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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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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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