Mixing up the ends and means of economic policy

Mon, 11 Aug 2014  |  

This article originally appeared on the Business Spectator website in October 2013: Here https://www.businessspectator.com.au/article/2013/10/31/australian-news/budget-complaints-bark-wrong-tree 

Budget complaints bark up the wrong tree

With this being my second to last article for Business Spectator, I want to deal with the concept of good economic management.

Don't let this put you off, but the issue of what is a 'good economic manager' has been clouded by the hysteria of recent years and what has generally been an unquestioning dogma on what economic policy is all about.

Let's start at the end.

At a macroeconomic level, if policy makers in Australia can deliver annual GDP growth at 3 per cent, inflation between 2 and 3 per cent, an unemployment rate at 4 or 5 point something, and preside over rising living standards, this is almost perfect. It is as good as it gets.

For all credible economists, this is the unquestioned, universally agreed end game for policy makers.

The budget surplus or deficit, level of debt, interest rates and value of the Australian dollar are the tools used to achieve those objectives and are not the target in themselves.

This is a fact so often overlooked in the misrepresentations of low interest rates as good, the level of government debt as bad and the deficit as a sign of mismanagement. Many people mistakenly think these should be the target and not the levers pulled by policy makers.

Think about it.

What good would a budget surplus be if the economy were in recession and the unemployment rate were 8 or 10 per cent?

What good are low interest rates if 5 per cent inflation is eating away at consumer purchasing power and Australia's international competitiveness?

Or, perhaps viewed the way it should be, how good is it when policy makers run a temporary budget deficit to keep the unemployment rate at 5 point something or that high interest rates cool the economy to lock in low inflation?

It comes back to the point I have often made in my Business Spectator writings. Any monkey with an excel spreadsheet can deliver a budget surplus. Cut government programs and spending and hike taxes and there you have it, the budget is in surplus.

This simple approach is unhelpful as it takes no account of the position of the business cycle.

A budget deficit is like a cold and rainy day.

Is a cold and rainy day good or bad?

If you are holiday maker at the beach then clearly no, it is dreadful. But if you are a farmer on land that has not received much rain over the prior two years then having the skies open and widespread rain is delightful.

So too is a budget deficit. In a booming economy, a deficit is inappropriate, while in a period of weak growth, it is highly desirable.

This is why suggestions that one side of politics or the other will have lower interest rates or will always have a surplus are misguided.

It is what happens to GDP, inflation and unemployment that largely determine the level of interest rates, and the state of the budget and whether the economy has been well managed.

And what's more, bad luck can get in the way of the best policy settings. A global recession, an inexplicitly overvalued Australian dollar or a natural disaster can have consequences for policy bottom lines and the real economy.

If the world is weak, interest rates will inevitably be lower and the budget more inclined to be in deficit. And that is the way it should be, because these policy reactions will help to insulate the local economy from the negative global news. It would smack of policy incompetence if interest rates remained high and the government cut spending and hiked taxes to ensure the budget stayed in surplus.

And this is the notion I have always had at the forefront of my thinking when writing about the budget, government debt and interest rates for Business Spectator. Many of those loyal readers commenting on my articles share a different view. However that view implies a preference for recession, high unemployment and a budget surplus, to the alternative that we have seen over recent years.

In the end, Australia's economy is in quite spectacular shape. It is into its 23rd year without a recession, it's been more than a decade since unemployment has been at 6 per cent and inflation over the last two decades have averaged 2.5 per cent. At the same time, Australians are among the richest people in the world with the International Monetary Fund data showing per capita GDP in US dollar terms fifth in the world behind only Luxembourg, Qatar, Norway and Switzerland. That is hugely impressive.

It seems someone has got the macroeconomic policy settings right and for that we should be very pleased.

comments powered by Disqus

THE LATEST FROM THE KOUK

CLIMBING THE COVID MOUNTAIN

Wed, 29 Jul 2020

TEN ECONOMIC STEPS THAT FORM A PATHWAY TO THE TOP

THEKOUK and EVERALDATLARGE OUTLINE A WAY FOR THE PEOPLE OF AUSTRALIA TO CREATE AND MAINTAIN SUSTAINED PROSPERITY

Covid19 has opened a door for Australians to positively accept significant changes that will lead to a shared good. This rare opportunity enables us to achieve sustainable economic and social goals that create a new ‘normal’ as our way of life.

These Ten Steps are presented as non-partisan recommendations to the Australian Parliament in the firm belief that, if they embrace them, the Australian economy and society will be greatly enhanced after the Covid19 pandemic has passed.

*A job for you if you want one.
A significant increase in part time and casual employment can be created that will enable you to enjoy a more creative and peaceful lifestyle and to live longer and better. The traditional age at which you would have been expected to retire will become obsolete as a result. An access age for pension and superannuation will become your choice. This will enable you to remain in paid work for as long as you want to, on a basis that you choose, while boosting the productivity and growth of Australia.

*You will get wage increases that will be greater than your cost of living.
A demand for enhanced innovative skills at all levels of employment will be created as the economy grows in strength, thereby enhancing your stature in the workforce and enabling executive salaries and bonuses to drop to levels that are accepted as justifiable by employees, shareholders and customers.

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

---------------------------- 

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced.