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.

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.

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.

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.

Wing Ah Ling,

We agree to disagree.

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