Out with the new and in with the old

Amongst the five things necessary to get the economy going was the recommendation to cut spending, which of course means cut government spending. But in a world of Y=C+I+G why would any government cut its own expenditure since it will only lower GDP and employment. And, of course, in a world of Y=C+I+G no government would.

But as it happens, the world is not made up of Y=C+I+G and cutting public spending does not lower growth and employment. But to know why that is requires a transit from modern macro, which is Keynesian through and through, and a return to classical economic theory and most particularly, to an understanding that it is only value-adding activities – that is, economic activities that pay for themselves with the revenues they themselves earn – that actually give you economic growth and employment. Governments don't do that past the first 10-20% even of their supposed investment outlays [although there is no doubt they do some]. Nor do loss making firms such as our car companies. Transitions are painful, but why carry such deadweight losses that only slow you down? Let some other government subsidise the cars we buy while we get on and do other more value-adding forms of production.

The rising unemployment we see now is not because of our new government but is the carryover from the dead hand of Labor's economic management. Now it is up to this government to take up the program so nicely laid out for it by Sinclair. What I always admired most about Peter Costello was how he ignored the advice of his Treasury to spend more and instead hacked into spending. Hopefully, our new government has learned from its predecessor and especially how to ignore Treasury which is filled with people who actually still think the stimulus was a good idea.

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29 Responses to Out with the new and in with the old

  1. Louis Hissink

    Steve,

    Government output is part of the GDP equation?

    Is it possible, then, to calculate the GDP minus government inputs, or is this politically impossible?

    I suspect it will be impossible because of the entrenched belief in the value of labour theory which makes government inactivity productive.

  2. I would pay even more to ask a question or two at the Royal Commision as well as pay to watch! Like a Q&A episode, the TV rights would be worth a squillion.

  3. The ABC could even be forced to produce the program using their own public taxpayer funds, televise the full proceedings due to their reporting failure to date and as a reward for their joint Fairfax investigation into CFMEU bikies and not the AWU scandal.

  4. Notafan

    Yes ABC24 or one of those other channels could prodcast live from the Commission. No need for any overpaid hacks to commentate. Let the Commission speak for itself.
    Also would stop ABC from editing all the embarrassing bits.

  5. Even if their ABC broadcast live, they’d still editorialise afterwards. Watch how, every time, the ABC’s political reporters subversively reinterpret Question Time, after you’ve just watched it, to suggest that the ALP actually won the day.
    No, Mark Scott and his recalcitrant minions must be terminated with extreme prejudice*, and then the ABC must be forced to cover the RC completely and fairly.

    *NaDT

  6. Leigh Lowe

    Hopefully, our new government has learned from its predecessor and especially how to ignore Treasury which is filled with people who actually still think the stimulus was a good idea.

    The first saving would to be empty the Treasury of those addicted to Government stimulus, rather that simply tolerate them our counter them.

  7. Leigh Lowe

    …. or counter them.

  8. Gazb

    I see the “G” as the immediate past problem for Australia; the G-out has been used in the formula; that’s what distorts the “Y” figures. The “true G” should become “G-in” only, which is simply the consumption we transfer to the government to spend on our behalf (efficiently or otherwise doesn’t matter, it’s gone); and the figure “G-in minus G-out” should be put somewhere else. If it is a surplus, it should lower inflation; if it is a deficit, it will probably increase inflation (hey, maybe we could add it to the inflation calcs.?).

    I think we should also keep (X-M) in the formula; otherwise all these closures of businesses in favour of imports will get lost from the stats.

    I wonder what the inflation and economic growth figures of the past decade would become if they were recalculated?

  9. Tel

    Is it possible, then, to calculate the GDP minus government inputs, or is this politically impossible?

    That would be Rothbard’s GPP calculation.

    http://mises.org/daily/2231/

  10. Alex Davidson

    Costello hacked into government spending? The figures show the opposite. Treasury might have been egging him on to ramp up the size of government even more, but he left us with a bigger federal government than he inherited…

  11. Ed

    The rising unemployment we see now is not because of our new government but is the carryover from the dead hand of Labor’s economic management.

    I would say it’s the carbon tax.
    Until they repeal it, unemployment will continue to rise.

  12. Ed

    Treasury might have been egging him on to ramp up the size of government even more, but he left us with a bigger federal government than he inherited…

    The usual mendacity. He left us with zero net debt and a budget surplus.
    We now have 300 billion net debt, and deficits as far as the eye can see.
    Oh yeah, and he left us a future fund…. what did the farm animals do to that once they took control of the farmhouse?

  13. Fred Lenin

    Just watching alpbc “news” Indos complaining to China about Abbot turning boats around!
    The “whole World Disgusted with Australia for not implementing UN marxist fascist global warming plan to reduce the First World s people to fourth World standards,Al Gore missing out on more money ,and Untidy nayptions missing out on all our money the last Dumb Bastards guvmint awasgoing to give them. Most of which would be used to increase the standard of living and pensions of Un “wurkas” as shortass would say mind you hes not as big a Bogan as jooliar giliard ,the prominent UN bludger,she got one upon kevvie shes in hes still not in!,

  14. Econocrat

    Seriously, what role does Treasury perform? It should be closed.

    They no longer have anything to do with marco stabilization, that is all the RBA. Forecasting? They had to get the RBA is to write briefs for Swan during the GFC because they had stopped doing any forecasting years ago, and were just relying upon Consensus Forecasts.

    The idea that they have something to do with fiscal policy is a total joke. Finance does almost all that now. Treasury just faffs around adding up the ‘spends’ and ‘saves’ and crapping on about the ‘fiscal strategy’. Name one real expenditure reduction that Treasury has devised and implemented in the last decade?

    Markets Group seems hellbent upon destroying every market it sees. Their efforts during the bank guarantee debacle shows they really don’t have the slightest idea about financial markets. And that they are responsible for the ACCC and ASIC, two of the most unhinged regulators out there, is a total joke.

    Revenue Group. For. F*&k. Sake. Basically, a bunch of incompetent psychos that believe every activity in society should be subject to control through the Commonwealth’s taxation power. The economic damage emanating from those retards is in the billions annually. This nutjob lust for power also colours all their views with respect to Commonwealth/state relations (They think the Home Insulation Scheme only failed because state governments did not enforce safety regulations. Sociopathic lack of insight and remorse.)

    All the debt issuing is now done by the AOFM. Surely the RBA could do that with their eyes closed?

    I think the decline started when Finance was split from Fiance in 1980 (I think), and was compound when the RBA was made fully independent under Costello. The movement of the tax legislation function from the ATO to Treasury (in 2002, I think) loaded the place full of tax loons. Under Henry, it became an ideological indoctrination camp for the climate change religion, and it’s greatest “achievement’ during the 2000s would seem to have been the generation of climate change nutters who are now ensconced throughout the bureaucracy (waiting to sabotage Abbott, I presume).

    There was a post a couple of weeks ago suggesting that the PC should be closed. I think that Treasury should be closed, and the remnants should be merged with the PC, renamed the Department of Commerce (or similar), and put in Sydney or Perth (where there is actually some private sector activity going on).

    The only thing that, to me, suggests we even need this organization is that it’s mentioned in the Constitution as holding the consolidated revenue fund, but that can just be moved around in the Administrative Arrangement Orders.

    Views?

  15. Ed

    Views?

    There is no downside other than the outrage of the left.
    I like the idea personally, but closing Treasury is about as likely as closing the ABC, which is to say, not at all.

  16. Andrew

    but he left us with a bigger federal government than he inherited…

    Using the corrupt accounting system in which
    - a tax is a “saving”
    - a tax rebate is “spending.”

    We wonder why the govt does such fucked up shit all the time. But when the ATO’s computer says “Oh, I see that Andrew has opted out of the public hospital system and paid for his own private insurance, so we don’t need to tax him as much” that’s treated as the govt SPENDING money.

  17. “We wonder why the govt does such fucked up shit all the time. But when the ATO’s computer says “Oh, I see that Andrew has opted out of the public hospital system and paid for his own private insurance, so we don’t need to tax him as much” that’s treated as the govt SPENDING money.”

    Or when the government fails to raise a tax or doesn’t apply a new tax it is called a “cost to budget”, so even the government not receiving the money in the first instance is now a cost to budget…

    So much silliness in the world of money these days…

  18. Squirrel

    “Econocrat

    #1190369, posted on February 15, 2014 at 5:02 pm

    Seriously, what role does Treasury perform? It should be closed.

    They no longer have anything to do with marco stabilization, that is all the RBA. Forecasting? They had to get the RBA is to write briefs for Swan during the GFC because they had stopped doing any forecasting years ago, and were just relying upon Consensus Forecasts.

    The idea that they have something to do with fiscal policy is a total joke. Finance does almost all that now. Treasury just faffs around adding up the ‘spends’ and ‘saves’ and crapping on about the ‘fiscal strategy’. Name one real expenditure reduction that Treasury has devised and implemented in the last decade?

    Markets Group seems hellbent upon destroying every market it sees. Their efforts during the bank guarantee debacle shows they really don’t have the slightest idea about financial markets. And that they are responsible for the ACCC and ASIC, two of the most unhinged regulators out there, is a total joke.

    Revenue Group. For. F*&k. Sake. Basically, a bunch of incompetent psychos that believe every activity in society should be subject to control through the Commonwealth’s taxation power. The economic damage emanating from those retards is in the billions annually. This nutjob lust for power also colours all their views with respect to Commonwealth/state relations (They think the Home Insulation Scheme only failed because state governments did not enforce safety regulations. Sociopathic lack of insight and remorse.)

    All the debt issuing is now done by the AOFM. Surely the RBA could do that with their eyes closed?

    I think the decline started when Finance was split from Fiance in 1980 (I think), and was compound when the RBA was made fully independent under Costello. The movement of the tax legislation function from the ATO to Treasury (in 2002, I think) loaded the place full of tax loons. Under Henry, it became an ideological indoctrination camp for the climate change religion, and it’s greatest “achievement’ during the 2000s would seem to have been the generation of climate change nutters who are now ensconced throughout the bureaucracy (waiting to sabotage Abbott, I presume).

    There was a post a couple of weeks ago suggesting that the PC should be closed. I think that Treasury should be closed, and the remnants should be merged with the PC, renamed the Department of Commerce (or similar), and put in Sydney or Perth (where there is actually some private sector activity going on).

    The only thing that, to me, suggests we even need this organization is that it’s mentioned in the Constitution as holding the consolidated revenue fund, but that can just be moved around in the Administrative Arrangement Orders.

    Views?”

    It would certainly be interesting to compare staffing numbers today in Treasury (and Finance) with what they were – after allowing for gains/losses of functions – when Finance was split off from Treasury by Malcolm Fraser. There certainly does seem to be a wide range of economic advice – some might say a multiplicity, or perhaps duplication multiplied – of economic advice available to the federal government, if you look across Treasury, Finance, PM&C and the economic advising and analysis areas of other departments.

    I recall during, or shortly after, the recession we had to have, an initiative for the Treasury to have a couple of outposted people in Sydney, so they could be “in touch”. This was after they were blindsided by the totally stunning fact that provisional tax revenue had fallen far short of estimates – who’d ‘ve thunk it – with business activity collapsing, and even the easy revenue of income tax on interest receipts falling off because interest rates, by that time, had dropped sharply – Blind Freddy, as the saying goes……

  19. The Pugilist

    Econocrat, you are right.
    Andrew and Seditionary1, you both raise a great point. The whole political debate is filled with statements like ‘Howard spent the mining boom on tax cuts’. It is ridiculous and makes no sense. We need to re-educate our public sector economists about opportunity cost, as they just don’t seem to get it. There are virtually unlimited ideas for ‘investment’ projects, but there are only a finite number that will create a decent long term stream of benefits. That savings (deferred consumption) is limited is beyond doubt, so we need to try and prioritise our investment spending to make the best use of these funds. This is a simple concept that eludes the ‘best and brightest’ of the APS. Increasing consumption now comes at the price of a lower level of future consumption. Saving is the key to growth and the paradox of thrift is a bullshit concept.

  20. The Pugilist

    Sedi, we should all be thankful the government lets us keep any income at all. In the fucked up minds of leftists, all income is the possession of the government and the distribution of it is for our betters to decide…

  21. crocodile

    Costello hacked into government spending. Kates, I’m fucken speechless.

  22. Tel

    We need to re-educate our public sector economists about opportunity cost, as they just don’t seem to get it.

    They get it, they just hope that no one else thinks about it, so they avoid talking about it.

    The Howard tax cuts were fairly small, but to the extent that he did cut tax, it was giving people back their own money. Forget about educating public sector economists, concentrate on explaining it to the people who earn the money. Arm the victim with knowledge, don’t beg the perp for clemency.

  23. Ed

    Costello hacked into government spending. Kates, I’m fucken speechless.

    That’s because you’re ignorant.

  24. sdfc

    Howards tax cuts during a boom were inflationary.

    Spending is the key to growth. Income creates saving.

  25. johninoxley

    Can I do the “extreme prejudice”. Please, Please,Please.

  26. .

    sdfc
    #1190647, posted on February 15, 2014 at 9:50 pm
    Howards tax cuts during a boom were inflationary.

    This is so stupid.

    What if people learn to fill out their tax returns correctly and get bigger refunds…is that inflationary as well?

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