“Imagine a wage earner”

I suppose it’s long overdue that the ALP starts thinking about wage earners, but better late than never. Julia Gillard had a very confusing analogy in her speech today – I suspect there was a slip between the economists and the speech writer.

Imagine a wage earner, John, employed in the same job throughout the last 20 years.

For a period in 2003 to 2007 every year his employer gave him a sizeable bonus.

He was grateful but in his bones knew it wouldn’t last.

The bonuses did stop and John was told that his income would rise by around five per cent each year over the years to come.

That’s the basis for his financial plans.

Now, very late, John has been told he won’t get those promised increases for the next few years – but his income will get back up after that to where he was promised it would be.

What is John’s rational reaction?

To respond to this temporary loss of income by selling his home and car, dropping his private health insurance, replacing every second evening meal with two-minute noodles.

Of course not.

A rational response would be to make some responsible savings, to engage in some moderate borrowing, to get through to the time of higher income with his family and lifestyle intact and then to use the higher income to pay off the extra borrowing undertaken in the lean years.

Running a nation is always more complex than running a family budget and analogies only work so far.

I thought I would first point out that Adam Smith famously said:

What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

So the bonuses from 2003 – 2007 were replaced by a five per cent indexation after that? So John was lead to believe that temporary income (bonuses) were replaced by permanent income? (But then why did he believe in his bones it wouldn’t go on?) Okay – but then he gets told he will experience a temporary stay on the 5 per cent indexation but then will be fully compensated afterwards? Under those circumstances it does pay him to use debt to smooth out his temporary loss of income. But with perfect certainty there are a lot things people would do differently to how we do things in a world of uncertainty.

But back to Gillard’s story. What she means to say is that John was promised a 5 per cent bonus each year, but then told the bonus wouldn’t eventuate. He made his plans accordingly and now faces a deficit of revenue over spending. What would an economist day to that? Tough – that was temporary income that you planned for as if it was permanent income. Cut your spending and live within your means. Less caviar and more two-minute noodles.

So how does Gillard try to wriggle out of this problem? Well, she argues that the bonuses will return in future – with interest. In fact, the future will compensate for the current loss of revenue. That is a huge call and she cannot know that to be true. That’s short-hand for believing the mining boom will last forever. I don’t know anybody who seriously makes that claim.

If John’s bonuses constitute permanent income then Gillard’s story might make sense as a balckboard economics example. But not otherwise. This is a very confused message from the PM.

Then there was this:

To return to John, you would not expect him to stop funding his son’s top quality schooling or his daughter’s university studies.

Looks like John is sending his son to a private school – maybe he has no faith in the Education Revolution or Gonski. As for the daughter’s uni studies – following the recent Gillard government education announcement it doesn’t pay him to pay for his daughter’s education – better to let the taxpayer take the risks (of her not paying back the HECS) and put any money into some or other investment and then just give her the cash.

So what can we take away from this very confused narrative? The government will continue to spend as if the revenue bonuses (of 2003-2007) were permanent i.e. they intend to ignore any structural deficit that may now exist and simply borrow to smooth over any (what they perceive to be) temporary declines in income.

It seems to be me that the only limit on how much they think they can spend is their imagination.

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46 Responses to “Imagine a wage earner”

  1. Jannie

    Like Henry Ergas said, picking holes in Swan’s economic argument is as easy as pciking a dead mans pocket. Same applies to Gillard. How did such illiterates ever become Treasurer and PM? Democracy is stupid.

  2. ar

    Gillard had a very confusing analogy

    Gillard had a very confused analogy… FIFY

  3. Craig Mc

    That idiotic speech explains everything that is wrong with this disastrous government.

  4. davey street

    This, and all her tosh, was written by John McTernan, Gillard’s personal Communications Manger HERE ON A 457 VISA FROM LONDON. Why couldn’t an Australian citizen be appointed to the position ? Don’t do as I do, do as I say, eh Julia. Also, the last five pollies McTernan worked for including Mike Rann of S.A. ALL LOST THEIR JOBS. Yet another great bit of decision making, Julia. LOOKS LIKE YOU’LL BE NUMBER SIX.

  5. Gab

    What is John’s rational reaction?

    To respond to this temporary loss of income by selling his home and car, dropping his private health insurance, replacing every second evening meal with two-minute noodles.

    Yes, Julia that’s what many folks are doing thanks to your stupid policies and kowtowing to the unions.

  6. tbh

    Oh dear, the stupid — it burns!

    In John’s situation I would be looking at the spending that is necessary and that which is discretionary. I would then be trimming the discretionary as needed to live within my needs. What I would not be doing is adding to my debt burden.

    Those bonuses cannot be counted on, nor can continual increases in income. You can only go on what you earn now and live within that. If you get increases above the rate of inflation then maybe you can expand your spending a bit.

    The bonuses get invested/saved or used to fund once off expenses (like renovations in our case).

  7. ar

    Govt debt akin to an individual on $100k borrowing $10k…

    OK, if that individual can front his boss and say “I’ve spent my entire wage so I’ve brought forward next year’s pay rise to this year and spent it. But it’s ok, you have time to pay as long as you pick up the interest. See you at my performance review in 3 years…”

  8. nilk, Iron Bogan.

    Wow. I’ll admit to being an economic illiterale*, but even I’m not that stupid.

    *deliferate misspelling. Oh, the stupids you will see when watching Julia G.

  9. candy

    There’s no guarantee John will keep his job, no-one has that guarantee. Also something else could happen – an extra child, a new dependant eg an aged parent, an injury could stop him working.

    How can anyone know what’s ahead and think they have guaranteed level of income, only foolish people do that.

  10. Andrew

    When Gillard calls the budget situation grave, you know it is pretty bad.

  11. The PM’s scriptwriter does seem to have some commendable familiarity with Genesis 47.

    “The Pharaoh might have kept one fifth part of the grain from the field”;
    the treasurer and I, for now, take a far smaller yield.
    Irksome checks on our authority, of course, must be repealed;
    we must find a way to screw all—not just the very well-heeled.

    Gillard to Swan, “Sir, didst not thou sow good seed in thy field? from whence then hath it tares?” Swan, “Abbott hath done this!”

  12. tbh

    When Gillard calls the budget situation grave, you know it is pretty bad.

    Oh yeah, it’s bad alright. Just as well there looks like being a new government in September (based on current polling anyway) and there is an outside chance of a return to some fiscal rectitude.

  13. H B Bear

    Imagine a Prime Minister. Now imagine a baseball bat.

    Roll on September 14.

  14. H B Bear

    Right up there with “We are us.”

    And that’s not hyperbowl.

  15. ar

    Imagine a wage earner

    Says Tim Blair – imagine a voter…

  16. dan

    This is goddamn insane

    The bonuses did stop and John was told that his income would rise by around five per cent each year over the years to come.

    That’s the basis for his financial plans.

    Now, very late, John has been told he won’t get those promised increases for the next few years

    How stupid do they think we are?? Maybe the population really are that dumb/?

    Income is still increasing…by SEVEN PER CENT YEAR ON YEAR…and they still can’t make ends meet

  17. Leigh Lowe

    What is she talking about.
    I’m serious.
    What. The. Fuck. Is. She. Saying????

  18. Right up there with “We are us.”

    Worse; at one stage, during the question time, she mentioned:

    Us spending wisely.

  19. Dan

    Why TF is John spending 100% of his income in the first place? The analogy just reinforces the image that Labor are stupid.

  20. Norma

    Seems all blogs have zoomed in on John. However I award the prize for best comment to Tim Blair:
    “What is John’s rational reaction?”
    To vote Liberal on September 14.

  21. Milton Von Smith

    Gillard today said:

    “First, you will be told that revenue for the next financial year is still expected to be more than this financial year. That’s true – at the same time our population will be larger, more people will be on the age pension, health costs will continue to rise.

    Indeed the growth in health and in the age pension will be far higher than the growth in tax money.”

    Really? As at February, nominal growth rate of tax revenue was 7.2 per cent.

    But what is expected to happen to spending in the areas that Gillard picks out?

    From Budget Paper No. 1, 2012-13:

    Expenditure on Health (page 6-5):

    2011-12: $61.2 billion

    2012-13: $61.0 billion

    Expected growth rate: 0 per cent

    Income Support for Seniors (page 6-28):

    2011-12: $34.8 billion

    2012-13: $36.8 billion

    Expected growth rate: 5.6 per cent

  22. Tracey

    Stopit. You’re all just simpletons and sloganeers.

  23. Ant

    Of course, if John was serious about fixing his financial problems he could have joined a union, muscled his way to top of it, twisted a factional boss’s arm into giving him a magic carpet ride through a safe ALP seat and into parliament and then shafted Aussie taxpayers good and hard.

    Not like there’s no precendent for this. Is there?

  24. manalive

    A rational response would be to make some responsible savings, to engage in some moderate borrowing, to get through to the time of higher income with his family and the hard core constituency lifestyle intact …

    The intended lender is saying get lost you have no credit.

  25. Pickles

    Imagine a wage earner, a young and naive salaried partner at a law firm if you like.

    She wants to buy a house, but doesn’t have the cash. So she gets an advance on next year’s salary and buys the house. With a little bit of help from her friends.

    The house needs a few renos, especially a fence. Don’t worry, she knows a greek builder.

    She needs new rags. Don’t worry, she knows someone who owns a c grade fashion house, when not building fences.

  26. Dan

    Whereby she left the lawyer job in disgrace, twisted a factional boss’s arm into giving her a magic carpet ride through a safe ALP seat and into parliament and then shafted Aussie taxpayers good and hard

  27. lotocoti

    Not only do I want to know what sort of job pays such bonuses that John has to sell his home and car, drop his private health insurance and replace every second evening meal with two-minute noodles because the bonus isn’t forthcoming, but also what sort of dimwit employer thinks John is worth such largesse when he clearly shouldn’t be trusted with anything more challenging than collecting road kill.

  28. lotocoti

    I’ve just realised who “John” really is.
    Perhaps Anthony Albanese lent his staff to TLS.

  29. Mk50 of Brisbane, Henchman to the VRWC

    Oddly enough, I was in something akin to this situation a few years back.

    I responded like any smart person does. I used the ‘bonuses’ to pay down my total debt load by a quarter or so and to build my asset base by about a third or so. yeah, we spent a bit on fun stuff too, but only a few % points.

    Whereas The Kruddles, Goose and Lying Slapper’s response was and remains to piss the whole lot up against the wall, build no assets and borrow heavily to keep the wall completely soaked in urine.

    Have I missed anything important in their response?

  30. Carpe Jugulum (HenchCritter VWRC, Mighty Thews Inspector 1st Class) don't call me Sven.

    ‘John’

    My bad, i thought she mean Johns.

  31. Leigh Lowe

    What stings is that we poor taxpayers, who have to actually manage “John” type situations (mostly of her making of late), have to sit through a condescending lecture about fiscal responsibility from this clueless lying bint.
    Insufferable.

  32. Megan

    I am blessed with a great imagination but I am struggling to find words that are not serious obscenities to describe this incredibly patronising and stupid beyond parody excuse for the PM of our country.

    Given I struggled with first year Eco at uni, it is truly terrifying to know that my understanding of economics and finance exceeds hers to the power of ten. And that was before my most excellent Cat re-education program.

    Most families I know are striving to be able to leave something to their kids when they die. Following her simplistic advice we should be all borrowing as much as we can and leaving them to pay off the debt in our memories.

  33. MikeDee

    So a real life example.

    Mike has just lost his job.
    Faced with a “slight” reduction in the revenue line, Mike has embarked on a borrowing spree based on the increased salary he is likely to receive on his change of employment.

    He has increased his spending on building a new garage for his new car he has bought, (a Holden of course!) taken out a new plan from the NBN to increase his job hunting prospects and train for the myriad of “green” jobs this 50 yr old is capable of being retrained in.

    Mike would like to return to University to do a course in Environmental Science to challenge Tim Flannery in his make believe gig, but the new fee programme leaves a hole in Mike’s forward estimates.

    Anyone got an opening for an over the hill trader with programming skills in excel and vba?

  34. Richard Bender

    Govt debt akin to an individual on $100k borrowing $10k…

    Except that it’s akin to an individual on $21,000 borrowing $10,000, as the Government doesn’t have access to the full $100,000.

    Now, many individuals on $21,000 are likely to be spending almost all that money on the necessities of life: food, housing, transport etc. They are not going to be in a position to easily service a $10,000 debt, even if the debt is over a very long term. If the $10,000 is being used to fund recurrent expenditure rather than a useful asset, the individual is in even more trouble.

    Worse, Gillard is spending more than her $21,000 and is not paying back any of her debt. Of course, she does have the distinct advantage of being able to print money and inflate the debt away, something our individual can’t do.

  35. H B Bear

    Gillard on finance – let’s go to the transcript:

    On housing finance

    Peter Gordon: Yeah, I see. Sorry. Julia, you own property in Victoria?

    JG: Yes, I do.

    PG: And whereabouts is that?

    JG: 36 St Phillip Street, Abbotsford.

    PG: And when did you acquire that?

    JG: In May 1991 and it settled in July 1991.

    PG: 1991, yeah. How did you fund that?

    JG: I funded that; Slater & Gordon extended to me a loan of $40,000, which I used for the deposit, and the rest of it I borrowed through the same branch of the Commonwealth Bank as Slater & Gordon banks at the William Street branch.

    On cashflow

    PG: Good. So that, is it fair to say as a general summary of that work that all of the work was paid for by you?

    JG: I believe all of the work was paid for by me. I was getting receipts, I was paying it. I at that stage borrowed an additional $20,000 from the bank to pay for the renovations. I had occasion to ask Geoff if I could be pre-paid, which he did. I don’t recall the amount. But that was recouped out of my pay for the first six months of this year. And, between that pre-payment and the borrowing of the $20,000 from the bank, I paid for that work.

    Plus ca change…

  36. Borisgodunov

    The question again arises,What in the name of GOD would Any liebor pardee “unigaraduate with a TINY “degree “know about ,
    1. Having a. ” Real Job “?
    2.,Workers ,except as people to treat as inferiors?
    3 . Earning a Living without taxpayer or union mambers money?
    4.Reality,Truth and Honesty?
    NONE of them fit within these Parameters ,NOT BLOODY ONE OF THEM!
    The most Useless ,Self Serving Pack Of Mongrel Bastards Australia has ever seen they make lionel murphy and grassby look almost HONEST!

  37. John has had massive cuts in interest you would assume and as such with his increasing income there should be no problem. He would have already paid down very significant debt already. If John didn’t realise that bonuses were just that and he is a high income individual I would question why he is highly paid.

    Running a nation is always more complex than running a family budget and analogies only work so far.

    It actually isn’t but could be said that it is hard to win elections if you do not dole out lots of cash to voters.

  38. Harold

    This could be a plan – she know’s very soon she ain’t going to be in charge of the mess. Need more revenue, will need to tax those rich people more.

  39. twostix

    It actually isn’t but could be said that it is hard to win elections if you do not dole out lots of cash to voters.

    Possibly the only more potent political force is the one unleashed when trying to raise taxes.

    Which is why Abbott needs to cut taxes to the bone forcing the socialists to waste the next fifty years battling with the electorate to just raise them back to todays levels again.

    It’s the only way to stop them.

  40. replacing every second evening meal with two-minute noodles.

    Either John is stupid or he likes to live the high life or is bone lazy. Pasta and potatoes and rice are far cheaper than 2 minute noodles. With this we can assume Julia doesn’t go shopping or has about as much knowledge of fiscal conservativeness as a drunken sailor high on other substances.

  41. garry

    Socialists do not learn from experience-for that matter the lower IQ voters don’t either. Money is seldom “invested”, it is just “blown”. This systemic problem is though capable of solution. What one has to do is to eliminate Swan’s facilitators-the lenders to the gov’t.
    What is the moral argument that says an incoming gov’t needs to repay the monies borrowed by Swan to finance bribes to an unpatriotic/greedy section of the electorate? Just slough it off and advise lenders to seek out the politicians who borrowed the money. Result; an immediate end to government borrowing, because lenders will disappear.
    This is an extreme measure, but really a reaction to the concept that it is reaonable that part of one generation should saddle the next with mountainous debt to finance a wasteful shopping spree.

  42. Michael

    Doesn’t John have any slush funds he can dip into?

  43. WhaleHunt Fun

    John consulted google about the flammability of the people who caused the economic disaster that befell him and his employer

  44. .

    A rational response would be to make some responsible savings, to engage in some moderate borrowing, to get through to the time of higher income with his family and lifestyle intact and then to use the higher income to pay off the extra borrowing undertaken in the lean years.

    So why the fuck did John gamble and whore his money away when his income took a hit in 2008 and why has he kept up his addictions?

    Fuck me she is a dumb peon. How on earth did she get a law degree or the chutzpah to correct the grammar of others? With her droning voice, terrible diction and abject stupidity?

    It is an insult to every Australian that she is the Prime Minister.

  45. .

    Let’s ask another question: why did “John” dip into the retirement savings of people he employed (future fund) and why is he planning to steal the savings of others (high super taxes, confiscation of dormant bank accounts).

    …and why is he planning to use said savings on his spending spree (forcing superannuation to invest in union staffed infrastructure projects)?

  46. European left wing economists and Keynesian economists like Paul Krugman are always at pains to argue that a nation’s spending is nothing at all like a household budget, far more complex, and so those homespun analogies are not valid. By using such an analogy, Julia Gillard seems to have completely undermined whatever theoretical justification remained for ongoing deficit spending!!

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