No such thing as “the level of demand” at an aggregate level

Through the whole of the Costello years as Treasurer, I would say that everyone would live through these exceptionally good economic times, but no one would learn a thing. And it’s not just that we had balanced budgets, but had ZERO DEBT. Only country ever to do this and we floated on air. So then we elected Labor and then we had the GFC, and then we had the advice from Treasury to go early and go hard, and so here we are today, in a crumbling economy with living standards heading south. Which is a preamble to this: Peter Costello and later treasurers right to stress benefit of surpluses. Not so sure about those later treasurers, but Peter was the legitimate article, Australia’s greatest Treasurer.

In his book on Australian treasurers, Bowen describes Costello as the country’s first post-Keynesian treasurer, rejecting the idea that taxes and spending should be used to manage the level of demand in the economy, with that task left to the Reserve Bank. The pursuit of a budget surplus was seen as evidence of good economic management and became an end in itself. Costello was able to distil his political message into a simple message: “Surpluses are good and Liberals deliver surpluses,” Bowen writes.

Half way there. There is no such thing as “the level of demand” at an aggregate level. You cannot manage it. You cannot cause it to go up and down. Aggregate demand has no separate existence apart from aggregate supply. It is Keynesian junk theory whether it is spending or adjusting rates. It will not work and never has, ever. Modern macro is false from end to end. As John Stuart Mill put it, and found in my Free Market Economics where it is explained at great length: “demand for commodities is not demand for labour”. That was written 170 years ago. The idea that there is progress in economic theory is just plain wrong.

PLUS THIS: From Max in the comments:

“Austrian theorist Henry Hazlitt argued that aggregate demand is ‘a meaningless concept’ in economic analysis. Friedrich Hayek , another Austrian, wrote that Keynes’ study of the aggregate relations in an economy is ‘fallacious’, arguing that recessions are caused by micro-economic factors.”

“The Keynesian is a collectivist methodologically. He looks at aggregates. He recommends government programs that affect aggregates.”

“Keynes argued, and his disciples still argue, that the cause of unemployment is insufficient aggregate demand. This is another way of saying that the cause of unemployment is excessive aggregate supply. The fact that Keynesians never put it this way does not affect the analytical truth of the argument.”

Absolutely dead on. Is this the source: Illegal Aliens and Unemployment: Causes and Effects by Gary North?

More economic incompetence coming our way

Modern economics is so incompetent to deal with the problems of our economy that it is simply breathtaking. This is the headline at The Oz: “Reserve Bank paves way for further cuts in official interest rates”.

His comments come against a backdrop of deteriorating economic data: house prices and building approvals are falling, while the national economic growth rate dropped from 3.4 per cent to 2.8 per cent, it emerged this week, surprising economists.

Speaking at the Australian Business Economists annual dinner, Dr Debelle said the federal government had room borrow and spend to stimulate the economy, if needed.

These people do not, of course, have any idea why the economy is floundering. They have kept rates low since the GFC and public spending has never been higher. Of course, a major part of the problem is that rates have been too low and public spending has been too high, but they would be the last people to know. Look at what he even said:

“Fiscal space is really important; we still have that in Australia,” he said, backing former Treasurer Wayne Swan’s controversial $52bn fiscal stimulus of late 2008 and early 2009, which saw $900 payments to households, help for first home buyers, discount roof insulation and a school hall building boom.

“Fiscal stimulus in Australia in my view was absolutely necessary and was a critical factor behind Australia’s good economic outcomes,” he said.

Unbelievable. No idea how an economy works but they will bludgeon it again until it finally responds to treatment. And there is not much doubt we are heading into an economic sinkhole that Treasury and the RBA have between them created.

The GFC is now a decade past and we, along with pretty much everyone else, have never had even an inkling of a robust recovery. Amazing.

Workers need a pay rise and are therefore determined never to get one

Two kinds of contrary stories, but only contrary if you are not part of the cargo cult mentality of the left. Then we can have higher real incomes and at the very same time throw over the cheapest energy sources available to us. First we have this: ‘Australia needs a pay rise’: Change the Rules volunteers reach out to thousands in door knock campaign.

Union members are volunteering to conduct thousands of conversations with Australians about the desperate need for pay rises during a national door knock in September.

Over two weekends, door knocks and market stalls will be held in more than 40 locations, covering Queensland, NSW, the ACT, Victoria, Tasmania, South Australia and Western Australia.

Volunteers will be hearing people’s concerns about the lack of fair pay rises under the Abbott/Turnbull/Morrison Government, and talking about the union movement’s plan to change the rules so people can get fair pay rises that keep pace with the cost of living.

And then there’s this: $15b European trade deal doomed if Australia dodges Paris pledge.

The Coalition’s internal climate war risks damaging the economy after Europe declared it would reject a $15 billion trade deal with Australia unless the Morrison government keeps its pledge to cut pollution under the Paris accord….

Labor’s climate change and energy spokesman Mark Butler said the government had no emissions reduction plan and would fail to meet its Paris goal.

“The Prime Minister might think he can get away with [failing to cut emissions] domestically, but it is clear it will not be accepted by our international trading partners, who rightly have an expectation the Australian government will act to deliver on our international obligations,” he said.

I used to think they said all those things just because there are people stupid enough to take all this on board without seeing the problem. Now I think they are just this stupid themselves. But at least The Coalition are redeeming themselves. Now they have to get the rest of the country to see the point, or at least 51%. Not really such a big ask and there’s still plenty of time to do it.

The wages of waste

Personally, I care not at all about the headline issue: At $528,000 a year, Turnbull’s pay is highest of any leader in OECD. PDT is not taking any salary at all so the price mechanism doesn’t always reflect relative value in any absolute sense. But this is what interests me:

The figures come as the Reserve Bank warns Australians to expect historically low levels of wage growth for some time yet, setting up a policy showdown with Labor before the next election over efforts to tackle the rising cost of living.

Both are trying to ameliorate the impact of torpid wage growth through offering billions of dollars in income tax cuts.

Workers have been starved of pay rises in real terms, with wage growth stuck at the rising cost of living for the past year. Inflation hit 1.9 per cent in March and private sector wages have barely kept up at the same rate but public sector workers have done better, lifting the rate to 2.1 per cent Australia-wide.

The reality is that both parties are deeply into Keynesian idiocies with some kind of belief that public spending makes an economy grow. I am not all that fussed about the deficit as such, but am very much concerned with the level of public spending which is almost invariably wasted. For every dollar spent, you get less than a dollar’s worth of value, often much less. That is why real wages don’t rise, and until that changes, real wages won’t either.

PDT understands that. Does anyone else?

Where is Peter Costello when you need him?

The single most ignorant statement found in the media today:

The South Australian senator revealed yesterday he could not support the government’s enterprise tax plan in its current form, declaring the money would be better spent on “well-targeted social and economic programs”.

The timeline only goes back 24 hours because idiocies like this are so dime-a-dozen, you can see them every day. And what is so depressing is that there are approximately half of the voting population who would see anything other than complete ignorance and idiocy in such thoughts. Does he ever wonder why such programs are more affordable today than they were twenty years ago, fifty years ago and a century ago. Would he be able to make a connection between the growth of private firms and the growth of incomes and welfare?

But what is possibly most depressing is that a capital-I form of ignorance such as this does not become the basis for a withering criticism of the parties of the left. Truly, where is Peter Costello when you need him?

If you want to raise the minimum wage you need to raise productivity first

The video comes at an opportune time since this is a large part of where our next election will be fought: Business faces world’s highest minimum wage under Bill Shorten. I will also mention that the Card and Krueger study mentioned in the vid for many years played a large part in our own wage cases where I had to spend an inordinate amount of time demonstrating how inane the notion is that higher minimum wages do not cost jobs. They do. Unless productivity goes up, the only possible outcome of raising minimum wages is a fall in employment. The vid makes the case, while also establishing how out to lunch the economic establishment is in yet one more area. Thinking you can create jobs by raising the minimum wage is as stupid as believing you can increase employment through unproductive public spending. Modern economics has almost entirely lost its way, but if that’s the advice people want, there will be plenty of advisors to provide it.

The chart below is from that same article, showing the drop in the minimum wage as a proportion of the median wage which coincided with the GFC and may even have preceded it. A very old sequence, a downturn that decimates industry changes the employment pattern along with the underlying wage structure. Using averages as a measurable reality that can be adjusted by some kind of administrative policy will never ever work. If you want to raise the real wage or the minimum wage you can only do it by raising the level of real value added per employed person. That’s called leaving things to the market, a very old idea that has always worked when it has been applied, but another one of those notions economists in general have long ignored and is now all but forgotten.

A brutal reminder of macroeconomic incompetence

The GFC was over with in 2009 and now we are at the end of 2017. So what are we to make of this, other than they have no clue what’s gone wrong:Brutal reminder of GFC still here, Treasury says, as retail stung by poor sales.

Treasury secretary John Fraser has slammed politicians for being out of touch with the struggles of everyday Australians and blamed “extraordinary political instability” for a lack of consistent policy settings that could push the economy forward.

Mr Fraser made his comments as retail figures released on Friday showed yet another month of downbeat results, with a fall in food, clothing and department store sales.

Rising energy prices and the weakest wage growth in Australian history are slugging consumers, driving anxiety among businesses in the lead-up to the crucial Christmas trading period.

In a speech at the Australian National University before the dismal data was [were] released, Mr Fraser said the country was still struggling with “the brutal reminder of the global financial crisis,” which took longer than expected to recover from and had led to a “perplexing weakness” in the economy.

The actual perplexing weakness is in the economic theories that have been used to analyse what’s gone wrong and then work out what to do to fix things.

The GFC was a worse-than-usual downturn that would have blown over in about a year, were it not for all of the Keynesian so-called “stimuli”. It is the fantastic amount of our national savings that have been blown by governments on building the education revolution, pink batts, the NBN, green energy and pretty well every other government spending program over the past decade. Obvious as the day is long, yet there is no one in Treasury who seems to understand why their road to recovery has been a road to ruin.

The public cost of supporting those who game the welfare system

This is how the welfare system works: it is as if someone has moved into your house, uses your kitchen, bathroom and one bedroom, but doesn’t contribute to the groceries or help to pay the rent. There may be reasons to allow this: sick relatives, friends who are down on their luck or because of a charitable streak in the owner of the house. But whatever else, this outlay does draw down on what is available to everyone else and leaves those who offer the welfare less well off than they otherwise would have been.

Most societies have offered welfare assistance to the sick, the disabled, the elderly or others who cannot provide for themselves. But they have also always limited the amounts provided for a number of reasons including the ever-present possibility that some of those receiving welfare could be earning their own incomes and contributing to total output, instead of taking from the earnings of others while putting nothing back in.

I say all this because of an article that showed up on the front page of the Herald Sun this morning: Warning over booming Australian welfare bill. From which:

TAXPAYERS are coughing up $300,000 a minute for a welfare bill that has soared $40 billion in 10 years.

The Herald Sun can reveal that the total lifetime welfare bill for all those currently receiving benefits has been estimated at $2.1 trillion.

The frightening figure emerged as federal government debt reached a record $506 billion yesterday, renewing concerns about the public cost of supporting those who game the system or are locked into a cycle of welfare dependency.

Remarkably, anyone currently receiving government help to study is expected to be on welfare for nearly half of the rest of their lives, costing taxpayers an average of $247,000.

This is the equation showing in miniature how our ability to spend works:

Income Earned – Taxes Paid + Welfare Payments Received

There is no reason in any particular instance that Income Earned minus Taxes Paid will be greater than Welfare Payments Received. Especially if for those receiving welfare are able to keep Taxes Paid to a minimum relative to Hidden Income Earned.

Welfare should not be a way of life, but assistance given when it is needed and only then. But now that Voting for a Living has become a viable alternative to Working for a Living, the constituency to do something about what is shown by these latest studies on our exploding welfare bill may no long exist.

Not everyone on welfare is gaming the system, of course. But not every payment on welfare is legitimate either.

“Wage growth is stuck in the doldrums”

The fact of the matter is that no one using modern economic theory could explain this: PAY GAP: Australian wages growth is stuck at record lows, and running behind inflation. Certainly you don’t find an explanation in the story which has only this:

With wages currently growing at an annual pace of less than 2%, and given evidence that it’s been hard to stoke wage pressures in other developed nations even with recent improvements in labour market conditions, it’s little wonder that some remain sceptical about a sharp turnaround in wages, particularly to levels back above 3%.

“The fact that wage growth is stuck in the doldrums comes as little surprise given the deterioration in Australia’s labour market, with the jobless rate climbing from 5.7% to 5.9%,” said Tom Kennedy, economist at JP Morgan, following the release of the report.

“We expect wage growth to remain unimpressive for some time given significant slack remains in the labour market.”

The problem has been obvious for almost a decade but only for those who have been classically trained.

Nonfunctional Broken Network

What happens when someone who writes with great charm about the funny stuff in life instead gets really angry about something that is not funny at all. Here we find out. Danny Katz has just been hooked up to the NBN and it is definitely no joke. He titles his column The NBN is coming! but it’s actually about what happened after the NBN arrived. For me, the waste and incompetence associated with government services like this are just one of life’s impractical jokes. This is part of the joint efforts of the Liberal-Labor Coalition to turn Australia into another Venezuela. Read the column through, but this will help you see what’s there at the link.

I sat down and stared at the green lights, waiting for them to stop flashing, waiting for my better life, thinking “NBN (Nearly, Be-patient, Not-long)”. The NBN connection box flashed for another 20 minutes, then another 20 minutes, then another hour and a hour, and I thought, “N… B… N (Nope… Bugger… Nothing).”

I was reminded of the wise ancient proverb, “A watched NBN™ Connection Box will never connect to a high-speed network (via a hybrid fibre coaxial lead-in cable)”.

So I got up and had a little snack in the kitchen: NBN (Nachos, Bowl, Noshing). When I came back the lights were still flashing. Getting a bit stressed now, a bit anxious, NBN (Nails Bitten Nervously).

The NBN instruction booklet told me to contact my internet service provider if there was any trouble, so I rang up Technical Support and was put on hold for another 40 minutes, an occasional recorded voice saying, “Did you know that you can resolve many of your technical problems online?” and I thought, “Well I would, if I could get online, you NBN (Numbskull Boofhead Neanderthal!)”

This is the full flowering of the Kevin-Julia-Malcolm alliance, peak political and economic stupidity at its highest intensity.