Deficits again

Turnbull has now upped the ante. At the political level, Australia is now fighting (a) an aversion to public sector deficits and (b) the appropriate choice between taxation cuts v/s other forms of spending.

During the Howard years every household wanted to go into debt, while corporations were doing very nicely out of the resources boom. With private debt soaring, the public sector needed to maintain a fairly responsible budget: in fact it did not do enough in this area: it needed to run bigger surpluses.

Now that households and corporations are reducing their private debt levels at an alarming rate, the opposite needs to happen. It is time for public debt to rise to sustain the economic recovery. Without it, there is no recovery.

This is why virtually every country in the world has adopted a decisive pro-deficit stance – and Australia is still way below the average public debt to GDP levels.

This is quite a different stance from the old debate about taxes versus spending cuts. This at least had some minimum rationale.

Of course, Turnbull may be now hoping the economy will recover of its own accord. In my view, there is buckley’s chance of that. So he is trading off some short term unemployment for fiscal “prudence”.

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ryi
ryi
12 years ago

Fred

Going in to deficit during the bust is ok but we need it be investment in infrastructure that boosts productivity rather than cash payments that will be sustain current levels of consumption and paying down excessive private debt.

Cash handouts are not reducing total debt nor increasing wealth, they are simply transferring private debt to public debt. The only justification for it I can stomach is the time lags it will take to get infrastructure projects in place.

Only by investing and improving productivity can we increase wealth and hope to reduce both public and private debt.

We didnt do this during the boom and nothings changed during the bust.

In that sense Turnbull is right that the quality of the deficit/investment/spending counts, but I’m not sure he’s put forward anything more desirable than the current package.

Corporations have also been exposed for their level of debt not just households.

Nick I

madeinaustralia
madeinaustralia
12 years ago

[quote]Cash handouts are not reducing total debt nor increasing wealth, they are simply transferring private debt to public debt. The only justification for it I can stomach is the time lags it will take to get infrastructure projects in place.[/quote]

Economics 101.

non targeted cash handouts never work as the government wishes.Poor to middle class families pay down debt, so the money ends up in the hands of the banks, while the rich just throw the money on the pile…often ending up in the Banks. So the money just ends up back into the hands of some of the institutions who started all this mess.

so what to do what to do. you are correct, a few billion here, a few billion their…who cares, its not going to make alot of difference to the national deficit.

…but…..there is now becoming a prevailing understanding that how the government reacts to situtations in the markets, effects people in the market more than was previously understood….

so, how has this government gone about promoting stability and positivity…not blind denial, nobody is asking them to lie about the state of the economy, but the Rudd government has turned this economic downturn, into a crisis, and then a full blown “national emergency”…well, lets look at the stats.

We are still growing. both GDP and national investment. While the world economy is contracting.
We still have record unemployment in some states.
Our mining industry is surviving despite international commodity prices being devestated.
We have a high education rate.
We have stable market systems.
We have tight regulation.

….so why all the demonizing of our markets, why all the alarmist rhetoric…why??

well yes there is some reason for concern…but, not nearly as bad as the Rudd government makes out to be.

By their own words they are bringing down our economy.

and thats the problem with their plans.

vanaalst.robert
vanaalst.robert(@vanaalst-robert)
12 years ago

Whether you happen to agree with Turnbull or not, you can look at it positively in that at least both parties are offering something substantially different on an important issue for a change.

Don Arthur
Don Arthur
12 years ago

Fred – I have a limited understanding of economics. Here are a few naive questions:

1. Keynes argued that governments could prevent unemployment by building houses etc. But if this was too difficult to arrange burying bank notes in old bottles and covering them in rubbish would be better than nothing. Private enterprise would dig them up and the economy would get back on track.

How important is it that the stimulus is invested in productive assets?

2. Turnbull thinks that Rudd is spending too much. How do you decide how much is enough? What are the consequences of spending too much or too little?

3. Why does it matter if people save their stimulus handout. If they put it in the bank won’t that make the bank more likely to lend to business? Won’t that help the economy too?

4. How much of the stimulus ends up stimulating someone else’s economy? And if governments can’t stop cash injections from crossing borders, what’s to stop a little country like Australia from free-riding on everyone else’s stimulus packages?

NPOV
NPOV
12 years ago

Fred, is 3. really right? What I’ve heard more than a few times is that small businesses are finding it very difficult to get credit from banks.

As for 2., if the government did nothing at all no doubt the economy would recover eventually. That was generally what governments did pre-Keynes anyway.
But recessions and depressions tended to last much longer before counter-cyclical government measures became the norm, as can be seen here:

http://www.nber.org/cycles.html

The average contraction length from 1857 to 1929, not including the Great Depression was 20 months. Since the end of the Great Depression it’s been 10 months. Keynes would’ve argue (and I think did argue) that Keynesian measures weren’t really applied adequately during the Great Depression itself, so it’s probably safest to leave it out as an outlier. It doesn’t make all that much difference if you include it in either group though.

NPOV
NPOV
12 years ago

The more deposits a bank has the more deleveraged it is, surely? Therefore I’d think as banks deleverage quicker they’ll be more willing to start lending again at some point. But I’d accept that this process will be too slow to have much impact on lessening the impact of a recession – at best it might help speed up the eventual recovery.

Don Arthur
Don Arthur
12 years ago

Fred – I’m less interested in evaluating the government’s stimulus package than in understanding the economic arguments.

On 2, how do economists judge the Goldilocks point for a stimulus package? If I suggested $100b for Australia would that be too big? If so, why?

Michael Kalecki
Michael Kalecki
12 years ago

I would say after reading the Statement on Monetary policy that there appears to be quite a bit of coordination between Treasury and the RBA with regard to monetary and fiscal policy.

The RBA seems pretty confident the problems of monetary policy transmission mechanism we see overseas is not happening here to any great extent.