Myth about Budget deficits

[TheGreatBarryB]

This from Ross Gittins article today deserves its own thread. Many hear need to read it and fill in a huge gap in their basic knowledge of all things to do with economics.

Worrying about the budget going into deficit is like being told a friend has been killed in a car crash and then inquiring about the fate of the car. At such times there are more important things to worry about. National government budgets are a means to an end, not an end in themselves. They're intended to act as a kind of shock absorber. When the economy turns down because businesses and households cut back their spending, the budget is intended to move into deficit automatically because this has the effect of cushioning the economy's fall.
Conversely, when the economy is booming because everyone is borrowing and spending, the budget is intended to move into surplus automatically because this has the effect of holding the economy back and so limiting inflation problems.
During the fat years, when the budget is in surplus, the excess funds are used to repay the debt incurred during the lean years when the budget was in deficit.
Because this process tends to occur automatically, trying to stop the budget falling into deficit during a recession would involve making cuts in government spending or increasing taxes at a time when the economy is on its knees.
This would be stupid because it would make the economy even weaker. And by making the economy weaker it would be self-defeating, making the deficit bigger rather than smaller. Thanks to the long boom and the consequent long run of budget surpluses we have completely eliminated the federal s debt.

 

[Fire]

I don't think anyone here is saying they want a surplus.

What they are saying is that they have an issue on where the deficit is going.

 

[TheGreatBarryB]

I don't think anyone here is saying they want a surplus.

What they are saying is that they have an issue on where the deficit is going.

Come on mate. How many arguments/comments have been posted on here complaining simply that "we had a surplus, now we have a bloody deficit" and that that in itself is irresponsible or going to lead to the end of the world?? Far far too many.

 

[Financialpanther]

I don't think anyone here is saying they want a surplus.

What they are saying is that they have an issue on where the deficit is going.

Agreed - I recommend going into a surplus if it means helping the economy along in tough times. The trouble is that I have serious doubts that giving $14b in cash payments to punters is the way of doing it. All we are doing is giving money to banks who won't lend (see liquidity trap).

 

[Fire]

Come on mate. How many arguments/comments have been posted on here complaining simply that "we had a surplus, now we have a bloody deficit" and that that in itself is irresponsible or going to lead to the end of the world?? Far far too many.

I can't recall any.

I'm sure there would be some, but nowhere near enough to start a thread about this.

TBH, I think you are completely missing the point.

 

[TheGreatBarryB]

I can't recall any.

I'm sure there would be some, but nowhere near enough to start a thread about this.

TBH, I think you are completely missing the point.

Stimulating spending with handouts. Yes some will be saved but a lot will be spent as intended. Money on schools, housing, railways and roads. Some have miised out e.g pensioners that will most likely be looked after in the May budget. What point am I missing?

What they are saying is that they have an issue on where the deficit is going.

And where is it going??

 

[Fire]

Stimulating spending with handouts. Yes some will be saved but a lot will be spent as intended.

Ok, and what is this going to do, apart from a short postponement of some bad numbers? Are we planning on doing this every two months for the next 6-7 years?

Money on schools, housing, railways and roads.

Hooray, something tangible. I am all for this kind of stimulus. Investment in long-term projects that will have a far longer lasting impact on stimulating the economy. More please.

Some have miised out e.g pensioners that will most likely be looked after in the May budget.

No one should be looked after in such a manner. A welfare nation is a bad thing, remember?

What point am I missing?

Considering everything you have written above, its clear that you are missing the point.

No one wants a surplus. The uproar is coming from where the money is going.

No one wants a surplus.

No one wants a surplus.

Repeat it and you might realise the difference between not wanting a surplus, and not wanting the deficit to be pissed into the wind.

And where is it going??

Largely into temporary consumer spikes that will ultimately achieve nothing. Not even theoretically.

 

[Lach72]

Imagine the metro Sydney could have with that sort of cash.
A footy stadium for Perth

 

[TheGreatBarryB]

Ok, and what is this going to do, apart from a short postponement of some bad numbers? Are we planning on doing this every two months for the next 6-7 years?

Keep a lot more people in jobs. People spend, businesses make money, businesses may put off sacking more people.

Figures just released say retail sales are up 3.8%. Biggest rise in 8 years. Prediction was for 0.4%. Assume it will be more next quarter.

Hooray, something tangible. I am all for this kind of stimulus. Investment in long-term projects that will have a far longer lasting impact on stimulating the economy. More please.

So a tick here, this accounts for two-thirds of the spending. Are you saying then you are agreeing with the majority of the package? So why are you whinging?

 

[Fire]

Keep a lot more people in jobs. People spend, businesses make money, businesses may put off sacking more people.

Duh.

What will it mean come July? What will it mean at the end? Will it have made a difference, or will it jsut be a waste of money?

It will eb a waste of money. Come July it won't mean a damned thing. It is a treatment for a symptom of the financial crisis, not a cure for the disease.

Figures just released say retail sales are up 3.8%. Biggest rise in 8 years. Prediction was for 0.4%. Assume it will be more next quarter.

Magic. I never claimed the package would have no impact. But its a meaningless impact. Meaningless because of the reason I outlined in my last paragraph.

So a tick here, this accounts for two-thirds of the spending. Are you saying then you are agreeing with the majority of the package? So why are you whinging?

Is this including 'infrastructure' spending like the home insulation? Lets pretend this is genuine infrastructure spending, that's still totals around 15 billion in total going to waste. I consider wasting 15 billion dollars significant enough to make me say something on an Internet forum.

 

[Ripper]

https://www.quadrant.org.au/blogs/qed/2009/02/the-dangerous-return-to-keynesian-economics


[

B]The Great Depression [/B]
The history of public policy during recessionary periods has a number of lessons to teach, assuming we are capable of learning from them. In Britain, economic policy during the Great Depression saw the application of a full-scale classical approach. A policy of balancing the budget and the containment of expenditure was adopted. By 1933, the budget had been balanced and it was from 1933 onwards that Britain emerged from the downturn of the previous four years.
It is worth noting that it was balancing the budget that was seen to have made the all-important difference. In rejecting deficit financing during his budget speech of 1933, the British Chancellor of the Exchequer, Neville Chamberlain, made this explicit statement:
At any rate we are free from that fear which besets so many less fortunately placed, the fear that things are going to get worse. We owe our freedom from that fear largely to the fact that we have balanced our budget.
The same story could be told about Australia, where the Scullin Labor government made the decision in adopting the “Premiers’ Plan” which sought a cut in public spending, a return to budget surplus and cuts to wages. In the light of later Keynesian theory, nothing would have been seen as less likely to have achieved a return to prosperity, but a return to prosperity was most assuredly the result. All this is perfectly captured by Edna Carew (The Language of Money,1996):





Certainly it was “later” criticised as overly deflationary after the depression had passed and Keynesian economics had become the vogue, but at the time, while the Great Depression was an actual fact of life, rather than it having been criticised, this was the consensus view of the economics profession of Australia. And it worked. Australia was amongst the first countries to recover from the Great Depression. The trough was reached in 1932 and from then on there was continuous improvement year by year.
Contrast the English and Australian experience with the United States. Roosevelt’s New Deal applied a “Keynesian” prescription before Keynes had so much as published a word. From 1933 onwards, public works, increased public spending and deficit financing were the essence of economic policy. And with what results?
The data in the table below show the unemployment rates in the United States, the UK and Australia between 1929, the last pre-depression year, through to 1938, the last year before England and Australia went into the war.

The more I read the more convinced I am that the main stream economists have been taught the wrong theory

 

[Richo83]

Imagine the metro Sydney could have with that sort of cash.
A footy stadium for Perth

Something that would make money and jobs. A key winner. Fire is right, alot of the issues are whats going to be done with this money, not necessarily that something is going to be done.

 

[acker]

Duh.

What will it mean come July? What will it mean at the end? Will it have made a difference, or will it jsut be a waste of money?

It will eb a waste of money. Come July it won't mean a damned thing. It is a treatment for a symptom of the financial crisis, not a cure for the disease.

Probably does to someone who might have hit the unemployment queue in April/May if the stimulus doesn't get passed through the senate.

Is this including 'infrastructure' spending like the home insulation? Lets pretend this is genuine infrastructure spending, that's still totals around 15 billion in total going to waste. I consider wasting 15 billion dollars significant enough to make me say something on an Internet forum.

How about stopping the pretending and posting some links to verify your figures

Malcolm Turnbull is talking about keeping the insulation part of the policy anyway.

In the meantime, the announcement that $14.7billion will be spent on schools, $6.6billion on 20,000 new homes, $3.9billion to insulate 2.7 million homes and $890million for road repairs and infrastructure put a rocket under the share price of companies such as CSR, which has an insulation division, and construction giants Leighton Holdings and Lend Lease.

http://www.theaustralian.news.com.au/business/story/0,28124,25004617-36418,00.html

 

[TheMase]

Probably does to someone who might have hit the unemployment queue in April/May if the stimulus doesn't get passed through the senate.

So they will join the queue in August instead. We are just prolonging the inevitable by creating consumer demand via debt. This debt serves no purpose other than to continue the status quo. It is not sustainable.

Long term infrastructure programs are a good idea provided they have real benefit, and long term economic productivity increases.

These hand outs will not get the world economy buying our resources at the levels (and price) that they were, and therefore the government is going to have to face a tough reality at some stage.

Either that, or devalue our currency to the point it is worthless.

Am I that far off the mark?

 

[medusala]

Because this process tends to occur automatically, trying to stop the budget falling into deficit during a recession would involve making cuts in government spending or increasing taxes at a time when the economy is on its knees.

There is a world of difference between what occurs automatically and a government wasting billions on packages which do stuff all.

Maybe the cheerleaders should dwell on that.


And Ripper is spot on re Keynes. Time and time again that policy has not worked.

What is the definition of insanity?

This time it's different. Sure it is.

 

[Clay Davis]

Keynes didn't even advocate deficit spending!

 

[Fire]

This time it's different. Sure it is.

But, we've never seen anything like it! All the previous knowledge is out the window! Capitalism has failed us! The stimulus will save our jobs! We can pretend this isn't happening! Lalalalalala!

 

[acker]

So they will join the queue in August instead. We are just prolonging the inevitable by creating consumer demand via debt. This debt serves no purpose other than to continue the status quo. It is not sustainable.

3-4 months makes a bloody big difference if they are trying to sell out of a house to downsize to a smaller mortgage.

It also makes the gap of time between not having a job and having a job less. And the amount of unemployment benefits we have to pay them.

Then we have business, 2-3 months will be the straw that breaks the camels back in a lot of their cases. Yes a lot of them have saved rainy day reserves just like a lot of the employees have saved rainy day reserves in both cases that will keep some businesses ticking and mortgages getting paid.

But they are not infinite indefinite amounts, and start up costs of business and re-employing are costly if we go cold turkey and let them go to the wall.

It also slows the time it takes for Australia's corporate and personal tax receipts to recover.

Long term infrastructure programs are a good idea provided they have real benefit, and long term economic productivity increases.

These are ones that are ready to go not after a heap of impact studies in 2012 while the US economy is back on track kicking goals sucking our best and brightest employers and employees over there to work on them.
But 2009/2010 in the middle of the economic storm

These hand outs will not get the world economy buying our resources at the levels (and price) that they were, and therefore the government is going to have to face a tough reality at some stage.

If you bought your house for $300000 I doubt you are going to give some arseclown offering you $50000 much time of day if they offered that on your asset.
Why the hell should Australia discount our non-renewable assets "our resources"
It's not like they are going anywhere during the downturn.
The world's running out of most of them, so obviously we won't go stupid discounting them.
Handle them right and the debt will look like pidgeon poop.

Either that, or devalue our currency to the point it is worthless.

Am I that far off the mark?

According to the CIA World fact book updated 22-1-2009

YES

Australia has an enviable, strong economy with a per capita GDP on par with the four dominant West European economies. Emphasis on reforms, low inflation, a housing market boom, and growing ties with China have been key factors over the course of the economy's 17 solid years of expansion. Robust business and consumer confidence and high export prices for raw materials and agricultural products fueled the economy in recent years, particularly in mining states. Drought, robust import demand, and a strong currency pushed the trade deficit up however, while infrastructure bottlenecks and a tight labor market constrained growth in export volumes and stoked inflation through mid-2008. The unwinding of the yen-based carry trade in late 2008 has contributed to a weakening of the Australian dollar. Tight global liquidity has challenged Australia's banking sector, which relies heavily on international wholesale markets for funding. The economy remains relatively healthy despite falling export commodity prices. The government plans to counter slowing growth in 2009 with fiscal stimulus efforts.

https://www.cia.gov/library/publications/the-world-factbook/print/as.html

 

[TheGreatBarryB]

There is a world of difference between what occurs automatically and a government wasting billions on packages which do stuff all.

Maybe the cheerleaders should dwell on that.

Prove it or offer a better alternative with detailed analysis and show that the alternative will do better than the Govt packages.

 

[luthor]

So they will join the queue in August instead. We are just prolonging the inevitable by creating consumer demand via debt. This debt serves no purpose other than to continue the status quo. It is not sustainable.

Long term infrastructure programs are a good idea provided they have real benefit, and long term economic productivity increases.

These hand outs will not get the world economy buying our resources at the levels (and price) that they were, and therefore the government is going to have to face a tough reality at some stage.

Either that, or devalue our currency to the point it is worthless.

Am I that far off the mark?

I'd say you're spot on.

I haven't got an issue with the spending on infrastructure but this crazy idea of throwing money at consumers to "stimulate" the economy is just daft.

The stupid "consumers" will piss it up against the wall and the smarter ones will almost certainly use it to reduce debt (mortgages, credit card debt...etc)

In neither case will the "spending" do anything tangible to "stimulate" the economy

This is almost a given, considering the climate of fear the Government has seemingly gone out of its way to whip up into a frenzy.

And now it's solution is based on old fashioned Keynsian theory.....if there's a problem throw money at it , cross your fingers and toes and hope it goes away.

Oh, and for those who still think this Keynsian theory is fine and dandy, bear this in mind...Keynes formulated his "General Theory" in 1936 ..that's before WW2 when Government spending represented approximately 10% of the Australian economy, as opposed to now, where I believe its close to 40%

The opposition and other minor party Senators are perfectly within their rights to ask the question as to why the Government is hell bent on the generation $42 billion dollars of additional spending as some kind of silver bullet to a problem that doesn't yet exist!

I'm asking that question myself.

 

[evo]

You post reminds me of something I read earlier today,luthor

I can't resist posting this.This guy is my sorta maniac

OzRant: Sure, I'm Revolting...

The Reverse Bank cut rates by 1% to a two-generation low of 3.25%... trying to resuscitate an overdose patient with a shot of heroin. IF loose credit and overborrowing were the problem, how is providing more cheap credit any sort of solution?

The Rudd government announced a plan to make Strayan children have poorer lives - the current government is going to steal from the future. Again - how is that a solution? Excessive debt - bringing forward future consumption - was what got us into this mess, and it's not going to get us out.

I have said this before - Keynesianism is flagrant fraud and bullsh!t: anyone who has read Keynes's "General Theory" will not that it is waffling, hand-waving and (for those with any technical ability whatsoever) as bad as Marx in its intellectual dishonesty.

But the parasite political class love Keynes' tripe because it green-lights a non-stop political interference in the economic life of their livestock.

Make no mistake, dear Reader - politicians are NOT interested in making you freer or safer: they are farmers, and you are their stock. They are interested in maximising their yield. You are a slave - a beast of burden - and you either do as you're told or you get culled from the herd. Your relationship with the State now, is the same as the relationship of a Dark Ages peasant to the Church.

We are at a point in societal development that is in some ways very similar to the situation when printing first became widespread: literacy increased, and 'vernacular' versions of the Bible were produced (often at great personal cost to the producer - Tyndale was burnt at the stake). Eventually though, the stranglehold of the priesthood over liturgical texts was broken, and Christianity lost sway as a genuine political force (over time) thereafter (as more and more people read the book in its entirety and said "WTF?").

And so it is now with our relation so the State: the political class has lost control over information, and more and more the people are becoming aware that political economy is a shell game practised by charlatans, mountebanks, frauds and parasites.

To rephrase Diderot - let us strangle the last politician with the entrails of the last priest, and liberty will be ours.

Sure, the politicians have all the armed goons that you can poke a stick at, but what those goons fail to appreciate is that they too are going to be betrayed - they have been promised a share of the spoils (in the form of better-than-average retirement incomes) but they have been lied to. AS they age, they will com to realise that pension indexation robs them blind in their declining years. Nothing is more anti-government than a former soldier who discovers that he killed for a lie and then was betrayed by those for whom he fought.

That said: any of them who is a 'True Believer' in his role in the repression of liberty, should be judged extremely harshly when the system breaks down (and it is in the process of doing so now: not a single Western government has a way around its long term financing requirements). I would not be averse to post-collapse death squads whose task was to hunt down senior figures in 'law enforcement' (it's in quotes because what they enforce are the opinions of politicians... the bulk of the time those opinions are worthless). Everybody thinks hunting down former GEstapo officers is a just and fair thing to do.

Jefferson said that the tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. I disagree since I think patriots are idiots (notions of 'nation' are vile, racist and ignorant). So I would rephrase it: the tree of liberty must be fertilised with the blood and bones of tyrants and their enablers.

 

[luthor]

Interest rates are at a 40 year low, unemployment is still under 5%, petrol prices are the lowest in living memory, the CBA (one of the major banks that cried poor-mouth to KRudd) is foreshadowing a record profit for the half year to Dec 08, Oz was left in its best fiscal position ever with a 20 billion budget surplus after the demise of Howard/Costello and the country was (until recently) according to Ruddspin, better equipped to handle the GFC than any other in the world.

Response from the Government a few months ago?..."Gawd the Australian public are so stupid that they might actually believe that the banking system in this land is like that in the USA"

Which is patently untrue, false and total bullshit...

Response from the Ruddster then....quick!!...tell 'em Bank deposits are "guaranteed" (whatever that means).

Result?.....all the frightened little old ladies, little old men , the already spooked and the great unwashed masses pull all their money out of the secondary financial market, the stock market and generally any "institution" that is not "guaranteed" and effectively hand the banks a massive inflow of cheap money, to the detriment of the many soundly managed property and capital funds, thereby creating a liquidity crisis in those secondary markets.

Good on ya Kev....sheer genius.

Since then we keep getting hammered day after day with more and more negative input to the extent that Recession and Depression have virtually become self fulfilling prophesies.

Response from the Government in the last few days?

Panic!!....we're all rooned!!

Solution?

Fire all the ammo at once!!!

Blow the surplus and as much again by March

Who's fault is it???......"ultra capitalism and neo-liberalism"

So let's have a big party, borrow against the future, hundreds and even thousands of bucks for all....just trust us....and as for those dirty rotten neo-liberal, conservative opposition bastards....what did they ever do for you?....like we said before the last election....any fool could manage this economy.

And now they've got the utter hide to want to hold us accountable for our grand plan to save the country

But just in case you think we've lost sight of the grand plan to save the world....no way.....we're still going to to push ahead with with the Carbon Trading Emmision scheme and lead the world in eliminating those horrible CO2 gasses that are destorying the planet....we'll destroy our own industries in the process....but hey....small price to pay for saving the planet...


End rant.

 

[Eastern Rangers]

Problem is folks that the household sector is screwed. Can't be propped up forever folks.

Funny enough major holes existed with in Neo Liberal market theory, just because every government has subsribed to it does not mean there are not alternatives, without increasing welfare dependancy and market regulation.

 

[luthor]

Problem is folks that the household sector is screwed. Can't be propped up forever folks.

Problem is that Rudd is more concerned with playing politics and writing and verbalizing nonsensical epistles about the evils of "Neo-liberalism" to justify his economic social engineering, rather than addressing the real issues.

He's using the demise of the US economy as an analogous argument to the Australian situation....clearly arrant nonsense and playing on the fears of the ignorant and uninformed to push a political agenda.

Geez...they reckon Howard was good at that....this bloke is a master.

 

[cancat]

Figures just released say retail sales are up 3.8%. Biggest rise in 8 years. Prediction was for 0.4%. Assume it will be more next quarter.

My friends in the retail industry say the sales figures were due to massive discounting and is not sustainable. The car industry uses another trick. Supply vehicles to their own staff as company cars and chalk it down as a sale.