Economics and political expediency

In my previous article (“Hanging onto our assets”, August 26, 2010) I suggested that Australia needs a group of competent people charged with thinking long term. In this effort I raise a few questions such a group could think about.

The Sydney Morning Herald on August 30, in the Financial Section, carried the headline, “Borrowing binge by major banks”. I wonder, does the wellbeing of Australia require the banking system to indulge in a borrowing binge at present, particularly if the binge is seeking a major proportion of the borrowings as foreign currency, probably $US?

Australia only needs foreign currency to pay for goods and services which we import but only when the total value of those imported goods and services exceeds Australia’s exports of goods and services. If we are presently in deficit in this way, how much of that deficit is due to interest on past borrowings by the banks? Was that earlier borrowing essential or was it borrowing which underwrote the capacity of the banking system to cause asset value inflation and to price wage earners out of the housing market? Should the banking system be allowed to continue behaviour that has had that outcome in the past? I, for one, think not.

Was that earlier borrowing simply made to increase each bank’s capital adequacy base so that the banks, as a system, could increase the quantity of non-productive (or actually disadvantageous) loans?

Politics is the art of achieving the reforms leaders think they can get away with. Most times the reforms are desirable but sometimes they are overvalued or even disadvantageous due to the distorted philosophies of leaders or their lack of intellectual capacity. Reforms which result in middle class welfare, and some so-called reforms of the labour market, flow from these latter sources: both sides of Australian politics make this type of mistake, sometimes for political power reasons.

In the recent election both major parties mistreated, distrusted and misled the Australian population and in this they were assisted by the media and even by economists who knew better, or should have. Just to pick one example - and this is chosen only because one leader admitted that he was not an economic Einstein, a view supported by a former parliamentary colleague:

The Coalition hammered the theme that the government was borrowing $100 million a day. The government was not borrowing that money from anybody. The government was creating the money in the same way the banking system creates money every day. One of any government’s largest costs involves writing a large cheque regularly to pay the less well-off in the community - a welfare payment. The Reserve Bank, which we all own through our government, honours those cheques (which it always does). There is no connection between the government’s taxation and other fund raising activities and the ability of the Reserve Bank to honour the cheque. The only real immediate costs involved are clerical. With the GFC looming ominously, the government rightly chose to write cheques to pay for job creation activities rather than for increased numbers of unemployed.

If the economy is in a depressed or low-growth state there will not even be a significant monetary inflation effect from the created funds, and the created work, but there will be a desirable boost in economic activity. Because the government is sovereign it does not even have to repay the Reserve Bank; it owes the money to itself.

It must be remembered that the work created in most cases generated lasting and worthwhile community benefits (97 per cent of school improvements) or benefits for individuals (those insulation installations that were successfully completed). Even the money that was supposedly wasted provided some stimulus even if it was mainly to the top of the motor industry or the tourist industry as rogues spent their ill-gotten gains. Many of the problems associated with the stimulus spending were due to poor administrative and supervision performances by state governments.

Another item worth considering is the situation which arises when the government writes cheques for taxation refunds. Some might argue that the taxpayer was only getting some of his (or her) own money back. But was he? The taxpayer works for their net wage each pay period. Their employer passes on the tax component to every consumer of the employer’s products; otherwise the employer would go broke. Therefore who does the tax refund really belong to? I suggest it could belong to the rest of the citizenry. They were the ones paying the higher prices for the goods or services carrying the tax costs.

The system in the UK may recognise this argument as there, once tax is paid, there are no refunds or there weren’t: but political expediency may have changed that. In Australia it pays to earn flat-out for say six months in any year then go on a long holiday. Much of the tax paid in the period of employment will be refunded. This is particularly the case in the highly paid professions where holiday conferences in attractive climes are quite common. Are high hourly rates an incentive to work or an incentive to take long holidays?

There is also a similar argument against free trade. Should the total of import duties be sufficient to cover the tax forgone compared to the situation as it would exist if the imported products were instead produced locally? There is also a reasonable argument that import duties should be sufficient to pay the unemployment benefits bill, at least for those able and competent to work and particularly if the country supplying the imports has no distinct comparative advantage other than poor wage rates and working conditions.