Pyrmontier – Refreshing

Between the often Keynesian ramblings of senior RBA staff and the apparent unwillingness of Treasury to object (at least publicly) to further growth in government expenditure, it is good to read something that might have been regarded as unremarkable, even orthodox, a decade ago from Michael Brennan –  the successor to Alf Rattigan and Gary Banks.

The speech is currently gated, but here are some extracts.

In the pandemic, the fiscal response was not really a conventional Keynesian stimulus, because it wasn’t trying to boost activity in a period of weak demand.

Rather it provided income to those most affected by supply-side restrictions, akin to a form of ex post collective insurance. It provided some protection against what amounted to uninsurable risks, the costs of which were concentrated on particular firms, households and sectors.

The fiscal response helped to smooth that cost across the community and through time – a more efficient form of insurance than would have been possible in private markets.

The risk in the public debate is that this insight – that GDP growth tends to exceed interest rates – is taken to imply something altogether different and much bigger: that debt and deficit no longer matter at all.

That we can afford the next and the next “one off” rise in debt on the grounds that growth rates will continue to outpace bond yields – noting that in other developed economies, the very same observation is being used to justify debt-to-GDP ratios more than twice as high as ours.

Then there is a microeconomic case for caution.

This is based on the observation that fiscal choices come back to the use of real resources in the economy. And there are some limits on the extent to which real resources can actually be borrowed from the future. One way this happens in practice is through a decrease in capital accumulation.

The real cost of government spending is measured in the labour, capital and materials used that would otherwise be employed elsewhere, such as in pursuit of some private entrepreneurial aim – innovation or investment.

Wise words that bear repeating.

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18 Responses to Pyrmontier – Refreshing

  1. Albatross says:

    Nice post. Thanks.

  2. egg_ says:

    A Trillion dollars in debt later…

  3. L Flawse says:

    If the Government largesse is fueling a Current Account Deficit resulting in Foreign Debt that also should be a limiting factor in government spending. You might still have GDP growth in services and industry that provide zero funds to pay off international debts.
    The morons now profess that Current Account Deficits don’t matter. Well they haven’t while we have been prepared to sell off 90% of our mining resources, large swathes of critical infrastructure, our water, critical manufacturing and now, large swathes of our best agricultural lands….just to cover the debt created to ensure the A$ doesn’t fall through the floor.

  4. mem says:

    Why hasn’t Catallaxy posted on the case of the missing Premier Andrews? And what happens if we never see him again and he has disappeared like Harold Holt? There are big political implications but no one is talking about it in Victoria. Why hasn’t the Premier appeared once since March 8th even doing physio or chatting up nurses? The three photos that have hit the media in the meantime are all stills and at least one of these appears to be photo shopped. Does he really have a back injury or has he had a complete mental breakdown? And if he is non functioning what happens for Victorians? Does the Governor General step in? And what about the state of emergency powers? Steve time for this to be addressed as this is a very unusual situation.

  5. Mango Man says:

    We are not yet in the teeth of this storm. Take note of the strategies engaged in China right now to accelerate towards a restructuring of its industrial base and sharply reduce dependency on foreign energy. A sharp curb on profligate provincial governments is the precursor to big spending on new energy plant and steelmaking with hydrogen to be followed by a race to try to corner the market in a variety of technologies.
    Trillions are about to be spent on top of the recent fiscal expansion. In China there will be some very bleak moments for those who’ve been gaming the money-go-round. In the West it will be in asset bubbles and debt balloons as inflation kicks in and rates shift up.

  6. mem says:

    Mango Man says:
    June 8, 2021 at 5:15 pm

    A sharp curb on profligate provincial governments is the precursor to big spending on new energy plant and steelmaking with hydrogen to be followed by a race to try to corner the market in a variety of technologies.

    With hydrogen? Good luck with that. Expensive, cumbersome for transport, dangerous and not necessary given the number of coal fired plants in China now. Where are your references?

  7. Paul says:

    So really to beat the debt we must go back to a cheap energy base, coal, to drive industrialisation, just like China.
    As we are fast approaching a poor backward economy with little wealth creating industries to employ a burgeoning unemployment population.
    In other words do what China are doing in terms of industrialisation

  8. Sinclair Davidson says:

    Why hasn’t Catallaxy posted on the case of the missing Premier Andrews?

    This is OT and is a question best asked in the open thread.

  9. MatrixTransform says:

    slaves.

    new ones

    the current ones are getting uppity

    we have already more than tripled the price of their housing and promised their superannuation back as an ‘income stream’ in retirement

    ungrateful bastards

  10. Texas Jack says:

    It’s nice to know that in the absence of any actual adults being involved in decisions leading to the mindless expansion of federal spending commitments there are some limits on the extent to which real resources can actually be borrowed from the future. Fiscal stupidity doesn’t appear to have a political cost any more, which makes me pretty sure you really don’t want to own bonds.

  11. 2dogs says:

    Spot on article.

    Expect inflation when the pandemic restrictions lift.

  12. RobK says:

    China’s stated energy policy:

    “We will push forward with the upgrading of coal-fired power plants, actively yet prudently develop hydropower, safely develop advanced nuclear power facilities, and maintain optimal development of wind and photovoltaic power,” the report said.

    https://www.scmp.com/
    I wish we had one like that.

  13. egg_ says:

    Expect inflation

    Australians Need To Wake The F… Up!
    In the Interests of the People

    Posted previously in the OT.

  14. mem says:

    Sinclair Davidson says:
    June 8, 2021 at 6:00 pm
    Why hasn’t Catallaxy posted on the case of the missing Premier Andrews?

    This is OT and is a question best asked in the open thread.

    I apologize for posting OT but couldn’t find the open thread. Could someone point me in the direction so I can do so.

  15. Dot says:

    The morons now profess that Current Account Deficits don’t matter. Well they haven’t while we have been prepared to sell off 90% of our mining resources, large swathes of critical infrastructure, our water, critical manufacturing and now, large swathes of our best agricultural lands….just to cover the debt created to ensure the A$ doesn’t fall through the floor.

    Complete garbage, you don’t understand that people investing NEW CAPITAL machinery here gets counted the same as them buying land here.
    If the AUD falls, more of that happens, ergo, double complete garbage.

  16. Rob MW says:

    Good read however:

    Who really cares anymore ? We are so far down the damn rabbit hole that the only thing that can be done is to actually go all the way to the bottom and claw the way back up.

    As long as there are a handful of taxpayers left and a good supply of printing presses, politicians learnt a long time ago that buying votes/government is easier than stomping around electorates doing baby kisses and shaking a few calloused hands. Paying someone to pay someone else, whether it’s consumer to retailer or contractor to supplier/construction, passes to the government responsibility buck to the first pay someone if the whole damn thing goes pear-shaped. It’s their fault for the misuse of the money !!

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