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