Saturday, April 14, 2012

Budget result, an outcome AND policy choice?

This post has been a real pain to edit so I apologise if I have missed anything in the conversation below. The near-original version can be seen here. I have omitted retweets by other economists/professors and replies by market traders.

Stephen Koukoulas is an economist and financial market strategist who between October 2010 and July 2011, was economic policy advisor to the Prime Minister of Australia, Julia Gillard.

John Quiggin will be best known to most as the author of Zombie Economics and is a Federation Fellow in Economics and Political Science at the University of Queensland. He is prominent both as a research economist and as a commentator on Australian economic policy.

What follows is a twitter conversation on April 2nd, 2012 with these two and myself.


Stephen Koukoulas
@TheKouk


Now let's quickly revisit the fundamentals of the mechanics of modern money operations:

  • Production levels are based on aggregate demand - spending.

  • Employment is created to generate output to meet demand for it.

  • This generates income which is consumed or saved.

  • Saving constitutes a "leakage" from the spending-output system.

  • We call this a spending gap.

  • If it remains unfulfilled then output and employment fall.

  • The responsible fiscal policy is to fill this spending gap.

  • Crucial point: the federal government is never revenue-dependent.

  • There is no such thing as the government 'running out of money'.

  • This is not the same thing as saying the government should spend infinitely.

  • It must fill that spending gap.

These bullet points borrowed from a powerpoint presentation given by Bill Mitchell


Two well-known Australian economists disagree with the arguably better known James K. Galbraith.

Galbraith says in his Huffington Post piece linked above that:
Let me begin by noting that the realized budget deficit is an economic outcome, not a policy choice. So long as the economy faces high unemployment, there is no fiscal formula -- no combination of tax increases and spending cuts -- that can make it go away.

and
One can reduce projected deficits -- for future years -- by raising future tax rates or cutting programmed spending for those years. But this is an artificial and unreliable exercise. The actual realized deficits in the future will depend on economic performance at that time, and it is economic performance that actually matters, not the deficit or the public debt. Thus tax reform -- and spending policy as well, in my view -- should properly focus on economic performance and not on deficits.

The only way the Australian Federal Government can achieve a surplus without rising unemployment is to resort to accounting trickery otherwise counter-cyclical measures will kick in and the promised political surplus is unobtainable.

7 comments:

paul meli said...

This is economic malpractice.

Equivalent to doctors applying leeches.

These are smart people, relying on what they have learned rather than what they can figure out for themselves through logical thinking.

They trust authority more than they trust their own thought processes.

Sad, but my kids and grandkids aren't going for it.

Ralph Musgrave said...

Galbraith said, “spending policy….. should properly focus on economic performance and not on deficits.”

Quite right. Or as Keynes put it, “Look after unemployment and the budget will look after itself”.

Letsgetitdone said...

Good post, Art!

Anonymous said...

"They trust authority more than they trust their own thought processes"

... and psychologists have proven this to be true paul, noting how even providing faux experts wearing (the traditional) white coats cause test groups to assume what they say is right ...

it really makes a mockery of "efficiency", "rational expectations" and so on.

Tom Hickey said...

"and psychologists have proven this to be true paul, noting how even providing faux experts wearing (the traditional) white coats cause test groups to assume what they say is right ..."

To the point of being willing to commit atrocities. Truly scary.

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