course, this means that the net change improvement in the financial position for the non-government sector in Australian dollars was +$11.1 b and the net change in financial assets of the non-government sector was $A26.8b. It is little wonder the wealth position and saving ratio for households has improved. After all, any national government deficit adds exactly that much to net financial assets of the non-government sector
Then we read this commentary on the data from News Limited Senior Economic writer George Megalogenis who on September 30, 2009 wrote that Deficit reveals both sides stuffed up.
IN the end it was the stimulus that pushed the budget into the red. The final cash deficit of $27.08billion for 2008-09 is almost identical to the original estimate for phase one of the stimulus – $26.59bn. To conservative eyes this is a scandal. To Labor eyes this is a job well done. The truth in this case is somewhere else again.
So if his arithmetic is correct, and it is moot anyway, the automatic stabilisers pushed the federal budget to the door and the stimulus packages pushed us into deficit. The automatic stabilisation by definition adds to aggregate demand (by reducing the revenue drain and adding the welfare payments) without any discretionary change in government policy.
The fact that they were supplemented by a discrete change in fiscal policy in the form of the two stimulus packages (plus the car industry package in 2008) means that the decline in economic activity was much more modest than predicted (even though real income per capita has fallen by more than output as a consequence of falling commodity prices).
Take away the discretionary stimulus packages and the automatic stabilisers (assuming his arithmetic is correct) would have driven us into a large deficit anyway but the output and employment loss would have been significantly higher than it already has been. So the “good deficit” driven by discretionary net spending has underpinned higher than otherwise output and employment and also provided the “finance” for households to cut their indebtedness – by increasing their saving ratio.
Further, if the government had have taken the conservative advice then the “bad” deficit that would have resulted anyway would have left us in much worse shape and the capacity of the household sector to actually reduce their debt holding by increasing their saving would have been compromised by the larger income contractions.
Why doesn’t George tell you that? Because it doesn’t suit him to represent the situation as it is.
He went on:
… Labor tried to fill the void by spending. But when the stimulus expires, there will still be a hole in the budget. Blame Wayne Swan and Peter Costello for that because they told voters at the last election that the revenue party would never end.
So a revenue party eh? While the federal government doesn’t need the revenue to “finance” its spending program, what the strong revenue growth did was allow it to achieve surpluses with less spending cuts than it otherwise would have pursued. This statement is in the context of a neo-liberal, budget surplus-obsessed national government that was going to pursue that goal no matter what.
So in once sense we might think that is a good outcome (although the composition of spending was still misplaced). But if the revenue growth hadn’t been as strong (courtesy of the commodity prices boom) then the economic dynamics would have been considerably different.
First, their obsession with a surplus would have seen more extensive spending cuts. For example, they would have savaged my own sector more. In the 11 years the conservatives were in power (1996-2007) there was a dramatic cutback in federal higher education contribution to universities as a percentage of total income with a growing portion (in some cases over 50 per drop in federal contribution).
Second, economic growth would have come to a halt long before it did and this would have probably reduced the capacity of households to increase their debt levels as much as they did.
Third, the budget would have been in deficit long before it was with the economy in worse shape than it is.
After outlining how the current deficit and its prospects as the stimulus package dries up is too high, the journalist concluded:
The fiscal trainspotters’ debate about whether Treasury got this or that number precisely right on the way down, or whether a softer landing was achievable with a smaller stimulus, is off the real point. Australia has been living beyond its means and both sides of politics must now show how they can repair the budget without risking a double dip in the real economy.
First, the size of the deficit is irrelevant in itself. There is no meaning in the terms a large deficit or a small deficit. You have to relate them to the extent of labour and capital underutilisation, which is a human measure of the aggregate demand deficiency. The fact that labour underutilisation is now in excess of 14 per cent in Australia (combined unemployment, underemployment and hidden unemployment) and capacity utilisation is in the 60-65 per cent range rather than 90 per cent range sends one very clear message – the deficit is not large enough.
Second, when we say Australia is living beyond its means and we have 14 per cent labour underutilised we have to wonder what the hell is being said. Households have clearly been living beyond their means as a sector because they have been dis-saving and increasing their debt levels year after year. But the situation would have been very different had the governments not pursued the surpluses in the first place and squeezed the liquidity of the non-government sector (mostly in this case the domestic private sector).
More household spending could have been financed out of income growth and saving could have remained positive (for the sector). The quality of the growth in terms if on-going viability would have been higher (notwithstanding all the reservations we should have about consumer-driven growth from an environmental perspective).
Third, the term “repair the budget” has no meaning in a fiat monetary system in isolation. I repair my bike when it is not functioning. But the idea that the budget deficit is in need of repair because it is “too big” is plain neo-liberal ideology and dogma. Involuntary unemployment and poverty should be repaired – that is clear to me.
The only way I would pass judgement about a budget deficit is if it was a “bad deficit” (as above). Then the solution is to increase the discretionary component and reduce the automatic stabilisation component and create jobs and build public infrastructure. But that will usually require increasing the budget deficit.
Anyway, that was the worst article I have read in the last few weeks. This one, however, goes close. It was published on September 22, 2009 in the Wall Street Journal on-line edition but you will have to pay for it so here it is free.
What you read is that the journalists still think we are living with a Gold Standard monetary system.
Anyway, in the article Nations Ready Big Changes to Global Economic Policy we read that the G-20 considered the US proposal which was entitled Framework for Sustainable and Balanced Growth and would require, if implemented:
… the U.S. saving more and cutting its budget deficit, China relying less on exports, and Europe making structural changes to boost business investment.
Okay, if the US is to save more unless it is going to expand net exports dramatically, it will not be able to reduce its budget deficit without worsening its domestic economic situation.
In a previously undisclosed letter (dated September 3) from a senior White House official we read that:
… As private and public saving rises … [across the globe] … the world will face lower growth unless other G-20 countries undertake policies that support a shift towards greater domestic, demand-led growth.
I am bemused when I read statements from so-called experts which contain mutually inconsistent options. I presume here that the official considers public saving to be running budget surpluses.
As a matter of conceptual clarity it makes no sense to say the government can “save” in its own currency. It might spend and build assets (financial or otherwise). But running surpluses do not build up any store of “saving” that allows for higher spending capacity in the future. This is in contradistinction to the way a household, for example, functions. For them spending less on consumption than they earn amounts to saving which can then be stored to permit higher consumption than otherwise in the future.
Trying to draw an analogy between the national government which issues the currency and the household sector which uses the currency is flawed at the most elemental level. Of-course, it is a representation that lies at the heart of mainstream economics and is a powerful analogy for them to beguile the ignorant public.
With that said, if both the non-government sector tries to increase their saving (which they are and should at present) and this is not financed by government deficits then we will certainly have slower growth (and a double-dip recession for sure). It is also true that policies that shift countries to greater domestic demand-led growth will have the best chance of reducing unemployment and increasing living standards. But that won’t happen unless we get used to on-going budget deficits.
Anyway, the journalists then said the G-20 will have to formulate a plan whereby:
Those countries running current account deficits, most notably the U.S., would have to define ways to boost savings. Nations running surpluses — China, Germany and Japan, among others — would detail how they propose to reduce any reliance on exports. The U.S. would likely need to commit to a sharp deficit reduction by government. Europe would need to commit to improving competitiveness. That could mean passing investment-friendly tax measures and reopening the debate about making it easier to fire workers — viewed as one way to encourage employers to hire more freely.
Confused? We need more domestic-led growth but then the two largest economic areas (the US and Europe) would have to melt their economies down. The former by reducing the public net spending which would thwart the goal of “boosting” saving. The latter by widespread shedding of workers and the resulting collapse in consumption (and rising deficits via the automatic stabilisers as welfare payments and crime rose).
Certainly the governments of China, Germany and Japan that push export-led growth are continually denying their citizens the opportunity to benefit from their resources. They are prepared to “net ship” real goods and services to the US and Australia and elsewhere and increase the material standard of living in the countries that where the “net ships” port in return for a desire to accumulate financial assets denominated in US, Australian and elsewhere currencies.
Exports are a cost remember and imports provide benefits (from a material perspective).
So you have to wonder why the citizens of these “net shipping” countries tolerate that strategy from their governments. In China they have guns pointed at them but in Germany and Japan no such obvious compunction is evidence. Pure ignorance probably allows the governments to get away with strategies like this.
So I agree that the citizens in the net exporting countries might be better off switching the composition of demand towards domestic spending as long as it was environmentally appropriate. But that says to me that budget deficits everywhere will have to be bigger.
There will be a greater need for public spending to fill the gap left by net exports in the external surplus countries. You may then argue that as the leakage from imports falls in the external deficit countries there will be more local consumption and a reduced need for deficits. But the reality is that these nations have to reduce their household and corporate debt levels (that is, increase savings) and so the need for public deficits to remain in place (and in most countries grow some more yet – given the high rates of labour underutilisation) will be paramount.
The other point is that if the US government is really pushing this “balancing” pact among the G-20 nations then they will be responsible for seriously undermining the living standards of its citizens – it would almost represent an unprecedented attack on US living standards. Given that the stimulus packages in the US have been highly geared towards the top-end-of-town as falling real wages and rapidly rising unemployment savages the living standards of the bottom 40-60 per cent or more of income-earners, this double whammy would be stunning.
There may be a market-driven adjustment in due course anyway, once the Germans, Japanese and Chinese citizens wake up to the fact they are having lower material outcomes to keep the Americans living as well as they do. Certainly in the energy markets the growth of a Chinese and Indian middle-class will have significant impacts on the welfare of lower income households (who face higher medium-term energy prices) in countries like the US and Australia and elsewhere.While this analysis is focused on Australian fiscal affairs, the principles apply to all countries where the national government issues its own currency within a flexible exchange rate environment.
Given we would stop going to car mechanics who wrecked our cars how come these journalists still have jobs?