When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

What even Borg did not expect was that his tax cut for the low-paid would increase economic growth so much that it has almost entirely paid for itself. Borg had created something that Osborne’s critics say does not exist: a self-financing tax cut. ‘There was some criticism at the time that we were borrowing to finance tax cuts,’ he says. But Sweden could do it, because it was expecting to return to surplus soon; Britain has no such luxury, he says. His main advice to Osborne is: ‘Keep on dealing with the deficit, because deficits destroy everything else.’

This ought to be game, set and match. Perfect policy, entrepreneurially based and no fiscal stimulus. It should become the model for everyone else but for reasons seriously unknown will not prove to be.

With thanks to Abu Chowdah for drawing this to our attention in an earlier thread.

The first is the implications for company tax of the mining sector growing more rapidly than anticipated and mining investment exceeding expectations.
As set out in Budget Statement 5, these factors will tend to dampen tax receipts as a share of the economy, as mining companies claim tax deductions associated with the depreciation of their capital stock. Of particular importance is the accelerated write-offs provided for many mining assets. Some assets receive immediate deductions while others are depreciated at concessional rates over a longer period. Accelerated write-offs effectively result in the deferral of tax payments into future years. While we had anticipated this factor in our forecasts, we underestimated its magnitude.

So what does Budget Statement 5 say?

Importantly, the expected massive increase in mining investment over the next three years, to nearly 9 per cent of GDP in 2013-14, will generate very large tax deductions. This high investment is in contrast to the characteristics of the mining boom during the mid-2000s, which was largely driven by increasing commodity prices and the expansion of existing projects. While existing projects are still expanding, there is an increase in new projects. In addition, the mining sector can deduct some forms of investment immediately rather than over the life of the asset. This will reduce the tax-to-GOS ratio during high investment periods.

As I keep arguing, if Treasury made the effort to model the actual tax base and not the tax to GOS ratio they might have more success in getting things right.

But back to the actual claim “Of particular importance is the accelerated write-offs provided for many mining assets.” So what are we talking about – how much money is at stake? To blow a hole in Australian government tax revenue – forecast to be $343 billion this coming financial year (up from $309 billion in the current year) – we must be talking about some serious money. If so, it would be documented in the Tax Expenditure Statement and also in the Productivity Commission’s Trade and Assistance Review.

So I had a look through those documents (again) to drag out the figures – remember we’re looking for big numbers.

The biggest numbers that I can find relates to transport – but this overstates any benefit to mining.

To be blunt I can’t find the kind of numbers that Parkinson must be referring to in the Tax Expenditure Statement. There may be good reason for that. Similarly, I can’t find the kind of numbers we’re looking for in the PC TAR either.

Should we accept that Treasury got caught off-guard by the extent of the mining investment boom? That is clearly what has happened – but how and why did it happen? Mining investment doesn’t occur at the drop of a hat; so I’m happy to expect large variations in medium-terms forecasts, but not large variations in year-to-year forecasts. Treasury should have a fairly good idea of the investment coming on-line and a fairly good idea of the depreciation expenses that will follow.

I would agree that the problem is what do we do from here. Clearly, most of the profession has ideas like these ones – and getting stuff published in the journals is difficult if you are outside the consensus. Any ideas on the best way to go on this?

This touches on a really important issue made all the more difficult by the insistance that all is right with the world and we are fortunate indeed to have such an excellent macro readily to hand when things go bad. This is David Romer in an article from a book just published titled, In the Wake of the Crisis: Leading Economists Reassess Economic Policy (MIT Press, 2012). There he wrote:

Given the wide range of evidence – not to mention the large body of precrisis work on the effects of fiscal policy that I have not touched on – I think we should view the question of whether fiscal stimulus is effective as settled. (page 60)

That’s why the issue Andrew raised is so formidable because it is the world’s worst problem getting things published that are outside the Keynesian consensus. And what Romer wrote is the consensus and it is hardening. Even amongst historians of economics, there are serious efforts made to restrict any use of HET to query modern economic theory and, of course, no normal economics journal will publish HET. Economists have effectively shut themselves off from the past because of its potential to disturb the present.

But the scandal surrounding the failure of the stimulus is growing. The mainstream does not want to talk about it but at the decision maker level there is a reluctance to throw good money after bad. Hollande may have been elected in France, and Obama is still there in the US, but the willingness to squander another trillion is just not there, but who can really know for sure.

The question for me is how do you get economists to abandon aggregate demand, to admit that the very basis for the macroeconomic framework has been worm eaten from the start, and the answer is that you can’t. The need to do this is not even on the radar in any school of thought that I know of because, given how everyone is taught, the idea is literally inconceivable. And once you start from a premise that recessions are caused by too little demand, the policy response almost states itself.

So what will happen – this is my optimistic scenario – is that over time governments will balance budgets, cut back on spending, reduce their level of taxes and encourage private sector growth without really having a theoretical framework that explains it. We will at the same time merrily continue to teach C+I+G as if that is a fair representation of how an economy works, and what’s worse, given what I have observed, we will tell our students that the model has again shown its worth during the GFC, just as Ken Henry seems to think. Whether it’s the textbook companies that will insist on it or just the deluded views of those who having predicted much worse are excited to find that things did not turn out as bad as they originally forecast is hard to say. The oppositional view will in the meantime remain at the margin of polite economic society.

The truth is that recovery would be almost ridiculously easy to achieve: all we need is to reverse the austerity policies of the past couple of years and temporarily boost spending. Never mind all the talk of how we have a long-run problem that can’t have a short-run solution—this may sound sophisticated, but it isn’t. With a boost in spending, we could be back to more or less full employment faster than anyone imagines.

But don’t we have to worry about long-run budget deficits? Keynes wrote that ‘the boom, not the slump, is the time for austerity.’ Now, as I argue in my forthcoming book—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.

Meanwhile, the strong measures that would all go a long way toward lifting us out of this depression should include, among other policies, increased federal aid to state and local governments, which would restore the jobs of many public employees; a more aggressive approach by the Federal Reserve to quantitative easing (that is, purchasing bonds in an attempt to reduce long-term interest rates); and less timid efforts by the Obama administration to reduce homeowner debt.

OK, I haven’t changed my opinion over the past three years either, but I don’t have to start things that I write with the kinds of disclaimer Krugman does by immediately owning up to “the depression we’re in” since that’s more or less what I expected to happen. Because in depression they definitely are and this is so in spite of every Keynesian thing that has been done. Since there is no evidence that more of the same will work this is just a matter of faith on Krugman’s part. Very touching but I suppose it is better for him to think as he does than to actually have to take any responsibility that the policies he sought to have introduced have been a catastrophe in so many individual lives across the US and elsewhere.

[My thanks to WB for sending the Krugman article along.]

In the early 1950s, when I was a young college graduate and a new employee of the Frost Bank, my great-Uncle Joe Frost, then CEO, told me that the very first goal we had was to return the deposits we received from customers. Our obligation was to take care of the community’s liquid assets and manage them safely so others could use them (via loans) to grow.

Frost Bank was not big enough to be saved by the government, Uncle Joe told me at the time, so we would always need to maintain strong liquidity, safe assets and adequate capital. I was impressed that making money was not high on his list of priorities, but he implied that profits would come if we observed sound banking principles.
…
Uncle Joe was not a fan of the [Federal Deposit Insurance Corporation] — he said it took his money to subsidize his inefficient competitors.

Source: Wall Street Journal.

Further, we direct the executive president not to attend any meeting of the HR Nicholls Society on the grounds that its objectives include undermining unionism, collective action and the legal framework that protects workers’ rights at work.

The HR Nicholls Society has issued the following press release.

16/5/12 

HSU EXECUTIVE ATTACKS FREEDOM OF SPEECH AND ASSOCIATION

 The motion by HSUeast to prevent Kathy Jackson from addressing the HR Nicholls Society conference dinner is an attack of every Australian’s right of freedom of speech.

 Ms Jackson should not be muzzled simply because she has brought to light the seamy actions of some members of the union’s management.

 What is needed is public airing of the underbelly of some of union practices that that have tarnished the whole of the union movement.

 By preventing Ms Jackson from freely speaking HSUeast becomes part of the problem of cover up and scandal that has been exposed in the FWA 1100 page report.

 It must be made clear that the HR Nicholls Society does not oppose unions: just the power they have been given and their attempt to act as a quasi-monopoly and the restriction they place on their members.

 In this particular case that means restrictions on freedom of speech.

 Further it may well be that the HSUeast may be in breach of the adverse actions provisions of the Fair Work Act by attempting to nobble Ms Jackson.

 In its motion HSUeast stated “Further, we direct the executive president not to attend any meeting of the HR Nicholls Society on the grounds that its objectives include undermining unionism, collective action and the legal framework that protects workers’ rights at work.”

According to Fair Work Australia’s website “A person (such as an employer) must not take any adverse action against another person (such as an employee) because the other person has a workplace right, has exercised a workplace right, or proposes to exercise such a right.”

‘Workplace rights’ has a very broad meaning. For example, a person has a workplace right if he or she has an entitlement under an award or agreement or a workplace law, is able to initiate a proceeding under a workplace law or is able to make a complaint or inquiry in relation to their employment.”

That right could also include freedom of speech.

HSUeast is not only attempting to stifle free speech but it may well also be in breach of the Fair Work Act by doing so.

It contemptible and should be condemned.

Further information:       Adam Bisits  0438 405 527

                                                  Ian Hanke      0407 841 957

Such attitudes are hardly confined to Greece as shown by the persistent difficulties to reduce spending being experienced by Spain and as further demonstrated by the Hollande ascendency in France.

Similar beliefs in magic wands are evident elsewhere.  In California, people preferred to vote for Governor “Moonbeam”, Gerry Brown whose no spending cut platform defeated Republican Meg Whitman, the woman who had built ebay by a landslide against.  Whitman’s message – that California needs to do something to combat its growing indebtedness, high spending and high taxing policies – found little support among voters.  Now, as Governor Brown’s policies are inevitably failing he is calling for $16 billion to be saved by equal cuts to spending and increases to taxes.  The problem with the latter is that Californian taxes are already among the highest in the US and the state’s travails owe much to its lack of competitiveness in this regard.

California does not have Greece’s option of renegotiating its debt.  Nor can it devalue its currency.  If the drachma were to be devalued 25 per cent on Greece leaving the Euro it would raise its debt from a nominal 150 per cent of GDP to 200 per cent.  But this may be a less painful way of cutting the pensions and salaries of bureaucrats than outright reductions.  In California’s case a 5 per cent wage reduction is planned but this is accompanying a cut in working hours – in some cases, of course, fewer hours by public servants might actually increase national productivity but probably only those of the ‘policy’ people who would doubtless escape unscathed.

Meanwhile in Australia the Rudd Gillard Government has already squandered the debt-free legacy it was fortunate to inherit and is set to build on this both by manipulating spending (bringing forward expenditures) and making optimistic revenue growth forecasts.  The spending spree that was the Commonwealth budget has brought a three per cent recovery in support for the ALP.  Those ads explaining the benevolence of government and the sums deposited in voters’ bank accounts in the next few days may well shift the polls further in the government’s favour.

So Greece, the cradle of democracy, is showing all the detrimental features of ochlocracy that the great philosophers feared would stem from rule by the agora.  But Greece is not alone and few places have discovered how to prevent the demos from eating the fruits of enterprise before they have been sown, let alone harvested.

If it’s fiscal stimulus the most important thing is to get the money out the door. . . . Whether the money is in some sense wasted . . . from a macroeconomic perspective it’s very much second order, maybe even third order.

From a Keynesian macroeconomic perspective, that is exactly right. There is nothing in that statement that is in the slightest contrary to macroeconomic policy anywhere around the world. It’s why the economies of the West are in such strife, because our economic establishment believes such stuff. And it’s everybody, just as Ken said in another part of the interview in which he was discussing an earlier discussion at the top levels of Treasury prior to the coming of the Global Financial Crisis:

We’d asked ourselves a question, senior group of people in the Treasury – what would we do if we were to be hit with another big negative shock and how would we respond, what would our advice to the Government be? And everybody in the senior levels of the Department was of a one mind on how the Department should provide advice.

The thing is, and this is more unbelievable than anything else, they along with a large proportion of economists around the world, are of the view that what they did has been vindicated by events.

Spend wildly and unproductively, accumulate debt that will take decades to repay, and distort the direction of the economy into dead end forms of output. I’m used to hearing such views defended and am almost past the shock of it. But you really have to wonder how we will ever get out from under both the consequences of the stimulus, and what’s worse, how we will save ourselves from the mis-education of our entire economic “elite” who before 1936, had they been trying to peddle such stuff, would have been rightly seen as a bunch of economic cranks.

Tim Andrews was going to meet at the same venue but he had to cancel.

Why the Purple Goanna? That was Rob’s choice but it was only for coffee, we did not sample the cuisine.