Monthly Archives: September 2012

Another example of lazy Keynesian thinking

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Lazy Keynesian thinking is found everywhere, even in places I least expect it. This is from Alan Mitchell’s column in today’s AFR.

The economic impact of the Gillard Government’s savings will depend on where they fall. If, as seems likely, it targets the tax breaks of higher-income earners, the impact will tend to fall on savings rather than consumption, and the effect on growth should be relatively short term.

So here is what understanding pre-Keynesian economics brings to you. If some economic change falls on savings it falls on investment and therefore will damage the economy. If it had actually fallen on consumption instead then the effect on the economy would have been almost negligible. Keynesian theory blots out most of an economist’s ability to understand the nature of the business cycle which is why hardly anyone saw the current slowdown coming.

Of course, to describe anything the Gillard Government does as a form of saving may be the most ludicrous part of all.

“Cranks and crazies”

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Our Treasurer last week described the Republicans in the United States, using the precise and diplomatic language he is known for, as “cranks and crazies”. Apparently he thought the Republicans were not taking America’s economic problems seriously, unlike say Barack Obama who apparently thinks US debt is around $10 trillion when it is in fact $16 trillion. Anyway, our Wayne thought it was the Republicans who were endangering the future of the American economy by trying to get some kind of debt ceiling in place which is why he used the phrase he did. He was then fully supported by the Prime Minister herself.

I have therefore had a look at this in an article now found at Quadrant Online which comes with the title, “Our Own ‘Cranks and Crazies'”. It begins:

Let me start with this. The justification for the mining tax was to ensure that the entire community would benefit from the minerals boom, the implication being that selling resources bestows no return to the rest of us outside the extractive industries and therefore requires a tax to share the wealth. But with the mining boom about to recede we are being told that, as a direct result, we will all have to get used to a lower standard of living. Absolutely right, but just as the loss of the mining boom has reduced everyone’s living standards, the boom, while it lasted, drove them higher.

Alas, our Prime Minister and her Treasurer were clueless about how we all benefit from growth, even in a single sector remote from our lives, and accordingly peddled one of the most ignorant and pernicious of all socialist memes: the resources of the nation belong to the people. The consequences of their tenure in office will be to our collective detriment for years to come as investors spurn putting their money into Australia, lest Labor return to the Treasury benches once again.

And this is the final para in which I focus on our Prime Minister and her Treasurer:

From the start they have never had much idea about what should be done and what needs doing. They have followed the socialist path of least resistance: re-empowering unions, spending money they don’t have, and because they have mismanaged our finances, leaving Australia literally defenceless in an increasingly dangerous world. The surest sign of Gillard and Swan’s poor judgment is that they can unselfconsciously go about calling others the very names most appropriately applicable to themselves.

If you would like to see what goes in the middle, you can read the whole article here.

An outsider on freedom of speech

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There I was on the ABC’s Outsiders on Sunday morning. The issues were freedom of speech, the American election and the Australian economy. You can put this up on the website and listen in.

I will just make this observation. Freedom of speech, rather than being a merely reflex good as it ought to be in our society, is now a hot issue because of the threats to our ability to say in public what we like since the right to free speech has now been mixed up with the politics of religion and the Middle East. But we here should be defending our right to free speech to the fullest extent possible. If we wish to end up like the various religious tyrannies which are dime a dozen, mired in poverty and with nowhere to go, then now’s the time to cave in and fail to defend our right to say anything we wish while governments seal off our right to discourse on whatever we want whenever we please. Governments typically don’t like it, and religious bigots certainly don’t like it, but we citizens do like it. Our right to discourse on whatever we like and to debate and discuss whatever we please has been amongst the most important reasons, if not the single most important reason, for our wondrous freedoms – unknown to almost any other civilisation in history – and for our economic prosperity as well, which is the greatest this planet has ever been able to produce.

Interestingly about being on radio, it is free form so you don’t know exactly what you will be asked, when you are asked you don’t know what you’re going to say often till after you’ve said it, but most importantly, once it is said, you cannot bring it back. What is therefore an immense worry is that it felt potentially dangerous to be defending free speech because of the political overtones that now surround public discourse on so many topics. It should not be like this but it is.

Final deficit almost double shortfall originally predicted

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The Government must be thinking about a March election, or even sooner, because they cannot possibly be serious that they will present a budget in May. Their latest fiscal horrors from The Australian:

WAYNE Swan has vowed deeper cuts to turn the budget around and post a surplus after last financial year’s deficit doubled to $43.7 billion from its original forecast 15 months ago.

Plunging company tax receipts contributed to the size of the deficit, slumping $876 million in the final two months of 2011-12.

The 2011-12 budget outcome, released by the Treasurer today, reveals a minor improvement in the final numbers compared to the May budget forecasts, with the underlying cash deficit coming in $661 million higher at $43.7 billion from $44.4 billion.

But despite the update, the final deficit is almost double the shortfall originally predicted in the May 2011-12 budget, when Mr Swan forecast a $22.6 billion deficit.

Saving and Investment

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I was teaching my usual Keynesian macro as a prelude to explaining the classical theory of the cycle when I came across this. That in the base Keynesian model, if investment is greater than saving (I>S) the economy will grow, and not only that, it will grow until income rises enough to generate the savings needed to fund the investment. I have, of course, taught this many times, but for some reason it was only on this occasion that it really occurred to me just how stupid this is. I have always seen how nonsensical it is to argue recessions are caused by the level of saving being higher than investment but the reverse is, now that I am looking at it, even more absurd. Because if it were even remotely possible for the level of investment to exceed the level of saving, an economy could always lift itself on thin air without having the capital base required to support it.

Let me say it this way. One of my students once posed the following question as part of an assignment: does the person who buys a camera pay the wages of the person who makes the camera? And to make it clear what his point really was, his question can be put this way: does the person who buys a camera pay the wages of the person who made the camera since the camera maker will have received his wages months and sometimes even years before the camera was bought by its final purchaser?

Obviously the answer is no. By the time the camera was bought, the workers who had collaborated in its production had been paid their wages long before. So how did the camera maker get paid? He was paid out of the collective savings of the nation that allowed this employee to receive his wage before the camera producer had found a buyer for the product itself. The availability of saving is the only means by which incomes can be earned before the products being produced are sold to their final buyers. No matter how you twist the theoretical structures one way or the other, an economy cannot buy more than it has produced, and if those who are producing are going to be paid a real wage with genuine purchasing power, the products they receive when they spend their money must come out of the collective savings of the nation. (OK the savings could come from overseas, but that’s not a solution to the problem; it only enlarges it.)

The deficits and debts we see around us everywhere are a consequence of a Keynesian model which has been fashioned on the belief that there is some means to conjure goods and services into existence merely by spending money to buy them. It is such a hopelessly false idea, but since something like 95% of the world’s economists believe this stuff, or at least have never stopped to think about it, on they go, advising governments to take actions to create demand for 105% of everything available for sale.

And because governments get first dibs at what’s available since they get to print the money they are buying things with, they don’t notice that there are no savings to back up the demands they make. It is the private sector that finds itself unable to grow and employ since the inputs they would normally have put to use have been already taken up by governments. But since economic theory tells governments this is the right thing to do even when common sense should tell them that it’s not, on they go, creating a wreck of any economy where this Keynesian stuff is being tried.

I’m afraid there is no helping it. We are going to have to abandon this demand side Keynesian view of things and return to the classics.

Obama, his mentors and the media

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I have a long article at Quadrant Online dealing with the two hidden aspects of the American election I think are not given their due: the corrupt role of the media and Obama’s far left mentors. These are the opening paras:

The American election will be one for the ages. At the very centre is the question, does Barack Obama truly represent the mainstream of the American ethos and its core beliefs as they now are, here at the start of the twenty-first century? The election will not just be about Obama’s policies themselves, bad as they certainly would be, nor will it be about the almost impossibility of reversing the course that will have been taken if Obama is re-elected, which will indeed be nigh on irreversible.

No, the election will be about whether the United States is any longer the country it once was, a country of free markets and a free people. A United States that can elect Barack Obama once is on the edge of a precipice. To elect him for the second time knowing everything we now know from his first four years as president means the US has gone over the edge.

The march through the institutions that began in the 1960s will have been finally completed. The ethos of an America that will not only be free itself but ensure whatever is necessary to maintain freedom in as much of the world as can be retrieved will have gone. We, in our till now free societies, will be largely on our own with no major power to shield us from totalitarian winds of every kind and gusting from all directions.

Barack Obama is a socialist of the most radical leftist kind. His mentors, just to name the three most prominent, were Frank Marshall, Saul Alinsky and Bill Ayers. That the vast majority of the population has no idea who these people are, or the role they played in Obama’s life, is in turn a consequence of the deep leftward turn of the American media forging ahead in step with the social sciences division of the major educational institutions of the United States. The commanding heights of the intellectual world have been taken over by the left and they have created an environment all but impossible to break through. It is only common sense in combination with the disastrous outcomes that leftist policies inevitably lead to that creates the hope that trends now in place can be turned round and reversed. The institutional structure of the United States permits change driven from below if it becomes widely understood that change is necessary. That is the story of this election. Will the American people see the danger in time or will they continue in the direction of the likely ruin that a second Obama administration would bring?

You can read the whole thing here.

The Romney Q&A

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The following is an edited transcript from the Question and Answer session in that infamous meeting with Republicans behind closed doors. You know, the one that mentioned the 47%. The transcript was compiled and published in The New York Post. If you have the patience for it all (it goes nine pages followed by four pages of journalist comments which don’t add that much) you should read it through. If you have any doubts whether Mitt Romney has what it takes to be a great president, this will put those doubts to rest.

Here is just a sample. He is responding to those who believe that winning ought to be a simple matter of going for the jugular. Romney has a different view. From his reply you can better understand the direction the campaign has taken and why.

Man in audience: . . . I wanna see you take the gloves off and talk to people that actually read the paper, that read the book and care about knowing the facts and — knowledge is power. As opposed to people that are swayed by, you know, what sounds good at the moment. You know, I — if you turned into a — like eager to kill, it would be a landslide, in my humble opinion.

Romney: Well, I wrote a book that lays out my view for what has to happen in the country and people who are fascinated by policy will read the book. We have a website that lays out white papers on a whole series of issues that I care about.

I have to tell you, I don’t think this will have a significant impact on my electability. I wish it– I wish it did, but I think our ads will have a much bigger impact and the debates will have a big impact.

. . . My dad used to say, “Being right early is not good in politics.” And . . . discussion of a whole series of important topics typically doesn’t win elections. And there are– for instance, this president won because of “hope and change.”

. . . I can say this, which — and I’m sure you’ll agree with this as well — we speak with voters across the country about their perceptions. Those people I told you, the 5%, to 6% or 7% that we have to sort of bring on our side? They all voted for Barack Obama four years ago.

So — and, by the way, when you ) when you say to them, “Do you think Barack Obama is a failure?” they overwhelmingly say, “No.” They like him. But when you say, “Are you disappointed that his policies haven’t worked?” they say, “Yes.” And because they voted for him they don’t wanna be told that they were wrong. That he’s a bad guy. That he did bad things. That he’s corrupt.

Those people that we have to get, they want to believe they did the right thing but he just wasn’t up to the task. They love the phrase that he’s over his head.

. . . But, you see, you and I, we spend our day with Republicans. We spend our days with people who agree with us. And these people are people who voted for him and don’t agree with us.

An so the things that animate us are not the things that animate them. And the best success I have in speaking with those people is saying, you know, “The president’s been a disappointment. He told you he’d keep unemployment below 8%. Hasn’t been below 8% since. 50% of kids coming out of school can’t get a job. 50%. 50% of the kids in high school in our 50 largest cities won’t graduate from high school. What are they gonna do?”

And the — these are the kinds of things that I can say to that audience that — that they nod they head and say, “Yeah, I think you’re right.”

What he’s gonna do, by the way, is try and vilify me as someone who’s been successful. Or who’s, you know, closed businesses or laid people off and this is an evil bad guy. And that may work. I actually think that right now people are saying, “I want someone who can make things better. That’s what — that’s gonna motivate me. Who can get jobs for my kids and get rising incomes.” And I hope to be able to be the one that wins that battle.

What would it take to get an Obama voter to switch?

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http://youtu.be/3EZQvSCGaJI

These are wonderful creations but what always worries me is whether they are able to draw anyone across from the other side. If you find this instantly funny and you see the point right away, you were never going to vote for Obama anyway. Since at this stage it is almost impossible to see Obama’s attraction for anyone, the ridicule that this little story heaps on Obama is unlikely to penetrate the defenses of anyone who is still in the Democrat camp.

Do these people really believe that a market economy is bad for their economic fortunes? Do they think that the brief flurry of a downturn in 2009 is the defining moment for the capitalist system and that they would willingly give it all away for the stability that socialism promises but does not anyway deliver? Do they not recognise that whatever it has been Obama has done to bring about a recovery has been a dismal failure? Are they so stuck in the rut of government transfers that even if they understand the harm Obama’s policies have done they are not prepared to shift?

And then on foreign policy, can anyone any longer believe that the US remains as secure today as it was four years ago? Do none of Obama’s supporters look at the Middle East and wonder how much worse it could have been under a Republican? Are they just that oblivious to the disastrous trend in American foreign policy under Hilary Clinton that they would still cling to Obama in the belief that Romney could be worse?

That the media and the academic world of the social sciences continue to support Obama only make me wonder whether graduates from arts and humanities courses actually learn anything worth knowing. How you would make such supposedly knowledgeable and intelligent people shift their vote is the greatest conundrum of them all, for which no answer is available. No answer at all.

Romney had already written about the 47% in his book published in 2010

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There has been quite a bit of focus on Mitt Romney’s having mentioned that 47% of the American population do not pay income taxes. And much of the commentary has been that he made the comment behind closed doors and out of hearing of most of the population. But the fact is that Romney had made the same comment and had made the same point in his book, No Apology, which was published in 2010. This is directly from Romney’s text (page 303).

In light of the challenges faced by the country, I am puzzled by those who align themselves with a political agenda that may be well intentioned, but that weakens the country and hazards our freedom.

First, however, there are people who correctly presume that they will get more money from governments if it is run by Democrats. I understand these kinds of Democrats very well. Adam Lerrick of the American Enterprise Institute calculated for The Wall Street Journal that under candidate Obama’s tax plan, 49 percent of all Americans will pay no income tax. Added to that number are 11 percent who would pay federal income tax of less than 5 percent of their income. So for 60 percent of Americans, spending restraint and lower taxes championed by Republicans may not mean a great deal to them personally – at least in the short term, even though the lower taxes promote economic growth, good jobs and higher incomes.

There is nothing here other than the recognition that those who do not pay tax are less inclined to vote for a candidate that promises to cut the taxes they already do not pay and who receive large transfers from the hands of government. This is a major problem both economically and politically and it does need to be recognised. But it was hardly a revelation to find that Romney has re-stated in public what he wrote in his book and is what everyone has long known but is seldom said.

Cranks and Crazies Everywhere

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Let me start with this. The justification for the mining tax was to ensure that the entire community should be allowed to benefit from the minerals boom, the implication being that selling resources bestows no return to the rest of us outside the industry therefore requiring a tax. But now with the mining boom about to recede, we are being told that as a direct result we will all have to get used to a lower standard of living. Absolutely right, but just as the loss of the mining boom has reduced everyone’s living standards, the boom, while it lasted, drove them higher. Alas, our Prime Minister and her Treasurer were clueless about how we all benefit from growth even in a single sector remote from our lives, and accordingly peddled the most ignorant and pernicious of all socialist memes – the resources of the nation belong to the people. The consequences of their tenure in office will be to our collective detriment for years to come as investors shirk investment in Australia lest Labor return to the Treasury benches once again.

Watching the ruin they have created I therefore find listening to Gillard and her Treasurer really hard on the nerves. But with Australia’s worst Treasurer in living memory – a Jim Cairnes clone only worse – speaking of the Republican Party of the United States as “cranks and crazies”, it really does make you wonder just how obtuse some people are. And to add insult to injury, our interim Prime Minister has backed her Treasurer up by repeating the same again as if she were a font of political and economic wisdom so that throwing support behind her Treasurer adds any kind of weight at all to his puny and inane judgment.

Forget about the fact that in a few months there is at least a 50-50 chance that the American President will be a Republican. There is no doubt that a President Mitt Romney would just glide past such foolishness since what the Treasurer or Prime Minister of Australia think about him and his party is little more than dust on the balance given the weight of woes he would inherit. And it also doesn’t much matter since whatever may be the views of our Prime Minister and her Treasurer, their influence in Washington will be negligible so that whatever they say will make not a whit of difference one way or the other to what actually gets done.

People whose idea of a stimulus package consists of pink batts and school halls, who believe wasting billions on the National Broadband Network is equivalent to the Snowy Mountain, who think they are doing the nation any good at all by increasing the rate of taxation on the one strong industry we had, and who believe that a carbon tax is the key to our future prosperity, are the last people you would think would want to introduce the words “cranks and crazies” into public discourse.

Here in Australia the Government pretends that it has some kind of strategy for getting the budget back into surplus of which two things may be said. The first is that – although in its words alone and not be its actions – by making the commitments they have made Gillard and Swan have at least recognised getting the budget into surplus is actually something that ought to be done. If there are therefore any cranks and crazies around in the US, it is the people who have been complicit in allowing the level of debt to rise to $US16 trillion with not a strategy in sight to bring it back down or, indeed, even to reverse its upwards course. What do our PM and Treasurer think of an Obama administration that has not presented a budget to Congress in three years? For Republicans to try to get some kind of fiscal action out of a Democrat Senate is just what anyone with sense would want them to do. If there are cranks and crazies around in the US, they are almost entirely found on the Democrat side of the aisle.

But the second matter shown by our leadership team is to see just how badly these people have mangled the one economy that has been in their charge. Handed not just a deficit free economy but an economy entirely free of debt, handed on a plate a mining boom designed to feed into a Chinese boom, they have managed in just five years to create massive debt and are about to oversee this forecast fall in living standards which is anyway evident in the shrinking of the private sector at the present time.

From the start they have never had much idea about what should be done and what needs doing. They have followed the socialist path of least resistance, re-empowering unions, spending money they don’t have, and because they have mis-managed our finances, literally leaving Australia defenseless in an increasingly dangerous world. The surest sign we have just how shallow their judgments are is that they can unselfconsciously go about calling others the very names that most appropriately apply to themselves.