Category Archives: Debtwatch

Diver­si­ty — not spe­cial­i­sa­tion — is the advan­tage.

When I was invit­ed to speak at a con­fer­ence in Bonn some years ago, my host insist­ed that I stay with him, rather than in the con­fer­ence accom­mo­da­tion. I expect­ed to find myself in a sub­urb of Bonn, but instead we drove to a tiny vil­lage with just 5,000 inhab­i­tants 130km away.

The bonus was that this was July 4, on which date each year a local Phil­har­mon­ic group put on an open-air con­cert on the banks of an near­by extinct volcano’s caldera lake. The whole town was there for the event, and my host intro­duced me to a love­ly old cou­ple sit­ting on a park bench.

It was an inter­est­ing expe­ri­ence to be part of the bud­get lock-up last week, but as I warned in my arti­cle, I could make mis­takes under that time pres­sure — and I did. I’ll cor­rect them below, but I want to open with a dec­la­ra­tion that I nev­er expect­ed to make: that the best sense I heard spo­ken about the bud­get was uttered by nei­ther Lib­er­al nor Labor nor Green, but by Clive Palmer.

NOTE: I made an error in my arith­metic in this post which I’m fix­ing up after too lit­tle sleep last night thanks to the post-Bud­get lock­up drinks: the basic log­ic is OK but the num­bers are wrong. I’ll link nonethe­less and amend the num­bers tomor­row.

Will the Lib­er­al Party’s his­toric eco­nom­ic for­tune hold for this bud­get? Bal­anc­ing Joe Hockey’s books would seem to require Aus­tralian pri­vate sec­tor debt around 250 per cent of GDP by 2025…

If the US econ­o­my was per­form­ing as well as the US stock­mar­ket, even Wal­mart work­ers would be break­ing out the cham­pagne.

Since 2009, the S&P has risen over 250 per cent in nom­i­nal terms, and almost 230 per cent in infla­tion adjust­ed terms. In nom­i­nal fig­ures, it is at its high­est val­ue ever, though when you adjust for infla­tion, it is still 10 per cent below its peak in 2000 (see Fig­ure 1).

The $64 ques­tion is: will it keep on going up?

Fig­ure 1: The S&P 500 before and after infla­tion

I have just accept­ed an offer to become Head of the School of Eco­nom­ics, His­to­ry and Pol­i­tics at Kingston Uni­ver­si­ty in Lon­don. I will take up the appoint­ment in time for the Autumn term, which starts on Sep­tem­ber 23^rd.

Kingston will respond pos­i­tive­ly to calls from stu­dents for gen­uine reform of eco­nom­ics education—like those made by the Post-Crash Eco­nom­ics Soci­ety in Man­ches­ter, and the Inter­na­tion­al Stu­dent Ini­tia­tive for Plu­ral­ism in Eco­nom­ics (which was launched only days ago).

These stu­dent calls for gen­uine reform are time­ly, because though there are some ini­tia­tives for reform, aca­d­e­m­ic eco­nom­ics has, if any­thing, become more hos­tile to crit­i­cism of the main­stream and to pre­sen­ta­tion of alter­na­tive per­spec­tives than it was before the cri­sis.

And good on them for it! Aca­d­e­m­ic econ­o­mists are ignor­ing or min­i­miz­ing the need for change, just as they did 40 years ago when I was one of the revolt­ing stu­dents. So stu­dents are tak­ing their demands to hear oth­er sto­ries read from oth­er than the Neo­clas­si­cal song­book to the streets–and the web and news­pa­pers.

Today 42 dif­fer­ent stu­dent groups around the world have launched the “Inter­na­tion­al Stu­dent Ini­tia­tive for Plu­ral­ism in Eco­nom­ics”. They have penned an Open Let­ter on the need for plu­ral­ism, which will be pub­lished in a num­ber of news­pa­pers today–May 5th 2014. The open­ing para­graph of the let­ter is (with two points high­light­ed in ital­ics):

Last week I showed that Australia’s net gov­ern­ment debt to GDP ratio is noth­ing to pan­ic about when com­pared to the rest of the world. We’re cur­rent­ly at under 12 per cent, where­as most OECD nations have ratios of 50 per cent and above.

But maybe that’s one rea­son Australia’s econ­o­my is rel­a­tive­ly strong.

I also showed that most coun­tries aren’t like busi­ness­es in that most coun­tries have a net neg­a­tive equi­ty posi­tion — their lia­bil­i­ties exceed their assets — which is a sit­u­a­tion that would have most com­pa­nies on their way to being declared bank­rupt.

This is a talk about what the eco­nom­ic con­se­quences could be of Aus­trali­a’s ambi­tion to achieve a per­ma­nent gov­ern­ment sur­plus of 1% of GDP. I present a very sim­ple Min­sky mod­el in which banks lend mon­ey to the pri­vate sec­tor, and the gov­ern­ment both spends and tax­es the pri­vate sec­tor. I then explore 4 sce­nar­ios: a bal­anced bud­get; a per­ma­nent sur­plus of 1% of GDP with no change in bank behav­ior; a per­ma­nent sur­plus of 1% of GDP with a sig­nif­i­cant increase in bank lend­ing; and a per­ma­nent deficit of 1% of GDP. The results are not what pro­po­nents of gov­ern­ment sur­plus­es expect.

Ask any politi­cian if gov­ern­ments should run sur­plus­es and the answer is like­ly to be a resound­ing yes, with the ratio­nale being that gov­ern­ments should “live with­in their means”.

Pre­cise­ly this rea­son was giv­en by the Aus­tralian Nation­al Com­mis­sion of Audit, which has been charged by the Abbott gov­ern­ment with the task of sug­gest­ing ways to rein in gov­ern­ment spend­ing. Its first report gave as the very first of its “Prin­ci­ples of good gov­ern­ment” the mantra that gov­ern­ments should:

Live with­in your means. All gov­ern­ment spend­ing should be assessed on the basis of its long-term cost and effec­tive­ness and the sus­tain­abil­i­ty of the nation’s long-term finances (Exec­u­tive Sum­ma­ry, Nation­al Com­mis­sion of Audit).

I’m speak­ing at two events this week­end:

North­side Forum: “THE AGE OF ENTITLEMENT IS OVER” So claims our Trea­sur­er, but for whom?:

Sat­ur­day May 3rd, 12–2pm, Func­tion Room at the Union Hotel, North Syd­ney, 271 Pacif­ic Hwy, North Syd­ney 2060

The launch of Geoff Davies’ book Sack the Econ­o­mists:

Sun­day, 4th May 2014, 3:30 for 4 pm, Glee­books, 49 Glebe Point Road, Glebe NSW

Fol­low the links above to book a place.