Should Governments run Deficits? a Minsky Model

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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.

Should governments run budget surpluses?

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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).

End of Entitlement & Sack the Economists talks

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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.




Paul Krugman, the champion of inertia

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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…

New Principles of Economics Textbook

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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:

More Effective Remedies for Inequality than Piketty’s

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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

A China Bubble?

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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.)

A sudden conversion of property bubble doubts

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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.

Vale Ted Wilshire

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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.

How not to win an economic argument

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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.”