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The Forum > Article Comments > Henry's upside-down economics > Comments

Henry's upside-down economics : Comments

By Alan Moran, published 27/5/2009

The Treasury chief, Ken Henry, simply doesn't understand how the economy works.

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So the solution is to put you in charge of the economy and all our problems will be solved. I don't know why the government hasn't thought of this already. Imagine the fount of all knowledge on the economy, and the man with all the answers, resides right here in our midst.
What an extraordinary waste of talent. Let's save money by getting rid of Treasury and all its bureaucrats and just appoint you to run the economy.
Simple.
Posted by shal, Wednesday, 27 May 2009 9:16:10 AM
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its funny how i never really click on buttons

but the article just seemed so out there..QUOTE<<This inability to predict investment drivers is the basic flaw in the Treasury models' medium and long-term forecasts.

Contrary to Henry's view,growth is not some preordained upward trajectory that might be interrupted,..but subsequently simply catches up on its trend...Still less is it a revenue stream that can be raided without undermining its fecundity...>>

remember this group has a DOT org website,..ie a govt body..critisising govt...wtf?..

i just had to click on the more button
http://www.onlineopinion.com.au/member.asp?id=45

found this
Institute of Public Affairs
http://ipa.org.au/
is an Institutional member of The National Forum

the page also has many other posts
but mostly negative of krudd and co

so being an institutional member is a cheap/affective way to get the spin heard/published..and dot org..means its govt?

by spin im meaning you need only look at the topic headings to see what this institute of public affairs...sounds almost like a govt body,yet clearly is allowed to ridicule govt bodies?...lol..

i should click on their link to find out what it really is..[a howhard creation?]...it could be a clever joke...but im not sure about its mission statement[or its powers]...lol
Posted by one under god, Wednesday, 27 May 2009 10:29:57 AM
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Isn't it a pity that One Under God didn't write something useful. Comments such as his/hers do so little towards an understanding of a topic. I am confident that One Under God should have something constructive to contribute - how about it, please?
Posted by peritech, Wednesday, 27 May 2009 10:44:03 AM
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If Treasury Head Ken Henry, the chief government adviser on the economy to Howard and now Rudd, doesn't understand the economy how come Australia is doing so well in the current global meltdown?

Incidentally, a .org domain name can be registered by anyone. The Institute of Public Affairs is a right wing think tank with no connection to government. It supports the Coalition in government and opposition.
Posted by Agnus, Wednesday, 27 May 2009 11:40:14 AM
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The problem seems to be Labor Governments , not much good at what they do , possibly the Drovers Dog might have made a difference , a better brand of thinker .
John Gorton would have made a difference to Oz politic with his Social Inclusion leanings , he would have had a calming effect on Labor People , instead we got Fraser who brought out the Ugliness and Pains in the electorate .
Hawk and Keating who were both too Rabid to be attractive anywhere , the ugly and arrogant philistines of Oz Gov .

Now we have a new type of Politician courted and captured by Rudd , Ken Henry .
Ken under Rudds Charm and Tutorledge can now make accurate predictions up to 10 Yrs hence !
Perhaps Mark Latham , Julia's friend , might be affording them the benefit of his extensive knowledge .

I don't know anything about Au Budgets but I bet it will take 30 years and 30% GST to pay out the Banks that lent the little Fidget Rudd 300 Billion .
Posted by ShazBaz001, Wednesday, 27 May 2009 11:45:29 AM
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The ALP is economically illiterate - that's why they always go in with a surplus and leave with a deficit.

I don't know enough about Henry to comment on his ability, but it seems that he and Rudd agree on the apparently out of step (with the rest of the world) predicitions on recovery; so, Henry has to be suspect.
Posted by Leigh, Wednesday, 27 May 2009 1:08:38 PM
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Gee, I thought for a while there that all the posters to OLO had gone bonkers after I had read the first few comments. Thanks to the next three, my faith in human nature has been restored. I would suspect that the only reason that Oz is doing as well as it is at the moment, is that previous governments have seen to it that the banking system has been reasonably well regulated as well as cosseted and their debts have not been allowed to get out of hand. That is not to say that they have escaped unscathed, but their ability to keep extracting fees and charges from their customers has been undiminished.

Unfortunately for the Labor government, neither they nor their advisers have a lot of experience out in the real world, with the exception of the PM's spouse and one suspects that she would have had a minimal input into the budget. Treasury forcasts, to me, seem way out in the realm of fantasy, but it the punters who buy shares all believe them, so that the present rise in the market may be short lived when reality sets in. The key to it all is unemployment which is rising steadily, both here and in China which Rudd and Henry think is going to be our salvation.
Posted by VK3AUU, Wednesday, 27 May 2009 3:10:59 PM
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"So the solution is to put you in charge of the economy and all our problems will be solved."

Shal, the author didn't say that. The point is not that this or that person should be in control of central planning of the economy. It is that no person, committee, board or authority can have the knowledge necessary to run the economy.

This is because the relevant knowledge of local conditions and subjective values is dispersed throughout 20 million people, and all the people overseas that they deal with. The knowledge set required for central planning to work is astronomically larger than is available to any planning authority, ever. Political solutions invariably tend to try to create artificial booms by manipulating interest rates. This has the effect of accelerating to the present, investment that would otherwise happen in the future. The result is a boom in the short-term, and a bust in the long term, by which time, the guilty parties are retired on the public purse and the result is unemployment, bankruptcy and the destruction of capital that would otherwise raise *everyone’s* living standard.

Economic planning should be decentralised in the hands of the people who own the property the subject of the economic plans.

Alan Moran
Good article, thanks. You are right: the state's economic planning bureacrats are guilty of utter economic primitivism that just happens to serve the interests of the political class as against everyone else in society.

By the way, ‘Deregulation Unit’ is a pretty unlovely name. What it's really about is repealing anti-social and oppressive behaviour by governments. Perhaps you try some benefit-selling: a change of name to “Freedom and Responsibility” unit?
Posted by Wing Ah Ling, Wednesday, 27 May 2009 4:14:50 PM
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I found this a very interesting article with a lot of profound comments.

It seems to me that borrowing and consumption got us into this mess, so how would further borrowing and giving away money for consumption help in any long term way? Even the money spent on infrastructure won't help a great deal except with short term unemployment.

What makes an economy strong is production, as America did 30 years ago, and Japan before their own bubble burst with unsustainable asset valuations. Does that sound familiar ? We have to make a big change in our philosophy and forget about living on debt. Debt is good when applied to production, but not for consumption. We need to save more and be more self sufficient and not rely on constant government handouts. It stifles free enterprise. We now have to pay out billions in interest, let alone the principle, for years to come as we mortgage our future.

I fear governments, not only in Australia, will continue with "Quantative Easing" with the printing presses firing up and a consequent surge in inflation and higher interest rates. This will hurt everyone. A little pain now is necessary for a cure later on.
Posted by snake, Wednesday, 27 May 2009 4:43:55 PM
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It would appear that Alan Moran is unaware that Ken Henry was chosen by John Howard, and that the Quango he is a director of is an offshoot of the Coalition.
I would be more interested in how Alan Morans Quango would address the GFC, as the Coalition don't appear to have any idea, whats so ever!
Posted by Kipp, Wednesday, 27 May 2009 5:34:44 PM
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Alan, You're an indefatigable ideologist of the hardline "market" position. I'm fascinated to imagine what your views are on market failure, indeed on whether such a thing exists.

Your end point about a "carbon tax designed to raise the price of energy and to thus reduce the competitiveness of our most efficient industries" is, yes, economically true, but hey - it also reflects your view of the world as one-dimensional, economic only.

I was in the audience at an Environmental Economics Conference in September 1990, in Sydney, at which you were one of the speakers. You got up and said that the solution to the Franklin River issue (as one example) was simply to put the river up for sale, and let the market decide.

I thought then, and I think now: you are an idiot savant. Perhaps you know a bit about economic theory, but your human and social perspective is zilch. You are autistic, a sort of idiot.
Posted by Glorfindel, Wednesday, 27 May 2009 10:19:47 PM
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Too many people are playing the man and not the ball on these comments. It's poor form.

Let's not get caught up with the identity of the author or IPA, or what they may or may not stand for. Let's judge the piece on its merits please.

Modelling and forecasting is a bogus exercise. People never get it right, in good times or bad. How many times did Costello underestimate the surplus?

People should put less faith in modelling and look more to the structural soundness of the economy. We must make sure that the economy is in a strong position, no matter what gets thrown at it.
Posted by Rowen, Thursday, 28 May 2009 3:09:34 AM
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Wing Ah Ling,

the headline for this article is
"The Treasury chief, Ken Henry, simply doesn't understand how the economy works."
He then goes on to argue that he knows what is needed and that Treasury does not.
My point (perhaps my bluntness was a tad overstated) is that this wasn't an attempt to argue another perspective. The author basically said i'm right and you (Henry) are wrong.
He makes an argument that trying to develop predictive models in rapidly changing circumstances is iffy and then proceeds to contradict himself by saying that a non interventionist approach should be adopted.
You can't have it both ways by saying there are unknown unknowns and things are too changeable to predict into the future, and then revert to free market dogma and say a particular ideolological approach will solve the problem.
Posted by shal, Thursday, 28 May 2009 11:11:51 AM
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Good call Rowan.
We can pretty much agree that:
-Borrowing for consumption is bad.
-Borrowing for investment is good.
-Borrowing beyond means to repay is bad whether for investment or consumption because someone else has to pay. (Whether it be the lender or another consumer or generation.)
-The free market can be "pumped" by unrealisticly low interest rates. This comes from the recognition that the money supply is regulated by people making estimates and following models.
-"Pumped" economies will deflate, unless that which is pumped is factories and other wealth producing entities.
-Lack of transparency fails to let people act rationally and allows the sharks to play profit games with public perceptions. Yes, this crash was seen coming and the smart ones did well. Perhaps we need to exclude *anyone* who did not make money from the last 18 months on the basis of lack of qualifications.
What we disagree on seems to mostly be the family political traditions, which is more tribal than rational, and the politics of safety: Unions for the unskilled laborers, small business support for the self employed and minimum tax and regulations for the inherited wealth set.
Even the hard right would agree that natural monopolies exist for which Government investment is appropriate. Borrowing to prop up the consumption bubble for another electoral term is, or course unwise.
I believe it will take a war or disaster to actually change course from here.
Posted by Ozandy, Thursday, 28 May 2009 11:15:25 AM
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Some interesting comments have been made on my article, which makes two points

The first is the extraordinarily callow nature of the Treasury modelling. Simply using a regression to forecast next year may work in a stable situation but it is meaningless if we are trying to estimate some time into the future especially in the context of major change in the world economic environment.

The second is that the modelling is almost devoid of any supply side. A form of stimulus is applied (strictly speaking not Keynesian since money supply is not – yet - increased). The stimulus is designed to replace the investment expenditure thought to be facing a shortfall by government expenditure in the form of hand-outs to those it thinks will spend on consumer goods.

The framework for this model rests on “accelerator” theory. Under this, a demand deficiency is countered by an injection of government funding which causes demand to rise and eventually to become self propelling as firms respond with increased investment.

The problem is that the demand injection comes either from creating money or from borrowing. In the first case there would be inflation and a painful clawing back of this using reduced government expenditure. If borrowing is the approach this will siphon off savings that would otherwise be used for investment and thereby cannibalise the available funds that would be available for investment as pockets of demand emerge and equipment might be replaced.
Posted by alan, Thursday, 28 May 2009 12:31:12 PM
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Shal
“He makes an argument that trying to develop predictive models in rapidly changing circumstances is iffy and then proceeds to contradict himself by saying that a non interventionist approach should be adopted.”

That is not a contradiction. It would be a contradiction if he said that trying to develop predictive models in rapidly changing circumstances is iffy, and is not iffy, both at the same time. It is not a contradiction to say that the tools of interventionism are defective, and that a non-interventionist approach should be adopted instead. This is because a non-interventionist approach does not involve the defects of central planning.

”You can't have it both ways by saying there are unknown unknowns and things are too changeable to predict into the future, and then revert to free market dogma and say a particular ideolological approach will solve the problem.”

That is not having it both ways, because you can have situations that are too complex to be centrally planned, and the most appropriate way of dealing with which, is to leave people free to choose what values they want to pursue, and what transactions to enter into. The function of predicting the future is left in the hands of a class of people – entrepreneurs - who are by definition exposed to the risk of loss for getting it wrong. This is entirely different from central planning, in which those calling the shots are not personally liable for the mistakes they make, and may even privately profit from the disasters resulting from their decisions.

It would be a recipe for confusion, and chaos, to think of the alternatives as being whether one ideology or another should be forcibly imposed. It is not mere “ideology” to deny that we we can make bread out of stones, can make wealth out of nothing by printing presses churning out paper money backed by nothing but government fiat. It is not a self-contradiction to call for the abandonment of central planning based on force-based monopoly, and to urge instead for freedom based on consensual transactions and private property.
Posted by Wing Ah Ling, Thursday, 28 May 2009 12:40:18 PM
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Wing Ah Ling,

We agree to disagree.
Posted by shal, Thursday, 28 May 2009 1:04:38 PM
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Ozandy
“Even the hard right would agree that natural monopolies exist for which Government investment is appropriate.”

The evidence or reason that something is a natural monopoly of government would have to be something other than the fact that government forcibly excludes competition in it, because that would be no argument, but mere force.

Similarly the fact that socialists think something is a natural monopoly of government is not evidence or reason, because socialists think everything is a natural monopoly of government, including the labour, freedom and property of everyone in society.

And then, if something is a natural monopoly of government, surely the reason must be that government enjoys some peculiar advantages in supplying it? But if that were so, then why would not people voluntarily pay to enjoy this advantage? If the only way they can be induced to pay for the service is to be threatened with being handcuffed or tasered, or locked in a cage, surely that is not much of an argument for the natural monopolists?

And then again, government entails a claim to a monopoly of the use of force, and to ultimate arbitration. But the people in government are still only human beings, with all the same imperfections as everyone else. They do not have superior knowledge, goodness, or capacity. The only thing that government can bring in to the equation that another party cannot, is the use of force.

So the argument that government enjoys a natural monopoly in something has to provide a justification that deals both with the ethical problem of basing social co-operation on force, and the practical problem that force does not intrinsically provide any more practical or economical solution than would be possible by consent.

So your mission, should you choose to accept it, is to say what provides the evidence or reason that shows a particular service is a natural monopoly of government? And please, no assuming what is in issue, nor appeal to absent authority
Posted by Wing Ah Ling, Thursday, 28 May 2009 5:07:21 PM
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Alan, while I do not disagree with the uncertainty surrounding the treasury forecasts, I really think we need to get past the notion that the federal government is revenue constrained and must tax or borrow before it can spend, don't you?

We both know that the government borrows while running a deficit for the purpose of draining excess reserves which would otherwise cause a major headache for the reserve in trying to set interest rates. They do not need to borrow to finance their spending. As you are aware.

The government has been draining out money by running up surpluses as a matter of policy, leaving running down private savings and running up private debt to finance economic growth. It seems likely that that private sector will now desire to net save again. How is the government going to run up surplus after surplus, year after year without doing the kind of damage that will cause the automatic stabalisers to drag us back into deficit again? Of course, in our system using non-convertable fiat currency, federal government surpluses are not in any way, shape or form, national savings. As you are aware.
Posted by Fozz, Thursday, 28 May 2009 7:43:38 PM
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If anyone in power understood the economy, we wouldn't have the problems we are seeing here and world wide. We are told our economy is in good shape, if that were so, why is poverty increasing, unemployment, business collapses, homelessness, health and transport collapsing along with just about every form of major infrastructure and services.

Then we have the scenario of blaming the labs or the libs, when in reality they are one and the same and have been since the late 1970's. What people are failing to understand about economic is it's complete reliance on many environments of life, sadly it has failed to consider any of them in it's modeling and outcomes. You can have environments without economies, but you can't have economies without environments. The most important environment we need to develop an economy for is the future, currently economists are desperately trying to prop up the past economic environments which we all know are past their use by date and dying. Each daily step society takes into the future, it gets further away from past practices, leaving those supporting the past without an environment to work in.

That's what Australia and the rest of the world is facing now. The author is a supporter of the past, so has no understanding of what form of economy is required for the future, just as Henry and the rest of the political and bureaucratic inept don't.
Posted by stormbay, Friday, 29 May 2009 7:57:09 AM
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According to Fozz’s theory, wealth is something that comes out a government printing press. Without this necessary and wonderful device, we would all be lying down in the gutter with our tongues hanging out, wondering how productive activity could ever be possible. Ordinary mortals face the problem that resources are scarce, but gods and politicians face no such constraints and have no cares themselves. We have only to wish for something, for the super-human fantasm of the state to grant it, which they do by forcibly taking property from A, beating him into submission if he resists, and then giving it to B. This goes by the name of ‘social justice’.

Stormbay
“You can have environments without economies”

Only if you don’t have human beings.

The purpose of economic activity is to produce stuff that people value to consume to increase their vitality or enjoyment. You seem to be under the impression that that is somehow superseded. Perhaps we should be like the old monks, live on water of the cool well in a little hut in a clearing in the woods, and live on water-cress. But you yourself could take a small step closer to a world of romantically pristine environment, uncontaminated by human noxious pests, by not using electricity and capital to post your opinions on the internet.
Posted by Wing Ah Ling, Friday, 29 May 2009 3:22:25 PM
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I spent 2 years at uni studying economics and here are a couple of helpful definitions for the uninitiated.
What's the difference between a politician and an economist?
The politician knows when he's lying.
Definition of a Economist: a dysfunctional sooth sayer. Lousy at predictions but boy can he tell you what happened.
Definition of think tank economist a dysfunctional sooth sayer still lousy at predictions but one who can tell you why it happened.

Now to the topic at hand what I and a lot of people want to know is if all these thunk tanks are so smart how come the credit crisis happened and happened because of a lack of regulations (isn't that what the authors whole reason for his efforts to deregulate)

It seems to me that we need a system that can be predicted not some dysfunctional practice that has more to do with alchemy than science.
Science when facts can be tested, predicted, reproduced and meets all the facts.

This article is more about political supremacy that fact and good of the country
Posted by examinator, Friday, 29 May 2009 4:04:15 PM
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Wing Ah Ling,

If you disagree with these fundamentals then you do not understand how our modern monetary system works. I hasten to add that while my socio/political outlook makes me consider myself a (democratic) socialist, that has no bearing on what I am describing. This IS how the system functions. It is neither "left wing" nor "right wing".

The Australian government runs a fiat money system. The currency is non-convertable - they do not promise to convert it to US dollars or gold or anything else. Australian dollars enter the economy when the federal government spends. They come from nowhere - there is no stock of previously taxed dollars held by the federal government (state governments are another matter). The government simply credits bank accounts in the commercial banking system and the sums appear. When they tax , they do the opposite. They simply debit bank accounts - the money deducted does not go anywhere. It is EXTINGUISHED.

If you were to pay your taxes directly to the federal government in cash, you would go to the central bank and give them your bag of $100 bills. They would give you an official receipt stating that you had fulfilled your tax obligations for that year. You would walk out with the receipt, they would take the bag of $100 bills you left - and tip them straight into a shredder. Once taxed by the federal government, they are no longer money. They are null.

In the federal sphere, taxes do not fund anything, surpluses are NOT national savings and deficits cannot be descibed as debt. I am approaching the word limit so I will stop here.
Posted by Fozz, Friday, 29 May 2009 5:36:50 PM
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Fozz
I don’t deny any of your propositions of fact, and believe I do understand the modern monetary economy. By all means, do tell us more.

What you say is good as far as it goes, but it does not go far enough. Because it does not go so far as to give an account of the *actual* wealth that is transferred by medium of fiat money, or money substitutes.

The argument is, in a nutshell, that the fiat money you describe is grafted onto a pre-existing system of (commodity-based) money, without which fiat money would be impossible. From then, the continuous printing of additional money is basically a legal continuous fraud by which the government dilutes the value of the prior stock of money in the hands of the population, to its own benefit, in a direct conflict of interest with the subject population. Furthermore, the act of fraud itself generates the cycle of boom and bust which benefits the political class while causing hardship and injustice to everyone else.

examinator

“ how come the credit crisis happened and happened because of a lack of regulations …. It seems to me that we need a system that can be predicted not some dysfunctional practice …. Science when facts can be tested, predicted, reproduced and meets all the facts.”

Just as it is a law of physics, for the same reason it is a law of economics that you cannot make something out of nothing. We have only to describe this law to realize it is true.

The science, and the prediction, and the facts, are all on one side of the argument, which has never been refuted.

But this truth is unpopular because it contradicts what politicians and the masses want to hear for a number of reasons.

The masses don’t want to hear it because of
1.the infantile mammalian desire for the teat – something for nothing;
2. the primitive desire of man for magic to be true. This superstitious faith is reposed in modern government
Posted by Wing Ah Ling, Saturday, 30 May 2009 2:29:18 AM
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3. Also if people can choose whether to obtain wealth by work or by plunder, they will choose what is easier. Government is a machine for making plunder safe and easy, because government is built on forcibly taking people’s property without their consent – taxation. So people believe that, by voting for goods paid for by government printing paper money, they are getting something for nothing. They aren’t. They are stealing.

4. And also, the socialist belief system encourages a belief in something for nothing based on demonstrated falsehoods, fake moral superiority, and the use of force - the law.

The politicians don’t want to hear that they can’t make something out of nothing because 1. They believe they have the power to re-shape society at will, ignoring economic laws about the scarcity of resources
2. they have nothing else to offer but the violation of property rights, and so even if they understood that they can’t make something out of nothing, still they would and do deny it.

It is either simple ignorance, or deliberate dishonesty, to say that the problem is caused by a supposed mysterious “lack of” regulation. As a matter of science, the problem is not caused by a “lack of regulation”. Government currently confiscates about 40 percent of everything everyone produces every day and spends *the entirety of it* on regulations to force prices to some different level. This has perfectly predictable, scientifically known consequences: a privileged greedy boom, and then a depression with unemployment, bankruptcy, moral injustice and social chaos. No-one has ever refuted this.

The problem is caused by attempts at central government planning of the economy, which has *always* failed. Politicians and interventionists of all stripes keep on ignoring the economic science, that is all.

If you want science, predictability *and* a fair system, the solution is to abolish governmental control of the money supply, and all the privilege and injustice it spawns.
Posted by Wing Ah Ling, Saturday, 30 May 2009 4:21:57 PM
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Wing Ah Ling

Commodity money or commodity-backed money are things of the past, as you are aware. The problem is that many people's understanding of how the economy functions is based upon systems that no longer exist. They logically assume restrictions that aren't there because the modern fiat money system has rendered them largely irrelivent. Government does not need to acquire gold to expand the money supply. The central bank does not need to contract the economy for the purpose of defending a pre-set exchange rate. The currency is non-convertable with a floating exchange rate.

Actual wealth is created every time the government spends. If government were to spend $50 million on a port expansion enabling the increased export of coal, iron ore, gas etc, and creating many jobs in the process, how would this not create wealth? There is no logic behind the oft repeated claim that government cannot create wealth, only re-distribute it and that only the private sector can create wealth. The opposite would have a greater ring of truth - the private sector cannot create wealth until the government spends the currency into existence.

I find interesting your proposal that the modern monetary system causes the cycle of boom and bust. Logically then, we should not have had boom and bust before the fiat system. But when we look back, we see savage cycles of boom and bust when currencies were backed by gold. One of the worst culprits for the ups and downs of the cycle blowing out into serious recession in modern times is the habit of federal government for trying run never-ending and ever increasing surpluses. They are not saving a cent, they are simply draining the economy.
Posted by Fozz, Saturday, 30 May 2009 9:46:10 PM
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I can't agree with a couple of the article's statements."In reality, such a rise in immigration could have a negative effect on GDP, as hands and mouths create wealth only when combined with skills, infrastructure and capital investment." For 30 years, I've been told by successive governments that immigration has a positive effect on GDP thanks to the new arrivals buying or renting houses, buying a car, furniture, clothes and a host of new consumables needed for their new life. As well, many work in jobs that locally born Australians won't work in, thereby making their new employers more efficient and presumably more profitable.
Alan then says: "This policy of borrowing from the future for consumption now is the opposite of what is needed to create sustainable growth and jobs." The opposite of borrowing from the future for consumption is to borrow from the present (I doubt if borrowing from the past is possible) and spend it some years into the future! Sorry, this doesn't make sense to me. What governments around the world have tried to do is stimulate their economies while creating confidence in the minds of the population that life can return to normal provided we don't all shut up shop, stop spending, sack employees and generally go into crisis mode. Rudd and friends may have been too generous in giving money to people who weren't in need or who were likely to spend it inappropriately, but he had no choice but to borrow from the future to stimulate productive employment and consumption in the present.
Posted by Bernie Masters, Monday, 1 June 2009 10:39:09 AM
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Bernie
“The opposite of borrowing from the future for consumption is to borrow from the present … Sorry, this doesn't make sense to me.”

It’s called savings. It, and not spending, is the basis of capital accumulation.

“….he [Rudd] had no choice but to borrow from the future to stimulate productive employment and consumption in the present.”

You are assuming the whole Keynesian story is correct. But if it was correct
a) The crisis wouldn’t have happened in the first place; Keynesian chronic manipulation of interest rates to ‘stabilise’ the economy and maintain ‘full employment’ obviously failed.
b) the Keynesians would have seen the problem coming. Yet as recently as a year ago both 'Helicopter Ben' Bernanke (Fed) and Paulson (Treasury) were denying there’s a problem and saying the economy is fine.
c) The Keynesians’ fixes – handouts to criminals and parasites - would have worked.
d) If we can stimulate the production of wealth without any countervailing downside – make something out of nothing – why do it only in a depression? Why not do it all the time? Hell, why not make us all independently wealthy and have done with it?

Keynesianism is wrong. Keynesians are merely government-funded high priests who tell the masses that Pharaoh can do no wrong, even while he defrauds them.

It is precisely the government’s addiction to inflationary finance – borrowing from the future – that causes first the greedy boom, and then the unavoidable bust.

Government cannot do *anything* to fix the problem caused by its own manipulation of the price of money.

For every job the government ‘creates’, more than one job must be destroyed.

‘The money you get from Canberra is the money you sent to Canberra, minus freight both ways.’

Fozz
“But when we look back, we see savage cycles of boom and bust when currencies were backed by gold.”

Government has an interest in endless inflation. Even before central banking and fiat currency, governments sponsored booms and busts by privileging banks from redemption on demand; in exchange for a cut of the loot.
Posted by Wing Ah Ling, Monday, 1 June 2009 3:22:53 PM
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Re Treasury heads/Ken Henry:

Australia has been fortunate in having a run of very good heads of Treasury, who generally have sought to give the best professional advice they could. I would say that when I worked in Canberra 1985-91, the economic policy elite tended to favour the ALP, but their economics were not based on ALP/ACTU policy. I would call them "mainstream" - like perhaps 98%+ of policy economists in industrialised countries (at least), they found on the basis of theory and evidence that compared to any alternatives market-based economies and free trade enabled higher living standards and more efficient use of resources, and a greater range of opportunities for individuals. They also allowed more government spending (through faster growth and higher productivity), although economic growth tends to be greatest when government's share of GDP is relatively modest (around 22% according to many studies).

Ken Henry is a nice guy and a good economist. He worked for several years as then Treasurer Keating's advisor, which suggested to me a stronger political commitment than Treasury heads generally would have. Certainly, he was Treasurer for Howard, but there are some indications that he is operating more politically under an ALP government, many commentators think that he has spoken and acted in a political manner which was not apparent in his predecessors and that his economic approach is influenced by his political leanings.

I agree that Treasury's assumptions on growth and spending restraint are heroic, and that the debt splurge which fails to target increased efficiency (e.g. by addressing the welfare-work transition) or increased productivity (well-directed infrastructure spending) will be very costly in terms of higher taxes and interest rates and lower employment than would otherwise be the case. Any short-term gains from the cash-splash will be far outweighed by medium-longer term costs.
Posted by Faustino, Monday, 1 June 2009 9:53:59 PM
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