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Know what they say - economists may have positive and normative analyses

Comments and rejoinders on Phil Lewis "Howard’s End: how the coalition’s last budget created the ground for the current deficit", 8/05/2013, https://theconversation.com/howards-end-how-the-coalitions-last-budget-created-the-ground-for-the-current-deficits-13848

I probably don't need to read the article to point out the central argument is wrong and totally unconvincing to politically independent and competent analysts, economists and policy makers who are not mechanical and dogmatic in their thinking.
It has been nearly 6 years since the Howard and Costello government was voted out and the current ALP government came to power. SIX YEARS!
Budget policy can change every year and the current government has had FIVE YEARS and FIVE budgets to change the course.
What has happened?
We've got huge debts and every years there were budget deficits.
Yes, the government can use various excuses, but it is not right for economists to accept any of those.

In answer to Felix's question: "Lincoln, for a self-proclaimed 'economist' to speak of 'huge debts' is a bit unimpressive - tends to make me wonder about the objectivity of your entire post."

Felix, to answer your question, firstly, I am not a self-proclaimed 'economist', but with a PhD degree in economics from the ANU. So what is your definition of economists?
Secondly, my objective is to inject some sanity into the debate. If you understand basis macroeconomics you would know that government expenditure is a policy tool to get the economy to the most desirable state and can be changed to achieve that objective. The underlying assumption is to get the budget balanced over a economic cycle.
Now it has been 5 and a half years since the current government in being control, that is how many days that the course of G could have been changed to bring the budget into balance?
Neither Rudd or Gillard have been bound by Howard/Costello policies, have they? Then why blame Howard/Costello for the current deficits 5 and a half years later?
In terms of debts, they are huge, if you looked the rate of change and the magnitudes of yearly average, aren't they?
So let not be arguing according to whether one has benefited from either side of political side and be objective and independent. AND apply a little economics, if one can.

In answer to Ted's questions "Lincoln, can you elaborate on why debts denominated in the currency over which the government has sovereignty are ever an issue?
"And could you also please elaborate on why deficits are bad for an open economy with a current account deficit and a positive savings ratio?

Ted, firstly, government debts, like private debts, incur interest costs at least, irrespective which currency it is denominated in, not to mention situations may change in the future that even the principal of the government debts may be forced to pay or may need to pay. Currently due to very low interest rates due to the state of the international economies, the costs of interest payments for governments are relatively low compared to otherwise. Just think about the case where interest rates were as high as nearly 20% a year occurred before.
Secondly, there is an inter-generation fairness issue, not too different from leaving your children with debts or wealth. Current government debts if not paid, represent a liability for future generations, that is, our children and grand children.
Thirdly, there is a moral hazard issue here too. If everyone thinks and acts as if government debts don't matter, then what governments and politicians would do? And what are the limits to the levels of debts in that situation? And also, the current political arrangement, not only in Australia but in many countries, mean either one side of the main political streams or both have an incentive to spend beyond its means, because they don't face hard budget constraints and public debts are not their individual debts and often it is the case that a political party may get more votes if it spends more. That is not a good governing system, though there is little that we can do about it.
For the second question, it involves obviously more factors. However, the key situation in that case s the domestic savings are seems not to be enough for domestic investment needs in aggregate. Alternatively, there maybe international competitiveness issue involved, either shorter term or longer term.
In the former case, government deficits is a contributor to the imbalance between domestic savings and investment needs and competing with private investments for funds. While it is not always, but is generally the case that private investments are more efficient. Of course, there are some investments that are more suited for government to make their the private sector due to various equity considerations and administrative costs involved.

In answer to Peter's argument "Depends largely on what the debt is for surely, Lincoln.
"If we do what some European countries have done - like Greece - and use it to plug holes in the budget and to maintain unsustained living standards - then yeah Government debt puts you on the road to ruin - or the IMF which is essentially the same thing.
"But if the overwhelming bulk of debt is undertaken to invest in infrastructure - both human (schools) and physical (NBNs) and there is a reasonable prospect of these investments yielding a decent return in future then we are not simply saddling the future with our debts at all - we are providing the means of not only paying off those debts but also towards improving living standards.
"My point is that there are few absolutes in economics - few simple aphorisms or slogans - for example that surplusses are always good deficits always bad. Depends when and what for over the longer term. What the level of demand in the economy is doing. What the money is to be used for.
"And that's where governments have the inside running on the private sector - the long term. Private sector investors don't - can't - afford a long term view. Governments can and do if they have the courage. Sadly the Howard Governments didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."

Peter, you raised a good question, although the previous discussions have not gone to that far.
You are correct that there are different uses of government expenditures. However, even with your examples, one may find issues with governments debts in worthwhile causes.
For example, the school education revolution programs, one can argue that there were both design and implementation problems that some of the investments are not effective and productive, say even the state governments were trying to skip some fats out of those programs, not to mention some school halls and libraries are not necessarily what those school needed most.
From policy design the restriction of school halls and libraries was problematic. From implementation when it became clear that there were problems with those programs and that stimulus were no longer necessary, the government could have make some changes to increase the effectiveness of those spending.
For the NBN, leaving the politics aside, it is still open to debate to whether it is cost effective or not and whether it is the best course of action or not. Clearly, no CBA was done or publicly available.

Peter, for your last paragraph's mention of "the Howard government didn't have this courage to invest in the future - which is why they have left nothing at all of lasting value."
Although I am not a defender of either government, I think the future fund established by the Howard government may provide an example that does not support or is contrary to what is argued there.
I have to say that I don't know how many billions that was and whether that is significant as compared to the NBN amount, though.

In answer to Henry "Lincoln, please illustrate these huge debts by quoting figures and percentages of GNP etc rather than making unsubstantiated, emphatic comments. Comparative figures also are needed.
"My position is that of most economists: our debt is relatively small as a proportion of GNP."

Henry, yes you are correct if that is compared to other high debts countries in the current levels and that is clearly one way to argue it. But there are other aspects, such as rate of increase and the increased amount in a year.
Perhaps you can calculate that to substantiate I am "making unsubstantiated, emphatic comments" and to see for yourself?

In answer to Ngoc's second part "Lincoln
There are three issues in fiscal management; (i) the revenue constraint; (ii) economic efficiency of gov spending; and (iii) distributive efficiency of gov spending.
I think Prof Lewis' article focused on (ii) and (iii), that is, squandering excessive revenue in time of economic (mining) booms without paying much attention on how and where to spend, leaving bad budgetary problems in the long run, especially in downturns of the business cycle shows lack of vision. May I add here that if gov of the time reform the tax system at the beginning of the mining boom to keep a share of the excessive profits generated from minerals export sales for the people. Part of this additional revenue can be saved in income generating assets for future generations. Another part can be used to help non-mining industries where competitiveness and productivity are severely disadvantaged by the mining boom via its impacts on terms of trade, labour markets etc and to finance long awaited reforms of the education and health care systems as well as the protection of environment. The rest can be saved in gov coffer to help balance the budget when the economic downturn comes without incurring excessive debts. (That said, I think the debts you mentioned is a by-product of past budgeting practice the current gov has to bear.)
For your information, just go to ABARES statistics, get data on minerals export sales in the last 10 years and sum them up, use price elasticity also available from ABARES' various model adjust this sum, take a percentage of the adjusted sum, say between 5 and 10 per cent, then you can see how much opportunity has been missed in the last boom boom and how much harder to manage the economy in the coming years due to a faux pas in the past.
BTW, if you only use your posting name then innocent people (including me) can mistakenly say you are a 'self proclaimed economist', can't they? Anyhow, forget this and accept my thousand apologies if it is not true."

I really don't understand your logic and you really lost me in your arguments.
As I have mentioned earlier, I am not a defender of either government.
However, your arguments seem inconsistent and appear saying one thing is good but ignore the history. E.g. save for the future and save for downturns. Didn't the Howard government paid the debts and established the future fund with billions of dollars of money in it? Those are not save for the future and not save for the downturns? And those were done with no the new mining tax. And dare I say that money in the funds is better than money squandered in some government investments.
Those who argue that the Howard government should have far greater foresight and forecasting power than others so they could foresee things that others even couldn't see later than their time?
Is that a reasonable expectation? Isn't it saying we are not super rich because our ancestors didn't invent the computer thousands of years ago?

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