What is the basis for 'global macroeconomic balance'?

Comments on Hiro Ito, PSU, and Ulrich Volz “Correcting China’s macroeconomic imbalances”, 3/05/2013, http://www.eastasiaforum.org/2013/05/02/correcting-chinas-macroeconomic-imbalances-2/

As an economist, I may ask some questions in this area as follows.

First, how global macroeconomic imbalance and rebalancing are and should be defined? What is the theoretic foundation of global macroeconomic balancing?

Second, isn't or is it the case that imbalance and rebalancing has been used as some trade protection and an excuse of some countries poor macro and micro economic management that had laid the foundation for the GFC?

Third, the authors state the following: "China is one country with a long-standing current account surplus, and this surplus derives from microeconomic or sectorial distortions that have led to excessive saving. In particular, underdeveloped public social safety-net systems and a repressed financial sector are commonly blamed for excessive saving."

Many countries have even poor and more underdeveloped public social safety-net systems and a repressed financial sector than China has had and they don't necessarily have trade surplus. So why should China, a developing country, have the same gold plated social security as some developed countries have? Further, even developed countries have different standards of social security, and some countries with higher standard may have seen either some budgetary or economic growth/competitive issues that they will have to deal with sooner not later. Aren't current euro zone woes a lesson in too high social security? So why should China simply fall into those high social security traps that burdens economic growth, efficiency and productivity?

Fourth, while it is true that China's interest rate control depress deposit rate and is an effective tax on savings, liberalising financial market is likely to actually lead even more savings and how that can contribute to address the high savings that some people are attributing to a cause of global macroeconomic imbalance?

I think economists need to stand back from political debates and think rationally rather than simply follow some politicians' arguments.

Economists should recognise that people have different savings and consumption preferences and those may change cross countries, regions and families and vary according stages of economic development.

We need a “global model “ to show the benefits and costs of balance and imbalance. Without a transparent model, all the arguments can be very confusing and many arguments may sound ‘right’ but actually be wrong.

As long as there are those differences and people are divided into countries, it is irrational and wrong to demand every country should have current account balance.

Imbalance is normal and balance is and should be rare.

But globally, there is no imbalance - it is all balanced out.

Pirate's logic

Comments on Wendy Dobson “The G8/G20 in Canada—what can we expect?” 24/06/2010, http://www.eastasiaforum.org/2010/06/24/the-g8g20-in-canada%e2%80%94what-can-we-expect/
We have heard over and over again about the imbalances and the need for rebalance.

I think the argument and stresses of international imbalances appears to be a disguised form of merchantism.

Jus consider what caused the GFC and its effects on the world economies of both the GFC causing economies and their victims. Was that the imbalances, or the so called excessive savings of those surplus countries, or the mal-practice and excessive leverage and gearing and misallocation of low cost capitals in some of the borrowing countries the sources of problems that caused the GFC?

Isn't it a pirate's logic for borrowers to say that it was the fault of those savers that lent their savings to them for them to use at their own wills? Why should people using mortgage complain and blame depositors for making the funds available for them to use?

Isn't any different to a drunk to say it was the retailer that sold the alcohol that was the problem of his being drunk?

Were they forced to borrow?

Why didn't they use the low cost capital to more productive purposes?

Didn't they need better infrastructure, like upgrading hospitals, roads and power stations?

Didn't they need to build low emission energies?

Now while it has been all too easy to argue one way or another and blame others for own problems in the wake of the GFC just a drunker could do, the originators of the GFC are not in a strong position to argue that others should save less and consume more and import more from them while their own economies reduced their imports by phenomenal percentages and caused havoc to economies over the whole world.

Isn’t it the case that the most important thing is to restore, stabilise and encourage growth in trade, while maximise world welfare by taking optimal paths of adjustment for the international economies?

Why should that necessarily be an immediate rebalance in international trade?

Duel aims of Malaysia's NEM interesting, but realistic?

Comments on Shankaran Nambiar “Malaysia’s New Economic Model as a rebalancing strategy”, 5/06/2010, http://www.eastasiaforum.org/2010/06/05/malaysias-new-economic-model-as-a-rebalancing-strategy/
It seems that rebalancing has been very fashionable and now become a buzz word.

Despite that, I would like to go against the fashionable trend and focus on the other point the author of the post did not discuss much.

I note that Shankaran Nambiar stated that "Malaysia’s New Economic Model (NEM) serves to address two crucial issues that confront the nation. First, Malaysia for some time now has had its feet caught in the ‘middle income’ trap. It is now keen to graduate to a high income status, joining the likes of Singapore, Taiwan and Korea."

Shankaran Nambiar seems to argue that high aggregate savings in Malaysia in the past or at present are abnormal and are only normal in economies where uncertainties are high. High savings, of course, are seen by some as sins that caused global imbalances that need to be rebalanced.

Shankaran Nambiar somewhat appeared to be caught in a difficulty that the GFC seems to imply the death of export driven growth model and yet Malaysia is too small in terms of population to become a sufficient market for it to grow.

I somehow seem also being caught by Shankaran Nambiar's difficulty, but for different reasons.

I was wondering if Malaysia's NEM has duel aims to both catch up with Korean, Hong Kong and Singapore and rebalance, then whether the paths of the latter's growth where high savings and export driven growth may have played an important role have any relevance to the NEM.

It seems to me that Malaysia needs to be much more creative to create a new growth model that is supposed to be better than the models of the other three.

That is my difficulty with Shankaran Nambiar's ambitions duel aims that implies a high degree of uncertainties, perhaps even much higher than that implied by the high savings.

What to say when Chinese currency is now strong?

Comments on Karen Maley “America's tougher line on China”, 24/05/2010, http://www.businessspectator.com.au/bs.nsf/Article/China-US-trade-policy-US-Dollar-pd20100524-5QSXX?OpenDocument&src=sph

It might be acceptable for the US and many commentators to argue that the Chinese currency is too weak and needs to be rise to resolve international imbalance when the $US is also weak.

But now the $US is strong. So is the Chinese currency accordingly just as what occurred during the 1997 Asian financial crisis, isn't it?

What would those commentators say now?

One is sure that they will have something to say even if to invent something completely new, whatever it is, because they are what they always do.

And, they are very good at it and nothing will be difficult for them.

Complex issues in Chinese currency and exchange rates

Second comments on Yiping Huang “Misperceptions about the RMB and Chinese exchange rate policy”, 11/04/2010, http://www.eastasiaforum.org/2010/04/11/misperceptions-about-the-rmb-and-chinese-exchange-rate-policy/

There are a number of points relevant but missing in Yiping's analysis.

Firstly, the impact on employment of appreciation, especially on mobile workers from rural areas and associated social stability must be carefully analysed and considered. This, of course is what the authority has to consider when large scale closures of manufacturing plants as a consequence of currency appreciation are concerned.

It is not just an issue static versus dynamic adjustment issue, although it has some relevance. Any dynamic adjustment has to be realistic as opposed economists’ wishes for a sudden technical or management improvement. For economists, it is so easy to change the ratio of labour versus capital and adopt new technologies. But in reality, the story can be quite different. Managers and entrepreneurs are not as lazy as some economists think.

Secondly, the issue of China's official reserves and assets denominated in $US and its potential very damaging consequences in terms of social stability, given that now many Chinese are aware the effects of a yuan appreciation. It is obvious to so many Chinese, especially the so called elite what an appreciation means in terms of the values of those assets. It is, however, very difficult to judge the how the public will react to authority sanctioned appreciation and the losses in state assets values.

Thirdly, even China adopted a flexible exchange rate, there is no guarantee that the US or some others continue to pressure China. For example, they could and would argue that it is not flexible enough as long as they wish to use it as stick to achieve whatever purpose they may have. At some stage, a country has to stand up to powerful countries for its own interests, otherwise international bullies will repeat endlessly with no real prospect to be checked.

Fourthly, the argument of country can only achieve two out three goals of "monetary policy independence, the free flow of capital and exchange rate stability" is likely to be problematic, if bank credits can be controlled. It is more than likely that in China’s case, all three can be achieved, rather than the conventional view.

Fifthly, although Yiping used some of the key insights (the unholy trinity) from the Mundell-Fleming model of international trade, an important implication of the model is overlooked, that is, the differential growth in domestic income as compared to external income. That should mean a deterioration of the current account balance. The experience of the past months indicates that has been the case now and further and possibly increasing trade deficits are likely to occur.

It would be prudent for both China and the US and other players to wait and assess the development in recent months before making any unwise moves. The Chinese economy is at a critical stage of structural transformation and in the short term it is highly likely to experience current account deficits until the transformation is completed.

Yes, China may move back to pegging to a basket of currencies and allows reasonable flexibility, but it does not necessarily mean currency appreciation measured by trade weighting.

Now it leads to ma last point on the missing elements in Yiping’s article, that is, the issue of China’s official holdings of $US denominated assets, that so many analysts have either ignored or think difficult to deal with.

It should be abundantly clear that it is reasonable for the Chinese authority to negotiate with the US authority on the issue of Chinese holdings of the US Treasury bonds. In fact it would be negligent of duty if the Chinese authority does not deal with this issue. Some move on that front is necessary for the Chinese authority to be able to tell its domestic audience on any currency moves.

It is unreasonable and indeed irrational for the US to ask for China to appreciate its currency and make a direct loss by holding the US government bonds. That will make the Chinese authority look so stupid.

A reasonable compromise is to use a mixed currency denomination, e.g. denominated in a basket of currencies.

Frequent fallacies of the imbalances argument

Second comments on Yang Yao "China’s growing pains, globalisation and adjustment", 7/04/2010, http://www.eastasiaforum.org/2010/04/07/chinas-growing-pains-globalisation-and-adjustment/

In addition to having more international financial assets for financing world development, I have some comments on a number of specific points in Yao's article.

While people often argue this or that and make statements on this or that, it is also fairly often that many arguments are incorrect even though they may be seemingly attractive to some particular audiences.

It is said that “the financial crisis demonstrates the unsustainability of the current pattern of global specialisation.”

But is that statement true or false? I would argue that it is not true but false. There are a number of reasons for my argument. Firstly, there is an issue on the real and fundamental cause of the financial crisis. While some people conveniently say it was the imbalances, most informed and rational people would think it was the malpractice lending by US banks associated with the sub-prime mortgages in the US prior to the crisis.

Then was the malpractice a necessary product of the imbalances, that is, low costs of finance prevailing in the US back then? The answer again is negative and no. It was irresponsibility and greed by some banks. It was their mistakes. It had very little to do with low costs finance available. Who on the earth wants to unnecessarily raise the costs of finance, given that the US also needed and still in need of investment in infrastructure projects? Alternatively they could have used low costs financing to investment overseas in other countries. There was nothing inevitable for that malpractice to happen.

Secondly, what is the problem with the current pattern of global specialisation? I can hardly see any and I think most people would not think it is a problem. Leaving the current practical and political issues aside, there are two points to argue for the positive of current global specialisation. One is that imbalances, whether it is domestic or international, households or regions or countries, are not necessarily a problem per se, as long as inter-temporal budget constraints are satisfied. It will be very counterproductive and welfare reducing one requires balance all the time for any unit. Why do people ignore this point when talking about imbalances just as if they are inherently a sin. They are not and are part of daily life and are good for everyone as long as they are responsible in their behaviour.

Leaving that aside, it should be abundantly clear that there are mechanisms that can resolve or reduce imbalances should that really be a problem without the need to significantly alter the global specialisation pattern.

I didn’t realise it is already so long in this comment, so I’d better take a rest on the case.

Create new international and secure financial asset classes

Comments on Yang Yao “China’s growing pains, globalisation and adjustment”, 7/04/2010, http://www.eastasiaforum.org/2010/04/07/chinas-growing-pains-globalisation-and-adjustment/comment-page-1/#comment-109532

There is clearly a need for more international assets classes for investors including sovereign funds and central banks.

In that context, IMS SDR might be a good candidate. Alternatively, the World Bank could issue WB bonds. But for liquidity purposes, the IMF or the World Bank must be ready to act as a market maker too in case there is not enough liquidity.

Leaving that aside, why can't China be more innovative to set up an international bank to provide loans in foreign currencies at reasonably favourable rates to sovereign countries? In that way it can also have security and reasonable returns for its international reserves.

Alternatively, why doesn’t China work together with the IMF or the World Bank to create some monetary facilities to create some new international financial asset classes.

Once the issues of assets in foreign currencies and current account trade needs are separated, it is easier for China and indeed other countries too to move more freely on exchange rate issues.

Krugman in actions of practice

Comments on Yiping Huang “Krugman’s Chinese renminbi fallacy”, 15/03/2010, http://www.eastasiaforum.org/2010/03/15/krugmans-chinese-renminbi-fallacy/

Krugman is good and famous at the so called strategic trade. Now he has found an occasion to apply his theories at the world scale.

When I heard or read about Krugman's talking about the Chinese currency versus the $US, I have always been reminded by a remark by Frank Milne (hope it is correct) once at his lecture of microeconomics at the graduate/masters level: economic policies can kill at a mass scale - look at what happened in China during the great leap forward and how many people died as a consequence!

Now Krugman, a winner of the Nobel Prize in Economics, is making his prescriptions to real economic problems and doing his economic advices to the US and possibly to some others.

It will be interesting to anticipate what his advices will result in, even for the Americans whom he tries or intends or has said or is said to help.

A few points to consider in teh context of US external deficits:

1. The US external deficit, is the US having external trade deficit with China? Or is China the largest and for how long it has been as the largest?

2. If China is currency manipulator then it must have devalued its currency against the $US which its currency pegs into. Has China devalued its currency in recent years? Against the $US?

3. Isn't the US a currency manipulator? Haven’t we often heard the US authorities say or have said that they want or wanted strong or weak $US? What do they mean or have they meant? Not a currency manipulator?

4. PPP and currency valuation: it is a general knowledge that most developing countries' GDP is higher in PPP, as opposed to their market currency. Does it mean their currency is undervalued in market terms?

5. The US has been blaming others for its external deficits, that is because they trade with others. Who should it blame for its out of control budget deficits?

6. Why balances, as opposed to imbalances should be the norm? Just think about savings and borrowings, consumptions and investments, why should any unit except the world as a whole be always balanced at all time? Is that good or bad for the living standards and welfares of the world?

7. Why does the US argues for free trade sometimes and say a different thing some other times? Isn't it political economy at the world scale?

8. Why has the US had the lowest and sometimes negative saving rate? Did any other countries force it to do that? Whose fault is it?

Researchers need to be factual and logic thinking

Comments on Xiao Geng “US-China economic imbalance: Alternatives to appreciating the Chinese yuan”, 23/02/2010, http://www.eastasiaforum.org/2010/02/23/us-china-economic-imbalance-alternatives-to-appreciating-the-chinese-yuan/

The article raises a fundamental point: there are other mechanisms besides exchange rate management to address the so called imbalances, if they are indeed an issue at all as opposed to crises panicking, straw-fetching exercises by some interested parties and some no brain people.

However, most of the points in the article are debateable.

For example, the inefficient investment argument is likely to be highly misleading and no-economics. Unless the investment is used in ways like the sub-mortgage occurred in the US prior to the recent crises, investment in infrastructure, in urbanisation in productive capacities taking advantage of the low cost capital available are hardly inefficient!

It is unclear what the author meant by the statement of the “rudimentary carbon emission standard”.

From what point of view is the carbon emission standard rudimentary? How rudimentary is China’s carbon emission standard, when taking account on the size of the Chinese population and GDP measured in PPP?

While this forum is probably not meant to allow for full scale and detailed article, one would expect that arguments need to be able to withstand basic factual and simple logic test.

What about the argument about for China to inflate its way out of the imbalance? That sounds more like those arguments for the US to get out of its trouble of government budget deficit and debt out of interesting people. But it is not clear at all if that is the thinking of Chinese policy makers.

Respect consumers' preferences

Comments on Peter A. Petri “Let growth engines drive the recovery”, 12/10/2009, http://www.eastasiaforum.org/2009/10/12/let-growth-engines-drive-the-recovery/

While the new engines of growth sound nice, there might be some significant risks in government policy generated products that so not match consumers' preferences and demand.

If the two go out of steps, there will be potential for huge waste.

Economists, businesses and governments need to study consumer preferences. Unless there are market failures, governments should refrain from intervention.

For example, in terms of savings and consumptions, as long as intertemporal budget constraints are satisfied, consumers’ preferences should be respected.

That is just one point in the current debate of international imbalances many people have got it wrong, or attributed to the wrong causes. Many arguments are simply red herring.

Wolfgang Münchau and Fred Bergsten wrong on imbalances

Comments on Wolfgang Münchau, Financial Times “The case for a weaker dollar”, 12/10/2009, http://www.businessspectator.com.au/bs.nsf/Article/Making-the-case-for-a-weaker-dollar-pd20091012-WQTFV?OpenDocument&src=sph

The idea "that the world will ultimately have to move to maximum targets for current account imbalances" is crazy, wrong, unrealistic and impractical, unless the maximum is extremely large.

It will be dead before its birth.

It is the same as to saying that a person must keep borrowing or saving to a faction of his or her income.

Isn't that argument ridiculous?

They should have a concept of permanent income over a life time and the income constraint should be based on that.

They should understand the principle of banking and finance, loans and savings.

They should learn better economics, including international economics and economic history.

It is a case of extreme overreaction.

It is also a case of disguising incompetent economic management and blaming anything for such incompetency by the US.

It is a case of economists' failure in dealing with this crisis and finding an easy excuse.

It is a case of a voluntary conspiracy to an extreme extent and scale by so many.

It is a case of disgrace for so many.

Differing situations and imbalances

Comments on Mohamed Ariff “World economy not quite out of the woods yet”, 6/10/2009, http://www.eastasiaforum.org/2009/10/06/world-economy-not-quite-out-of-the-woods-yet/

It is likely that the story of decoupling of developing economies at least some major Asian ones from developed economies in terms of recovery may be holding.

So as the author argued that "it is unsafe to make sweeping generalisations, as conditions vary from country to country", that argument applies equally to cautions for being too optimistic and being pessimistic.

In light of that, it could be argued that the G20 statement that it is too early to withdraw stimulus is problematic, because of the differences between the member economies in terms of their recovering status. It has given some activist governments the excuse to indulge in their unnecessary delays in prudently managing their economies that will leave future problems to those economies.

Another point is that the so called international imbalances seem to be red herring. It is more an issue of a blaming game to find a scapegoat for the financial and economic crisis that had a fundamental cause of mismanagement of the economy by irresponsible lending practices and the inability of the authorities to manage asset markets and government finance using the traditional macroeconomic policy instruments such as monetary and fiscal policies.

To argue that international imbalances were the causes is no different to arguing that everyone or at least every household should run a balanced income and expenses every year or more extremely every day. Isn’t that ridiculous? Or are there any differences between the two?

One of the main roles of financial and capital markets are to bridge the different situations between different participants, so that people can run “deficits” or “surplus” over a sufficiently long period as long as the longer term budget constraints can be satisfied.

The argument of imbalances ignores this simple financial principle or function and is illogical.

Another look at the so called intermational imbalances

Comments on Michael Stutchbury “Success story riding on China’s back”, 22/09/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/success_story_riding_on_chinas_back/

Michael, you are spot on. The economic situation in Australia is so different to that in the US and the Europe Union.

It is a result of a number of reasons, including the impact of the Chinese economy, and Australia’s solid and sound pre-crisis economic situation which in turn includes sound banking system, no government net debt, and low interest rates and low unemployment.

Another point you made is about the likely external imbalances as a result of a booming Australian economy that will be sustainable. That will be strengthened if considering foreign direct investments if Australia allows as a result of the boom.

In fact, the current account imbalances between the US and the rest of the world can also be sustainable for a long time if the US allows foreign direct investment into its asset markets.

It is like a older person living on his/her saved assets as opposed to his/her current employed earnings. It is another version of the “life cycle” income theory.

So far few economists have considered this issue through this way.


But economists should broaden their thinking in era of globalisation and unprecedented international adjustments.

Rethink international imbalances and the East Asian model

Comments on Mohamed Ariff “US-East Asia trade: Is East Asia ready for a rebalance?” 16/09/2009, http://www.eastasiaforum.org/2009/09/16/us-east-asia-trade-is-east-asia-ready-for-a-rebalance/

I had also thought the existing model would not be able to continue until a short while ago after I had read this article and had another thought about this.

It does not appear to me that the existing model needs to change.

When thinking and talking about the existing model in the wake of the financial and economic crises, most thought and argued that the international imbalance is unsustainable. While that is obviously true for the long run. But what is the "long run"? Until that is well defined, then one can get easily confused by "short term" inequilibrium and the needs for long run balancing.

Further, the existing model can continue when assets and trade in them are taken into account, e.g. the US households trade some of their assets for consumption. In that way, current account imbalance can last for a very very long time. That should and need not be a problem.

It is all too easy for one to blame international trade imbalance for any problems, whether it is the cause or not, or the real cause or not.

Comprehensive and solid analyses are needed to understand the implications of the "international imbalances". Partial analysis does not help to address the perceived problems and are very likely to be highly misleading to wrong policies with huge economic costs.

Economists should not just simply follow what a layman or some politicians say. They need to apply serious and rigorous economic thinking.

A disappointing report by the Co-ordinator-General

Comments on Michael Stutchbury “Report fails to see fiscal recovery”, 28/08/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/report_fails_to_see_fiscal_recovery/

It is likely the case that the Treasury forecast got the shape of the economic recovery path seriously wrong, by underestimating the growth in the short term and overstating the media to longer term growth.

The shorter term issue was a failure to properly account the effects of two factors. The first one is the good shape of the Australian economy, like the main banks, was almost unaffected by the recession. And the second is our link with Asia, especially the China effect associated with its quicker recovery. Treasury clearly got this wrong.

The longer term issue was a failure of underestimating the serious damage to the US and other major western economies of the great recession following the financial crisis and the required adjustment in savings and consumptions in the US in particular over the next few years and possibly the next decade. Treasury is very likely to have got that wrong.

That adjustment will mean the US is likely to have a prolonged period of below trend growth and that in turn will affect the world growth as a whole, even though Australia is partially isolated from the US slowness.

The report by the Coordinator General is partly a self praising product. It does not appear to be objective and proper analysis. It is a pity the report was done by that person rather than an independent person.

Overall, the report was disappointing at the best.

Wrong diagnose, focus, and prescriptions

Comments on Eswar S. Prasad “REBALANCING GROWTH IN ASIA”, July 2009, http://www.nber.org/papers/w15169, quoted in fancunhui的日志, 美国经济研究局论文：亚洲再平衡式增长, http://www.pinggu.name/space-11768-do-blog-id-17325.html

It seems to be a useless study from an equally incompetent economist, disguised as something to help high savings countries.

They should be focusing on how to rebalance the high consumption countries, especially the US economy. It has been a real problem of theirs, but they blame for high saving countries.

If they don't import, how could other countries export to them? If they don’t consume much, how can other countries force them to do so?

If they can sort out their own behaviour, the issue of international imbalance will be solved.

What is the main difference between high and low income countries from economic point of view? It is the difference in their productive capacity, and in turn their physical capital stocks on a per capita level.

How to reduce that difference rapidly? By investment and capital accumulation. Investment requires savings and that is why developing nations need to have higher saving rates.

Treasury as top economic policy agent and Rudd/Swan political spins

Comments on Paul Kelly “Spun out”, 23/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25523687-12250,00.html

Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.

The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.

Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.

If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.

In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.

To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.

Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?

The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.

The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.