No. 164


STONE the crows; economic policy has become a morality play with sobriety the sinner.

A couple of months back the Crows reported the fuss over statistical errors and omissions in a paper by Kenneth Rogoff and Carmen Reinhart.[i] Their overall argument survived, that deficit spending by governments impedes growth. Still, the comrades in the commentariat claimed the mistakes crippled the case for public sector restraint. [ii]

Paul Krugman was one of many suggesting spreadsheet slips ended the case for balancing budgets[iii].  But there was always more going on in this argument than a dispute over the impact of public debt. Krugman nails it in a new review essay, but not in a way that makes his case :

Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “shit happens”. We all want events to have meaning. When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition towards believing stories that attribute the pain of a slump to the excesses of the boom that precedes it – and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process.

Of course, he adds, cutting state spending in tough times is not all about morality; it also serves the interests of the rich:

Is the austerian impulse all a matter of psychology? No, there’s also a fair bit of self-interest involved. As many observers have noted, the turn away from fiscal and ­monetary stimulus can be interpreted, if you like, as giving creditors priority over workers. Inflation and low interest rates are bad for creditors even if they promote job ­creation; slashing government deficits in the face of mass unemployment may deepen a depression, but it increases the certainty of bondholders that they’ll be repaid in full. [iv]

This is thrice nonsense on stilts.

First, austerity does not suit anybody who relies on economic growth to make a quid. And as for a rentier class waxing fat on investment income, tell that to the mass of superannuation investors who cannot survive on dividend streams and interest payments. [v]

Second, deficits in Europe and Japan, the US and Australia are not just due to GFC crisis spending. From Athens to Canberra, governments have run structural deficits through the stimulus spending of tax cuts while funding ever more expensive health and welfare systems.[vi] In the case of continental Europe, social welfare spending doesn’t only go to those on the bottom of the heap. Just 30 per cent of income transfers go to the lowest quintile. [vii] (We do better on this with the bottom 40 per cent of income earners receiving 84 per cent of Canberra welfare cash.[viii])

And before anybody argues for increased taxation on high-income earners to reduce the deficit consider two points. First the top 10 per cent of Australian income earners pay 45 per cent of income tax.[ix] And second, the lesson of the boom (oh come on, you remember the boom) is that rather than invest in the future, or reduce the public sector’s overall share of the economy, governments spend everything they extract from taxpayers, and then some.

And finally if there is any psychology involved in opposing the idea that government spend no more than it extracts from citizens it is a determination to stand up to economic adolescents who want what they want when they want it. As Stephen Anthony points out, government spending has grown faster than GDP over the last 50 years with Commonwealth outlays increasing from 17 per cent of GDP to 25 per cent since the ‘60s. The total tax burden is up from 19 per cent to 25 per cent. [x]

We are now in an era where profligacy is political purity, where governments assume they are obliged to provide the services voters want when they can’t be paid for. Despite cuts to single mothers pensions and an assumption that the unemployed are all working in the black economy, (because no one can survive on the Newstart allowance) government does not dare reduce spending on health and welfare to suit its circumstances. As the Crows write this very line, there is an ad on the box for the Feds’ “household assistance program,” explaining how more money is on its way to help with “everyday expenses”.[xi] Not help for people in strife, just people with everyday expenses. Nothing wrong with that, when the Commonwealth can cover the cost out of the national housekeeping.

Which is manifestly not now. The established wisdom is that economics is too sophisticated for ordinary people and household finances is a misplaced metaphor. Um, except when it suits advocates of ill discipline. As the Prime Minister explained a month or so back :

Imagine a wage earner, John, employed in the same job throughout the last 20 years. For a period in 2003 to 2007 every year his employer gave him a sizeable bonus. He was grateful but in his bones knew it wouldn’t last. The bonuses did stop and John was told that his income would rise by around five per cent each year over the years to come. That’s the basis for his financial plans. Now, very late, John has been told he won’t get those promised increases for the next few years – but his income will get back up after that to where he was promised it would be. What is John’s rational reaction? To respond to this temporary loss of income by selling his home and car, dropping his private health insurance, replacing every second evening meal with two-minute noodles? Of course not.

A rational response would be to make some responsible savings, to engage in some moderate borrowing, to get through to the time of higher income with his family and lifestyle intact and then to use the higher income to pay off the extra borrowing undertaken in the lean years. Running a nation is always more complex than running a family budget and analogies only work so far. But I trust the nature of the challenge we confront is now clearer. [xii]

‘Fraid so. Unlike John, the government can borrow indefinitely and cover interest out of growing revenues, better spent on productive investment or returned to citizens in the form of tax cuts. Interest on net government debts this year is $7bn, which even in these profligate times is a fair chunk of change.[xiii] It really is simple stuff and analogies, if not from households then certainly business budgets, apply.  As Christopher Joye put it in the Saturday Fin, “the one thing governments can control with absolute certainty is their discretionary spending … Fairfax has shed significant staff to ensure it is financially responsible. Rudd, Gillard and Swan have been unwilling to make similarly tough decisions.” [xiv]

The state here as in Europe the US and Japan has lost respect for self-restraint and the implications are alarming – we are now turning our collective back on the spirit of capitalism which requires debt to fund growth not prop up unaffordable activities.

And don’t tell the Crows that all will be well when revenues pick up. Government debt is the Australian norm. The Federal government has paid, rather than received, interest for just nine of the last 42 years. [xv]

The PM’s pal John is living beyond his means and will likely continue to do, for as long as can meet the interest on his debt – just like his parents did and so is the country.

Does this return to the long-term Australian experience of living on tick, matter?

Too right. Moral values shape economies. Deirdre McCloskey demonstrates that it was less imperialism and capital formation that led to England and Holland generating the first spurt of economic growth, which has rarely stopped since and infinitely improved physical and spiritual life for billions of ordinary people in the process. Rather it was the adoption of the values and conventions of capitalism and respect for entrepreneurs who decided that economics was not a zero sum squabble over fixed resources. [xvi]

This inevitably involves accepting that although magic puddings are a great idea and would make budgeting so much easier they do not exist. And not even the strongest argument for the morality of budget deficits can cook them up.



[i] Stephen Matchett, “Stone the crows,” 158, April 22 @ recovered on June 1

[ii] Free Exchange, “The 90 per cent question,” The Economist April 20

[iii] Paul Krugman, “Rogoff and Reinhart are not happy,” New York Times, May 26

[iv] Paul Krugman, “Krugman takes Rogoff and Reinhart to task on austerity,” Australian Financial Review, May 31

[v] Financial Services Council, “Australians have a $1 trillion shortfall in retirement savings” September 3 2102 @$1trillionshortfallinretirementsavings.Final.pdf recovered on June 1

[vi] David Crowe, “Decade of tax cuts blamed for Australia’s severe structural deficit,” The Australian, May 22

[vii] Patrick Diamond and Guy Lodge, “European welfare states after the crisis,” Policy Network, January 2013 recovered on June 1

[viii] Australian Bureau of Statistics, “Government benefits, taxes and household incomes,” June 29 2012 @$File/65370_2009-10.pdf recovered on June 1

[ix] Adam Creighton, “Rich are paying their fair share, and then some,” The Australian, February 2

[x] Stephen Anthony, A roadmap for fiscal sustainability (Minerals Council, April 2013) 14 @ recovered on June 1

[xi] Department of Families, Housing, Community Services and Indigenous Affairs, “Household Assistance Package,” @

[xii] Julia Gillard, “Address to Per Capita reform agenda series,” April 29 @ recovered on June 1

[xiii] Australian Government, Budget 2012-13, Appendix D: Historical Australian Government Data,” @ recovered on June 1

[xiv] Christopher Joye, “Flaws riddle biased budget office analysis,” Australian Financial Review, June 1

[xv] Budget 2013, ibid

[xvi] Deirdre McCloskey, Bourgeois Dignity: why economics can’t explain the modern world (Chicago, 2010)