The crisis we face today has revealed how backwards Australian economists really are. There exists a serious, fundamental problem in the way economists are trained in Australia. I cannot fathom any other reason as to why, when economists in other nations (albeit a minority) can see the problems we face so clearly, yet in Australia the "contrasting" opinions are so confused. All of the debates in the media, regardless of political spectrum, always make the same assumption: that government is the solution; that it is a necessary evil to provide us with prosperity. I hope to show, as briefly as possible, that this assumption is unfounded and is indeed detrimental to our prosperity, freedom and liberty.

For the basis of this argument, I'm going to look at a recent article by the ABC entitled "Economists tackle the deficit and debt debate", which supposedly shows some contrasting views from well-known Australian economists. The article begins with a witty quote, stating that:

"It is said that if you put ten economists in a room you will get eleven different opinions."

"This has certainly been true of the federal budget analysis, with rare exceptions such as the general support for the Government's increased infrastructure spending."

The article takes opinions from three economists: Dr Stephen Kirchner, an economist from the Centre for Independent Studies think-tank; Professor Bill Mitchell, the director of Newcastle University's Centre of Full Employment and Equity; and Associate Professor Steve Keen from the University of Western Sydney. I'd like to address the fallacies, indeed the dangers, of taking the advice of these vastly contrasting "economists".

Dr Stephen Kirchner

Our of the lot, Dr Kirchner is probably considered the "free market" economist, or at least the closest thing to it, but even he fails to see that a deficit was not necessary.

"There's no question that we were going to go into deficit, and this was necessary to soften the blow from the global economic downturn," he said.

"But it is a question of degree, and overall about two-thirds of the deterioration in the budget balance is due to slower economic growth, but about one-third is due to discretionary policy actions which have made that downturn in the budget even worse."

The best way to soften the blow from the global economic downturn is to remove the cause, not treat the symptoms. Yet Dr Kirchner, indeed none of the economists mentioned in this article, seem to understand what the cause was: the manipulation of the market by the central banks of the world and their enablers, their governments. A decline in government revenues isn't an excuse to increase the size of government, relatively speaking, to that of the private sector. Dr Kirchner continues,

"I don't know that there's been much evidence to suggest that there's been a positive impact on employment creation from the fiscal stimulus packages."

"There's a long-run crowding out effect from government borrowing that will probably persist well after the recovery is underway," he said.

In this, Dr Kirchner is only partially correct. The stimulus packages did create jobs, it boosted the retail industry, the construction industry and many others connected to them. It's fantastic; indeed wonderful, to see this marvellous plan succeed in creating jobs for the people! But one has to ask, where did the government get the dollars to pay for these jobs? It had to tax from other people, people who you never see. The $900 it took from Joe the businessman to pay for Steve the construction worker is now $900 that Joe never gets to spend: he may never buy a new suit, costing the local tailor work; he may leave his garden unkempt, costing the gardener work, and so on. So not only is Joe robbed, at a loss of $900, but the many industries he would have spent it on also suffer, not to mention the net loss incurred through the layer of bureaucracy that was involved in the redistribution process. There is no reason why Steve should deserve more sympathy than the tailor or gardener who no longer have jobs. The "stimulus" is no more than a mere displacement...there is no net gain to the economy.

As for the long-run crowding out effect from government borrowing, Dr. Kirchner is correct. Any money they government sources - whether from tax, borrowing, or inflation - is now money that the private sector, the people, no longer have.

Professor Bill Mitchell

Prof Mitchell, unfortunately, epitomises the state of academic economics in Australia. He believes that government is the solution to all of our woes, that it is this great almighty utopian being that can do no wrong,

"[if the government didn't intervene] There would have been a very severe economic contraction with much more substantial unemployment, much higher negative GDP growth rates, and we would have really regretted it."

"[on the 1990s recession] They allowed the recession to occur and deepen before they intervened, they intervened very late and, as a consequence the economy was already starting to turn, that is grow, before they really started to pump money into it," he said.

"We had a very tepid recovery, and unemployment kept rising for several years after that, and it took us nigh on 14 years to get the unemployment rate back to where it was before the '91 recession began."

Everything the government does is contradictory in one sense or another. If it seeks to aid one industry, it must take from another industry. It's at best an illusion that everyone can live on the back of everyone else. The government can never restore more to the public than it has already taken. It's an impossibility for it to confer a particular benefit upon an individual, or group of individuals, as part of a community, without imposing a greater cost upon the community as a whole.

On the basis of the above, how can Prof Mitchell possibly, logically, justify his case that government can reduce unemployment or boost the wealth of Australians (to be fair, he mentions GDP, which includes government expenditure and not the costs associated with it, so the government can "boost" that statistic)? He can't, so he resorts to the following,

"The Government does not need to fund its net spending. The Government is not like a household - households like my household, if we want to spend we have to find a source of revenue, we are revenue constrained. The federal Government is not revenue constrained, it issues the currency," he said.

"When the Government does issue debt, it provides us with a safe haven for our savings. The debt repayments and the debt servicing the Government makes provides us with income and allows us to earn income from our savings in a risk free way," he said.

"It's something that superannuation funds can invest in much more securely than some of the more high risk assets."

There are fallacies abound in the above comments, so let's start from the top. I don't think Prof Mitchell is advocating a return to the printing press, although if he is, any ounce of respect I may have had for him would be completely gone...I think he's stating that because that option is there, and the government takes a constant stream of taxes from its people, it never needs to back its debt with real, productive revenue (a good thing too, because government has no revenue of its own merits!). It's this argument, and that government issued debt is a safe haven for savings, that I will address.

Let me begin by saying that government debt, contrary to what Prof Mitchell says, has no upside. In order for government bonds, required to finance debt (I ruled out the printing press), to sell, the government has to make them attractive. To raise $60bn in capital, as an example, the government is going to have to issue, say, 630 million bonds, each with a face value of $100, paying 5% interest over the course of a year (each bond would then fetch $95.24 from a capitalist, and $95.24 x 630 million = $60 billion). Each year the government has to redeem the maturing notes for $100 and reissue the bonds - thereby losing money ($3bn a year), unless they either issue more bonds next year or finance the interest payments as another way to recover the loss.

To summarise,

YEAR 1: 630m bonds * 95.24 = $60bn revenue for government

YEAR 2: 630m bonds * 100.00 = $63bn back to the investors

NET LOSS FOR GOVERNMENT = $3bn

The problem, of course, is that for this debt to be paid off (and for the cycle to end - issuing more and more bonds can't go on forever), it is necessary for the government to tax the general public to repay its commitments. Each government bond therefore represents a future claim on taxpayers. While a select few might benefit - perhaps the superannuation funds that Prof Mitchell mentions - it's at the expense of someone else (people who Prof Mitchell fails to see), as the money to pay for the interest comes directly from the taxpayers. The only other option, of course, is for the RBA to buy up the bonds and monetise the debt - thereby causing inflation, which is another form of tax (and punishes the poor, the very people the government is claiming to be help with their deficit).

What Prof Mitchell fails to grasp is that whenever the government buys something, it consumes resources that might have been devoted to other ends, and in particular might have been devoted to the production of capital goods. It can never give more than it takes. Government debt will almost certainly reduce the amount of gross investment, and hence production in future decades will be lower than it otherwise would have been. This cannot be offset by pieces of paper issued by the Treasury.

Associate Professor Steve Keen

Despite his good intentions and sound knowledge of economic history, Steve Keen's fanatical attacks on debt and the "roving cavaliers" (bankers) leave him blinded to the very tools that enable them: the central bank and government. His recent popularity makes him the most dangerous of all of these "economists", because while he called the crisis correctly, his misunderstanding of the real cause and his unwavering obsession with Minsky is likely to lead us into more trouble than the well-known fallacies of the previous two "experts". He says:

"We have had far too much debt, more than the system can actually cope with, we therefore can't get out of this the way we used to get out of it by re-encouraging private lending once more," he said.

"People who got a thousand dollars through a tax cut, used that thousand bucks to borrow ten thousand dollars to speculate on real estate and margin loans," he said.

"The reason we had a boom at the same time as running gigantic surpluses was because the private sector was running up enormous amounts of debt, spending it, and then giving us a paper economy that looked pretty good for a while."

"Ultimately, we're going to see governments changing across either to abolishing debt, or to literally printing money rather than running out debt to finance their spending," he said.

"We know this crisis was caused by too much debt, how on earth do we think that getting into more debt is going to solve the problem."

"The financial system has broken the capitalist system, and I'd rather break the financial system in return and start building capitalism all over again, than leave us in the debt trap we've ended up in."

Most of what Steve Keen said is true, to an extent. Before beginning to critique him, I'm going to clarify something: the article I sourced this from by Michael Janda adds the following paragraph before the direct quotes, which I have a feeling misunderstands what Mr Keen is saying:

"He advocates a drastic solution to the debt problem - that is for the Government to get rid of the debt by causing higher inflation or by simply cancelling it and nationalising the banking system."

Nowhere in what Mr Keen said does he "advocate" those solutions - he merely states that they're the likely outcome. Based on that, I'm hesitant to criticise him for something he may not be advocating, so instead I'm simply going to focus on what he has said, not what Mr Janda thinks he said.

Steve Keen believes that private banking is the source of instability, rather than central banking. He considers an unstable banking system a normal feature - and, it seems, almost a necessary feature - of a dynamic capitalist economy. The 'necessary' part, however, is given without any real argument. Just because banks can create unbacked credit, it doesn't mean it's a flaw of the free market: what enables this to occur without a bank run? Quite simply, the existence of a central bank allows private banks to expand credit (debt) to a much higher level than the free market would permit, preventing the efficient functioning of capitalism.

In a free-market economy, intermediaries such as banks have difficulty expanding unbacked credit, because if a particular bank engages in an unbacked expansion of credit this bank runs the risk of being "caught" (a bank run). Consequently, the threat of bankruptcy is likely to deter banks from pursuing the expansion of unbacked credit. As such, it's unlikely that there's an inherent tendency in the capitalistic economy to generate unbacked credit that destabilises the economy.

This is the problem with Steve Keen - the framework he follows, that of Minsky and Marx, may help him to describe what went wrong (excessive debt, etc), but it doesn't explain. It arbitrarily puts the blame for instability on the capitalistic economy without even making the slightest attempt to establish a logical verification for this claim. Thus, Mr Keen's recommendations - the movement away from laissez faire towards bigger government - are incorrect and unfounded. His suggestions are merely a recipe for progressively slowing the accumulation of real wealth and hence lowering the living standards of all Australians. This is why Steve Keen and his followers are dangerous (apologies for not sticking entirely to the comments made in the above article, part of this critique is based on prior readings of Mr. Keen).

The article finally concludes with:

"Given the long-term nature of the debt commitments Australia is entering, it will be years, and maybe more than a decade, before economic historians can look back and continue arguing which view was right."

Historians can argue all they want: there are still some poor deluded souls who think that the "New Deal" got America out of the great depression, and likewise there will be people who will point to the government when we get out of this one. But the fact of the matter is, government intervention caused this crisis, indeed it has caused almost all of the boom-bust cycles throughout history, and attempts by the government to restore prosperity will only achieve the opposite: to delay recovery and, in the worst case, further impoverish us all.

To conclude, the state of economics in Australia is a disgrace. Not only have most never heard of the Austrian school, although this isn't their own fault: they're indoctrinated throughout the education system to believe that Keynes can fix our woes; that the free-market is inherently unstable; that "greed" is evil, but the very suggestion that government may not be the solution to all of our problems is met with immediate hand-waving, accusations of being "anti-Australian", or "fanatical", or a "capitalist pig". They're so occupied with attacks against each other - left and right - that they can't even comprehend the idea of freedom and liberty, they've never even questioned the very system itself! What is it about the concept of "free to choose" that is so hard to grasp? Why is it always assumed that there's some personal gain to be had; some motive behind the fight for protecting individual freedoms other than the very principle in its own right, regardless of the situation? For example, when defending the rights of individuals to smoke, you're labelled as "irresponsible", or a supporter of the "evil tobacco companies". On the flip side of the coin, when arguing against government spending on a project, let's use the example of an art exhibition, any economist who objects is accused of disapproving of the project itself rather than just disapproving of the government support; you're accused of being "anti-art"! The result is the label of anti-every kind of activity, when on the contrary all we're asking is for those activities to be free and to seek their own reward: to justify their own existence without coercion. Just because something isn't supported or regulated by the government, doesn't mean it should cease to exist - if the people really want an art exhibition, and I'm inclined to believe some would, they will go about achieving that gratification. All government involvement does is displace enjoyment, displace labour, displace gratification, displace resources, and displace wealth - usually for the purpose of preserving its own existence, an existence dependent on the work of others (and their votes!).

The Howard government squandered a unique opportunity: rather than reducing the role of government in our lives, he used his power to expand spending, become involved in pointless wars that put Australia on the terror map, vastly increase regulatory power, and stole freedoms and liberties from every Australian, all under the watchful eyes and support of his legion of "economists".

This laid the perfect platform for Rudd and the Labor left to further expand and destroy the economy and individual freedoms. The struggle between right and left is futile; both are a vote for the same thing, the same system, the only difference being where the resources are taken from and to which politically-connected interest groups they're distributed to. I'm asking for a change, for some form of decency in Australia; a consideration of freedom and liberty, a shift away from the reliance on government and a move to sound economics.