Beeson's bizarre comparison of China with Japan's military past

Comments on Mark Beeson "What China did and should learn from Japan", 30/01/2016

This article, though probably good in economics, is unfortunately overblown in terms of comparing China’s current military stance, or even its or approach in the South China Sea or East China Sea, with that of Imperial Japan in the second half of the 19th century and the first half of the 20th century. Japan was then a militarised country, expansionary and aggressor, invaded quite a number of countries in Asia.

It is hard to understand the author could get the comparison so wrong. Even in economic and developmental aspects, it is doubtful that the China model is similar to the Japan model.

In terms of development stage, China is now far from the stage of 1990 Japan. As a result, there is still a long way for China to go to ‘exhaust’ the role of state in maintain rapid growth, if the argument of the different roles of state (institution reforms) needs to evolve.

PS: That piece by Beenson, shows some economists may get very strange perspective when they apply their economics knowledge to something new to them, even though I am an economist too.

How advance of experiment economics - depending on capacity to model and understand models

Comments on Andreas Ortmann "Economic theories that have changed us: experimental economics", 11/07/2015

I am an economist myself by training, although my formal training was derived back to the early 1990s, more than 20 years old. As a result, I don't really know much about the experiment economics, although I have certainly heard of it and aware of it.

That said, it seems one cannot get too much into the differences between agents/people in formulating a realistic and workable economic model, simply because of the complexity that poses for modelling and to get consistent result. Everyone can be different from another. and there are billions of people on the world. People are consumers and agents, in economics. How can you model billions of different minds as individually represented ones in a model?

Again, having said that, it is possible to incorporate some key insights from experiment economics into slightly more complex economic models, so both worlds of the traditional economics and the experiment economics can be married into one workable model.

Most economic models are some abstraction of the real world, so they can capture the main aspects but simple enough to understand and apply. Of course, with computing technology advances more complex models are constructed to simulate the reality in more complex and more realistic ways.

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."
Ngoc
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?

Savings, investments and industrialisation/urbanisation versus external balance

Comments on Michael Pettis “Ten signals to watch as the world resets”, 19/02/2013, http://www.businessspectator.com.au/bs.nsf/Article/China-rebalancing-growth-markets-GDP-trade-pd20130219-52RAQ?OpenDocument

I am not too sure how much finance Professor Michael Pettis understands economics, even the basic economic principles.

China is still industrialising and urbanising. It's level of per capita income is very low compared to industrialised countries. It has more than half of its population, probably more 700 million, still live in rural villages. There are a lot of infrastructures that need to be built to facilitate its industrialisation and urbanisation.

Naturally, that needs investments, huge investments over many years.

It is against this background that Professor argues the following highly questionable points:

"China must bring both its savings rate and its investment rate down sharply. If it can bring savings down faster than investment, China is probably rebalancing in the right way, and this should show up as strong growth and a declining trade surplus."

Without savings and investments, how could China industrialise and urbanise?

This is where some academics just simply follows some popular topical sayings and prescribe non-sense ideas.

Given its needs for investments, the sensible policy is to channel its savings to investments in infrastructure and urban constructions to accommodate the transfer of hundreds of millions of rural people to urbanised living.

Professor is understndably worried more about so called external balance. But that should not necessarily require a cut of both savings and investments. As long as savings are balanced by investments, external trade should also be balanced.

That is probably economics 101 and even a finance professor should understand that.

Apparently Professor Pettis does not appear to.

This is also why many Chinese university students are so disappointed with their professors and lectures.

Now we can see some of the reasons why that is the case.

Effect of globalisation on the supply side

Comments on Stephen Grenville “Why forecasting has broken down”, 10/01/2013, http://www.businessspectator.com.au/bs.nsf/Article/Global-economy-fiscal-policy-forecasting-models-ec-pd20130108-3R4MS?OpenDocument

I think the reasons why those international forecasters consistently got their forecasts wrong you mentioned are correct ones, though there might be more than those.

I think there might be a different effect of globalisation on the aggregate demand and supply of an economy.

The conventional frameworks for macroeconomics may suffer from lacking a closer look at the effect of globalisation on the supply side in the context of a serious supply side shock in the wake of the GFC and the ensuing various other related government debts and fiscal problems.

Let's say various macro policies do have an effect on increasing the aggregate demand of an economy, but that may not necessarily restore the domestic supply side when international supply can substitute domestic supply due to their advantages in being unaffected by the supply side forces that exist in the more advanced economies such as the US and EU.

This increased effect of globalisation and trade substitution on the side supply may suggest that the full recovery of the advanced economies to their normal growths may take longer time even though the macroeconomic policy particularly the monetary policy is much more accommodating now as compared to the 1930s.

Unless the governments can come up with new ways to restore the domestic supply side of an economy, the road to recovery will be long and hard for those economies.

Theories and practices of economics with innovation in between

Comments on Shaun Vahey "Academics v practitioners: split views within the Shadow Board", 4/12/2012, https://theconversation.edu.au/academics-v-practitioners-split-views-within-the-shadow-board-11110

The views of both practioning and academic economists are "should be", though they may have different perspectives in their thinking.


The academic economists there may have a too theoretic focused and may be a little too rigid and inflexible. In their mind, it is all theories that matter. If it is not in accordance to the theories, they cannot be. But the Fed has operated on a non conventional basis for quite sometime and that points out the potential shortcomings with the academic macroeconomists (their thinking).

Practitioning economists may be too affected by the markets.

Meaning and meaningful in measuring producivity

Comments on Tim Mazzarol "

Poor management performance and the implications for Australia’s economic outlook", 15/07/2012, https://theconversation.edu.au/poor-management-performance-and-the-implications-for-australias-economic-outlook-8254

While Dr Gruen and Dr Dolman's paper fingers out at what they view as poor management, particularly amongst our nation’s manufacturing firms based on some interesting research recently completed by the World Management Survey, chart 1 and chart 2 alone are not necessarily helpful in supporting their viewpoint.

Chart 1 is a time series while chart 2 is a cross-sectional. Although chart 2 indicates what is argued in this article, that is, the difference in management between Australian manufacturing firms and world best such as the US, Japan and Germany, is does not say how that difference changed over the same time period shown in chart 1.
Besides, chart 1 show the multifactor productivity had declined since 2003 not just from 2008-09. Was that coincident with the mining boom from 2003?
Further, I doubt the meaning of multiproductivity shown by chart one would really mean much to firm and industry management, because such measurement, while having its merits, may have some weaknesses in terms of significant relative price changes. We all know that the mining boom was associated with significant rises in mineral prices. From profit maximisation point of view, if the out price rises, then even the multifactor productivity stays constant or goes backward the firm may still be more profitable.
That is the difference between academic style studies and real world operators.
So the question is how to be most meaningful in measuring productivity in the real world. That would require a bit of creativity, not simply adopt what is available. Creativity may be controversial when it first appears, so it needs courage too.
If I were to redo a study on productivity similar to show the case shown chart 1, I would take the changes in relative prices into account and come up with a new concept or new measurement for it.

PS: The same logic applies to the situation when an industry or the economy is experiencing recessions when capital is sticky in the short term and cannot be adjusted as freely and quickly as desirably. So from microeconomic point of view, firms maximising profits would take the most effort to do it and that does not necessarily mean an improvement in multifactor productivity.

Do we really need a new climate change paradigm?

Comments on Mutsuyoshi Nishimura "In search of a new climate change paradigm" June 15th, 2012, http://www.eastasiaforum.org/2012/06/15/in-search-of-a-new-climate-change-paradigm-2/

Nishimura asks the following question: “what kind of carbon market is needed?”
The answer is quite simple, yet the world at large seems unable to get it.
If it is true that “there is a strong consensus that imposing a price on CO2 emissions is the most cost-effective way to motivate all players to use less fossil fuels and move to low-carbon or non-carbon economic systems”, as Nishimura states, then isn’t a global price for carbon emissions and an equal per capita distribution of the revenue from pricing revenue simply enough to do the job?
Isn’t what is taught in economics to deal with pollution issues?
Most economists in the developed world including many of its national leaders and politicians should understand this, but few of them advocate this simple, efficient and effective method/policy. Why?
The answer is also simple, but I leave that to the readers.

My blog is back again - lessons of the GFC for economics

It's been a while that I have not included my comments in my blog due to certain inconvenience at work. And  it is time to resume doing it.

Comments on Kemal Derviş and Homi Kharas "New challenges for the global economy, new uncertainties for the G20", 17/06/2012, http://www.eastasiaforum.org/2012/06/17/new-challenges-for-the-global-economy-new-uncertainties-for-the-g20/
The GFC and possibly a potential second GFC seems to indicate more fundamental causes at play, that is, the tendency of markets particularly assets markets fails to work properly and to reflect correct values in the face of the surge of developing economies and its effects on world financial especially money markets.
The rapid growth in average productivity in fast growing developing economies generates excess savings/credits. This causes some sorts of bubbles in the asset markets by having more fund and credits to push up stock market and housing market.
People with apparently increased values in their assets may consume more than their life time real income level.
Bubbles mis-allocate national resources to bubbling sectors cause them to boom to meet the demand.
So, it seems that the GFC is caused by the fundamental failures of markets working along when governments fail to realise national and international regulation and cooperation are needed to correct those market failures.
This may be a lesson in economics when something is new and significant appears that the market is unable to cope.

Spectrum of capitalism - something between pure market to pure state

comments on "Davos elite confront capitalism crisis", 26/01/2012, see http://www.businessspectator.com.au/bs.nsf/Article/Davos-elite-confronts-capitalism-crisis-QUL3N?OpenDocument&src=hp9

The debate really is no brain. It is like the kind of debate between new-classical economists and new Keynesian economists, the truth is always some where in between.

Keynesian realise that market can have problems from time to time in getting full employment not soon enough and that is true, so government has to do something to aim at achieving full employment.

Even that theory works, then there is politics that endangers the theoretical fiscal policies that will be needed to ensure full employment.

Then, there are further problems with markets, it is not just aggregate demand or supply that are the only issues, there are structural and inter-temporary issues that are not too dissimilar to the aggregate issues. Those kind of structural and inter-temporary issues also need policies to manage and government is needed to play that role to address those issues.

Then of course income allocation has been recognised as an issue so government constantly work on taxation and welfare policies.

All those issues added together, you have a much bigger role for government to play in the economy: that is essentially some kind of capitalism and state work together, or some kind of state capitalism.

Of course, countries may differ in the kind of issues and their severity that requires different kind of combination of market and state, akin to the kind of Samuelson’s synthesis of classical and Keynesian economics.

Eurozone sovereign debt crisis: creative thinking badly needed

Comments on Christopher Findlay "European debt crisis: European fragmentation?" 6/11/2011, http://www.eastasiaforum.org/2011/11/06/european-debt-crisis-european-fragmentation/
Most mainstream economists and politicians tend to think in a flexible exchange rate regime as the best and that can sometimes become a barrier to creative thinking.
In the current situation, for example, Greece could exit the euro and start using a new national currency withou destined to dwonward currency spiral if it pegs to the euro with a certain and appropriate own currency real depreciation.
I don’t see it would be inevitable for what occurred in the Asian financial crisis in 1997 to repeat if Greece, or any small number of existing eurozone countries exit the euro.
A dual and pegged currency in the current eurozone would present a sensible adjustment from the current effectively fixed exchange rate equivalent from 1 to 1 to a x to 1. Essentially it would create a much more flexible adjustment mechanism without necessarily introducing increased risks.
Even from the mainstream economics point of view, it is not a retreat from its current state of euro to a worse regime!
Why don’t economists think in this way?

Don't expect too much from businesses

Comments on Peter Shergold “Business must engage in battle for hearts and minds”, 18/10/2011, http://www.theaustralian.com.au/news/opinion/business-must-engage-in-battle-for-hearts-and-minds/story-e6frg6zo-1226169108879

It seems Professor Shergold is creating a new capitalist economics for business.

It is, however, unclear whether it is realistic or feasible to ask business of so many firms to do so.

It ignores the difference in the role the government should play and the role businesses should play.

Certainly there would be free riders, and perhaps many will be such free riders under what the professor is proposing!

A fundamental economic principle from Adam Smith is that social value is created at the same while every unit is pursuing it own interests!

That has been the social basis for capitalist businesses.

Now the professor is challenging that very principle!

I am not sure his proposal is sound from business point of view.

I think a possibly feasible proposal is to appropriately regulate businesses by government, so the Smith principle can always hold even when market is imperfect!

That role is for government, not for businesses, I would imagine.

How to get Sydney moving?

Comments on Henry Ergas “Mere money won't get Sydney moving”, 4/04/2011, http://www.theaustralian.com.au/national-affairs/more-money-wont-get-sydney-moving/story-fn59niix-1226032905744

Only having read the concluding paras without reading the whole article, couldn't it be better both logically and politically, to combine immediate actions with longer term structural design at once?

Given the existence of the problem for so long, surely there must be some no-regret transport projects that can go ahead immediately, no matter what a longer term structural consideration will result in.

NSW/Sydney people are sick and tired of of spins and inactions, or worse wastes of taxpayer's money and expect action.

They have just voted for action and they deserve rightly it.

Of course, Ergas is right, only simple action without a long term best design can only lead to more wastes and more serious jams.

So, O'Farrell should and must combine the two to provide both assurance and best policy, for taxpayer's money and improve people's lives and living standards.

Economists also need to be aware of the real world too and combine long term perspectives with short term actions as well as a dynamic optimal trajectory, I am afraid to say.

Issues of conventional macroeconomic policy

Comments on Andrew Sheng “US, Japan and EU monetary policy: Monkeying with interest rates”, 22/09/2010, http://www.eastasiaforum.org/2010/09/22/us-japan-and-eu-monetary-policy-monkeying-with-interest-rates/
While Hoenig's frank and realistic assessment of the current dilemma of excessive low interest rates is nice, it is not clear his prescription is a credible and better alternative within the current set of policy tools.

Any monetary policy by changing interest rate will have an effect on inter-temporary allocative efficiency and equity.

However, the current more pressing issue in the US is how to solve the contemporary issue of resources allocation when there is high unemployment as well as under-used capital capacity.

It seems there is virtually no explicit framework to deal with these issues concurrently, in a way that can show what overall the best trade off is.

Leaving that aside, the Japanese experience of lost decade or decades is more terrifying if that were to be repeated in the US.

If one cannot survive now, what is the use to consider tomorrow? Just as Keynes said, in the long run we are all dead.

Economists may need to come up with more credible and effective solutions. This is an efficiency issue for economists!

PS: The Japanese experience, if it becomes more wide spread, indicates the ineffectiveness of current macroeconomic policies in dealing with such a “balance sheet recession” when it occurs and the consequences of conventional macroeconomic policy in preventing it from occurring in the first place.

Inconsistent macroeconomics

Comments on Yiping Huang “Focus upon the Chinese yuan on both sides of the Atlantic”, 12/08/2010, http://www.eastasiaforum.org/2010/08/12/focus-upon-the-chinese-yuan-on-both-sides-of-the-atlantic/
The point that PBOC should shift focus on to the basket of currencies from the $US is excellent. In fact, China should be much more transparent on the basket of currencies the yuan is managed to be pegged to.

It should publish the weight of each currency in the basket the yuan pegs to, at least the framework how it works or the central bank manage it. It is hard to understand why that can't or shouldn't be done.

While official statistics shows inflation has been low in China, has that been consistent with the reality and people's experiences? It is highly doubtful probably. It is likely that the real story about the Chinese real exchange may be different from the official statistics tells, with significant real appreciation than its nominal appreciation has suggested.

I would be very cautious in using deliberately higher inflation as a tool for exchange rate adjustment, because that is very dangerous with playing of expectations on inflation.

Of course, 1% annual inflation would be low, especially in the context of high economic growth. If that was true, it would mean there could be room to allow a modest inflation target.

An inherent inconsistency in macroeconomics is the policy for domestic price stability and the wild swings shown in international exchange rate market under the flexible exchange regime. Economists do not seem to have a consistent framework to deal with both domestic and international macroeconomic stabilities.

It is the same issue of market and the management of aggregate demand and supply, albeit with international borders involved.

Why is that difficult to do for managing international issues?

That is question economists have to realise, ask and answer.

Further, they need to come up with a satisfactory solution.

It should not be too difficult task for the economic profession.

Krugman on macroeconomics and its miss of the GFC

Paul Krugman's article on macroeconomics: "How Did Economists Get It So Wrong?", 2/09/2009, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=1&_r=1&ref=paulkrugman

Krugman's right economics at the wrong time

Comments on Paul Krugman “That ’30s Feeling”, 17/06/2010, http://www.nytimes.com/2010/06/18/opinion/18krugman.html

What Krugman argues is probably the right economics but at the wrong time.

Maybe the relationship between the cost and benefit (or perceived or expected ones) of government spending and the government debt level is non-linear.

When government debt gets too big, the costs of a further increase are likely to be greater.

That is certainly how it works for the private sector.

Government is a little different and a government has more room to move, but it is likely to have some limits.

PS: This is what Krugman argues:
"Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don’t add up. Point this out, and they come up with different rationales, which also don’t add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
..."

Keynesian not dead but require discretion

Comments on Michael Stutchbury “Crisis puts nails back in Keynesian coffin”, 15/06/2010, http://www.theaustralian.com.au/business/opinion/crisis-puts-nails-back-in-keynesian-coffin/story-e6frg9p6-1225879617867
Frequent interventions by governments in terms of fine tuning the economy in the tradition of Keynesian may not be desirable, given government's ability and capability to get things right, as well as political problems and constraints.

That, however, does not mean Keynesian should be completely abandoned altogether and never be used, such as the case in the wake of the GFC where there was a clear case that prudent government interventions can outweigh the costs of those actions.

It seems that Keynesian should be used for two main purposes. Firstly, it should be used in an emergence or a crisis where market would take too long to correct itself and restore broadly appropriate macroeconomic settings.

Secondly, it may be used for purposes of media and longer term structural adjustment, as opposed to deliberate counter cyclic fiscal policy beyond its autonomous stabilising effects.

If a government has the ability to fine tuning, then it could also conduct counter cyclic fiscal policy, but it is generally much harder and requires much higher policy design and implementation capacity by the government and the bureaucracy working perfectly in close cooperation.

The Greek tragedy?

Comments on Andrew Sheng “The Greek tragedy: Global debt crisis and balance sheets”, http://www.eastasiaforum.org/2010/05/31/the-greek-tragedy-global-debt-crisis-and-balance-sheets/

Sheng's following description at the start is interesting and sensational: "If a pack of wolves stalk a herd of buffalo, the herd can guard the weaker buffaloes. But if the wolves stampede the herd, they are able to take down the weakest buffaloes."

He tries to state the negative side of the financial markets, but it may have a side and negative effect on markets in general.

The first question is: what are normal participants and what are market wolves, and who can define and identify them and do something positive about it? That can be very difficult indeed.

It is like nature and food chain. “We, human beings”, need to determine which ones along the chain are good and which ones are bad, of course according to our standard and values. But we, though highly intelligent, can often be wrong in our interventions on nature.

So much digression and let me get back to the topic here. If the market participants do not act or react to news and information and take actions to maximise their interests, what do we expect them to do? Should they reward Greek equally as they do to Germany?

So I seem to have lost in this line of thinking and am disoriented as to what are the norms and principles regarding to market participants.

Let’s also move to a private company. If it is bankrupt, what should or do we “human beings” need to do? To let it fail because it is failed or act as “red cross” to rescue it?

Again, Sheng’s remarks have caused me great uncertainty.

It is complex economics and normality/morality, isn’t it?

Learn, learn and learn, life-long learning work in modern and knowledge society with its changing and uncertain morality.

Are reforms needed?

Have the reforms and changes in China over the past 30 years moving to market economy good or bad according to some morality?

I am wondering and wondering.

The unfortunate Greek tragedy!

Roskam exposes flaws of Rudd economics

In a featured article in The Australian Financial Review today, 28/05/2010, page 58, John Roskan has an excellent exposition of Rudd's distorted and selective approaches to economics.
Roskam states that Rudd, in his economic essay published in the Monthly in February 2009, went so far in attacking the so called "neo-liberals and their belief in the efficient-market hypothesis", and branded their "economic modelling for causing the global financial crisis".

But now Rudd is using a never tried theoretic modelling involving many assumptions as the basis for his Resource Super Profits Tax.

What Roskam concludes is that "it seems Rudd has no qualms about theoretical models when it's social democrats instead of neo-liberals doing the modelling."

By the way, the AFR editorial, on the same page, is titled: "a way out of the quagmire" and has the following advice to Rudd and Swan and their government:

"The RSPT is nor so neutral after all. Another to dislike the silent partner model is that it merely postpones the risk of fiscal shocks."

"The government needs to examine all these options, and more."

Note: Those options include: Professor Garnaut's suggestion of replacing the RSPT with a version of the petroleum resource rent tax. The "neutral" mentioned above means the Brownian theoretical basis of the RSPT that it does not distorts investment incentives and decisions.