THE BUDGET: WE DO THE VOODOO VERY MUCH BETTER THAN THEY DO!

The only function of economic forecasting is to make Astrology look respectable.

Ezra Solomon.

With so much discussion in the mainstream media this week devoted to the forthcoming budget, The Mugwump Post thought that it would join the pundits, soothsayers, oracles, and Ju-ju men by throwing in our two cents worth.

But first a brief, and very general background.*

For those who came in late…

The current economic theory as applied by nations such as Australia, the UK and the US in the formulation of their budgets rests on the Chicago School of economic management and the application of the Laffer Curve.

This theory is usually called the ‘Supply Side’ or as it is better known; the trickle down effect and has been the dominant theory in economics since the late 1970s.

The trickle down effect rests on the notion that a government can increase its revenue by cutting tax rates, selling government assets and reducing the public service.

In this way argue its proponents, the rich would no longer seek to avoid taxes on their wealth, and the lower rates coupled with privatisation would stimulate growth and boost the nations revenue as the very wealthy breathed a sigh of relief and began to spread their largesse.

This largesse in turn, would trickle down to all levels  of society and everyone would benefit.

George Bush Snr. termed this; ‘Voodoo Economics.’

The most fervent admirers of this theory have been Margret Thatcher, Ronald Reagan and John Howard.

For Thatcher, ‘Friedmanomics’ offered the chance to engage in social Darwinism and bring about a return to ‘Victorian values’ in modern day Britain, spearheaded by energetic entrepreneurialism in fashion of the nineteenth-century.

In both the short and long term, Thatcher’s experiment was a failure.

During the first year of Thatcher’s first term of office, the application of Friedman and Laffer’s theory saw inflation balloon from nine percent to over twenty percent, and the output of British manufacturing which had fueled the Empire during the Victorian era,  plummet due to the recession that followed, and gave rise to a divisive and confrontational style of governance whose effects are still being felt by Britons today.

Across the Atlantic, Ronald Reagan was implementing identical policies which reduced the tax rate for the wealthy from 70 percent to 50 percent, and finally to 28 percent.

Similarly to Thatcher’s Britain, recession followed and across Reagan’s eight years in office, the US budget deficit swelled from nine hundred million to three trillion dollars.

In Australia, ‘Friedmanomics’ was introduced gradually by the Hawke government and then more forcefully by the Keating government, (remember the recession we had to have?) and was finally applied with full force as the central economic platform of the Howard government.

Whilst this produced a series of surplus budgets of around 1.2 percent of GDP, unemployment rose sharply and Australian manufacturing went into a tail spin from which it has never recovered.

Meanwhile in the Deep Woods…

Both the Rudd and Gillard governments continued to apply ‘economic rationalism’ as fiscal policy, although to his credit (no pun intended), Rudd adopted Keynesian methods to counteract the effects of the Global Financial Crisis by issuing  every household in Australia a cheque for one thousand dollars to stimulate spending and maintain consumer confidence.

When the initial shock of the GFC had passed, treasurer Wayne Swan reverted to the use of ‘Friedmanomics.’

Which brings us to today.

This week the headlines in the MSM have screamed ‘Labors Budget Blowout’, ‘Deficit Black Hole’ etc… in order to promote an emotive, and usually negative reaction from the electorate.

It was Thatcher who used the analogy of government budgets being the same as a household budget. Others use the credit card comparison but the thrust of the argument is the same.

That is, you can’t spend more than you earn and if you do, then at some stage austerity measures will be needed in order to meet your debts.

While it’s true that households and wage earners cannot spend more than they earn, governments however, can literally create money out of thin air as they hold sovereignty over their currency.

This means that governments can create funds to start or boost major projects such as building new schools, hospitals, transport infrastructure etc… and reclaim the amount (the revenue),  through taxes from the jobs directly and indirectly created by such projects.

The ‘debt’ or deficit spending is then  issued to meet voluntary imposed legislative requirements which are in place for operational or political reasons, but never for financial reasons.**

Much of the reason that the Gillard government has opened itself to attack on the economic front, is largely due to its underestimation of predicted revenue to be gained from the current tax base.

As the current tax base favours the wealthy and not the poor, Gillard is now  faced with the choice between sharp spending cuts or significant tax increases, and neither options are favourable with the electorate.

This either or situation also runs the risk of putting the country into recession, a fact which the Coalition as champions of the continued use of Friedmanomics are well aware.

Common sense would dictate that a judicious application of both may alleviate the problem in the short term but in the long term what is really needed is for one party or the other to break the spell of the trickle down effect and create major government funded projects to tackle the growing infrastructural needs in health, aged care, education, and genuine job creation, coupled with reining in subsidies to the private sector.

The natives believe that this is the same man…

For the Coalition, the premise of deeper spending cuts to the public sector will balance the budget and bring a return of the ‘golden years of Howard’, are similar to that of Lee Falk’s comic book character who fights crime from the Indies to the Andes in his undies while fooling the ‘natives’ that he is immortal, – is simply based on a hoodwink.

In the meantime, with both parties seemingly locked into the Chicago School ‘supply side’ theory, the next four months will more than likely be spent trying to convince the electorate that; ‘We do the Voodoo very much better than they do.’

* This article has eschewed the use of  graphs, curves and pie charts to support the above argument  in the interests of brevity.

Those who wish to pursue a more detailed explanation, should visit the following web-site or go to Youtube and type in ‘Modern Monetary Theory.’

http://bilbo.economicoutlook.net/blog/ Besides, looking at pie charts always make the hardworking staff at The Post hungry.

** Authors italics.

9 Comments

  1. It’s taken me a while, but I finally understand what fiat currency is. I was watching a video on restoring the US gold standard which explained it quite nicely. It did put together a very strong argument for restoring it.

    Now Edward, I’m no economist – in fact I would go so far as to say i know NOTHING about economics – but I can’t help thinking that your endorsement of fiat currency is not a good idea. I vaguely remember hearing something in high school that if the government printed too much money, it would become worthless and it would drive inflation sky-high.

    From watching this video, it appears that in the US, the reason the rich are getting richer and the poor poorer is exactly because of the fiat currency.

    Am I very confused? If so, I’m happy to have it explained, in a Dummy’s version please 🙂

    Reply

    1. That makes two of us drmarfi – I’m not an economist either but I am slowly getting my head around MMT or Modern Monetary Theory, sometimes known as Neo-Chartalism or post Keynesian economics as it’s just common sense when you think about it.
      Rather than bore you with a long winded and possibly convoluted explanation, the following links may prove helpful.
      Snowcow is a US site but the theory remains the same.
      Peter Martin’s site, Modern Monetary Theory: Real Economics offers an easy to understand guide.
      Bill Mitchell’s site is the grandaddy of them all and is pitched at tertiary level but don’t let that dissuade you, Bill is one of the founders of MMT and any answers to the questions you may have can usually be found there.
      Other names to google are Mike Norman who gives a no-holds barred and often very funny explanation is well worth exploring, and another MMT founder, Warren Mosler. Finally, the youtube vid. is a good start for those wishing to explore and understand MMT.
      Cheers.
      http://www.snowcow.com/society/federal-budget-not-like-household-budget/

      http://petermartin2001.wordpress.com/2014/03/05/can-commercial-banks-create-money-out-of-thin-air-3-the-creation-of-money-by-private-banks-in-the-process-of-lending-leads-only-to-the-removal-of-money-from-the-economy/

      http://bilbo.economicoutlook.net/blog/

      Reply

  2. Thanks Edward. Slowly becoming clearer. Sounds simple and crazy all at the same time. Are there any countries adopting the theory? I like the idea of full employment too – but the neolibs won’t want a bar of it – capitalism needs a permanent underclass and a pool of unemployed to exploit the workers.

    Reply

    1. That’s a good question drmarfi, possibly most of the Scandinavian countries and Holland, keeping in mind that full employment usually means 2% or less of the working population unemployed. It’s not so much Capitalism per.se. that requires an underclass, Australia had full employment from 1941 until 1992 when Keating ditched Keynesian economics in favour of ‘Friedmanomics’ which requires between 5.1 and 5.4% permanently unemployed in order to ‘stimulate’ the economy. The real figure as Bill Mitchell points out is around 16% (and climbing) when you take into account the underutilized such as unemployed tertiary graduates and their older (over 50) counterparts who simply can’t get a job or are working part-time/casual as semi or unskilled labour as will be the instance for Abbott’s ‘Green Army’ The good news is that the push for MMT (Keynesian economic theory) is steadily growing due to the failure of ‘supply side’ economics which is causing rising unemployment and slumping economies but there’s still away to go before any the Australian political parties get their head around it due in part to 30 years of utter bullshit being pushed down their throats in the guise of ‘common sense.’ The Greens have the best chance but at the moment seem to be unable to grasp the nettle. Remember, MMT theory is like the theory of heliocentricity in the 17th century. At present, its tantamount to heresy to suggest that ‘supply side’ economics is a dud and neither politicians nor the MSM commentators (the so called ‘experts who appear in newspapers or on TV) are courageous enough to stand up and declare that the Emperor has no clothes. Only a few brave souls such as Bill Mitchell, Randy Wray, Mike Norman, and Steve Keen have had the guts to speak out. But as I said, the movement is steadily growing and people are starting to see the light – after all its only common sense. In a capitalist economy, the more people that you have employed in the private sector, the more money there is to go around while those employed in the Government sector provide a safety net if there’s a economic downturn.Therefore, what is needed is a re-staffing of the Govt sector in order to drive the private sector to create more jobs and a greater cash flow which in turn creates a robust economy. Simple really. But Tony and his drones are committed to the ideological bullshit of the ‘free market’ – which isn’t free at all, in order to achieve the ‘trickle down effect’ of Friedmanomics. Trickle down is simply another way of saying that the rich are pissing on the poor -and then telling them they should be grateful that its raining!

      Reply

  3. Hi drmarfi,

    It’s only seems crazy because of all the brainwashing we’ve had. Hang in there. It will make sense !

    We had to abandon the gold standard because growth in trade became dependent on new discoveries of the stuff. Far from a “golden age” the era of the gold standard was marked by recessions and high unemployment.

    Keynes called the gold standard a barbarous relic.

    Fiat currency is however backed by the wealth of the nation which makes a lot more sense (except to goldbugs).

    As to your question, I’ve read that China may be using MMT principles, but you’d never know.

    Because the distinction between the government and private sector in China is so blurred, one observer suggested that government spending on infrastructure was being booked as private sector “investment” in the national accounts, rendering any kind of “deficit/surplus” analysis (that needlessly obsesses us), totally meaningless.

    MMT made sense to me when I realised that deficit spending was just a “flow”, “water under the bridge”, created from nothing, and the deficit was just a measure of the “rate of flow” of that spending.

    It only becomes “debt” when we make a “stock” of that “flow” by issuing an equal dollar amount of bonds, and “borrow” it back to limit the growth of the money supply that deficit spending creates, and which, sloshing around in the banking system, can have unwanted interest rate effects.

    Read Bill Mitchell’s “Deficit Spending 101” for a more detailed explanation (over a coffee, not a beer).

    Reply

  4. MMT has deep roots.

    The spending of money out of deficits keeps on increasing the stock of money [and bank reserves] and this keeps on pushing down the rate of interest. Somehow the government must prevent the rate of interest from being pushed down by the additions to the stock of money from its own expenditures. There is an obvious way of doing this. The government can borrow back the money it is spending. (Abba Lerner 1951)

    Reply

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