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 23rd.
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.
In his latest blog, Paul Krugman slings off at non-mainstream economists — and the students at Manchester University campaigning for change to the economics curriculum — for wanting fundamental change in economics. paraphrasing his argument, it is:
No need for change, boys and girls: mainstream economics has everything under control. We missed the crisis just because we failed to observe the shenanigans in the shadow banking system. Once we realised our observational errors, we had all the necessary tools and knew what to do (oh, and what the rebels said would happen didn’t anyway, so there!). The status quo is fine: move along folks, nothing to see here…
Professor John Komlos has just released a new textbook on economics which breaks away from the mold of producing clones of Samuelson’s genre-defining opus. Its title is “What Every Economics Student Needs to Know and Doesn’t Get in the Usual Principles Text”. At a price of $26.55 via Amazon, it is priced to be an affordable supplement to a standard textbook. Given the failings of the discipline that were so vividly highlighted by the global financial crisis, this book is well worth considering as an alternative to the Neoclassical monoculture that dominates economic tuition today.
The following blurb is lifted from John’s website:
