What a Difference

What a difference 12 months and more makes.

In today’s Business Spectator column Stephen Koukoulas writes:

The budget surplus or deficit, level of debt, interest rates and value of the Australian dollar are the tools used to achieve those objectives and are not the target in themselves.

In April last year he was saying:

At the time I replied:

the result of a budget is an outcome not a policy tool

And the response I received was

What utter rubbish…

The full conversation can be seen here.

Good to see him change his mind and that we are more or less on the same page!


Sensible Macroeconomics


Good politics pre-election.  Good macro post-election.

One problem:  Commission of Audit has a reference that states:

2) “It is also essential that the Commonwealth government live within its means and begin to pay down debt.”

This appears to be in direct conflict with raising the debt limit.

The Federal Government is not like a household!  Households can’t make their own currency and require that people use that currency to pay taxes.  I have addressed this and many other myths previously.

Bad Debt? Good Debt? Complicated Mess!

via MacroBusiness via AFR

On Friday, The Australian Financial Review reported that Hockey was “mulling” the idea of separately classifying debt the federal government raises to invest in infrastructure projects from the debt required to finance the budget deficit.

Personally I did not understand a word of this when I read it for the first time.

The article goes on to argue that Hockey will draw a distinction between good debt and bad debt. The former being the self-liquidating kind that is repaid via improving productivity. And that Hockey will aim to split the debt into on and off balance sheet categories.

However, thanks to Richard Dennis of The Australia Institute, he makes it crystal clear:

After spending years deliberately conflating public sector debt and private sector debt in order to better scare the electorate, Hockey now wants us to distinguish between “good debt” which is used to fund infrastructure, and “bad debt” which is used for recurrent expenditure.

Infrastructure is one of those words that is easy to say and hard to define. Most people accept that roads are infrastructure, but is a highway to nowhere really a good investment? Implicit in Hockey’s language is the notion that it is OK for governments to borrow money to build big things made out of concrete but that we shouldn’t borrow for the delivery of government services. But what about education or preventative health?

The Conspiracy Against Steve Keen and Others

Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:

So as I see it, we should first of all be evaluating models, not individuals; obviously we need people to interpret those entrails models, but we’re looking for the right economic framework, not the dismal Nostradamus.

Second, we should be evaluating models and the individuals who claim to have these models based on broad performance, not single events; if your approach (say) predicted the housing crash but then also predicted runaway inflation from Fed expansion — I assume everyone knows who we’re talking about [for those that don’t, Krugman is referring to Peter Schiff] — it’s not a good approach.

Finally, I think we’re looking for conditional predictions — what happens given events that are themselves not part of the model — not absolute predictions. It was, for example, very hard in the fall of 2011 to know how the ECB would respond to the escalating financial crisis in Europe; failing to predict that Mario Draghi would find a way to funnel vast sums to debtor nations through discounting would have lost you a lot of money, but wasn’t really a failure of the economic model.

This is an excellent set of criteria—all I would add is one more in a similar spirit, that the model has to be evaluated on its own grounds, and not on grounds that suit a different approach to modelling. For example, a model that is purely a simulation can’t be rejected because it doesn’t make an empirical prediction based on current data, nor can models that acknowledge “the butterfly effect” (that a complex system can’t be predicted beyond a very limited horizon) be criticized for not getting the timing of an event right.

With that one addition, Krugman’s guidelines state precisely what I wish Neoclassical economists (and others) would do. Unfortunately it’s not what they d0 – Read more at Business Spectator  it is well worth reading.  Then come back for the bit from Paul Davidson, economist and journal founder, over the fold. Continue reading

Sydney 12 Noon Today

New Modern Money and Public Purpose Seminar at Sydney University this Friday afternoon (Australian Eastern time), with Bill Mitchell, Sean Carmody, and Peter Kriesler, on

“Macroeconomic Policy Making in Small, Open Economies: An Australian Perspective”.

More details here:


Please spread the word!

The Right Way to Pay for the NDIS

Ask US economist Warren Mosler whether the national disability insurance scheme should be paid for by a new levy or by spending cuts, and you’ll get a jarring answer – neither.

He’ll also tell you the question shows both the government and the opposition don’t really understand how public services are funded in a modern economy.

”Julia Gillard’s DisabilityCare does not require a tax at all,” Mosler says. ”Despite what most of us think, no modern capitalist government ever taxes to raise money to spend. Their real motive, even if they don’t know it, is to reduce aggregate demand and slow the economy.”

That means Tony Abbott’s insistence on spending cuts to return the budget to surplus is wrong too. ”When the economy is at less than full employment, spending cuts can only make matters worse.”

What’s really needed, Mosler adds, is both a simultaneous cut in taxes and an increase in spending to cover NDIS costs. That will restore what ought to be an essential fixture of Australian, and world, economies: good, healthy, productivity-enhancing deficits.

Read more: SMH

Whilst I have a few differences with the article, it is nice to see Modern Monetary Theory (MMT) get some time in MSM in Australia. I will say Centre of Full Employment and Equity (CofFEE) agrees with Warren Mosler as it was founded by his colleague Bill Mitchell, also a creator of Modern Monetary Theory. Together with L. Randall Wray, they make up the big three of MMT.

In my own small way I advocate MMT, there are those three and then they are the ones with the great PR skills who are Stephanie Kelton and Mike Norman. I do not always agree with the way the message is sold but I do agree with the message. MMT economists are a small but growing group.

Where is the Money Coming From?

As was discussed in the two previous posts, there is no financial need for these governments to borrow at all in order to fund their deficit spending.

The government has no need of funding. It is in a position to create and destroy its own money as it pleases. Whenever it transacts with the private sector – a ‘vertical’ transaction – money is either created or destroyed. Whenever the government runs a budget deficit or surplus, there is a net change in private-sector holdings of financial assets. In contrast, when private sector agents transact among themselves – a ‘horizontal’ transaction – there is no net change in financial assets, because such transactions always create a private asset and a matching private liability, netting to zero. The government can create or destroy net private financial assets at will; the private sector cannot.

The horizontal and vertical transactions are best illustrated by the following diagram.


So when reporters are asking where money is coming from to fund programs offered by political parties they are severely misguided.

The best example of this erroneous view can be pulled from this ABC 7.30 report: Funding black hole confronts both sides of politics where Chris Uhlmann states:

There are only two options to pay for them. Raise taxes or cut costs. Both carry risks.

This is a common mistaken refrain in wondering where the money is coming from as shown in the first 9 seconds of this video and highlighted in this article and some other more  recent announcements. Now Uhlmann is not wrong in saying the options he provide carry risks, he goes on to state the specific risks but for the private sector people on the end of either those option both are the equivalent of a tax hike.

That is not to say cutting costs is without its merit if it cuts cost on what is considered wasteful spending.  What is wasteful spending?  Well that’s a political decision.  Previously the Government has said some Defence expenditure is and currently the Coalition says the Schoolkids bonus is.

There is a third option called deficit expenditure and it carries a risk too.  That risk is high inflation.

So “Where is the Money Coming From?” is a really naive question.