Tag Archives: public spending

You do know that an increase in the GST from 10% to 12.5% would mean a 25% increase in tax revenue

Posted on by
1

At the moment the GST is 10%. On $1000 there is therefore a tax of $100. If the tax is raised to 12.5%, on $1000 the tax would be $125. $125 is 25% higher than $100. The increase is not 2.5%. It is 25%. We would be mad to allow this to happen. Which brings me to this in today’s paper: Lifting GST rate is critical for meaningful tax reform, economists say.

Reforming the GST, including lifting the rate to 12.5 per cent, is critical to boosting economic and productivity growth and could raise between $14bn and $40bn a year, consulting firm PwC says.

This is the same kind of expertise that forecast thousands of deaths from the coronavirus. Do not go anywhere near allowing anyone, State or Federal, to raise our taxes. Let me quote Judy Sloan, also in The Oz today: Don’t waste time on tax: It’s spending that matters. Here Judy is referring to the advice from “former department head Jane Halton”:

Unless the GST or other taxes are increased [Ms Halton says] we won’t be able to afford the public services we apparently all desire. We are approaching a cliff, according to her, and unless something is done, devastation awaits. This is a common refrain from the Canberra bubble.

Judy concludes:

The real pity is that there haven’t been many (any?) reports about expenditure reform. The billions of dollars of government spending that are just wasted and the broader failure to achieve the stated objectives of programs — now those are issues worth considering.

Do not let anyone raise our taxes. We would be mad to let them do anything that allows governments to waste even more money than they already do.

Every government’s greatest wish: to spend like a drunken sailor

Posted on by
Reply

Next to my own article at Quadrant Online is a new one by Peter Smith, one of the few economists I think of as worth the time to read: This Can’t Go On Much Longer. His point is that you can print money from now until forever, but eventually you will cause enormous damage which will remain unrecognised until the after the deluge has struck.

I will go to economics and ask where is the money coming from and what are the implications of governments spending so much of it. I note that some commentators have referred to Modern Monetary Theory for guidance (watch for lefties coming out of the woodwork to promote it). Consult my article in the last July/August issue of Quadrant if you want to know about this theory; but, sufficient to say, it sheds more obscuration than it does light.

Governments are giving vast amounts of money to businesses and individuals to try and make up for their loss of revenue and income. Is it a good policy? Yes, it is. Governments have shut economies down and, thus, there is no option. Otherwise, people would starve and businesses across the board would collapse. At the same time, the character of giving matters. Some is sensible; some wasteful.

A formula being used in the US, and maybe elsewhere, seems by far the most sensible. Small and medium sized businesses are being given loans to cover their costs, including their wage costs, which will be forgiven if they keep all their employees on. Support to large businesses is also vital to ensure they do not collapse; and support to individuals thrown out of work.

Even on my own high street, there are all kinds of businesses in great difficulty, some even shutting down, never to return again, in many instances because landlords are not reducing their rents. Others will return, but many others won’t. Back luck to them, but also bad luck to you since your personal wealth is being depleted by these typical actions of governments, actions costless to them but not to us. This is how Peter ends:

So, what am I saying? I am saying that the normal implications of government overspending do not apply. This situation is unique. Think of it as an enforced sojourn, albeit on hard rations in solitary confinement. Most everything shuts, we sit on our hands, and the government gives those made destitute free money to pay bills and buy food and medicines. When the sojourn is over, we will have suffered a sharp loss of production but can make up for that over a period of time.

The trick is to ensure that business collapses are kept to a minimum; that most are in shape to start up again, and that individuals are kept whole. Every day will make it harder for some businesses and people to bounce back. This means the sojourn can’t go on much longer; only a few more weeks at most. Trump knows this, and could provide a lead for other countries, including Australia; if the hate-filled American media don’t deter him from acting as speedily as we need. And need it we do. Morrison, in the announcement I referred to, mentioned restrictions being in place for six months.

It’s every government’s greatest wish to throw around money at everyone and everything. Just think of Kevin Rudd and Barack Obama in the wake of the GFC. It then took near on a decade to return to where things had been in the US, and that only because of Donald Trump. Here we never got back to where we were in 2009. If you think this will be different, well good luck to you. We are being systematically robbed, and it will continue right up until the day the community at large finally says they have had enough.

EN PASSANT: From the comments thread at QoL:

Peter,

This is the economic destruction of the West (and Australia) that the globalists, climate Cultists, Fabians, Totalitarians (of every ilk) and Socialists have dreamed about since forever. Greta can now go back to skool as the capitalist world has deliberately suicided at the behest of our politicians.

It appears to be relatively easy to prophesise our future, so here are some of mine in this Orwellian Brave New World:
a. The Chinese are already buying stocks in key American (and Australian) companies.
b. They are offering big loans and support to those supporting their Belt & road initiative – like Victoria. All you have to do is bow and kneel. How easy is it to just bow and scrape in order to be saved?
c. The ‘Oz stimulus package’ will turn out to be a massive ‘hot shot’ heroin overdose that will economically ruin Oz.
d. The Oz $$ will become valueless
e. The Chinese will call in their markers and will take key assets as payment (Ports, Communications, Infrastructure, and whatever else they want that destroys our sovereignty). The Greens, the Left and the ABC will cheer this on as a ‘good thing’.
f. Emergency ‘Social Control’ measures will become more draconian and possibly permanent
g. Pollie pensions and benefits will NOT be cut …

Welcome to the future …

As usual, my solution requires ‘risk-taking’, which my children condemn as cavalier. When their arguments have no effect on me, they then (justifiably) ask, ‘But what about Mum?”
Anyway, I think that applying a harsh Triage approach has statistical merit and would contribute to achieving the prime practical objective of decreasing the ‘Rate of Increase in Infection’ through the period of Peak Hospitalisation Demand. This would maximise the number remaining at work and minimise the permanent damage to business and industry.

However, as we import so much from China our industries will probably collapse anyway as materials are already in short supply. The owner-builder next door has stopped as he cannot get – wait for it – roofing screws.We have destroyed the Australia I knew because 1,800 people are known to be infected and 16 have died.

The look of self-satisfaction on ScoMo’s face at the destruction he and Parliament have wrought on Oz beggars belief. Why not add a super-tax to our last productive industry and finish the job? Kill off mining and we will have destroyed Oz to save the planet.

A common sense program for action

Posted on by
Reply

Let me see if I have this straight.

Public spending on wind farms will create jobs, save the planet, restore the economy to strong rates of economic growth and raise our standard of living.

And in spite of the obvious common sense of this program, there are still people who are opposed. I have to say, it’s incredible what some people will believe.

Crony socialism

Posted on by
Reply

Here’s the nature of the problem. The Treasurer goes to the public service – the very people whose entire livelihoods are financed by public spending – and says to them that the government has a massive deficit that has to be dealt with. And he adds, in the short term, there are only two solutions:

  • cut spending and live within your means
  • raise taxes and finance as much of current spending as you can

    What do you think these self-interested custodians of the public good are going to answer?

    Every regulation has a thousand regulators who want to keep their jobs. Every program has ten thousand programmers who like the steady income and their cushy jobs. Much of it is a ponzi scheme in which they even get to set their own level of wages.

    There is, of course, the one additional problem. Every regulation has a fan club. Every program has its clients. It is the regulations they have to endure they are really interested in removing. It is programs that don’t benefit themselves they think need to be ended. But there is a kind of everyone defends regulation since no one trusts the market, and removing any public programs threatens all of them so there is a reluctance to see any of them wound back.

    Finally there’s the media, especially the publicly-funded ABC, who can be counted on the bag and slag any serious effort at public saving if it is done by a more conservative government.

    In sum: where’s the constituency for cuts to spending?

    What is the defence against Keynesian theory

    Posted on by
    Reply

    You may think I go on a bit about this Keynesian economics but it is the source of every government’s warrant to spend like there’s no tomorrow. So long as the universal view is that economies are driven by demand, there is no effective answer to decisions to spend. Since according to Keynesian theory, the spending ends up in jobs, and the multiplier effects ensure that, no matter what the original spending is on, it will lead to higher growth, even if the first round of such expenditure is a total waste, it all contributes one way or another to our prosperity. Once you have tossed Say’s Law aside – which specified that demand could only come from the supply of products whose revenues covered their production costs – there is no intellectual defence against public spending. Don’t you care about the unemployed? Are you not interested in economic growth? Then surely governments must spend to put people into jobs and raise our living standards.

    No economist today has a ready answer to this that builds out of the economics we teach. Accept as valid that Y=C+I+G+(X-M) and you seem to me to be defenceless against public spending as a certain social good.

    We worry about public sector waste, misdirected production, a tonne of money lost on useless green programs, a proliferation of public servants whose main role in life is to prevent other people from producing. We are apparently content to see government hand tax money over to businesses to complete projects that will never repay their costs. We do this because, at the back of everyone’s minds, there is the belief that it will all be to the good, as it stimulates growth and puts people into jobs.

    Honestly, what is the reason not to do any and all of it if the Keynesians are right? Why not spend the money if it will create jobs that would otherwise not be there and stimulate faster growth that would otherwise have not occurred? It amazes me that whether this is actually true is never the issue. We discuss deficits and debt but the underlying premise, that public spending is good for growth, is never challenged. We build schools, hospitals, infrastructure and every dollar spent is seen as a net positive. But unless you understand in your very bones in what circumstances this is untrue, you will never rise up and bring this madness down. We are bankrupting our societies and slowly grinding our capital into the ground, but so long as we have Keynes to tell us it is all to the good, it will go on forever, until the collapse. And if Japan is anything to go by, it will continue even after that. If no one understands why it should be stopped, it won’t be.

    The endless supply of Keynesian nonsense

    Posted on by
    Reply

    I have now received Louis-Philippe Rochon’s reply to my critique of Keynesian economics which was the lead comment in an exchange we are having on Keynesian economics. His reply comes under the heading, How to Promote a Global Economic Recovery? “The worst infliction we can impose on our economies is to leave them to the tyranny of the markets”.

    Thus, from the very heading I can see how far apart we are. There are an astonishing number of techniques and approaches that can be used to manage an economy with public spending to get an economy out of recession only one amongst this vast array of possibilities. If you are going to start with the assumption that not trying to spend your wasteful way to recovery is the same as laissez-faire then there is no possibility of ever understanding how badly our economies are now being mismanaged. But perhaps that is just the title. What more does his letter say? Let me pick up his argument point by point, starting with this misbegotten piece of theory.

    The driving force behind economic growth both in the short run and the long run is aggregate demand, pure and simple. . . . Yes, that’s right: more government spending leads to more investment. It’s a crowding-in effect!

    Nothing to lift an economy like public investment! Every business like the post office. Every investment another Solyndra. All subsidised with nothing self-sustaining through the revenues it earns. Dig a hole and get fill it in again. Don’t worry about earning a greater return than the funds outlayed. Just close your eyes and spend. Don’t worry, it will all work out once that magic multiplier cuts in. If this is all there is to the theory, there is nothing there but wishes and wind. But there is also your recollection of those magic Keynesian moments at the end of World War II.

    My recollection of Keynesian policies is quite different: they contributed to 3 wonderful decades of growth following WWII – what we fondly call the Golden Years of capitalism. Keynes is quite evidently the greatest economist of the 20th century who saved capitalism from self-destruction. For that, he is remembered as one of the greatest thinkers.

    First, the General Theory was published in 1936, three years after the Depression had come to an end in every economy but the United States, where it dragged on until the coming of the war to the US in 1941. And, of course, those three wonderful post-war decades were preceded by the decision of the United States in 1945-46 to balance its budget immediately. The massive wartimes deficits were instantaneously brought to an end and a balanced budget put in its place even with millions returning to the workforce after being mustered out of their wartime military service or from their jobs in wartime industries. The Keynesians of 1945 all wanted a continuing deficit but Truman turned them down.

    How does a Keynesian explain that, I wonder? We are instead reminded of the supposedly woeful economic outcomes of the 1980s, which I must confess not to remember in quite the same way as this:

    By contrast, starting from the 1980s, with the monetarist debacle and the real business cycle shenanigans, we ended up with less average growth and higher average unemployment rates.

    It is a contrast, of course, but the contrast of importance is with the 1970s, the greatest period of Keynesian disaster until the one we are in the midst of now. The catastrophic stagflation of the 1970s, where deficits and spending only led to high unemployment and a blowout in inflation that could only ultimately be controlled by a fierce monetary policy that finally did regenerate a period of prosperity that continued for another two decades. But what about the period after the GFC when governments were spending hand over fist on one stimulus after another.

    While governments did put into place Keynesian aggregate demand policies in 2009, they quickly abandoned these policies in 2010 in favour of austerity measures.

    A one-year stimulus, was it? The US is the paradigm example. Despite Congressional attempts to slow the growth in the deficit, the attempt to contain public spending in the US only seriously began with the sequester in 2013!
    And indeed, the White House specifically dates the commencement of the sequestration from the first of March that year. If ever a stimulus was given time to work itself out, that was then. The disastrous response of the American economy to the stimulus is perfectly in line with my own argument. The very belief that conditions were improving up until the sequestration began can only mean we are living in a parallel universe.

    But how much we differ on the timing when restraint finally began, we can certainly agree on the current disaster. He may think it’s because the stimulus was brought to an end too soon. I think of it as the inevitable consequence of a Keynesian policy.

    When you look at aggregate demand today, it is at best anemic. Consumers are saddled with debt, and private investment has flatlined; austerity measures are being imposed everywhere. There is no room for growth. That leaves only exports to ensure a recovery. But with Europe on the verge of deflation, the BRIC countries slowing down, the prospects for exports are dimming. So where will growth come from? I am afraid that without aggressive fiscal deficit spending, we are dooming future generations and ourselves to another decade or more of weak economic growth.

    On this much we can agree, that the world’s economies are in a mess. Consumers deep in debt, savings eaten away by low productivity government spending, and private investment going nowhere. And I didn’t just say the stimulus would not work; I said the stimulus would make things much much worse. You describe what I see, but I expected things to end like this from the start. You could only start to recognise a problem more than a year later, and only because by then it was obvious to all and sundry that in every place the stimulus had been introduced economic conditions had become much worse. You nevertheless continue to believe that the problem is not enough government spending.

    This secular stagnation is the direct result of a lack of fiscal spending advocated by austerity voodoo doctors and charlatans.

    I understand that the principle of cause and effect never applies to Keynesian theory. The plain fact is that there has never been a single instance in the whole of the period since the General Theory was written that a public sector stimulus has been able to bring a recession to an end. There is not one single solitary example, with the coming of World War II the only supposed example when unemployment ended mostly because half the male population under 30 was put into the military.

    It is not aggregate demand that matters, but value adding aggregate supply. You must do more than build brick walls, you must build where what is built actually contributes to future prosperity. To think more holes dug up and then refilled can generate recovery because it constitutes “fiscal spending” is the essence of economic illiteracy. And for true economic illiteracy, it’s hard to go past your program for recovery:

    First, we must replace private debt with public debt.

    Second, we must put job creation above all other goals.

    Third, we must deal head on with the problem of income inequality, which is at the very core of the crisis in aggregate demand.

    Fourth, with respect to Europe . . . they must either adopt the proper federal institutions to deal with the problems facing the Southern countries, or get rid of the Euro all together.

    That is to say: we must socialise our economies.

    Private debt is incurred by private sector firms. To replace this debt with public debt would so obviously drive us into us deep recession that it is almost impossible to understand how this is not perfectly obvious to you.

    If such a program appeals to you merely because of this aggregate demand incantation of yours, I’m afraid, your program would be part of the problem and in no way part of any solution. I fear, however, that three quarters of a century after the publication of The General Theory, economics is now at such a low ebb that what you have written will look like perfect good sense, even as every attempt to do what you have suggested would make things worse than they already are.

    In times gone by, before Keynes, economists talked about “effective demand”, that is, what had to happen to turn desire for products into an ability to buy those products. Now it is aggregate demand – the total level of demand – which has leached the original concept of any understanding that for everyone to buy from each other, they first have to produce what each other wish to buy. If that is not obvious, then common sense has gone from the world.

    But I say again. A short post cannot state everything that needs to be said. For a more complete explanation of these issues and what needs to be done, you must turn to the second edition of my Free Market Economics. It’s still not too late, but it is getting later all the time.

    Debating Keynesian economics with a Keynesian

    Posted on by
    Reply

    We are slowly but ever so surely finding our standard of living slipping away. In spite of all that public spending and the deficits and mounting debt – well actually because of all these things – we are slowing going under. Most of us find we are doing without some things we took for granted not that long ago. Whether you look to the US, the UK, Europe, Japan or Australia, a return to rising real incomes and full employment continues to look ever more remote.

    And it’s not for lack of public sector “stimulus”. Those deficits continue and even so the money market geniuses keep worrying about deflation. What are we to do? More QE? More debt? More government subsidies for projects that cannot be funded through the revenues they are expected to earn? These are the textbook answers from the textbooks provided to every economic student in the world.

    It is all the same Keynesian rot that has not only never worked on any occasion that it has been tried, it has always with no exception made economic conditions worse. If you know of some example where public spending led to recovery, please let me know. For myself, I can give you chapter and verse on all of the failures, and yet nothing seems to be more everlasting than a textbook theory that is simple, plausible and wrong.

    I am now in the midst of an online debate with Louis-Philippe Rochon, an Associate Professor of economics, founding co-editor of the Review of Keynesian Economics and co-editor of New Directions in Post-Keynesian Economics. It has been organised by Edward Elgar between two of its authors, and I have just had my first go in an exchange of letters. I have also discussed this debate at Quadrant Online.

    The problem remains for me remains as it always was:

    What I can tell you from personal experience is that the notion of aggregate demand as a driver of economic activity is now so universally believed that it is nearly impossible to get anyone even to see that it might possibly be wrong, that there is another way of thinking about things. But before Keynes came on the scene, no economist, other than a handful of cranks, ever thought that economies were driven from the demand side.

    To deny the independent existence of aggregate demand is so conceptually disorienting to an economist educated any time over the past half century that it is near impossible to get them even to see what you mean. But I have had my go and I expect Louis-Phillipe to answer in the next day or so. I am pleased that he has taken this on, but I remain curious how he will respond. I can only say that no one has ever been brave enough to take this on before. I have had plenty of slanging and ignorant comment. But if it is possible to show that aggregate demand for anything however wasteful can ever promote economic growth and higher employment – NBN, mothballed desal plants, bridges to nowhere – I hope to hear it now.

    Pre-budget nerves – my list of dos and don’ts

    Posted on by
    Reply

    I am getting a bit nervous about the budget that’s brewing, no longer behind the scenes but with a few strategic leaks breaking into the news. As you may know, I am no Keynesian but I went back and took a look at my own Free Market Economics text since I could not remember whether I even mention the word “deficit”. The index has it listed once, three pages from the end on page 332.

    Here are my thoughts on things. Why they left a Labor-supporting Keynesian to manage Treasury in the single most important budget they will ever introduce is beyond me. Anyway, here are my thoughts.

    It’s not the deficit per se that matter but the level of public spending.

    If you want to fix the economy, resources must migrate from being under the direction of the public sector and into the hands of the private sector. Therefore, the focus should be on cuts to non-value-adding forms of public spending. If it doesn’t show a positive return within a reasonable period of time, cut it off. This, by the way, is not an anti-welfare message although welfare too must be affordable. I am talking about infrastructure and the many forms of waste and mis-regulation that are found at every turn.

    The economy will grow, employment will grow, real wages will grow if and only if economic activity is directed by private sector entrepreneurs. It will shrivel under the direction of government. Do not even imagine anything much beyond the first 10 percent of what you are already spending will create economic growth. Cutting public spending will create growth, not maintaining existing levels.

    Raising taxes to fund public spending is a deadly mistake and wrong twice over:

    . Higher taxes will allow you to maintain the level of public sector direction of our scarce economic resources.

    . Higher taxes will reduce activity in the private sector.

    The core aim must be to encourage entrepreneurial activity. There is no budget problem that cannot be fixed by:

    . Reducing the level of unproductive public spending

    . Fostering private sector growth (where unproductive spending has its own very brutal cure).

    If the strategy is to balance the budget in ways that will diminish private sector investment and entrepreneurial activity, it will make things worse, not better. Economic conditions have been improving since the change of government with nothing much at all having been done. Leaving things alone is better than introducing new programs or raising taxes to fund existing forms of waste. Step back, get out of the way, cut your own take up of resources. But for heaven’s sake, don’t apply some bizarre Keynesian budget-surplus strategy by funding the existing level of public spending at the expense of the private sector.

    Government ‘investment’ does not equal growth

    Posted on by
    Reply

    Judy Sloan’s column from The Australian today goes under the heading, Public spending won’t fuel the growth engine. I mention this on the same day as I have received word that my paper on Mill’s Fourth Proposition on Capital has been accepted for publication.

    First Mill. In 1848, John Stuart Mill in his Principles of Political Economy included his four propositions on capital which not only never challenged in his lifetime, the fourth, that demand for commodities is not demand for labour, was described by Leslie Stephen in 1876 as the “best test of a sound economist”. It was the pons asinorum of classical economics, the divide that separated those who could understand economics from those who could not. But what is remarkable is that since that date in 1876, not only has there not been another economist to have embraced this statement in full, but it has been challenged by some of the greatest names in the history of economics – Marshall, Pigou, Hayek are just some amongst a quite extraordinary array of economists from every side of the economics divide who have tried to explain what Mill meant. To my astonishment, I am literally the first person since 1876 who has argued in print that what Mill wrote is literally true. It is the best test of a sound economist.

    And what the proposition meant, as the words plainly state, is that buying non-value-adding goods and services – and here the issue is public spending in particular – will not lead to increased employment because it does not lead to economic growth. A Keynesian stimulus is therefore doomed to fail, evidence for which has been accumulating at an astronomical rate since 2009.

    Judy in her column has brought forward evidence from a paper published in the UK whose subtitle is, “Government ‘investment’ does not equal growth” and written by an economist by name of Brian Sturgess. Here is Judy’s conclusion:

    If the government is intent on spending even greater proportions of GDP on infrastructure — which was already ramped up under the Labor government — it must ensure that only projects for which the benefits far exceed the costs are approved. Spending money on infrastructure is no silver bullet to achieving economic growth and better living standards. Let’s just hope the audit commission has taken on board some of Sturgess’s conclusions.

    Yes, let us hope our government has taken on these conclusions which once went under the collective name Say’s Law.

    And after all that stimulus spending too

    Posted on by
    Reply

    You do know most of our economies are going nowhere, right? So to add to the rest of the tales of woe, there is this from David Uren:

    Even assuming that the US overcomes its current budget crisis without wreaking too much damage, businesses in the advanced world may continue to hold back from the investment required to generate jobs and growth. The slowdown in the emerging world, the severity of which has taken the fund by surprise over the past six months, may prove intractable.

    The biggest change in the IMF’s outlook in the past six months concerns China. In April, it believed the slowing of China’s growth to just below 8 per cent this year would be a passing pang, with growth returning to 8.5 per cent by 2015 and continuing at that level into the indefinite future.

    But it now believes there has been a permanent reduction in China’s potential, and it sees growth slowing to 7.3 per cent next year and to just below 7 per cent beyond 2016. If the pattern of global disappointment continues, China’s long-term growth rate could be below 6 per cent, it says. For the IMF, which traditionally adjusts its forecasts in fractions of a percentage point, this is a huge downgrade.

    Public spending beyond some limited amount is a long-term economic disaster. The evidence mounts. But are we learning? We shall see. I will only add that the story presumes that there is a kind of wilfulness in business not investing at the present time. They would if they could so the fact that they don’t tells you something else about how badly our capital base has been mismanaged for the past decade or so in particular.

    Only the members of a government and their advisors are apt to believe that members of a government and their advisors are able to direct our resources in a value-adding direction. It is a delusion, but they’re the ones who get to decide. But what a mess their delusions cause!