You have to give it to the Coalition propaganda machine – it never fails to come up with a brand new slogan with which it can belabor the Government. We are now being told by Tony Abbott and Joe Hockey that we must ‘live within our means’. How many times have we heard that? Otherwise, they tell us, there will be Federal Budget deficits ‘as far as the eye can see’. Can you count how many times you have heard that little gem?
Again, the ability of the Coalition’s media machine to devise catchy slogans is apparent. Who would want deficits for as ‘far as the eye can see’; who would object to the notion of ‘living within our means’? When you look at these words seriously though, you will see that they are, as usual, just more of the Coalition’s catchy, plausible, yet meaningless slogans.
What does ‘living within our means’ really mean?
It all depends on the time, and the circumstances. By using the phrase though, the Coalition is relying on the electorate giving it a tick of approval without asking what they really mean by it.
When the parents of baby boomers lived within their means they did so by saving until they had the cash for what they wanted. With no credit cards around, that was the only option. For a house they saved until they had a deposit and then approached the bank manager with trepidation for a house loan that often stretched over 25 years, with three-monthly repayments. They ‘lived within their means’ because there was no other option.
By the time Generation X arrived, living within one’s means morphed into paying off the required minimum on the credit card each month, which was often ‘maxed-out’. They bought what they wanted within the limit on their cards and hoped they could pay for it some time. They paid a lot of interest on the way, and some defaulted. For housing, banks were willing to lend vast sums to buy McMansions, leaving house owners to worry about every interest rate rise lest it tip them over the edge and leave them not living within their means.
These two times reflect quite different ways of ‘living within one’s means’. The Coalition is using this homely metaphor in the hope that older people will think of what was in their early years almost a ‘cash economy’, certainly for everything but buying a home, and will apply that image to the one and a half trillion-dollar economy that Australia has. It is a misleading analogy that the Coalition hopes will have older people nodding in approval – of course the country must live within its means, just like we did!
Yet, should voters think about it, most of them who own a home today did not pay cash for it – they borrowed money and paid it off over many years. If that is normal and OK for homeowners, why is government borrowing so ‘evil’, why is incurring debt such a terrible blight on government? It’s only so because the Coalition has said so. Humpty Dumpty Hockey has ensured that ‘living within our means’ connotes just what he wanted it to mean – out-of-control borrowing to fund profligate spending. He even uses the maxed-out credit card analogy.
Let’s then examine why government borrowing is in a category different from personal and household borrowing, and why placing them in the same class is misleading.
Joe Hockey would have us believe that running a $1.5 trillion national economy is not dissimilar from running a household budget. He would have us believe that borrowing and running up debt is bad in both circumstances, and that when the budget is not balanced his so-called ‘belt tightening’ is necessary, whether it be a household budget or a government one. That analogy is simplistic either by design, or because Hockey knows no better. As Hockey wants to be Treasurer, we can only hope it is not the latter.
Governments are responsible for maintaining the health of an economy, no matter what the global financial circumstances happen to be. When there is high debt, where expenditure has exceeded revenue, especially for a long while, there is a natural tendency towards ‘belt tightening’, contemporaneously styled ‘austerity’, to reduce expenditure, to lessen debt and to move towards balancing the budget. That has been a dominant school of economic thought during the current global financial crisis. However, notwithstanding that plausible strategy, austerity has not been a spectacular success where it has been applied.
Europe has been the test bed for the application of austerity, or to use Hockey’s phrase ‘belt tightening’. The economies of Greece, Spain, Portugal, Italy and Ireland, and more recently Cyprus, were jeopardized by chronic overspending, particularly on social services, generous pensions and the like, spending that was not offset by revenue. The very wealthy in some of these countries, Greece in particular, made an art form of tax avoidance, so tax revenue has been chronically below expenditure. I emphasize ‘chronically’, to highlight the fact that this is no temporary deficit, as is Australia’s. It was understandable that when these economies reached the point where default on debt threatened, bailout funding was sought to address this sovereign debt risk.
Taking Greece as an example, the Eurozone countries and the International Monetary Fund agreed on a €110 billion bailout loan provided Greece implemented austerity measures to restore the fiscal balance, privatised €50bn worth of government assets by the end of 2015, and implemented structural reforms to improve competitiveness and growth prospects. Similar arrangements were made with other countries in a comparable situation. Austerity was a key element.
It was always a controversial remedy; advocates and opponents disagreed passionately about its capacity to resolve the Eurozone state of affairs. In his 28 April article in
The New York Times: The Story of Our Time, Paul Krugman, Professor of Economics and International Affairs at Princeton University, wrote: "
People like me predicted right from the start that large budget deficits would have little effect on interest rates, that large-scale “money printing” by the Fed…wouldn’t be inflationary, that austerity policies would lead to terrible economic downturns. The other side jeered, insisting that interest rates would skyrocket and that austerity would actually lead to economic expansion. Ask bond traders, or the suffering populations of Spain, Portugal and so on, how it actually turned out." Even those of us who were not in touch with the detailed economic arguments for and against austerity, saw on TV the political upheaval and civil disturbances that followed the imposition of austerity measures, first in Greece, and later elsewhere. Despite the application of these measures for a long while, there is not much positive to show for them in economic terms, and in places like Spain, unemployment has reached 27%, with youth unemployment approaching 50%.
Another article in
The New York Times that Krugman wrote earlier in the year:
Austerity Europe, may be of interest to the technically minded as it includes a revealing graph of how austerity is accompanied by
reduced, not increased growth. Regarding that graph, Krugman says: "
In normal life, a result like this would be considered overwhelming confirmation of the proposition that austerity has large negative impacts. Yes, you can concoct elaborate stories about how it could be wrong; but it’s really reaching. It seems safe to say that what we have here is a case in which rival theories made different predictions, the predictions of one theory proved completely wrong while those of the other were totally vindicated – but in which adherents of the failed theory, for political and ideological reasons, refuse to accept the facts." The last sentence is telling – although experience has demonstrated the failure of the austerity approach, its adherents cling tenaciously to it, even to this day.
Since Krugman wrote that article, academic evidence devastating to the austerity approach has emerged. The intuitive argument for austerity and belt tightening has been underpinned all this time by a 2010 academic paper
Growth in a Time of Debt by Harvard academics Carmen Rinehart and Kenneth Rogoff of the US National Bureau of Economic Research, a paper that purported to ‘prove’ that debt inhibited economic growth, and by implication, austerity promoted it.
Rinehart and Rogoff reported three findings; the first, the one that austerity proponents relied upon, read: "
Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more.” The austerity advocates in Europe grasped onto this paper to reinforce their intuitive approach to debt problems in the Eurozone, namely that debt above a certain level inhibits growth, and that austerity was the answer. But it was not just in Europe that the paper gained ready acceptance. It was cited by Paul Ryan, the 2012 Republican nominee for the US vice presidency, in his proposed 2013 budget
The Path to Prosperity: A Blueprint for American Renewal. Did Joe Hockey also read the Rinehart Rogoff paper and use it to support his ‘belt tightening’ mantra? I wonder!
The paper held sway for a couple of years, then along came Thomas Herndon, a doctoral student at the US Political Economy Research Institute, who, as part of his studies re-examined the Rinehart Rogoff paper, and to his surprise found an elementary error in the Excel spreadsheet they used to calculate their results.
Writing in an article:
The Reinhart-Rogoff error – or how not to Excel at economics in
The Conversation, Jonathan Borwein and David H Bailey from The University of Newcastle reported that after analysing the data, Herndon identified three errors:
“The most serious was that, in their Excel spreadsheet, Reinhart and Rogoff had not selected the entire row when averaging growth figures: they omitted data from Australia, Austria, Belgium, Canada and Denmark. In other words, they had accidentally only included 15 of the 20 countries under analysis in their key calculation. When that error was corrected, the “0.1% decline” data [a key finding supporting austerity]
became a 2.2% average increase in economic growth.” [My bolding.] "
So the key conclusion of a seminal paper, which has been widely quoted in political debates in North America, Europe, Australia, and elsewhere, was invalid.” Herndon’s professors, Michael Ash and Robert Pollin, checked his findings and found Herndon had correctly identified the Rinehart Rogoff error.
The article in
The Conversation concluded:
”If Reinhart and Rogoff…had made any attempt to allow access to their data immediately at the conclusion of their study, the Excel error would have been caught and their other arguments and conclusions could have been tightened. They might still be the most dangerous economists in the world, but they would not now be in the position of saving face in light of damning critiques in The Atlantic and elsewhere.
“As Matthew O’Brien put it last week in The Atlantic: “For an economist, the five most terrifying words in the English language are: I can’t replicate your results. But for economists Carmen Reinhart and Ken Rogoff of Harvard, there are seven even more terrifying ones: I think you made an Excel error.
“Listen, mistakes happen. Especially with Excel. But hopefully they don’t happen in papers that provide the intellectual edifice for an economic experiment – austerity – that has kept millions out of work. Well, too late.”
The Gillard Government is not an adherent of the austerity approach, at least in the extreme form that was applied in Europe, but if one can judge from Joe Hockey’s words and Tony Abbott’s mutterings, the Coalition is.
It seems as if it is the conservative side of politics that favours the austerity line of attack. We hear it from the Coalition, we see it in an extreme form in Campbell Newman’s Queensland, we see it applied in its grossest form in Europe, we see it in the US in the ongoing fiscal cliff debate where the conservatives (Republicans) insisted that radically cutting government expenditure (austerity) and leaving untouched tax breaks for the wealthy is the only way to go, whereas the progressives (Democrats) advocate the opposite.
And if you need any more convincing of this stark difference in attitude and approach to debt in the Australian context, do watch
Friday evening’s episode of Lateline where economist Stephen Koukoulas, MD of Market Economics, debated ‘the health of the economy’ with Judith Sloan, academic economist and economics editor at
The Australian. Koukoulas spoke like an economist, Sloan like a Coalition advocate, slogans and all.
What the voters in Australia will soon have to decide is whether they want to go down the austerity track – ‘living within our means’ Hockey style – as advocated by the Coalition, or whether they prefer the less radical approach of the Government to bring the budget back to surplus in a steady fashion, preserving jobs and economic growth in the process.
Putting it more bluntly, voters will have to decide whether they want to follow a process of austerity discredited by experience in Europe, now stripped of its intellectual underpinnings, or follow the less radical approach of the Gillard Government that seeks to maintain modest expenditure and stay away from heavy-handed austerity, and in the process enable our nation to avoid an economic downturn and rising unemployment, a process that is based on sound economics and proven practice.
Sadly, the loose language that the Coalition uses in this debate may seduce the unthinking into believing that their plausible but empty slogans are economically sound, and well tried and tested. What do you think?
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