Tag Archives: Economics

Sensible Macroeconomics

hockeydebt

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.

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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.

vertical_horizontal_relations

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.

Your Kids Will Not pay $94 Billion of NBN Debt

The Coalition has announced their broadband plan for the 2013 election and have a nice little infographic to go with it.
Infographic

Unfortunately for them I don’t think it is selling the message they wish it to do. I am sure many would dispute the price tag as well. Nonetheless that message is what we shall discuss.

Some critics of fiscal policy claim that by running large budget deficits, governments risk creating unsustainable levels of public debt and a burden on future generations. In reality, budget deficits create no such debt burden for societies whose governments are monopoly issuers of flexible exchange-rate fiat currencies. The debt of these governments will never become unsustainable unless for some inexplicable reason they decide to borrow foreign currency rather than their own fiat money.

In fact, as was discussed in the previous post, there is no financial need for these governments to borrow at all in order to fund their deficit spending. The reason, in practice, that they do issue debt to match their deficit spending is to meet voluntarily imposed legislative requirements that are in place for operational or political reasons – none of which are indispensable – but not financial reasons.

This clearly shows the impracticality of leaving any debt to your children or your grandchildren. I am not saying the Coalition is economically illiterate, they are not, just misguided.

Not all governments are so fortunate. The Spanish and Greek governments, for instance, don’t have the same policy freedom because they have committed themselves to operating under a common currency, relinquishing the right to issue their own currencies as they see fit. National governments who maintain a fixed or pegged exchange rate similarly give up some policy freedom. Lower levels of government, such as local or state governments, also lack such freedom because they are mere users of the currency, as opposed to issuers of it. However, for the governments of the U.S., U.K., Japan and many other countries, there is plenty of scope to pursue as much deficit spending as is necessary to facilitate economic recovery.

None of this is to suggest that debt is without consequences. But the debt that is problematic is private debt, not public debt. Unlike the government, private households and firms really do need to fund their spending. A household can’t simply credit its bank account on whim; nor can a private firm. When private debt can’t be paid, economic crises can occur, as recent events have made clear.

This is an adaptation from Heteconomist on Budget Deficits and Savings

Government Debt is a Problem

Australian Modern Monetary Theorist Bill Mitchell has explained in an eye-opening post how the private-sector desire for bonds was made very evident in his country in the early 2000s during the period of a conservative government that oversaw ten budget surpluses in eleven years. Since the budget was in surplus, it was initially supposed that there was less need to issue government debt – the assumption being that the purpose of debt is to fund budget deficits. The assumption was quickly revealed to be unfounded. The drying up of government debt caused disquiet in the financial community, which suddenly had less access to risk-free government bonds.

The government’s response was for the central bank to sell bonds (issue debt) even though there was no budget deficit. This should have demonstrated to orthodox economists once and for all that the issuance of public debt has nothing to do with funding government net spending.

In short, 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. Private-sector agents are financially constrained; the government is not.

This is an extract from Heteconomist on the Social Significance of Money.

Understanding Modern Money

Understanding Modern Money Operations is Easy

1. Dollars are created when government (and their central banks) spend. Contrary to popular belief, governments DO NOT NEED to collect taxes or to borrow before they spend. They can simply create dollars from thin air.

2. Too much of the latter sort of “money creation” leads to excess inflation, and too little leads to households not having what they regard as enough money. So spending declines and unemployment rises.

3. It follows that attempting to balance the budget or avoid deficits or anything of that sort is a TOTAL AND COMPLETE waste of time. It’s pointless. If unemployment is excessive, government needs to create money and spend it (and/or cut taxes). Conversely, if inflation is excessive, government needs to do the opposite: that is, withdraw money from the private sector via a budget surplus, and “unprint” the relevant money.

(h/t Ralph Musgrave)

Newstart and DSP Allowances: the brass tax

A guest post by Mick Peel

People reliant on pensions and benefits are recognised as being amongst the poorest in our community. Age and disability pensioners have always received higher payment rates than the unemployed. But since 1997, when the Howard government started to index pensions to average weekly earnings but continued to index unemployment payments to the consumer price index, the gap has widened significantly.

Pensions are indexed in a different manner to Newstart. Pensions are indexed to Male Total Average Weekly Earnings (MTAWE), the Consumer Price Index (CPI), or the Pensioner and Beneficiary Cost of Living Index – whichever is greater. Newstart is only indexed to the CPI. In September 2011, the MTAWE increase was 4% while the CPI increase was 2.5%, which resulted in an increase of $10 for pensions and $6 for Newstart.

Overview

Following the recommendations of the Harmer Review, in September 2009 the federal government increased the single rate of Age Pension by more than $35 per week – one of the largest pension increases in Australian history. This was a welcome change that significantly reduced income poverty among the aged. However, this further widened the gap between Newstart and pensions to the point where the shortfall is now nearly $266 per fortnight. In 1997, a single unemployed person received 92% of what was paid to a pensioner; that ratio is now 65%. There has not been a ‘real’ increase (apart from inflation) in Newstart Allowance since 1995.The Newstart Allowance is the lowest unemployment payment in the OECD for a single person on an average wage who has just become unemployed.[1]

Since 1996, payments for the single unemployed have fallen from 23.5% of the average wage for males to 19.5%. Furthermore, the level of Newstart for a single person has fallen from around 54% to 45% of the after-tax minimum wage. Newstart has fallen from 46% of median family income in 1996 to 36% in 2009-10.[2]

Currently, single unemployed adults receive $490 per fortnight in Newstart payments, or $35 per day. If they’re renting privately, they’re entitled to up to $120 per fortnight in rent assistance. But, to get that amount their rent has to be more than $267 per fortnight, leaving them with just $24.50 per day for all other costs.

Analysis

The real disposable incomes of Newstart recipients have been flat for the past couple of decades, while the real disposable incomes of minimum wage workers have increased modestly (compound annual growth rate = 0.7%). Full-time workers on average earnings have seen steady real income growth (compound annual growth rate = 1.7%), pulling away from minimum wage workers and from Newstart recipients.[3]

dollarcomparisons

[1] Australian Council of Social Services, 2011 http://acoss.org.au/images/uploads/ACOSS_Poverty_October_2011.pdf

[2] Prof Peter Whiteford, ‘Paltry Newstart Allowance is fast becoming a poverty trap’ 20 April 2012: http://theconversation.edu.au/paltry-newstart-allowance-is-fast-becoming-a-poverty-trap-6218

[3] “Newstart recipients” refers to adult recipients with no dependants and no income other than their Newstart payment. Similarly, “DSP recipients” are single, working-age adults who are wholly reliant on their pension. ‘Minimum wage worker’ refers to a full-time employee employed for 38 hours per week at the National Minimum Wage or its historical antecedent, which is taken to be the C14 rate in the Metals award; the worker has no other income and lives alone.

DSP recipients’ incomes started out at around the Henderson poverty line and ended up at the same point, but lagged behind the line for a decade and a half or so.[1] The gap between Newstart recipients’ income and both of the poverty lines has grown, while the gap between both lines and the income of a minimum wage worker has become smaller.[2]

incomecomparison

[1] Henderson poverty line from the Melbourne Institute. Relative poverty line based on ABS 6523 (median equivalised disposable household income).

[2] We don’t have an official poverty line in Australia, be it an absolute line as in the US or a relative line as in Europe.

In short, Newstart recipients’ real incomes have been flat, while those of full-time workers and DSP recipients have grown. The gap between the incomes of people on Newstart and minimum wage workers has grown; the gap between Newstart recipients and their counterparts on DSP has grown further.

The problems faced by the unemployed were recognised by the Henry Review of the tax system, which highlighted the need for a principles-based approach to setting payment levels: “Establishing adequacy benchmarks for transfer payments not considered in the Pension Review would make the system more robust, particularly if the benchmarks were preserved through a common but sustainable indexation arrangement.” This “would mean an increase to base rates for single income support recipients” on Newstart.

The Henry Review also recommended that the maximum rate of rent assistance should be increased and the rent maximum should be indexed by movements in national rents.

Source note: Calculations via Matt Cowgill at the ACTU – real incomes take into account personal income tax liability, the Medicare Levy, the LITO, and the BTO. “1991″ refers to September 1991, with the tax parameters for the 1991-92 fiscal year; each subsequent year uses the same timing. Payment rates from FaHCSIA. Minimum wage rates from FWA/AIRC. Personal income tax rates and thresholds from the ATO. LITO amount and thresholds from the Income Tax Assessment Act 1936. AWOTE from ABS 6302. CPI from ABS 6401.