The Moral Case for Economic Freedom

Kerrod Gream

Kerrod Gream analyses the effects of economic freedom and the positive benefits for those poorest in society.

“The rich are getting richer and the poor are getting poorer” is the catch cry of the left, but this statement is hardly based in reality. With Australia’s income statistics showing that the lowest income households had an increase of 5% between 2009-2010 and 2011-12, with middle income households having an increase of 4% in disposable income.   This in addition to total share of household income between 2007-08 and 2011-12 increased for low and middle income households, and decreased for high income households. This holds true against the argument from the left.

 

 

Changes in Mean Real Equivaliesed Disposable Income

[i]

It’s common to just look at home for the overall quality of life, but of course being a first world nation even our poorest are well off comparatively to underdeveloped nations. It is however a problem of today that we don’t grant those nations the same benefit we had while developing, with calls to remove cheap energy sources such as coal and force them to use inefficient sources such as solar, and to only continue to buy goods from those of us better off. Economic freedom overall is something that should be looked at and the benefits to the poorest not only in first world nations, but in the most impoverish as well. It does have a casual link between economic freedom and the overall wealth the poorest in society hold.

With this being the case it’d be best to look at the relevant cases as to the effects of income when looking at economic freedom. The Fraser Institute does a yearly analysis of economic freedom based on a variety of factors, these being: size of government, legal structure and private property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business.  Australia regularly scores well on this metric having scored between 7.9-8/10 between 2005-2010, and scoring 7.88, and 7.87 in 2011 and 2012 respectively. Having been ranked 5th in the world in 2009-10, in 2012 we had dropped to 8th.

But these statistics are best looked at as a global analysis. Nations that are in the top quartile of economic freedom had higher GDP Per Capita; with the top nations having an average per capita GDP of $38,601 in 2013, compared to $6,986 for those nations in the lowest quartile.[ii] While GDP Per Capita does give a good overview we are best to look at the situation for the poorest 10% in each quartile.

In the top quartile of nations the average income of the bottom 10% was $9,881, with the bottom quartile’s bottom 10% of earners having just $1,629 on average in 2013.[iii] This however has improved since 2008, with the bottom 10% in the nations in the highest quartile having an average $8,474 yearly earnings, compared to $910 for those in the bottom quartile of nations with economic freedom. [iv]

Economic Freedom and the Income Earned by the Poorest 10%

[v]

These benefits of higher income levels result in higher life expectancy, with the average life expectancy in the top quartile nations at 80.1, and the lowest quartile sits at 63.1 years.[vi] Those in more economically free nations report a higher life satisfaction, averaging 7.5 out of 10, compared to 4.7 in those in the least free quartiles.[vii]

This is all before addressing income share, this is the share of income between different sets of people. Income share of the poorest 10% is generally pretty consistent across all quartiles of nations based on economic freedom. With those in the highest quartile of economic freedom having the largest share of income at 2.64% this however isn’t reflected in the second highest quartile with the poorest 10% in those nations having the lowest income share. What this effectively shows is that the income share of the poorest isn’t highly affected by different government policies, and redistribution, but rather that it’s fairly consistent across the quartiles of economic freedom. This also shows that the poorest in society have a slightly greater share of the economic pie in economically free nations.  With the best overall result in not redistributing produced wealth, but by increasing the size of the economic pie, as it were.

Economic Freedom and the Income Share of the Poorest 10%

[viii]

Economic Freedom and Economic Growth

[ix]

Looking on this basis the only moral argument to help the poorest in society is not by centralised government control, as that harms economic growth and income levels of the poor. We should continue to strive towards market solutions, rather than centralised solutions, and increase the overall share of wealth not just redistributing the wealth that we have. While the rich may be getting richer, the poor are also getting richer and the best way to help those in the poorest is to encourage economic growth with greater economic freedom, and less government intervention.

 

Kerrod is President of the University of Sydney Economics Society, and also serves as the chairperson of Australia and New Zealand Students for Liberty.

[i] http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6523.0Main+Features22011-12

[ii] Fraser Institute, “Economic Freedom of the World 2015 Report”

[iii] Ibid

[iv] Fraser Institute, “Economic Freedom of the World 2010 Report”

[v] Fraser Institute, “Economic Freedom of the World 2015 Report” pg 24

[vi] Ibid

[vii] Fraser Institute, “Economic Freedom of the World 2010 Report”

[viii] Fraser Institute, “Economic Freedom of the World 2015 Report” pg 24

[ix] Fraser Institute, “Economic Freedom of the World 2015 Report” pg 23

The Left’s Smear Campaign on Business Revenue is Nothing but a Dishonest Lie

Kerrod GreamKerrod Gream takes on the perception that companies should be taxed on revenue that the left have been pushing since the ATO’s Corporate Tax Transparency Report for the 2013-14 Financial Year.

Following the release of the ATO’s Corporate Tax Transparency Report for the 2013-14 Financial Year there has been a spewing of memes, and distaste from those of the left about how businesses aren’t paying their fair share. These go along the line of “This company made x amount of revenue in 2013/14 but paid almost 0% tax” ignoring that revenue does not equal profit. Their 0% tax figures comes from comparing total revenue to the tax paid, rather than comparing taxable income(aka profit) to tax paid.

The CFMEU's dishonest attack on Boral, who paid their fair share of tax on taxable income.

The CFMEU’s dishonest attack on Boral, who paid their fair share of tax on taxable income.

The unions, all of which they themselves pay no tax, have been some of the worst on the smear campaign on business. Australian Unions are calling for Spotless to pay tax on their $2.2billion of revenue despite the fact that they made an operating loss in the previous financial year and are perfectly entitled to deduct that from their total tax paid. The CFMEU has quite possibly been the worst of the spread of misinformation, providing the image above but also attacking News Corp  and Brickworks(the offending image as of writing this article has been removed) over revenue and not profit. The left wing lobby group GetUp also continued to spread the misconception. Ignoring that 0.2% of companies pay 58.2% of company tax, as reported by Commonwealth Treasury Papers.

The top 0.2% of companies pay 58.2% of company tax.

The top 0.2% of companies pay 58.2% of company tax.

This adds in to various media sources playing into this game of taxing revenue with the ABC attacking companies claiming they paid effectively zero tax on their income. The Guardian creating a calculator to determine which companies you paid more tax than despite having taxable income viewable hoping the reader will conflate revenue and profit. To add to this Buzzfeed jumped on the bandwagon of business ignorance with an outline of companies’ revenue and tax paid, with no reference to actual profit. This intellectual dishonesty either screams of an intentional smear campaign on the productive sector; that is businesses that provide jobs and investment in Australia, or just an abysmal understanding of how businesses operate.  To add into this the Twittersphere has been attacking these companies all over, and openly advocating that revenue is the important figure, and arguing that the only reason they minimise their taxes is because of offshore funnelling of profits.

Michael West

And then Ben Eltham; a reporter for the leftist rag, New Matilda; openly admits that he doesn’t understand how a business operates by not realising that income coming in doesn’t take into account the actual costs of running a business. This includes investment, staff costs, financial costs, and the day to day costs of running a business. Revenue is only useful for looking at turnover compares to previous years, and not in looking at how much money a company actually made, as different sectors have different methods of markups.

Ben Eltham

These people and organisations keep conflating revenue and profit, not seeming to understand that they are two separate things. With revenue being total amount of incomings prior to any expenses being paid. Profits however are what taxes are placed on, because had Boral in the example above paid the 20% that the CFMEU are calling for them to pay on revenue that $855million in tax would turn a $173.3million profit into a $681.7 million loss. These people have no idea how to run a business, and would send every single business bankrupt if they got their way. The best part of the irony in all this is tax exempt organisations calling for organisations that pay far more than they do in tax to be taxed more.

All these organisations and people are the same people that are opposed to a broad based consumption tax in the form of the GST. They don’t get the mental gymnastics to oppose a revenue tax(the GST) while calling for revenue to be taxed. It seems that they don’t understand that costs get passed onto the consumer, and taxing revenue after the fact is just going to destroy business. Any attempt to attack the big end of town will inevitably hit smaller businesses harder, as they don’t have the structural base to bring about easy compliance with new tax and regulation.

Those on the left calling for taxing of revenue obviously haven’t read what was contained in the ATO report. The ATO even admits that low tax in relation to taxable income and revenue doesn’t necessarily mean that the company is dodging tax in that year, and there may be deductions from previous year’s losses that haven’t been accounted for and a range of other factors not outlined in the report. Had they actually read it, they’d understand why they’re just making themselves look incredibly uneducated. The transparency list is quite possibly going to be a mistake that the left use to prey on the ignorance of the masses.

These people wanting to tax revenue instead of profit clearly have no experience running a business, and even if they do understand want to see nothing but destruction of our industries, and jobs in Australia. The only saving grace of this is all the top comments on the memes being put out are correcting the difference between profit and revenue.

 

Kerrod Gream is Chairperson of Australia and New Zealand Students for Liberty, Deputy Director for NSW of The Australian Taxpayers’ Alliance, President of the University of Sydney Economics Society, and a branch Vice President in the Liberal Party.

Let’s open up the books at the Reserve Bank

Henry Ford, the American automobile manufacturer, once said that “It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning”, writes Sukrit Sabhlok.

Indeed, if there’s one thing central bankers have been successful at, it’s using obfuscation and jargon so the public finds it difficult to understand what exactly it is they do.

Even when experts try and figure out what central bankers do, a range of legal barriers prevent a complete accounting of their activities. When former Congressman Ron Paul tried to audit the US Federal Reserve System a few years ago, for example, he faced opposition from a range of economists and politicians keen on preserving the Fed’s secrecy.

In Australia, the opaqueness of the Reserve Bank’s discretion doesn’t seem to trouble many people. But it should, because the RBA wields a significant power that influences the level of prices in the economy and consequently affects the hip pocket. The inflation it creates hurts the poor – and if more people knew the RBA was the culprit behind rising prices, and that much of the erosion in purchasing power we have seen over the past 100 years was unnecessary, there is little doubt that there would be protests on the streets.

The RBA’s aversion to scrutiny can be seen in the way that it shies away from the media spotlight, preferring instead to stage-manage the appearances of its officials in carefully scripted testimonies before parliamentary committees. The agency also enjoys significant exemptions from freedom of information legislation, and furthermore, doesn’t provide reasons for its decisions in a way that allows the public hold individual board members accountable for their views (one can contrast this to the Bank of Japan where individual board members’ votes are recorded).

Perhaps most troubling is the Reserve Bank’s budgetary processes, which are ‘off-the-books’ in the sense that the Bank just prints the money it needs to carry out its functions without needing to seek parliamentary authorisation for its spending. Although legislation does specify that the RBA is to return profits to the Treasury, the process is removed from other departments or agencies of the state.

How does the RBA justify its lack of accountability? The organization’s defenders have typically pointed to the doctrine of ‘central bank independence’ which rose to popularity in the 1990s. The doctrine aims to remove political considerations from central banking by insulating the technocrats at the RBA from transparency so they can carry out their work in the ‘best interests of the community’.

But a degree of latitude from intervention by politicians, while a noble objective, has become a code-word for secrecy. The need for free and frank discussion outside of the democratic realm is cited by central bankers as a reason for not releasing transcripts of the open market committee or for keeping hidden agreements with foreign central banks and governments.

This should be viewed as the self-serving tripe it is. The High Court as the nation’s highest court exercises equally important responsibilities yet its judges provide detailed reasons for their decisions so the public can hold them accountable for their views, and also has a budget authorized through the parliamentary process. It is doubtful that the RBA, as the custodian of the nation’s money supply, is so special that its individual board members should not have to justify every cash rate decision made.

In practice, the much vaunted ‘independence’ of the RBA is greatly exaggerated, so the doctrine of central bank independence fails to persuade in any case. Appointments to the board, which are made by the Treasurer, have been politicised, undermining its so-called independence. It makes sense that Treasurers would take into account more than just merit when making appointments: they are likely to select someone that already agrees with Cabinet’s own policy preferences. A blatant example of this was the appointment of Robert Gerard – a donor to the Liberal Party who had contributed $1 million to its coffers and was said to be a supporter of low interest rates – by Peter Costello.

The board itself is a coalition of vested interests populated with representatives from lobby groups and commercial entities who are heroically asked to set aside their sectional interests and prioritise the ‘public good’. The current board comprises powerbrokers with links to Walmart, Origin Energy and other major firms. Even the only academic member of the board, Professor John Edwards, was formerly employed by HSBC Bank and was an advisor to Prime Minister Paul Keating – a detail that would’ve been looked upon favourably by the Labor government that appointed him.

Consider also, that the RBA seems to accommodate its political masters through its reluctance to raise interest rates before elections. Ian McFarlane himself admitted in Australia’s Money Mandarins that "[the 2001 election] did have some small weight in our decision. If there was a really strong case to do something, we would always do it regardless of the election campaign. But it would have to be a pretty strong case". Since it gained ‘independence’, the Bank has only raised rates once before an election, and that was during the 2007 campaign.

It’s little wonder, then, that between 1991 and 2007 Australia was a high inflation country. Investor Chris Leithner points out that monetary aggregates rose at a rapid rate: M1 increased 404%, at an annualised compound rate of 10.2%. Naturally, this has significantly devalued the currency in Australians’ pockets and reduced standards of living – and all the while the Bank has continued to keep a lid on information that could be crucial in evaluating its performance.

Although it has been argued by central bankers that their role requires secrecy, they are overstating their case. To the contrary, when markets get more information, this can be expected to reduce uncertainty, bolster confidence and improve economic outcomes. Economic historian Robert Higgs, for instance, has shown how lack of investor knowledge about the government’s expected policy actions delayed recovery during the Great Depression. Similarly, studies have shown that greater transparency is often associated with less inflation variability.

A monetary system consistent with the rule of law – where accountability and transparency is the norm rather than the exception – demands opening up the books at the RBA. The public deserves to know.  

Sukrit Sabhlok is a Masters candidate at Monash University and editor of the Journal of Peace, Prosperity and Freedom

Warm and well fed, or hungry in the dark?

Vic Forbes asks, which is worse – gradual man-made global warming or sudden electricity blackout?

Vic Forbes asks, which is worse – gradual man-made global warming or sudden electricity blackout?

Alarmists try to scare us by claiming that man’s activities are causing global warming. Whether and when we may see new man-made warming is disputed and uncertain. If it does appear, the world will be slightly warmer, with more evaporation and rainfall; plants will grow better and colonise some areas currently too cold or too dry; fewer old people will die in winter and sea levels may continue the gradual rise we have seen since the end of the last ice age.

There may even be a bit more “green” in Greenland. There is no evidence that man’s production of carbon dioxide is causing more extreme weather events. Any change caused by man will be gradual and there will be plenty of time to adapt, as humans have always done. Most people will hardly notice it.

What is certain, however, is that global warming policies are greatly increasing the chances of electricity blackouts, and here the effects can be predicted confidently – they will be sudden and severe.

Localised short-term blackouts can be caused by cyclones, storms, fires, floods, accidents, equipment failure or overloading. People will cope with them. The more widespread blackouts, caused for example by network collapse or insufficient generating capacity, will have severe effects.

All modern human activities are heavily dependent on electricity. Blackouts will stop lifts, trains, traffic lights, tools, appliances, factories, mines, refineries, communications and pumps for fuel, water and sewerage. People will be trapped or stranded in trains, ports, airports, lifts, hotels, hospitals and traffic jams. ATM’s, credit cards and supermarket checkouts will not work. Cash, cheques, IOU’s and pocket calculators will be required to buy anything.

Immediately a blackout occurs, those with emergency generators, fuel or batteries will start using them. But within a very few days, batteries will run flat, emergency fuel supplies will be exhausted, food supplies will disappear from stores and pumped water will not be available. Intensive dairies, hatcheries, piggeries and feedlots will all face critical problems in keeping their animals alive and cared for.

If the blackout is extensive and prolonged, looting will infect the big cities and then spread to country areas. People who are old, sick, incapacitated or alone will be forgotten as able-bodied people focus on feeding and protecting their own.

The real threat to humanity today is not the theoretical dangers from gradual man-made global warming. A far bigger real danger is the growing threat to reliable electricity supplies from deep-green climate policies.

The most reliable electricity supplies come from coal, gas, hydro, nuclear, geothermal or oil. Misguided politicians and uncompromising nature are conspiring to ensure that few of these will be available to generate Australia’s future electricity.

The carbon tax and renewable energy targets threaten the financial viability of using coal, gas or oil to generate electricity. Banks and investors will not risk their capital on new carbon-powered stations dependent on an unstable and polarised political environment. And the declining profitability of existing stations under the carbon tax and mandated market sharing makes it risky and uneconomic to spend money maintaining existing aging stations.

The same green zealots who plot to destroy carbon energy will also work to prevent the construction of new nuclear or hydro plants in Australia. And Australia’s geothermal resources, being generally deep and remote, are unlikely to provide significant electricity for decades.

We are thus being forced to rely on fickle breezes and peek-a-boo sunbeams to generate expensive and intermittent electricity. And it will not be economic to continue building backup gas plants that are run below capacity or sit idle, earning insufficient income as they try to fill the unpredictable production gaps in the supply of green energy. The margin of supply safety will disappear.

Therefore, if we continue to allow green zealots to dictate our electricity generation, blackouts are inevitable. Britain and Germany already face this grim prospect.

All actions have consequences. We cannot continue pouring billions of dollars of community savings down the climate-change sink-hole, without starving our essential infrastructure. We cannot keep adding taxes and political risk to traditional electricity generators without reducing new investment in real base-load generating capacity. And we cannot keep adding unstable solar and wind elements to our electricity network without adding greatly to electricity costs and the risks of network failure.  

When the lights fail, and the supermarket shelves are cleaned out, we will return, at great cost and after much misery, to cheap reliable continuous electricity using coal, gas or nuclear fuels.

Gaia worshippers will find that “Earth Hour” will not be such fun when it becomes “Earth Week”.

Viv Forbes has no vested interest in electricity generation, except as a consumer. And he gets no funds from the government Climate Change Industry. He holds shares in a small Australian coal exploration company which will benefit by exporting coal if expensive unreliable electricity in Australia forces more power-using industries overseas.

In defence of skepticism on climate change

Major Karnage explains that skepticism is the only way to believe the science and not the spin

Reviewing the "Heartland affair", Robert Murphy notes how one climate scientist did not think that the actual evidence against Heartland was enough and decided to forge a more "damning" document; and how gleefully the rest of the climate change movement began adopting this clearly forged document with no skepticism whatsoever: Diminished Climate Alarmism: Lessons from L’Affair Heartland — MasterResource

Now to be sure, climate science isn’t the same thing as politics and the blogosphere. Just because these climate alarmists showed ridiculously bad judgment when it came to the Heartland affair, doesn’t necessarily mean that they are wrong about the trajectory of global temperatures in the absence of mitigation strategies. However, I do think this episode—and the reaction of the skeptic community during Climategate—are quite illustrative of the two camps’ approaches to the actual science. Back when the Climategate emails were first spreading around the Internet, I distinctly remember many people in the comments at blogs such as ClimateAudit warning their peers by saying things like, “Guys, remember, we’re skeptics. This is too good to be true. Let’s not jump up and down on this, because it might be a trap to make us look gullible.” In contrast, the major players on the other side—when Heartland was “caught” saying things that were far more absurd than what the Climategate emails revealed—jumped with glee. For example…

Walter Russell Mead posits his analysis of the incentives leading to distortions in the climate debate: How Green Gullibility, Hyperpartisanship Are Wrecking The Climate Movement | Via Meadia.

  • The climate movement’s proposals (above all, the global carbon treaty that in theory will subject the economic output of  every country on earth to global controls) are radical, costly and virtually certain to fail.
  • To be enacted, these unpromising measures require an unprecedented degree of consensus, as every major country on earth would have to accept, ratify and then enforce the climate treaty the movement seeks.
  • The climate movement must therefore be, in Dean Acheson’s words, “clearer than truth” in order to stampede public and elite opinion around the world into a unique and unparalleled act of global legislation.
  • Because many in the climate movement believe that this treaty is literally a matter of life and death for the human race, the moral case both for stretching the evidence and attacking critics of that agenda as aggressively as possible looks strong to weak minds.
  • The absence of any central authority or quality control in the climate movement (and the tendency of unbalanced foundation execs and direct mail contributors to provide greater support to those ready to take more aggressive action and espouse more alarming ideas) gives more radical and less responsible voices undue prominence and entangles the whole movement in dubious claims.
  • The increasing obstacles encountered by such a poorly conceptualized and poorly advocated agenda cause the embittered and alarmed advocates to circle the wagons and become both more extreme in their rhetoric and less guarded in their claims when precisely the opposite approach would work better.

I must say that I have a lot of sympathy for this position, although I do not think the phenomenon is limited to the "the world is ending" side of the debate; the other side is just as irrational and just as selective in its facts/deliberately deceptive for policy reasons. What we essentially have is a political debate posing as a scientific one. The best example of this is the fact that the most commonly cited reason to believe in the climate change alarm is the supposed "scientific consensus" shown through petitions like this one – the idea being that if 31,487 scientists agree with something, it can't possibly be wrong. The very idea makes a mockery of

the scientific process. Since when was science measured by opinion polls?!? By politicising the issue so radically, scientists are forced to take sides, and measuring the number that each side has is hardly productive towards settling the debate. Just look at this paragraph from NASA's website: Climate Change: Causes | NASA

In its recently released Fourth Assessment Report, the Intergovernmental Panel on Climate Change, a group of 1,300 independent scientific experts from countries all over the world under the auspices of the United Nations, concluded there's a more than 90 percent probability that human activities over the past 250 years have warmed our planet.

The "Intergovernmental" is revealing of quite how politicised the debate has been from the very beginning — the "science" of climate change is not being determined independently, but by people with clear vested interests in a certain outcome. This leads to situations like that 90% figure, which I will translate for the non-mathematicians amongst you:

The 90% is the significance level of the model that they have created to show changes in the climate over the past 250 years. A mathematical model is similar to other models, in that it is a smaller, simplified version of a complex original. What they have done is taken all known measurements of temperature in the world and averaged them out per year to try and find the "global average temperature over time"; then they have incorporated all of the factors that they know to affect the environment in order to find an equation that "models" the effects these things have; then they test how well the model fits the actual recorded temperatures. The "significance level" shows the probability that any one point on the model will reflect the actual observed temperature.

To say that there is a 90% probability that human activities have warmed the planet is misleading. In actual fact, the model that the IPCC generated including estimated human greenhouse gas emissions has a 90% chance of fitting the observed results — which is a far less persuasive statement; especially since, as anyone who has formally studied statistics would know, general practise is to work to a 95% significance level.

This is not at all to say that CO2 emissions are not playing a role in warming our climate or that the climate is not warming: both of these points are, more or less, beyond dispute. What I am saying is that — contrary to what a certain Australian Government keeps telling us — the science is not "settled". There is a lot we have left to learn and a lot that is uncertain.

Of course, to deny the proven science is not productive either. In fact, I would recommend a healthy dose of skepticism whenever you read anything related to climate change, pro or anti. Nothing outside of the internal debates in the scientific community hold much water these days.

And no Ms Gillard, the science is not "in". Science does not come "in", we're not talking poll results. That's not how science works.

Major Karnage is a Sydney-based young professional. This was originally posted on his personal blog

Major Karnage can be followed on Facebook or Twitter.

The Coalition’s New Economic Plan for Australia: Low Quality Goods, More Natural Disasters and Higher Government Spending, and Higher Prices

The Coalition urgently needs to lift its economic game, writes Milton Von Smith

As regular readers will know, I am always the first in line to give Labor a good whacking for their truly crazy and destructive economic ideas. 

And I am not in the habit of breaking the Eleventh Commandment.  But I think that you will agree that his has been a particularly bad week for sensible economics in this country.  And I'm afraid to say that the Coalition has made a sizeable contribution to this outcome. In fact, the Coalition has scored the trifecta this week – the trifecta of truly atrocious economic ideas, that is.

They have been so bad that they are making Wayne Swan look like an economic genius, instead of the dunce that we – and Swan – know that he really is. 

And all of this in the same week that Labor will apparently announce another GBNT (Great Big New Tax).  So none of this is good politics either. 

It all started out with Barnaby Joyce telling us that we should all buy low quality, flood-damaged produce from Australian farmers instead of higher quality, cheaper imported fruit and vegetables.  Never mind that we don't like low quality produce because it – ahem – sucks

No, Joyce is worried that if we consume more imports, we would encourage a "long-term alternate supply source to that of Australian produce." 

Excuse me, but isn't that exactly what we should be encouraging? 

First of all, higher quality, cheaper imports are, you know, cheaper and better.  That's reason enough in my book. 

But shouldn't we also not discourage the development of alternate supplies from other countries so that when drought and flooding rains occur again (as they inevitably will), we won't all starve to death? 

Curiously, Joyce wasn't worried about the possibility that by telling Australians to buy low quality domestically produced goods, he was encouraging a "long-term alternate supply source" to high quality Australian produce. 

You see, if it turns out that thanks to Barnaby Joyce, our farmers and grocery retailers can get away with selling damaged goods at higher prices, what is to stop them doing that forever?  That problem will take care of itself, no doubt. 

Joyce's piece of economic lunacy was quickly followed by Joe "I have a 9 point plan to wreck the Australian banking system, the details of which nobody can remember except for the fact that it was completely silly" Hockey, who chimed in with his explanation of how the reconstruction from the flood disaster would boost jobs. 

Hockey's view is classic voodoo economics, and is exactly the kind of thinking that has led to Australia's current problems with government overspending.

He objects to Tim Andrews' claim that Hockey has invoked the broken window fallacy – but Hockey's own explanation provides two perfect examples of that fallacy in action!

Example 1: Hockey seems to think before the floods there were a whole bunch of  resources just sitting around doing nothing – particularly in the banking and insurance sectors.  Apparently those idle funds will now be "injected" into the economy. 

But this is complete and utter economic nonsense.  Before the floods, those funds were being put to productive uses elsewhere in the economy, creating employment and economic wealth.  Now they'll be put to less productive uses – replacing things that have been destroyed by the floods. SImply put, the jobs that would otherwise have been created, won't be. 

Now that doesn't mean that those funds shouldn't be deployed – if insurance companies have a contractual obligation to pay out claims, then that is of course what they should do.  But nobody – least of all the alternative Treasurer of Australia – should be claiming that the aftermath of a flood or any other natural disaster will "create new jobs". 

If that was true, why on earth would Hockey support an emissions trading scheme?  On Hockey's flawed reasoning, if global warming is going to increase the number of weather-related natural disasters, then won't that create jobs, and therefore be A Very Good Thing?  

Example 2: The same reasoning applies to Hockey's bogus claims about the effects of a "net injection of funds from governments", which he says will also create jobs.  Where does Hockey think this "net injection" will come from?  Santa Claus?  No, it will come from taxpayers.  The money taxpayers would have spent or saved and which would have been used to create jobs and economic wealth in productive activities wil now be diverted, via taxes, to less productive activities. 

Again, the jobs and economic value that would otherwise have been created, will not be. Of course, Hockey is right that the priority should be not to have another GBNT – but even if that didn't happen, the spending would still be funded by GBETs (Great Big Existing Taxes), and would therefore would still be diverted from other more productive areas of the economy, reducing jobs elsewhere. 

And finally today we had John Cobb calling for milk prices to be higher.  Yes, you read that right.  Cobb even wants the ACCC to investigate the major grocery retailers for cutting their prices!  Can you believe it? 

So I tell you what, I am fed up with the Coalition this week. They need to lift their game, and fast. As far as I can tell, their new Three Point Plan for Improving Australia's Economic Prosperity seems to be:

  1. Consumers should buy more low quality goods instead of cheaper, better imports, because that might encourage imports and that is A Bad Thing;
  2. We should have more natural disasters and more government spending because they are job creators.  They put to use those otherwise idle resources which have zero opportunity cost, and magically "inject" funds into the economy; and
  3. We need to increase consumer prices for basic staple items. 

I don't know about you, but it seems to me that as far as plans go, this one could use a bit more work. 

Milton Von Smith is the Economics Editor of Menzies House 

 

ALP’s knight is a thief in rusty armour

Niall Ferguson wrote in The Australian:

 

In the US GFC brings to mind the recipe for deep-fried chicken devised by Colonel Sanders. KFC stands for Kentucky Fried Chicken. Here, GFC should stand for Gillard's Fraudulent Claim.

The claim in question is that it was the fiscal stimulus injected by the Labor government that saved Australia from much more serious recession. According to one recent election ad, "Labor did what it had to do to avoid recession and protect jobs." The ABC's Kerry O'Brien unthinkingly recycles this line when asking Tony Abbott how he would have saved the 200,000 jobs Labor "created". It must have been music to Julia Gillard's ears when Nobel Prize-winning economist Joseph Stiglitz gave her his seal of approval recently. He praised the government's debt splurge as "one of the best-designed Keynesian stimulus packages of any country".

 

He goes on to say:

 

There's no denying the magnitude of the Australian handouts. If you rank developed countries' fiscal packages for the period 2008-2010, Australia's ranks third as a percentage of GDP, behind only the US and South Korea. So why did Australia's stimulus work so much better than America's? Spare us the fable that it was better designed. After the home insulation fiasco and the now-proven waste on new school halls, that can't withstand serious scrutiny.

Which brings me to problem two with the argument Labor saved Oz. Strangely, the professor (Joseph Stiglitz) has overlooked the other, more plausible explanations for Australia's relative outperformance. Step forward five candidates with a better claim to the credit: 1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry.

 

And concludes that:

Labor has stimulated the Australian economy, in the same way that Ned Kelly used to stimulate the economy of Victoria.

It's a very interesting article and if you get a chance I'd suggest reading the whole thing at The Australian.

(Posted by Chris Browne)