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.
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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:
I will launch Sack the Economists, by Geoff Davies, on Sunday 4 May (3:30pm for a 4pm start) at Gleebooks, 49 Glebe Point Road Glebe NSW 2037 Sydney. The event is free, but an RSVP is required here or via phone at 02 9660 2333. Following is an edited extract pertaining to Thomas Piketty’s recent best-seller. I hope to see Sydney-side readers of this blog at the launch.]
This is a guest post from Geoff Davies
There is no end of commentary about China’s real estate bubble, with an even split between those who believe it may pop at any moment, and others who argue it never will.
The alternative ploy — that it doesn’t exist — doesn’t get same airing that it did in the US before the subprime crash. Instead, the “it’s a bubble, but it won’t burst” case is that the bubble is too important to China’s continued growth to be allowed to burst, and — unlike the US — China has the wherewithal to keep it going, at least for a while. (See There will be no Minsky moment for China, March 25; China Can’t Afford to Let Its Housing Bubble Pop, January 30;Templeton Braving China’s Housing Bubble, February 28; Chinese Property Sector Will Not Implode Like America’s Subprime Market, March 11.)
Back in the Olde Days, before the global financial crisis, when I was one of a handful raising the alarm, some of the most strident opposition to my opinion about what this might mean for housing in Australia came from Christopher Joye (who was then a Director at Rismark). We went head to head on many occasions, with me arguing that our prices were a debt-fuelled bubble, and Joye arguing that rising house prices simply reflected rising household incomes.
There are very few people who qualify as unforgettable in your life, and Ted Wilshire was one of those for me. A larger than life character in every sense of the word, Ted was best known as the Research Officer for the Australian Metal Workers Union (AMWU) who penned the then-influential pamphlets Australia Ripped Off and Australia Uprooted in the days prior to The Accord under the Hawke and Keating Governments.
A critique of a yet-to-be-published paper of mine (“Loanable Funds, Endogenous Money and Aggregate Demand”, forthcoming in the Review of Keynesian Economics later this year; the link is to a partial blog post of that paper) by non-mainstream economist Tom Palley reminds me of one of my favourite ripostes by a politician, back in the days before spin doctors stopped them saying anything offensive — or indeed anything interesting.
As Sir Robert Menzies, former Australian prime minister and leader of the conservative Liberal Party, was giving a campaign speech in 1954, a heckler called out “Mr Menzies, I wouldn’t vote for you if you were the Archangel Gabriel”. Menzies shot back: “Madam, if I were the Archangel Gabriel, you would not be in my constituency.”