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Yes We Canada

Immigration is in the news again, courtesy of US President Donald Trump’s executive order to ban citizens of seven Muslim-majority nations from travelling to the United States. Despite some previous confusion, the wording is definitely ‘ban‘. For some reason, Trump seems to have the policy switch flicked firmly to Bannon ban on.

World leaders have almost unanimously condemned Trump’s executive order, essentially irrespective of their position on the political spectrum.

Canadian Prime Minister Justin Trudeau, who is slightly to the north of Donald Trump both geographically and in the World Leader Telephone Directory, tweeted:

Prime Minister Malcolm Turnbull, on the other hand, has refused to be drawn into criticism of the ban. Cynics might suggest that the emergence of this taci-Turnbull is a nod to the anti-immigration ferment within a precarious Coalition government, but I’d like to put political motivations to one side in this post.

tiddalik

Tiddalik prepares to Drain the Billabong

Comparing Canada’s and Australia’s divergent stances on immigration is particularly fascinating, due to the innate similarities between the countries:

In short, Australia should compare itself to Canada more often.

trudeau

…maybe not physically.

Given Australia’s likeness to our antipodean cousins, I wanted to test the hypothesis that graces the bumpers of so many Australian-bought-but-foreign-made cars. Are We Full? Or can we Fuck On?

2015 Estimates[1][2][3][4] Canada Australia
Population
(people)
35,848,610 23,777,800
Area
(km2)
9,984,670 7,692,094
Density
(people/km2)
3.59 3.09

Looking at the vital signs, Canada is 50% larger than Australia by population and 30% larger by size. Let’s ignore Trudeau’s pledge to increase Canada’s immigration intake and instead let’s freeze Canada’s population (and population density) at 2015 levels. What would it mean for Australia to look like the Canada of 2015? I want to investigate two scenarios:

  1. Australia’s population density becomes equal to Canada’s (3.59 people/km2), and
  2. Australia’s population becomes equal to Canada’s (35.8 million).

1.1 Population Density

2015 Estimates and Scenario[1][2][3][4] Canada Australia
Population
(people)
35,848,610 27,617,425
(+16%)
Area
(km2)
9,984,670 7,692,094
Density
(people/km2)
3.59 3.59

If Australia was willing to share 232rd-place density honours with Canada and accommodate 3.59 people per square kilometre, its population would increase by almost one-sixth, to 27.6 million.

‘But sir,’ I hear you protest, ‘Australia’s population isn’t spread evenly across the country! The Koolamugerys’ place is hardly 6 hours return!’

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A young Bernard Salt rides for demography

Reader, you’re absolutely right. With 89% of its population living in urban areas (cities with more than 100 000 residents) Australia is the 8th most urbanised OECD country in the world. Almost 82% of the Canadian populations can be found in cities, the US is about the same, and the OECD average is 80%.

1.2 Population Density considering Urban Size

If we still wish to compare Australia to Canada, we’ll have to make an adjustment for urbanisation. Australia’s three most populous cities–Sydney, Melbourne, and Brisbane–hold about 49.5% of the nation’s population. Let’s combine their populations and sprawling metropolitan areas to make a city called Sybourbane. Australian residents can live in Sybourbane, or they can live elsewhere.

Canada’s seven most populous cities–Toronto, Montreal, Vancouver, Ottawa-Gatineau, Calgary, Edmonton and Quebec–hold about 49% of the country’s population. Let’s similarly combine these seven cities and their inhabitants to create the mega-city Tormoncouttagartonbec. Canadians can either live here, or somewhere more pronounceable.

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It could be worse.

What do these two synthetic cities look like?

2015 Estimates and Scenario[1][2][3][4] Canada
7 largest cities
‘Tormoncouttagartonbec’
Australia
3 largest cities
‘Sybourbane’
Population
(people)
17,595,706 11,759,186
Area
(km2)
37,217 38,184
Density
(people/km2)
473 308
Population share
(% of country)
49.08% 49.45%
Area share
(% of country)
0.37% 0.50%

Our two supercities are around the same area in absolute terms and account for around the same proportion of the country’s population. The Canadian supercity holds 1.5 times as many people as the Australian city (17.5m vs 11.8m), and therefore around 1.5 times more people per square kilometre.

Keep in mind that Sybourbane and Tormoncouttagartonbec aren’t as fictitious as their whimsical names suggest. Sybourbane is what would happen if we wedged Greater Brisbane and Greater Melbourne around the fringe of Greater Sydney, holding the cultural cringe constant–it’s a bigger sprawl and a bigger population, but the density of the supercity is simply the average of its component cities.

What Sybourbane and Tormoncouttagartonbec do show us is just how much more dense Australia’s and Canada’s cities are than their respective remainders. Sybourbane has 308 people per square kilometre, which is 100 times more people than the national average!

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There they are

Now it gets really interesting. Rather than dialling up Australia’s overall population density to match Canada’s, and absorb 3.8 million more people across the wide brown land, what would happen if Australia were match the densities of both Canada’s supercity and its rural remainder?

 2015 Estimates and Scenario[1][2] Australia
3 largest cities
‘Sybourbane’
Rest of Australia
 Total Population
(people)
32,097,393
(+35%)
Population
(people)
18,052,985 14,044,407
Area
(km2)
38,184 7,653,910
Density
(people/km2)
473 1.83

So even if we account for the incredible difference in density that separates Australia’s three largest cities and the rest of the country, when we fill both of these areas until they become as dense as Canada’s supercity and non-supercity components, Australia’s population increases by 8.3 million people, or 35%.

2.1 Population

As a final testament to punching above our weight, let’s go all out and match populations with Canada. Let’s also move every one of the additional 12.1 million people into Australia’s three largest capital cities (or our supercity Sybourbane), and keep the remainder of Australia as dense as it currently is–in short, the Hansonite nightmare.

hanson

I Will Come To You became a hit in the migrant community

 2015 Estimates and Scenario[1][2] Australia
3 largest cities
‘Sybourbane’
Rest of Australia
 Total Population
(people)
35,848,610
(+51%)
Population
(people)
23,829,996 12,018,614
Area
(km2)
38,184 7,653,910
Density
(people/km2)
624 1.57

Under this scenario, population density in Sybourbane more than doubles. Residents of Sydney, Melbourne and Brisbane, already bedridden from complaining about decades of infrastructure underinvestment now have twice as many neighbours offering unsolicited and unAustralian soups. Sybourbane’s population density in this scenario (624 people per square kilometre) comfortably surpasses that of its Canadian sister city Tormoncouttagartonbec (473 people per square kilometre). We can’t let this happen, we won’t let this happen…

It’s going to happen. Within 5 years, if Australia’s population continues its growth rate of the past 5 years, it will be home to 32 million people (Scenario 1.2). Within 6½ years, Australia will be home to 35 million people (Scenario 2.1), the same as Canada’s 2015 population.

While these numbers demand attention for the infrastructure challenges they pose, we should not fear density for density’s sake. To call 624 people per square kilometre ‘dense’ is mildly overcooking Sydney’s current claim as the 914th densest city in the world. We’re gaining on you Liege, Belgium!

Pauline.jpg

Any way you look at it, density is destiny.

Indeed, the worst-case scenario for our inundated tri-city called Sybourbane is benign–even by the Canadian standards of 2011. If we return the cities of Tormoncouttagartonbec to their original locations, we find that for every one of their Canadian square kilometres in 2011:

  • Toronto accommodated 945 people,
  • Montreal accommodated 898 people, and
  • Vancouver accommodated 803 people.

Whereas if all of the population growth Australia will see by 2023 were concentrated in the supercity, then for every one of its square kilometres:

  • Sybourbane would accommodate 624 people.

That is, the three most densely populated cities in Canada in 2011 were still denser than Sydney, Melbourne and Brisbane would be, even if we invited 12.1 million Canadians to move to those cities.

Which doesn’t sound like a bad idea–depending on which Justin they send.

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What have you done for me stately?

Among the catalogue of ironies perpetrated by the humourless, few are more gutbusting than the wholehearted participation of small-government advocates in the processes of government. If there’s one thing that both libertarians and small-L liberals are more enthusiastic about than reducing the size of the state, it’s that they be next in line to ride the leviathan.

Without doubt, massive inefficiencies exist in any organisation designed by fallible people. But to suggest, as those who would shrink the state might be tempted to do, that the public sector has a monopoly on busywork or socially useless production is far too generous a compliment to the government’s selection criteria. As Hanlon’s razor attests: never suspect a conspiracy when incompetence will do. (The public sector doesn’t have a monopoly on incompetence, either.)

And yet the attitude that many proponents of ‘small government’ bring when they are added—no doubt with a great deal of self-loathing—to its swelling ranks, is that the state should do less, not more. If anything, government should be a paragon of anaemic efficiency, operating like many of these advocates claim to have run their own small businesses.

Rather than granting him the misfortune of seeing his dreams realised in the public sector, let’s envisage what the philosophy of a small-government cheerleader would actually look like in business.

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“This is ripe for parody. Ripe!”

Imagine installing a rabid adherent of the ‘small business’ ideology at the helm of Woolworths or Wesfarmers. In the name of efficiency, we should firstly expect widespread redundancies. Coordinating such a large number of staff members—many of whom do nothing but coordinate, in turn, the layers of management below them, down, down, all the way down to the floor staff who are employed largely to throw out perishable food which some know-it-all regulator has decided would be poison after four months—is the real waste here.

Drastically reducing staff and store numbers would leave the company with quite a bit of spare real estate, which could be sold off to another part of the private sector for more efficient use. Because the company was contracting, not expanding investment, it could live within its means and not flirt with the folly of going into debt—at least, not for as long as this management team was around. And if the one‑off windfall from its asset sales one day ran out? Well, that would be a burden shouldered by future generations. At least current management didn’t compound their problems by going into debt today to invest in more stores.

Cuts.jpg

Granted, the company would sacrifice some of its economies of scale and scope with these cutbacks, but think of how efficient the handful of remaining stores would be! Service delivery would be far, far more limited—realistically, the only people served would be those who could afford to go elsewhere for sustenance—but queues would be a thing of the past. What’s more, the company would no longer need to cross‑subsidise its unprofitable regional outposts using the proceeds of its metropolitan stores. And really, if people wanted to buy vegetables that badly, they would have made the lifestyle choice of moving to the city, rather than living out on some farm where all they did was mass-produce vegetables or something.

With his operation running more efficiently, our Woolworths or Wesfarmers fountainhead figurehead could unashamedly embrace the principles of the free market by doing away with those anti‑competitive contracts that gouged farmers and enabled his shops to sell milk for $1 per litre. Milk is for the weak, anyway. Any man still drinking milk past the age of 25 should consider himself a failure. On the whole (and on the skim), new management would be doing private citizens a favour. For too long, grocery bludgers have suckled at the teat of Big Supermarkets, under the guise of gaining nutrients for survival. The philosophy of small business would put an end to that.

leech

Despite his innate Randian superiority, our small businessman could not afford to rest on his laurels at this point. After eviscerating his workforce, his worries would turn to whether any of these ingrates would turn on him. Not in the commo revolutionary sense, of course—even the proles could recognise we all had to tighten our belts—but in voting with their feet. Now that we mention it, the few lingering stores had been suspiciously quiet since the former workers had their primary source of income removed… This could only mean one thing: they must be starting their own businesses! Hah. Good luck in this economy.

The uninitiated reader might consider our hero to be something of a villain for reducing employment, output and profit. Not so! In pursuing his efficiency-enhancing policies to their logical extreme, he has shrunk the size of business and thus succeeded in one important respect: concentrating its (admittedly) smaller residual profits in the hands of an even smaller (but very deserving) number of residual colleagues.

Feet_Up.jpg

This reductio ad absurdum doesn’t deny the wisdom of stamping out waste or chasing efficiency gains, whichever sector we find ourselves in. But to claim that so-called private sector virtues—balancing the budget over the cycle, avoiding debt at all costs, embracing perfect competition by shunning exclusive deals and refusing corporate welfare, reducing employment to an inflexible skeleton crew and cutting the wage (costs) of those who remain to below‑subsistence levels—are observable or desirable, even in the private sector they’re supposed to represent, is lunacy. For small government acolytes then seeking to impose the ‘conventional wisdom’ of these imagined businesses onto the public sector, perhaps Hanlon’s razor needs sharpening: never suspect an ideological imperative when making a quick buck will do. Just watch how quickly that champion of free speech, the Institute for Public Affairs, shuts up when asked about its funding sources.

Costanza.png

It’s precisely because of the latent (if hypocritical) success of such well‑funded vested interests, who advise unleashing unbridled competition upon everything except the market for paid advice, that the ‘public sector bad, private sector good’ dichotomy has become entrenched in public debate. Consider the privatisation of public utilities (this summer, your most expensive Christmas present is likely for AGL or Origin Energy), or the outsourcing of public projects (world-class NBN, anyone?) to the intrinsically more streamlined, competitive, and lower-cost private sector. Why would you shop anywhere else?

Not that Australian Parliament has lately been covering itself in the glory of ruthless efficiency. But even here, the very lethargy of debate serves the false premise that the public sector is incapable of doing anything except the most elementary functions of defence, a few tax and welfare cuts, and a bit of basic R&D to keep Malcolm’s agile mind from fogging over. A well-worn phrase has re‑emerged to classify resistance to anything that falls outside this broadly agreed agenda for government: playing politics.

Playing politics is the charge levelled at one side for failing to fold on something that its opponents consider straightforward or trivial. Its validity largely depends upon where you draw the boundaries between the public and private sectors. Bill Shorten has accused the Prime Minister of ‘playing politics’ in suggesting that the South Australian government’s renewable energy policies posed a threat to the energy security otherwise afforded by non-renewable sources like coal and gas. In turn, Malcolm Turnbull has accused the Opposition of ‘playing politics’ in rejecting the same‑sex marriage plebiscite as divisive, expensive and unnecessary.

Agree_to_Disagree.jpg

Playing politics is apparently an indulgence that prevents governments from governing, or oppositions from representing the unlucky minority who voted for them. But it doesn’t take a reference book to recognise that the opposite of ‘playing politics’ isn’t ‘working politics’. No, it’s surrendering the point to your opponents, conceding that their constituencies and vested interests are more representative or crucial than yours. With greater frequency, the motive for accusing one’s sparring partner of playing politics appears to be undemocratic, cheered on by unrepresentative but well‑funded interests who would rather hitch the political process behind their inexorable private sector tugboat than see it play out as a public sector tug‑of‑war. While I loathe interminable political debates as much as the next person, I want politicians to play politics, almost as much as I want the Australian cricket team to start playing cricket. Politicians should play politics, eat politics, sleep politics, work politics and repeat politics. It’s what they’re elected to do!

Whether you resent or resign yourself to politics as currently ‘played’, the beneficial potential of the state remains missing presumed dead. The overt libertarian supporters of small government fantasise about it as a regulation‑stripping rubber stamp, and thus cheer on its demise. Arguably though, a greater threat to the state comes from the equivocators. These are the avowed supporters of democracy, who nevertheless adopt a small‑government ideology. They are the small-L liberals, or the advocates of ‘liberal democracy’.

Full disclosure: only implicitly, I might be identified as a small-L liberal. I trust people. I assume the best in people. I admire the initiative, ingenuity, resilience and sympathy of people. When people work or enterprise in the private sector, I don’t assume they immediately become mindless slaves to the profit motive. But nor do I assume that people who’ve chosen a life in the public service become indolent pencil‑sharpening clock-watchers.

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Regardless, I consider deeply misguided the trumpeting of one’s own liberalism, as if the absence of freedom is currently the gravest threat to western societies. Arguing for more liberal democracy amid chronic failures of social democracy is like campaigning for more dessert when an increasing number people are going without dinner. And while the importance of classically liberal principles like openness, flexibility and self-determination are important, they cannot risk being drowned out or transmogrified by the kind of society-denying libertarianism that would bite the hand of the state that, at some point or another, has fed its ingratitude.

To provide an example of the short-sightedness of well-meaning small-L liberals, let’s take the Uberised economy. Stage 1: Uber and its ilk are heralded by liberals as the dawn of a brave new innovative age. The reluctance of Uber to pay tax, to attend humanely to the conditions of its workers, or to share its profits beyond its few founders are dismissed by liberals as transitional speedbumps at best, or evidence of the declining relevance of the state at worst. Stage 2: The technological revolution reaches its zenith, with robotic cars—which liberals had hungered for—emerging as one of many innovations liberating the masses from the drudgery of employment. Stage 3: In the workless liberal utopia, all individuals can pursue their potential with the aid of a Universal Basic Income provided by the state, which is of course financed by…all the taxes that Uber and its ilk failed to pay. Whoops. Will government in any meaningful, democratic sense exist in such a place? Or should we look forward to Uber Presents Western Democracy?

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So what is the alternative? Though both libertarian and liberal champions might have their delicate free-speech‑loving ears offended by such a suggestion, it must exist in restoring the role of the state. While ‘the system’ we have now has at times failed the majority, this is not because the state is unfit for purpose. Rather, the state has been uprooted from its democratic foundations by opportunists wishing to make a quick buck, abetted by libertarians who attack its foundations and by liberals who are either too preoccupied downloading their latest firmware updates or too staunchly, unironically protectionist of their own current slice of tolerable fortune.

A stronger state has at least two desirable features. The first is the recognition, not before time, that the private sector is not enough to deliver social benefits. For instance, the private sector will never deliver sufficient jobs to secure full employment. Even if the non-government components of demand (consumption, investment and exports) improved such that all available workers could be hired, an emboldened and vocal labour force is simply antithetical to the private sector’s interest at the bargaining table. The second feature of a larger state is that such emboldened, employed, and embiggened working and middle classes provide an organic safety valve to fight the state’s potential overreach.

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Robust middle and working classes are better nourished, educated, paid and engaged with democratic processes. They are granted admission to the liberal bubble (which, I’m sure if they are ready to shake off recent and offensively illiberal charges of elitism, liberals won’t mind) and are more capable of rejecting at the ballot box those government actions that fail to capture the will of the people. To think what a government threatened only by its constituents and not by moneyed interests might achieve! It might tax super profits during a once-in-a-lifetime mining boom, or borrow to invest in public goods at lowest-in-a-lifetime interest rates. It might start to sound dangerously like civilised social democracy.

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The silent majority and the ignorance of experts

Earlier this year, in that brief window between Donald Trump’s nomination and Bernie Sanders’ concession, a friend and I attended a panel discussion featuring a leading light from the Australian Labor Party. During the question and answer session, my friend asked of the politician:

As Donald Trump gets more popular, despite his abominable personal and business record, why does it seem that the American people are so willing to vote against their best interests?

To his credit, the politician immediately rejected the premise that voters were blind to their own interests. He suggested instead that voters knew moneyed interests—Trump included—had long exploited the system to benefit themselves. Accordingly, he argued, voters would turn to the candidate pledging to tackle income inequality, raise the minimum wage, clean up Wall Street, and get big money out of politics. And that’s why they’d elect the natural advocate of these policies: Hillary Clinton.

As a relative newcomer to US politics—and almost by definition a die-hard Bernie Sanders fan—my friend was puzzled by this apparent non-sequitur. Attempting to sound credible, I hastily back-filled a candidate explanation for his reasoning:

Centre-left parties know that they have to talk like Sanders but walk like Clinton. As much as I’d love them to elect Bernie, he’s simply too anti‑establishment.

History has proven that both the politician and I were at least half wrong. He had underestimated US voters’ preference for panache over policy substance, and I had underestimated their desire to appoint an anti‑establishment candidate, regardless of his political allegiance.[i]

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In the 2016 campaign, female candidates were judged by their record. Male candidates were judged by their hair. #progress

A few months after this event, while the campaign that every centrist political commentator had predicted would precede an easy Clinton victory was careening off the rails, I attended a second, informal dinner with Labor staffers. Our conversation turned to the delightfully unpredictable business of interacting with the public, when one staffer spoke about those enchanting constituents who, in their calls to their MPs’ offices, could cite chapter and verse of the Labor Party’s platform.

While we scratched our collective heads to recall the last Labor government that pursued the democratic socialisation of industry, production, distribution and exchange, an uncomfortable truth lingered above our meals: the ideals professed in a political party’s platform are almost inevitably conceded to the pragmatism of adversarial politics. Both major parties would agree that in the end, governing is done by hard‑headed governments. Any reflection of the high‑minded populism of the platform is generally a coincidence.

Meanwhile in the United States, Bernie Sanders had emerged after his elimination from the Democratic primaries clutching a new edition of the Democratic Party’s policy platform. The most progressive platform in Democratic Party history, Sanders insisted, would tie a Clinton presidency to the mast of ‘delivering for all Americans’. As it turned out, the Clinton administration didn’t even get the opportunity to let them down.

While in Australia we watch the dust settle from the US election, and contemplate the figurehead of a President Trump with his appointed underbelly of regressive Republicans, the two major parties are busily repositioning their brands. Both claim to have ‘learned lessons’ from Trump’s victory, but each leader echoes a different element of the President-elect’s message. Being Australian politics, our attempt to imitate the United States is half-hearted at best, but we’re still giving it a shout.

Malcolm Turnbull, in typically tone-deaf style, has thrown out the baby but kept the bathwater, shunning the populist parts of Trump’s package and settling for popularity within his own ­­party room by pressing on with ill‑advised tax cuts for (the two‑thirds of) Australian businesses (who choose pay them in the first place). Bill Shorten has sampled from Trump’s protectionist message, with his democratic remix asking of Australians ‘buy Australian, for Australian’ (workers). While this rhetoric perhaps inadvertently pushes Labor closer to the socialisation objective soon to be written out of its platform, it remains to be seen whether the party will resist the temptation to revert to its platitudes of ‘sensible government’, where one talks like Sanders but walks like Clinton.

Unlike the Coalition, the Labor Party has the political flexibility both to embrace a more comprehensive agenda that truly delivers for the majority and to shun, without contradicting its principles, the repugnant elements of a Trumpish campaign. If Australian voters are as mindful of their best interests as our earlier Labor politician argued that US voters are, then many Australians are likely to accept only begrudgingly the ‘deplorable’ elements of a Trump-style platform, that many centrist commentators consistently called out.

We are the…1 per cent?

And what of these commentators? Their arc runs in parallel to that of the major political parties. The press, too, saw governing as the province of governments, not of mavericks who were so audacious as to claim they were relinquishing ties to ‘the system’ and instead representing ‘the people’. For most of the press, all that stood between Clinton and the White House was the inconvenience of a democratic election.

Full disclosure: I followed the US primaries as a quixotic, almost tongue‑in‑cheek Bernie backer. I believed—I believe—that in the US (and, to that same, faintly echoed degree, in Australia) the time has come for a ‘new New Deal’ agenda to be realised. Unlike a handful of Sanders die-hards, and along with my inquisitive friend, I was willing to transfer my entirely inconsequential support to Clinton, insofar as she adopted these policies as a comprehensive alternative to the true backwardness of Trump. But the biggest obstacle to Clinton’s election proved not to be the readiness of the American people to accept sweeping change, but the obsolete notions held by the Democratic Party and a complicit press about what constituted ‘electable’.

Thus the media followed in lockstep the Democratic Party’s march off the electoral cliff. As the officially endorsed Clinton campaign unfolded, I grew progressively dismayed by the Democrats’ relentless dilution of the agenda that Sanders and his movement had advanced, in the name of ‘electability’. But I was even more gobsmacked by the media’s oblivious cheerleading for a storyline and a heroine that looked boilerplate, sensible, and inevitable—notwithstanding the giddy lilt that commentators failed to stifle when replaying soundbites from that cheeky (but patently unelectable) Trump!

But in dismissing Trump’s candidacy out of hand, the mainstream media betrayed the same kind of superciliousness that pervaded a Democratic Party paying mere lip-service to Sanders’ plans for genuine change.[ii] The American people wanted Jack Daniels, but the press gang was cheering on the wowsers to serve Coors Light. Separate from any endorsement that it may have made, any media outlet that failed even to conceive of a Trump victory needs sincerely to consider its credibility, relevance the neutrality of its presentation. Unfortunately, if justifiably, many of Trump’s supporters need no encouragement to do just this.

Post mortems of the 2016 US Presidential Election have progressed through the Kübler-Ross five stages with respectable speed, from the denial that Trump could ever pose a threat to Clinton’s anointed run, to the acceptance that ‘conventional wisdom’ was a phrase conceived in irony by economist John Kenneth Galbraith. Fittingly, as media outlets and the party that Galbraith once advised now wander together through the wreckage of the US election, they are accompanied by a handful of economists humbly offering characteristically courageous omniscience-after-the-fact.

One rationalisation of Trump’s victory, it seems, is economic! Apparently, disenfranchised Americans had seen an economic system in which they were working (or looking for work) harder than ever, for ever-smaller recognition of their endeavours. Media-savvy economists have bravely suggested that underpaid, underemployed American voters were simply mad as hell and couldn’t take it anymore. If only there were a presidential candidate who pledged tackle income inequality, raise the minimum wage, clean up Wall Street, and get big money out of politics…

Here, though, another parallel appears. Even late-to-the-party economists would now acknowledge that if the Democrats and the mainstream media wish to remain relevant to the people they claim to represent and inform, they must acknowledge their errors and rewrite their raisons d’être. If history is any guide, they won’t. And if economists are any guide, they won’t.

Economists, both in their own right and because of their proximity to the political process, provide a useful case study about what to expect next from centre-left parties and the media. To borrow from Bobby Kennedy:

There are those look at things the way they are and ask why, but most economists look at the same things and tell you they could have explained that.

Even ‘to borrow from Bobby Kennedy’ is a lesson in how economists preserve their credibility by citing not the original source (in this case, George Bernard Shaw), but a more recognisable repackaging. Professional economists know that they must do two things. First, to maintain their standing among their peers, economists must shout from the shoulders of conventional wisdom. Second, to hold the esteem of the public, their shouts must remain steadfastly unintelligible.

Economics is by no means a settled field. Take fiscal policy: some economists will profess that ‘there is no alternative’ to austerity following a demand-driven downturn, while others will argue just as sincerely that such conditions call for immediate fiscal stimulus. The austerians stake out the turf war by likening a government’s budget to a household’s, while the ‘Keynesians’ are content to fight on these false premises. Not having read or understood Keynes in the original, they become Keynesians in austere clothing, and Harry Truman told us where that kind of transvestitism leads.

Very few ingredients are required to conduct a ‘respectable’ economic debate in the popular media. After the acceptance of a few logical fallacies, an infusion of deliberately obscurantist jargon, all that remains to be added are two parties, convinced of the absolute truth of their argument and content to talk past each other. It’s the kind of debate from which everyone—except the onlookers it might affect—walks away thinking they’ve won. It sounds awfully familiar.

Despite pretensions that its standard theory is ‘science’ and its policy is akin to ‘engineering’, economics resembles the inexact, non-science of politics more closely than its practitioners would care to admit. And, like in politics, it’s not always the quality of your argument or the primacy of your sources that fosters your success as an economist, but your bravado, your pedigree, and ‘who you know’ (to put into a reference section).

Economics establishes certain rules and conventions (the American Economic Association conference is a must), which create insiders and outsiders. Insiders who heed these norms, though they might disagree with one another, care less about the disagreement than they do about their invitation to the debate: once inside, they can quote the Kennedys and discuss balanced budgets with abandon. Insiders can crow about a Great Moderation as it unfolds, about having solved the central economic problem of preventing depressions, and revel in the unprecedented rise in GDP, ignoring outsiders’ warnings about the unequal distribution and precarious sources of this income, until a Great Contraction arrives. At this point, insiders can claim with all the naked naivete of a Clinton‑backing media outlet that ‘no one saw this coming’, before trumpeting their newfound interest in inequality, while both rediscovering the wheel and continuing to ignore the barrow pushed by insiders who hadn’t talked about anything else throughout the whole sorry affair. Because, according to the insiders, outsiders in the economics profession, with their nerdy preoccupation with Keynes in the original, their unfashionable attention to distributional issues, and their disarmingly populist conclusions, might as well not be practicing economics at all.

Perhaps due to the success of economics in remaining incomprehensible, the public might be unaware that the discipline faces a similar crisis as that of the major political parties and the mainstream media. Erstwhile outsiders are gathering around Fortress Economics, threatening to make its often-antisocial mantras—that the government should rein in spending and aim for budget balance even amidst chronic unemployment, that an unemployed person hasn’t searched hard enough for vacancies that don’t exist, that your wage reflects, by definition, the additional contribution you’ve made to output, and that free trade is an unalloyed force for good—accessible to and contestable by the layperson. As in the political arena, some maverick economists are shysters in it for the money, while others have simply read more, or more relevant volumes, than insiders preoccupied with being palatable (read: electable). Worryingly for the economics establishment, some outsiders are even well‑credentialed, such as Sanders advisor Stephanie Kelton, who holds a PhD from Cambridge, and who can tell you that the mechanics of fiscal policy aren’t so much mythical as mundane, but that, still, almost everything you’ve heard about a government budget constraint is incorrect.

This doesn’t mean that everyone should get a solid gold house and a rocket car. But it does mean we could get rid of mass unemployment without much of a fuss.

The triple tides in the major political parties, the mainstream media, and the economics profession find common cause in an increasingly fractious and—though Trump himself might be reluctant to admit it—a better educated populace. The public are sick of being condescended to by a class of professionals who resent rather than represent them, who confine their public interactions to party platforms with planned obsolescence, to tweets that remain unheeded, or to derisive claims of economic illiteracy.

While a case has been made elsewhere about the ignorance of experts—the disdain that blue‑collar workers hold for professionals—the reciprocal contempt that professionals hold for the people they profess to represent is the far more invidious ‘ignorance of experts’. At some point, the political class decided it was reasonable to turn the existential question often asked of them: ‘yeah but what have you done for me lately?’ back onto voters. The media adopted this condescension, and insider economists have never known any attitude different.

Although the insiders from the economics profession deserve the demise that awaits, economists are correct in assigning economic motives to the actions of the ‘silent majority’. ‘The people’ demonstrably desire change, but it’s change from representative democracies that are neither. It’s change from being molested by fork‑tongued technocrats with slippery jargon promising efficiency dividends, productivity payoffs or fiscally orderly houses, but in reality delivering job cuts, wage freezes and endless exasperation. Ironically, economics can offer some guidance to its co‑accused in politics in the media, in the form of one of its fatuous first principles: ‘incentives matter’. The voting, viewing, and value‑adding public don’t need politicians, the media, or economists as much as these professions need the public. And, all at once, the experts are starting to catch on.


[i] Before you protest that ‘Hillary won the popular vote’ and better reflected the will of the majority, I don’t care. The structure of the Electoral College is the least of the Democrats’ worries. Trump, the most unpopular Presidential candidate of all time, shouldn’t have even gotten close.

[ii] Before you protest that ‘Hillary won the Democratic nomination’ both by popular vote and upon aggregation, I don’t care. Sanders, a little-known Senator from Vermont, with almost no media coverage, and with SuperPAC funding one one-hundredth the size of Clinton’s, shouldn’t have even gotten close.

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(D)omar Comin’!

In 1944, Evsey Domar wrote one of the most important papers in macroeconomics. He proposed a model of the economy in which the government could stabilise total output at a desired level, by way of bond-financed expenditure. The exposition was clear, the conclusions were undeniable and, most importantly, the maths were relegated to an appendix. Almost anyone could understand the paper, which might be why almost no-one talks about it.

“Oh indeed,” said Mr Little, approvingly.

But Domar’s main contribution wasn’t that the government could secure a level of output that was consistent with full employment through deficit spending. Crucially, he also showed that if bonds were issued to cover these deficits, the interest payments on the accumulating debt would be very unlikely to bankrupt the government in most growing economies.

The process

Domar takes what we’ve labelled a ‘horizontalist’ approach to government expenditure. The private sector begins with funds in its bank account (1). The government issues a liability, bonds, which it offers to the private sector as an asset, in exchange for some of their money (2). The government empties its account into private sector accounts when it spends (3). The government then taxes the private sector to obtain money for interest payments (4) and disburses interest (5).

GOVERNMENT SECTOR PRIVATE SECTOR
Assets Liabilities Assets Liabilities
1 Deposits $0 Deposits $100
2 Deposits $20 Bonds $20 Deposits $80
Bonds $20
3 Deposits $0 Bonds $20 Deposits $100
Bonds $20
4 Deposits $5 Bonds $20 Deposits $95
Bonds $20
5 Deposits $0 Bonds $20 Deposits $100
Bonds $20

The only difference between rows (1) and (5) in the table above is the creation of government liabilities/private sector assets. While this might seem innocuous, there are two possible hitches. First, if Domar’s government wants to spend more money, it must repeat the process, which will increase the quantity of bonds outstanding. Second, the outstanding bonds attract interest, which will increase the tax take (even though this is ultimately returned to the private sector).

Some qualifications

The Domar model has no ultimate source of funds; everything begins in medias res. We can assume there’s a central or private bank lurking somewhere offstage, but all money in the system simply appears in the hands of currency users.

Because Domar’s model permits a government solvency problem, it might not be best suited to modelling the economies of Australia, Canada, Japan, the United Kingdom or the United States, whose governments tax, spend and issue bonds in their own respective currencies and can never ‘run out of money’ in a meaningful sense. Japan’s government-debt-to-GDP ratio has passed 100 and now 200 per cent on some measures, but investors know that the Bank of Japan would convert their bonds to cash if they sold en masse. Eurozone governments don’t have the luxury of obtaining euros on demand in such a situation, so increasing debt-to-GDP ratios can present a problem for them.

Omar Little, Neo-chartalist

Nevertheless, the prospect of skyrocketing debt-to-GDP ratios still commands the attention of some governments (who are always able to repay their debts if the need arises). So until economists and politicians in countries with sovereign currencies are as enlightened as you, dear blog reader, here’s some ammunition for any fights they might want to stage on old, probably obsolete ground.

Evsey Domar presents: When Debt-to-GDP Ratios Explode!

The burden of the debt

Domar is interested in two related questions. Can the quantity of bonds (‘the government debt’) increase without limit? And will the interest payments, taken as tax, ever become unpayable?

Let’s say that the government wants to hit a target flow of income every year, Y. By itself, the private sector currently spends C per year in consumption and saves the rest. To increase the total flow of income to the target, the government adds its own expenditure to the total stream, G = Y - C.

But the government needs to have money in its account first, so it issues new bonds to the private sector. If the government wants to sustain income at its target rate Y by continuously spending, it must keep adding to the stock of outstanding bonds by (\Delta GD) each year, and it must also pay interest on the outstanding stock of bonds i \times GD.

Domar therefore splits the government’s debt into two components: the principal and the interest. The principal is the total stock of bonds on issue, GD, which is a debt owed by the government (and, often neglected, an asset owned by the private sector). The interest component, i \times GD, Domar labels the ‘burden of the debt’, because he proposed it be paid by taxing the private sector.

If you’re interested to see how this proposal leads to anything other than ruin, read on! Domar sets up two scenarios in his model in order to give his detractors the best chance of success. (Feel free to skim through the next two sections for the highlights, if maths isn’t your thing.)

Do fo’-fives still beat a full house?

Scenario 1: A zero-growth economy

The first scenario assume that national income (or expenditure, or output, or GDP) is constant every year. The economy just doesn’t grow at all.

Y = Y_{0}

To ensure this constant flow of income is achieved, the government contributes a given proportion, G/Y, or \alpha for short. Government debt, GD, accumulates from its initial level, GD_{0}, by this constant fraction borrowed each year

GD = GD_{0} + Y_{0} \times \alpha \times t

The debt-to-GDP ratio is found by dividing the second equation by the first:

\frac{GD}{Y} = \frac{GD_{0}}{Y_{0}} + \alpha \times t

But as time marches on, with the government constantly taking a fixed slice of a fixed pie, its accumulation of pie slices will be truly gigantic. ‘In the limit’, or when time equals infinity, the government’s debt is infinite:

\lim \limits_{t \to \infty} \frac{GD}{Y} = \infty

Granted, we’re not in year infinity just yet, but won’t we be in trouble when we get there! Thankfully, we don’t have wait that long before we realise that, in reality, the government debt-to-GDP moves up, down and sideways from year to year. A constant stream of deficits isn’t necessarily paving the road to infinite debt.

Domar acknowledges the unlikelihood of expanding debt too, attributing this extreme case to the extreme setup of this scenario. In an economy where income has to be kept at the same level every year, the government would essentially be trying to find unproductive investments. (Government spending in this dreary scenario would not only have no multiplier effect, it would nullify the multiplier effect of any private spending.) As badly as some governments have performed, few have done that badly.

Scenario 2: A constant-percentage-growth economy

So Domar proposes a more realistic case. The GDP of most developed economies for the past 100 years has grown at about an exponential rate. This sounds pretty drastic, but it amounts to saying that income grows by around the same percentage, g, every year:

Y = Y_{0} \mathrm{e}^{g \times t}

In this scenario, the government still borrows a constant proportion \alpha of income, but because that income is now growing, so too is the amount borrowed. Accordingly, debt accumulates:

GD = GD_{0} + Y_{0} \times \alpha \int_0^{t} \mathrm{e}^{g \times t} dt

GD = GD_{0} + \frac{Y_{0} \times \alpha}{g} \times (\mathrm{e}^{g \times t} - 1)

The debt-to-GDP ratio is:

\frac{GD}{Y} = \frac{GD_{0}}{Y_{0}\mathrm{e}^{g \times t}} + \frac{\alpha}{g} \times (1 - \mathrm{e}^{-g \times t})

In the limit, government debt-to-GDP ratio in a growing economy reaches a constant value:

\lim \limits_{t \to \infty} \frac{GD}{Y} = \frac{\alpha}{g}

Moreover, “MONEY BE GREEN!”

The bottom line

Even though the government adds a constant stream of deficits into the total flow of expenditure in this second scenario, because income is growing, the debt-to-GDP ratio stabilises. And because the debt-to-GDP ratio stabilises, so too does the interest burden, levied as taxes on the private sector.

Deficits and debt might not be as disastrous as we’re told to think. Indeed, Domar paints a much brighter picture:

‘The problem of the debt burden is the problem of an expanding national income.’

In other words, there’s no compulsion to pursue a surplus to ‘pay off’ past deficits, if a growing GDP–to which productive government expenditure contributes–can do the trick. And even then, if you’re in a country whose government spends in its own currency, debt-to-GDP ratios might not be all that meaningful.

But Domar’s point remains sound. The goal of sustained GDP growth seems agreeable (sustainable growth we can leave for another blogpost). An expanding national income is enabled, in part, by government expenditures on the demand side and increased investment in productive capacity on the supply side. These policies can be achieved jointly; for example, raising expenditure on health and education boosts incomes and raises the productive capacity of workers.

And if leaf raking or ditch digging are the only options for employing idle capacity, and the idle minds of policymakers? In a depressed, low-inflation economy, the choice is easily stated. The output lost from a day of unemployment is gone forever. The extra debt incurred in employing productive workers to contribute to a growing economy eventually stabilises, and it provides an asset to the private sector in the process. The trade-off is difficult to spot.

References

Domar, E. (1944), ‘The “Burden of the Debt” and the National Income‘, The American Economic Review, 34(4), pp 798–827.
Lavoie, M. (2014), ‘Post Keynesian Economics: New Foundations‘, Edward Elgar: Cheltenham.

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Hello, Newman.

Frank N. Newman’s slim and sensible book Freedom from National Debt should be mandatory reading for anyone who wants to express an opinion about government spending, deficits and debt. Newman’s exposition also echoes the aspiration of this blog in three immediately apparent ways. First, he’s the kind of economist who trained as a mechanic before presuming to be a scientist or engineer. Whereas the representative economist is the obnoxious and ill-proportioned Porsche driver who wouldn’t know how to pop the bonnet, Newman strikes me as the roadside assistance mechanic who would patiently change the battery while hearing that our driver ‘already knew how to do that’.

“Grease monkey?” “I don’t care for that term…I don’t know too many monkeys who could take apart a fuel injector.”

Second, rather than investing his considerable mental capital in academia, Mr. Newman devoted it to developing a close understanding of how the government and the private sector actually spend, aided by three decades of experience in the US Treasury and the banking sector. Third, informed by this reality, Newman sensibly and rigorously answers the question: ‘How is the government going to pay for it?’ In so doing, he awakens the economic possibilities that most governments (and many citizens) don’t realise are within their grasp.

Freedom from National Debt offers its reader precisely that. Bill Hicks would approve.

Newman_Calculating

“When you control the nation’s currency, you control…information!”

These tributes shouldn’t be read as an appeal to authority. While Freedom from National Debt shows how we can all enjoy a better ride, it’s the logical mechanics getting us there which matter. While I highly recommend buying the book in the original (the Kindle edition is A$4.01 at time of writing), because descriptions of government spending, taxing and bond sales tend to read like your car’s service manual, in this blog post I’ll distil the main points, punctuated by the occasional gif.

The players

We can best understand the economy Newman presents by dividing it into a public and a private sector. The public sector consists of the government and the central bank. Newman’s focus is on countries with their own central banks, which issue a currency that’s not fixed to the value of another (or to the value of gold). Such a currency is convertible only into more of itself. Countries with these arrangements include Australia, Canada, Japan, the United Kingdom and the United States. In addition to the public sector, Newman specifies a private sector, comprising private banks, along with households, firms and the overseas sector. This setup has an implicit hierarchy.

“And I’ll be there, in all my glory, watching, watching as it all comes crumbling down!”

The hierarchy

At the top of the pyramid is the government, which names the currency, demands that all taxes be settled in it, and empowers the central bank to issue it. On the second layer is the central bank which, in addition to currency issuance, manages the government’s accounts and the reserve accounts of all private banks in the economy. Private banks occupy the third layer of the pyramid, because they also create money every time they grant a loan, although this is done with an accounting ledger, rather than with physical currency. When an agent in the private sector wants to buy a house, a car, or anything requiring a bank loan, a private bank simply scribbles the money into existence. The private sector agent has a new deposit, created ‘from nothing’, which he or she uses to pay the seller. The private sector agent also has a new debt, equal to the amount of the loan, which eventually must be repaid. Accordingly, filling out the base of the pyramid are private sector households, firms and overseas agents, who use domestic money, but cannot issue it, no matter how hard they might try.

For the rest of the private sector, their dream of becoming a bank have gone unfulfilled.

How they spend

This four-layer pyramid therefore consists of two ‘money issuers’ (private banks and the central bank) and two ‘money users’ (the rest of the private sector, as well as the government, under current arrangements). Money issuers lend money into existence, whereas money users merely shuffle existing money around.

Let’s look at this pyramid in more depth, starting from the base.

Private sector (money users)

When you or I spend our hard-earned cash, we’re just transferring a portion of our existing deposits to someone else. The total amount of money in the system is unchanged. If you’re fortunate enough to have a job, where did your salary come from? Probably your employer’s bank account. And how did your boss get that money? Most likely from customers who paid for your company’s goods and services. And those customers probably had money because they had jobs, with bosses who paid them… Without the intervention of a bank creating a loan, we’re quickly chasing our tails. Where did the money that you and I spend originate? While you might rightly see yourself as a ‘wealth creator’, neither you, nor your boss, is a money creator.

(Unless you work for a bank. But don't be difficult.)

Unless you work for a bank. But don’t be difficult.

Sure, firms might issue corporate bonds to finance some of their activities, but the households buying these merely transfer their own deposits into firms’ bank accounts. No new money enters the system in this way. Similarly, a household buying shares or government bonds is making a portfolio allocation decision using already existing deposits  No new money enters the system in this way either.

There's no new liquidity; it just gets moved around.

For you and me, liquidity just gets moved around.

Private banks (money issuers)

Private banks have the power to create new money whenever they ‘spend’. Most often this happens when banks interact with households and firms (who can’t issue money). To reiterate, when a bank grants a home loan or buys corporate bonds, it simply adds new money to the deposit side of its ledger, which the deposit holder can then use to spend. Whenever a private bank lends, total money in the system increases.

The central bank (a money issuer)

The central bank is the public sector counterpart to a private bank, in that it also creates new money when it spends. But the central bank has additional responsibilities: managing the government’s bank account; managing the reserve accounts of private banks; and acting as a ‘lender of last resort’ to private banks when they can’t sort out payments between themselves.

We’ll assume, in the spirit of realism, that the central bank avoids lending directly to the government, which compels the government to fill its own bank account with private sector funds if it wants to spend. This is the conventional practice in Australia, Canada, Japan, the United Kingdom and the United States.

And, with some caveats, the Ukraine.

And, with some caveats, the Ukraine.

The government (a money user?)

The government of these countries is at the top of the money tree. By making laws about the currency it will receive taxes in, and by entrusting issuance of this currency to the central bank, the government should be considered as the ultimate issuer of the currency in the countries mentioned above. However, institutional arrangements, entered voluntarily by these governments, make them appear as though they’re mere money users. So we’ll treat them as such.

Sorry. We already have a Newman.

“Sorry. We already have a Newman.”

Therefore, in order to spend, the government offers bonds to the private sector in exchange for deposits in its own account. When the government ‘deficit spends’, it transfers this newly obtained money right back into private sector accounts. The deposits of the government are unchanged. The deposits of the private sector are unchanged. Total money in the system is unchanged. But now the private sector has a new asset–government bonds–and the government has a new debt of identical size. (The one that we’re supposed to be afraid of.)

Should we fear government debt?

Immediately, we can see one reason public debt might not be as scary as it seems: government debt is a private sector asset. But scaremongering about the increasing value of our assets just doesn’t seem as newsworthy.

“Only the currency’s true owner would rather give it away than see it come to harm.”

Nevertheless, two rational fears remain, which should be addressed: how does a government like Australia’s pay interest on its debt? And what happens if bondholders decide to sell up?

Government bond sales in Australia are always very popular with investors. Because there’s never a question of ‘where the government is going to get its money from’, investors can be confident that they’ll always receive the interest and the principal. (Most investors simply roll maturing bonds over.) If some investors do want to cash in their bonds, the government provides them with this money, including any interest payments…and it obtains this money by issuing yet more bonds! Interest payments do not consume any part of the government’s finances that would have otherwise been spent on real resources.

Nevertheless, at first glance, this looks something like a Ponzi scheme. Paying off debt by issuing more debt is surely the road to ruin! Won’t the charade eventually fall apart? What if all Australian bondholders were to sell their bonds en masse?

Oh the humanity!

“Oh the humanity!”

Let’s say this favourite worst nightmare of the fiscal conservatives comes true and all Australian bondholders redeem their stakes. The government would simply provide these people with Australian dollars. It’s a straight swap of one Australian government asset (a bond) for another (a deposit), with some help from the central bank. The government is in no better or worse position to spend than it was before. The reason the government could repay investors in this unlikely event–because the central bank is the ultimate source of Australian dollars, and it’s ultimately a creature of the state–is the very reason most investors won’t cash in their bonds. (The story is different for Europe.)

But if investors do sell up, they now have a bundle of Australian dollars, with which they can do three things: (1) buy Australian goods and services; (2) invest in other assets denominated in Australian dollars; or (3) exchange Australian dollars for a foreign currency. If they exchange Australian dollars for a foreign currency, the other party to the exchange faces the first two choices. And so it goes. The only way Australian dollars will ever leave the system is if bank loans are repaid. Just as private banks and the central bank were the only two entities bringing money into the system, they are the only two entities through which money can leave.

Newman_Door

“I spent my money on the ClapCo D29. It’s the most impenetrable lock on the market today. It has only one design flaw: the door must be closed!”

The bottom line: Freedom from national debt?

I’ve not done much justice to Newman’s fantastic book. Buy it if you can. But if nothing else, remember the following.

Governments with their own central banks, issuing a currency that’s not fixed to the value of another currency (or to the value of gold), will always be able to pay their debts. Sensible investors know this, which is one reason why government bonds are still so popular in Japan, a country which boasts a government debt-to-GDP ratio of around 175 per cent, but also boasts the only central bank that issues yen (in which the debt is denominated). The eurozone nations are in a different position. Greece, Spain and Germany don’t have the capacity to issue euros, so unless the ECB is in a financially stabilising mood, there’s no guarantee that these countries will repay their debts if investors cash in their bonds.

For governments with monetary systems similar to Japan’s (or Australia’s), the only risk of excessive spending is inflation, not insolvency. But excessive private sector spending is no less of an inflation threat. The small-government people might have neglected to mention that. But to give them some credit, just because the government can buy everything it wants, doesn’t mean that it should. Inflation is a reasonable fear, regardless of its source.

As households and firms, you and I do not effectively ‘lend’ anything to the government, at least not for long before it spends that money back, and definitely not in the sense that central and private banks lend. The money in our deposit accounts that we might choose to invest in government bonds has at some stage been put there by someone else, a currency issuer. Any money that we think we’ve ‘made’ can ultimately be traced to only two sources: (1) a private bank which at one time granted a loan to someone (whether it was you, your boss, your boss’s customers…), or (2) the government which, in concert with the central bank, once bought something from the private sector. Most of the transactions you and I make with our money merely shuffle existing deposits around.

Newman_Dance

Shuffling. Everyday.

Some might still argue that ‘freedom from national debt’ will only occur when there’s no national debt left. Indeed, that’s one policy option available to the Australian government. But I’d prefer the ‘freedom to choose’ a government that directs its money towards building and maintaining real public assets and leaves a guaranteed financial asset for the private sector as the signature of its works.

References

  1. Mosler, W. B. (1995), ‘Soft Currency Economics‘, http://moslereconomics.com/mandatory-readings/soft-currency-economics/
  2. Newman, F. N. (2013), ‘Freedom from National Debt‘, Two Harbors Press: Minneapolis.
  3. Wray, L. R. (1998), ‘Understanding Modern Money‘, Edward Elgar: Cheltenham.

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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.

Andy_Dufresne_Obtuse

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.

John_Coffey_Tired

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.

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.

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Taxes and Praxis: Technical Notes

In the previous post, Taxes and Praxis, I attempted to clarify a process which is constantly confused by mixed metaphors and misapprehension.

As far as I can tell, the balance sheet rendition of this process was accurate and watertight. (But of course I’d say that.) Nevertheless, the exposition did tread a tightrope strung between two positions on whether a sovereign government ‘needs’ tax revenue in order to spend. On one side are the so-called ‘neo-chartalists’ and on the other are the ‘horizontalists’. (To anticipate a T-shirt slogan, yes, some Economists Do It Horizontally.) From a sufficient height, these two arguments are so close as to be indistinguishable, because they’re making the same fundamental point. Certainly, taxes (or bond sales) appear to finance the spending of a sovereign government, under current institutional arrangements. For the government to spend, it has to have ‘money in the bank’ first. And the money in the government’s own bank account at any time is indeed the legacy of previous tax collection and bond sales. But is the circus currently constructed around government taxing and spending operations necessary? Conceptually, can the luxury of spending be liberated from the certainty of taxes?

Most academics in the neo-chartalist camp admit that there must be ‘money in the [government’s] bank’ first, but they’re more interested in the mind-expanding possibilities that a sovereign currency grants (but which the government usually ties its hands from realising). As a result, they usually consider governments with their own central banks as inseparable parts of a unified public sector. This is called the ‘consolidation hypothesis’.

On the other hand, horizontalists are sticklers for process. While they’ll acknowledge the teaching moment that the neo-chartalists are trying to share, and even support the neo-chartalists’ conclusions, the horizontalists insist on describing exactly what unfolds in practice. Sadly, the conventional wisdom extracts and combines the worst of both parties’ arguments, while the parties themselves are arguing so vocally about semantics that they become too hoarse and haggard to compete in the more important debate. Watching it unfold is like being Tim in the following scenes:

Since the conclusions from my previous point rest on reconciling a semantic point, I’m obliged to walk the tightrope once more, for clarity. So, sigh, here it goes. Enter the Dragon.

(Or is it Way of the Dragon?)

Does the government need your money? Simon and the Horizontalists

If the government needs your tax dollars before it spends, then perhaps I’ve wasted your time and confused you unnecessarily. But I’ve realised that main the difference between the neo-chartalists (or Gareth in the above video) and the horizontalists (or Simon the IT guy) is the question that they think is being asked.

Simon, the IT guy and eternal pedant, heard, “Does the government need your money in order to spend?” And his answer is, “Yes, under current government and central bank treaties and operational specifications, the government needs a positive balance in its account at the central bank before it can spend.”

Simon would argue as follows:

  1. The balance sheet operations in the previous post depict standard bond-financed deficit spending. The government needed $4 million in its account and it sold bonds, to Gail, in order to obtain these funds, which Gail created with nothing more than a ledger entry.
  2. The government could have financed its expenditure by taking a full $4 million in taxes from Trudi-Ann up front. If Trudi-Ann didn’t have $4 million to meet this hefty bill, she could treat it as an outstanding liability, make the movie, sell it to the government and pay off her taxes with the proceeds. Note that, in this situation, taxes do appear to precede government spending. (And unlike the previous option, no new money is created here.)

But that’s the extent of Simon’s operations-focused answer. Most sovereign governments currently engage in a mixture of both processes to fill their bank accounts prior to spending. They sell bonds on the secondary market (to the bank owned by Gail) and/or they tax (Trudi-Ann) first. The government does seem to need your taxes first, particularly in the second scenario.

Should the government need your money? Gareth and the Neo-chartalists

Gareth, usually correct on the moral of the story but imperfect on the details, heard, “Should the government need your money in order to spend?” And his answer: Nope. For the following reasons:

“Assistant to the regional manager.”

  1. With a sovereign currency, the government shouldn’t have to go to the secondary market (Gail) to sell its bonds. As argued in the previous post, ACT I, in which the government sells bonds to Gail’s commercial bank before the central bank buys them back, could be cut out altogether: the government could sell bonds directly to the central bank. This is sometimes called ‘monetising the deficit’ and is an almost unspeakable taboo in the conventional wisdom. But as long as the central bank drains reserves from the system (ACT I Scene 3), as it must, if it wants to hit its cash rate target, the results are equivalent. The government gets a deposit, without having to tax Trudi-Ann, while the balance sheet of the commercial bank is unchanged overall. For this reason, Gareth’s people often argue that the ‘independent central bank’ is just an illusion–if the government wants to spend, the central bank is inescapably complicit.
  2. Logically speaking, the tax take is not even ‘your’ money at all. What if the government demanded Trudi-Ann pay her taxes before it bought her movie? And what if Trudi-Ann couldn’t defer her tax payment and her bank didn’t grant her a loan? Unable to pay her taxes, Trudi-Ann would have to declare bankruptcy, while the government would collect nothing, and Stop the Boats would never become the Waterworld-topping blockbuster it was destined to be. But not because Trudi-Ann couldn’t pay her taxes to finance the film. Rather, the system would collapse because the government didn’t spend the tax money into existence first! Government and central bank balance sheets obscure the sequence of events, but logically, even for a so-called ‘taxpayer-funded’ program, spending must precede taxation.

The Bottom Line

Under current arrangements, it appears as though taxes do precede, and contribute to the finance of, government spending. But should they? Logically, it’s the other way around. Government spending happens before taxation. And in practice, after the accounting smokescreen is blown away, the amount that government spends is independent of the tax it collects. Public spending can, and should, be liberated to pursue the public purposes that you, the consenting and taxed public, are empowered to decide. So think big. As David Brent’s favourite philosopher puts it:

Appendix: two concepts of government spending and taxation

Say the government and the private sectors each start with $100 in their respective bank accounts. (This money had to be spent into existence at some point in the past, by either a central or private bank, but they’re off the scene now.)

The government wants to spend $120. In this situation, the horizontalists would suggest the following sequence of events.

  1. Start with $100 each.
  2. Government takes $20 from the private sector as tax.
  3. Government spends $120 into private sector accounts.
  4. Government offers $100 in bonds to private sector (representing the part of its expenditure not matched by taxes).

Balances are restored to their original amounts and $100 in new assets have been created.

Government Sector Private Sector
Assets Liabilities Assets Liabilities
1 Deposits $100 Deposits $100
2 Deposits $120
(incl. tax)
Deposits $80
(after tax)
3 Deposits $0 Bonds $100 Deposits $200
4 Deposits $100 Bonds $100 Deposits $100
Bonds $100

The neo-chartalists would propose the following chain of events, emphasising that a sovereign government shouldn’t need money in its account before it spends because, well, it’s a sovereign government:

  1. Start with $100 each.
  2. Government spends $120 into existence using ‘keystrokes’ (or an entry in its accounting ledger).
  3. Government takes $20 from the private sector to ensure the latter recognise that taxation is representation.
  4. Government offers $100 in bonds to mop up the excess deposits in the private sector.

At the end of this sequence, the amounts of private sector wealth, money and bonds are identical to the first case. And that’s why this argument is largely semantic and almost unnecessary.

In this neo-chartalist vision, however, the government appears to end up with $220 of deposits. How is this so? The answer is kinda zen. If the government ‘didn’t need’ the $100 it had back in Step 1, why should it ever have any amount of money in its account? If it’s spent into existence using keystrokes, government money balances are superfluous, according to the neo-chartalists. It sounds like a Buddhist proverb, but the balance sheets below depict the neo-chartalist claim that a sovereign government ‘neither has nor doesn’t have money’. It just has the power we entrust to it.

Government Sector Private Sector
Assets Liabilities Assets Liabilities
1 Deposits $100 Deposits $100
2 Deposits $100 Deposits $220
3 Deposits $120
(incl. tax)
Deposits $200
(after tax)
4 Deposits $220 Bonds $100 Deposits $100
Bonds $100

Recommended reading

The following sources, though copied from the previous post, remain as relevant as ever.

  1. Australian Office of Financial Management (2015), ‘Securities Lending Facility‘, Australian Government, http://aofm.gov.au/ags/securities-facility/
  2. Baker, A. and Jacobs, D. (2010), ‘Domestic Market Operations and Liquidity Forecasting‘, RBA Bulletin, December, pp 37–44.
  3. Bell, S. (2000), ‘Do Taxes and Bonds Finance Government Spending?‘, Journal of Economic Issues, 34(3), pp 603–620.
  4. Fullwiler, S.T. (2008), ‘Modern Central Bank Operations–The General Principles‘, Center for Full Employment and Price Stability Working Paper, June.
  5. Fullwiler, S. T. (2012), ‘Krugman’s Flashing Neon Sign‘, http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html.
  6. Godley, W. and Lavoie, M. (2007), ‘Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth‘, Palgrave Macmillan: Hampshire.
  7. Juniper, J., Sharpe, T. and Watts, M. (2014), ‘Modern Monetary Theory: Contributions and Critics‘, Journal of Post Keynesian Economics, 37(2), pp 281–307.
  8. Lavoie, M. (2013), ‘The Monetary and Fiscal Nexus of Neo-Chartalism: A Friendly Critical Look‘, Journal of Economic Issues, 47(1), pp 1–32.
  9. Mitchell, W. F. (2010), ‘Taxpayers Do Not Fund Anything!‘, http://bilbo.economicoutlook.net/blog/?p=9281
  10. Mosler, W. B. (1995), ‘Soft Currency Economics‘, http://moslereconomics.com/mandatory-readings/soft-currency-economics/
  11. Newman, F. N. (2013). ‘Freedom from National Debt‘, Two Harbors Press: Minneapolis.
  12. Reserve Bank of Australia (2015) ‘Domestic Market Operations‘, http://www.rba.gov.au/mkt-operations/dom-mkt-oper.html
  13. Reserve Bank of Australia (2015) ‘Open Market Operations‘, http://www.rba.gov.au/mkt-operations/resources/tech-notes/open-market-operations.html
  14. Tymoigne, E. and Wray, L. R. (2013), ‘Modern Money Theory 101: A Reply to Critics‘, Levy Economics Institute of Bard College Working Paper No. 778.

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