## Carrie-d Away

A report issued by Deloitte Access Economics this morning has compared the fiscal situation facing Australia’s government to ‘a Stephen King novel’. I’ve read an embarrassingly small number of Mr King’s works, but I’d like to offer Deloitte a suggestion from On Writing:

Now comes the big question: What are you going to write about?

And the equally big answer: Anything you damn well want. Anything at all…as long as you tell the truth.

But I’m also mindful of King’s suggestion on the following leaf, that:

Book-buyers aren’t attracted, by and large, by the literary merits of a novel; book-buyers want a good story […] When the reader hears strong echoes of his or her own life and beliefs, he or she is apt to become more invested in the story.

So I tip my cap to Deloitte in knowing what newsreaders (in both senses of the term) want. They want to hear about a federal budget limping down the road of time, a hole torn in its side, as it sinks into deficit, at a snail’s pace, trying in vain to repair its blowout, the goalpoasts forever being moved back by China…

“Mayor Quimby, you are well known for your lenient stance on crime, but suppose for a second that your house was ransacked by thugs, your family was tied up in the basement with socks in their mouths, you try to open the door but there’s too much blood on the knob… My question is about the budget, sir.”

In short, people want a budget that could look like that of their household or business. But which household or business is the sole issuer of Australian dollars? Moreover, when did the deficit become the target of government policy? If the government is the sole issuer of Australian dollars, it will simply never go broke in Australian dollars. With this knowledge, the deficit should be seen as a tool of policy, like a classic Stephen King deus ex machina which salvages otherwise doomed storylines.

Maybe Deloitte’s laundry would still employ me…

Speaking of tools, Finance Minister Mathias Cormann made an insightful point in an interview this morning about the tools the government can use, and the outcomes which are simply out of its control. He didn’t extend the argument to the logical conclusion reached for here, but it was a promising start. The Australian government can control the volume of pure government expenditure, ($G$). It can also control the schedule of consumption, income and corporate tax rates ($\tau$).

The government spending flow $G$ adds to total income $Y$ and courses through the economy. Every expense incurred by one party (be it the government or the private sector), is the income of somebody else. The government doesn’t know how many times its initial injection of funds will flow around the system (as other people’s income), just like your boss doesn’t know how many times you’ll spend the income you’ve been paid (creating income for someone else in the process). But over a year, the stream of total income flows will add up to $Y$.

The schedule of tax rates (represented by the average, $\tau$) is applied to this flow of income and taken back by the government as its ‘tax revenue’. The government budget deficit ($DEF$) which emerges in a given year is then the difference between government expenditure and total tax revenue :

($DEF = G - T = G - \tau Y$)

Because the government can’t control all of the right-hand-side components of this equation (namely $Y$), it has no control over the left-hand-side result. The government has no idea how many times its initial injection (of $G$) will be spent again to create income for someone else. If the answer is ‘lots of times’, then $Y$ will increase and so will tax revenue $\tau Y$. This shrinks the budget deficit. If the answer is ‘not many times’, then the budget deficit will grow, all else equal. To reiterate:

Things the government can control: Things the government can’t control:
• Pure expenditure ($G$)
• The tax rate ($\tau$)
• Total GDP ($Y$)
• The deficit ($DEF$)

Transforming the ‘drunken sailor’ simile usually applied to its spending habits, the government can get back on the right foot (then the left, then the right, until it takes twelve steps…) It must ‘accept the things it cannot change’ (i.e. the deficit), but find ‘the courage to change the things it can’ (i.e. expenditure and tax rates).

The Bottom Line

There are more horror stories in the Australian economy than are dreamt up in Deloitte’s philosophy. The unemployment rate is above 6 per cent and isn’t turning around. Youth unemployment is over 14 per cent. Wage and consumer price inflation rates are subdued at around 2 1/2 per cent, but property prices are growing at almost 7 per cent. Already inadequate pensions are set to be frozen in real terms.

Just take it back, is all.

It’s not the government’s budget which is imbalanced; it’s the economy. Because Australia issues its own currency, the nation can’t ‘go broke’ like you or I can. (And as we’re more likely to, if the government ‘tightens its belt’ as Deloitte’s colourful language could be interpreted to urge.) But there is hope, in the form of well-directed government spending, to make the drab walls of a non-existent budget problem dissolve away. Get busy spendin’, or get busy lyin’. That’s goddamn right.

Salvation Lies Within.

References

1. Godley, W. and Lavoie, M. (2007), ‘Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth‘, Palgrave Macmillan: Hampshire.
2. King, S. (2000), ‘On Writing: A Memoir’, Hodder and Stoughton: Great Britain.
1. #1 by danieldevoss on 4 May 2015 - 10:53 am

I was sure I’d beat Bill Mitchell to it, but alas, it wasn’t to be… http://bilbo.economicoutlook.net/blog/?p=30819

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