Let me begin by saying that I still think the science that suggests anthropogenic carbon emissions are the major cause of climate change is anything but settled. Given the unpredictable nature of the climate and all the scandals involving the IPCC and other government-funded climate science bodies we would be foolish not to maintain some caution; I certainly don’t think we should be rushing into anything that could adversely affect the living standards of many, many people. However – and this is a dilemma I’ve had for a while – it seems both political parties are set on “action”, so the billion dollar question is: which path will cause less damage?

“Personally, I find that the most objectionable feature of the conservative attitude is its propensity to reject well-substantiated new knowledge because it dislikes some of the consequences which seem to follow from it—or, to put it bluntly, its obscurantism. I will not deny that scientists as much as others are given to fads and fashions and that we have much reason to be cautious in accepting the conclusions that they draw from their latest theories. But the reasons for our reluctance must themselves be rational and must be kept separate from our regret that the new theories upset our cherished beliefs” – F.A. Hayek

First, apologies if I have the details of either policy a bit muddled; I honestly haven’t had the time to trawl through them so there might be some parts I have wrong, please correct me if that’s the case. With that said, first up on the chopping block is Labour’s Emissions Trading Scheme.

• Schemes of this nature have enormous administrative costs
• Government allocates emission permits sector by sector, industry by industry
• Government auctioning permits for businesses to continue to do business is a huge tax hidden in a bureaucratic black box
• The government has even more power to pick winners and losers, all of whom will no doubt commit huge amounts of capital to lobbyists to influence the government

Now as someone who is generally very sceptical about giving the government any new authority, I could certainly see how billions of dollars could go “missing” under this scheme. At face value, while it will cut carbon, it will expand bureaucracy and crony-capitalism to even further heights.

As for the Liberal’s “direct” approach, again correct me if I’m wrong, but it looks like, quite simply, “$10b worth of handouts for businesses and farmers to reduce emissions.” As with the above – although this may be more transparent and cost less – it’s almost a certainty that the creation of a new body to simply hand out cash for farmers to plant trees and so forth will reek of pork barrelling and waste. I’ll examine it a bit more in the coming days (honestly, I really don’t have the time – this entire post is being rushed, mainly so I can get the following point out. I will comment on this post at a later date after reading up on both schemes).

So, with both schemes looking rather rubbish, why hasn’t anyone considered a (fully rebated) direct tax on carbon itself as an alternative (I’m only raising this as I feel – with action guaranteed – that it’s the most sound option)? It would avoid the shortfalls of the above options as:

• It would be a straightforward tax on fossil fuels based on each fuel's carbon content
• It avoids the uncertainties of the cap and trade – a carbon tax would provide a clear and candid incentive to adopt energy-saving and carbon-minimising technologies
• The market will be left to determine how to most efficiently order affairs under those new prices (i.e. windmills, solar, hydrogen, whatever – the market will pick the most effective)
• It has a known cost and taxpayers could demand a commensurate reduction of other taxes (e.g. income tax)

That final point is the biggest reason why I would support “action” in the direct taxation of carbon over a cap and trade or Abbott-style scheme. The amount collected from it could be directly transferred back to the taxpayer in the form of a tax reduction elsewhere. The last thing we need is another black box for the government and banks to play with (hello carbon trading bubble!).

Now, let me end with something I think needs to be addressed more urgently, and will do more good for the environment than any of the above schemes: the removal of state-granted monopolies in power generation.

The carbon tax scheme I mentioned above will not work unless there is a free market in power generation (currently as there's no incentive to cut emissions utilities can just absorb the loss – their performance isn’t measured on profitability – or pass on the extra costs in the form of higher prices without even a glance at alternatives. It is also very difficult/impossible for a competitor to enter the market.). It's clear that state-sponsored public utility monopolies and the bureaucratic regulation of their pricing structures and investment options greatly limits the freedom of power markets...consumers lose the ability to choose their provider and the utilities lose their freedom to determine what to charge and what infrastructure to invest in.

If power was returned to the free market we would see more competition, better pricing, more cost-saving (more resources conserved) and more money flowing into green power.

It’s ironic that the government today spends money on adverts telling people NOT to use power during a period of high demand (e.g. a heatwave)...when if markets were in charge, a heatwave would not be looked at as a problem but as an opportunity. Entrepreneurs would be itching to meet demand instead of making excuses, just as they do in every other sector that is controlled by markets.

The real question is how can anyone be serious about helping the environment while these state granted monopolies are allowed to exist?

...at least not the economy, despite what Acting Victorian Premier Rob Hulls says to the contrary.

The Victorian Government says new economic modelling has vindicated its decision to pay for golfer Tiger Woods to play at last year's Australian Masters.

"Original projections were that the 2009 JBWere Masters would generate a $19 million boost to the Victorian economy but, due to unprecedented ticket sales and public interest, the actual impact was almost double what was forecast."

Woods received an appearance fee of $3.25 million, with the state government chipping in $1.5 million.

Major benefactors included major hotels, restaurants, taxis and the retail sector. 

This is a classic example of failing to take account of Bastiat's warning to consider what is not seen, as well as what is seen, when deciding where best to allocate taxpayer dollars. Yes, hotels, restaurants, taxis and retail did remarkably well for a brief period and who knows, maybe a few extra tourists will now visit as well. But this only what is seen. At first glance, it appears obvious that Woods was a boost to the local economy. Indeed, when I examine the comments on the two linked news articles above, almost all of them are full of praise for the government. But what happens when we look at what is not seen? The dollars expended to lure Woods had to come from somewhere.

If people are spending their money at local restaurants because they're there to watch Woods, there are other places - perhaps restaurants in their own neighbourhood - where they are not spending that money. The money spent by the state, whether raised through taxes or borrowing, would have been spent by someone on something else (with the expected benefits of these alternate projects being the opportunity cost of luring Woods).

The economic reports as quoted and paid for by the government always fail to apply an appropriate cost to the initial funds in their cost-benefit analysis. I don't have access to the report that Rob Hulls is quoting, but having read others I can only assume that they simply state the $1.5 million is like "mana from heaven" and does not represent a loss to the taxpayers when in reality, they should begin with a huge number in the cost bracket. Unfortunately we can never know what the money would have been spent on had the government not expropriated it for this purpose. But what we can say is it would have been used to satisfy the most urgent demands of consumers. The funds used to lure Woods, having been diverted from this most urgent - and therefore most valuable - use, must rank lower. Unfortunately modern cost-benefit analysis does not take any of this into account.

Yes, the cost to the individual taxpayer is relatively small and the benefits to large interest groups (golf, hoteliers, food, transport, retail and so on) who contribute significantly to government campaigns are enormous in comparison. But at the end of the day, if there was a profit to be made in luring Woods to Melbourne, private investors would likely have been quick to act to take advantage of the opportunity with their own funds. Instead, particular lobby groups have convinced the government to support Woods because it was not clear to them whether his arrival would have been profitable without taxpayer funding.

Unfortunately the majority of the population never even thinks about what is not seen. Economists who prepare reports for the government to justify their various subsidies - whether through ignorance or greed - never consider what is not seen (if they did the government would stop hiring them to prepare said reports!). I personally think that every high school student, well every person, should read Bastiat's short but brilliant essay The Broken Window. So much damage could be averted if people just considered what is not seen when deciding whether economic policy is worthwhile.

You need ‘courage’, according to Rudd anyway:

Prime Minister Kevin Rudd has called for world leaders to show political courage at the climate change talks in Copenhagen in three weeks' time.

"What's required is a bit of political courage for everyone collectively to step up to the plate, put behind the familiar, put behind the fears and concerns of the past and embrace instead the opportunities of the future," he said.

"We're at one of those crossover points in the world, one of the crossover points in Australia.

"Let's rise to the challenge rather than simply succumb here at home and abroad to the politics of fear."

The ability of these guys to convince themselves of anything always amazes me.

The banks don’t have to lend to inflate

Contrary to popular belief, banks do not need to lend to expand the money supply and eventually create price inflation. Yes, the Australian banks are still lending at an impressive rate but since the bust this has been predominantly to the housing, individual and public sectors, with commercial lending actually declining year-on-year (although it is already on the way back up from July lows).

Just because the demand for loans by businesses fell off does not mean that the monetary pumping undertaken by the RBA will have no effect on price inflation. Banks never have to be passive and, indeed, they usually waste no time in spending their new cash reserves. All they have to do to expand the money supply is buy existing securities, whether from each other or other corporations, thereby increasing deposits. They do not have to depend upon business firms to request commercial loans, or to float new bond issues.

…But it doesn’t matter anyway

Saying that, in a speech today the RBA's head of domestic markets department, John Broadbent, revealed that “…listed corporates have raised a record amount of equity this year, totalling some $60 billion, with issues broadly based across all sectors.” So not only are banks buying existing securities but they are buying up new bonds at record levels. This will be inflationary.

Mr Broadbent continued to say that most of these equity raisings had been used to pay down debt, with some companies explicitly saying the funds raised were to repay bank loans. While this may sound deflationary, it is not.  When someone pays back debt, the money used to pay that debt with does not suddenly disappear but simply goes to the creditor, in the case the bank. The bank then spends on additional security purchases, shares, or issues more loans which increase deposits. In other words, most if not all of the ‘repaid debt’ flows straight back into the economy.

The seeds have been sown

“The first sign of a hyperinflation is a rally in the stock market,” Jens O. Parrson, Dying of Money: A History of the Great German and American Inflations.

The new money and all-time low interest rates from the RBA coupled with a record fiscal deficit and added public debt obligations has created a new wave of malinvestments (investment in areas not aligned with consumer preferences but that which appears profitable thanks to the artificially low cost of credit and rising prices) in Australia that will eventually need to be liquidated. As an example of the rising confidence, the latest Dun & Bradstreet business expectations survey of 1200 business owners and executives shows expectations for investing in capital are at the highest level in 10 quarters, registering an index level of eight points. It is only a matter of time before the distortions created by all of the new cash created by the banks – and enabled by the RBA – will be revealed. While it may take a few years thanks to factors such as China’s demand for Australian resources, foreign accumulation of the Australian dollar (as bad as it was, every other nation appears to be inflating more) and so on, those same factors will mean the eventual bust will be worse in Australia than elsewhere.

The Australian recovery is not sustainable and rapid price inflation is a very distinct possibility.

This was originally sent out on 30/10/2009 to a private mailing list; the content has not been modified. This article is also available in PDF format.

Crack the Champagne, the US is out of Recession

…but you might want to hold that thought. The announcement last night that the US had posted GDP growth of 3.5% should spur markets on in the short-term and temporarily delay the correction, but a quick glance at the numbers reveals things are not as rosy as it seems. Growth in GDP was led largely by the ‘cash for clunkers’ program which contributed 1.7%, or 48% of total GDP growth, with a large part of the remaining growth created by the government’s $8,000 tax credit for first-time home buyers. It is important to understand that these types of government initiatives do not create lasting growth, they create ‘statistical growth’.

When the government pays for someone to trade in their ‘clunker’ – a vehicle that is still functioning and probably could keep functioning for years – they are paying someone to destroy their property, something with real value. The short truth is that the destruction of anything of real value is always a net loss, a misfortune, or a disaster and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing.

So while ‘cash for clunkers’ created positive gains according to GDP, a figure which measures all spending regardless of how destructive it is, it will not improve the long-term wealth (growth) of the nation. In summary, the latest GDP figures are nothing but a short-term burst of consumption created by the government. In real terms, taxes increased, personal income fell, disposable income fell and the savings rate sank, all while personal consumption increased, paid for by an increase in the federal deficit. This will not create lasting growth.

Australian CPI Up; Rate Rise Imminent

The latest CPI figures indicate that price inflation is coming (the ‘basket of goods’ the RBA measures increased by 1% QoQ) and the RBA will respond by hiking rates by an (estimated) 25 basis points on Melbourne Cup day in line with their inflation-targeting policy. We expect CPI inflation along with subsequent rate rises to continue into the new year.

What most people don’t realise is that the RBA is the culprit – rising prices are occurring because of the monetary pumping and financial sector bailouts the RBA engaged in back in late 2008/early 2009 as discussed in the October edition of Ausnomics. Inflation (monetary) is indiscriminate; its effect will be different on different parts of the economy. The same monetary pressure which in some parts of the economy may have reduced unemployment will in others produce definite and disastrous inflationary effects. The aggregate thinking and disregard of the economy’s capital structure by academics, the RBA and the government necessitates that these important implications are neglected.

Market Correction is Happening Now

The United States public and mainstream media are finally waking up to the fact that their government has been recklessly spending, creating massive new ‘initiatives’ (i.e. health) without funding them, dishing out cheap credit to politically favoured sectors and telling businesses where and how to invest. Unfortunately the Australian media still has no clue that we have been doing exactly the same – the smokescreen that is China and the resources industry is, so far, covering up the evidence.

The Fed has been (not-so)secretly bailing out the banks with massive reserves that they pay interest on. It is actually quite amusing – economic fascism at its best! The Fed gives banks cash, pays them to keep it at the Fed/buy Treasury bonds (you see if they spend it – like the Australian banks have already done – it creates ‘price inflation’), the banks simultaneously write off their bad debt and make a profit to boot. They then pay themselves big bonuses which the government criticises them for: funny, as all of that free money was dolled out to them by the government in the first place!

All of this bad news and growing anxiety could see the Australian market, as it has historically, follow the US-led correction.

Growing Public Angst

General Motors has asked for even more federal money to keep them going – surely the better option was to let them fail and allow the good parts (yes, they still have a lot of good assets and employees) to be bought and for the rest to necessarily liquidate. Unfortunately the government has declared their hand and they have to follow through to the end, something the public is growing concerned about. Further doubts about the health of the recovery will be raised over the next couple of months which should temporarily push the bulls to the side.

Australian welfare state keeps growing and growing and growing…

The big question is: how are we going to support this when resource prices eventually crash as they did back in the 1970s? Will we have another decade of double digit price inflation as the RBA tries to inflate away our public welfare, debt and other obligations?

Unless this trend changes, that is the most likely scenario. Rudd’s national healthcare policy (no doubt to be unveiled as an election promise) and emissions trading scheme, if successful, will only add to the nation’s commitments and future debt levels. Australia simply cannot afford these ‘initiatives’ – the resources boom won’t last forever and the nature of politics is to spend spend spend with little regard for the future. As the late Dr. Adrian Rogers said, ”…the government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

…Now for Some Political Economy: Why More Government is Not the Answer

To quote Gordon Gecko, the fictional character from the movie Wall Street, “greed is good!” The world runs on individuals pursuing their separate interests. History has shown us time and time again that the only way in which people have escaped from poverty are where they have had capitalism and largely free trade. If you want to know where people are worst off, it is exactly in the kinds of societies that depart from that. There is no alternative way of improving the lives of ordinary people than the productive activities that are unleashed by the free market.

As Adam Smith famously said in the Wealth of Nations (I.ii.2: pp 26-27),  ”…it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Ask yourself this: how is political self-interest somehow better than economic self-interest? Where are these omniscient angels going to come from? With capitalism, the only people who can rise to the top and stay there are those who consistently meet the changing demands of the consumers. Under economic competition, people compete (earn economic profit) by best serving the consumer. By contrast, the worst tend rise to the top of the political ladder as there is a tendency for these people to both desire power and be effective at using it. Under political competition, politicians compete (earn political profit) by supplying wealth transfers to interest groups through legislation and regulation.

Just remember that the free market or “excessive greed” did not cause this crisis; political self-interest, market interventionism and mercantilist policies did.

Update 30/10/2009: Apologies for the previous chart - an honest mistake was made and the GDP figures used were quarterly and not annual. This has been fixed and the charts below are accurate. This does not change the essence of the story - although it is not as bad as first thought it is still a huge problem! If you received the FLASH update before 1500 AEDT please download the correct version here.

Talk about a welfare state!

What is going to happen when resource prices fall? Who is going to support the economy?

Unfortunately, the nomenklatura will attempt to dig themselves out of this hole by increasing government involvement in our lives. And who is going to support a move to more government? Why, the significant and growing portion of the country who, as Mises said, rely on the government to provide "...thousands and thousands of people with safe, placid, and not too strenuous jobs at the expense of the rest of society."

When China stops picking up the bill and the party ends we are going to have one hell of a hangover!

I have been rather busy over the past week with work and other things so to ease the inactivity I thought I would simply quote from Hazlitt (quoting Sumner) about the Forgotten Man. It is important to always think about the Forgotten Man when considering whatever the latest political ideal floating around is...as Bastiat would say, to see what is not seen, to understand the full effects of a policy, not just the immediate.

In the course of our study, also, we have rediscovered an old friend. He is the Forgotten Man of William Graham Sumner. The reader will remember that in Sumner’s essay, which appeared in 1883:

As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for ... .. What I want to do is to look up C.... I call him the Forgotten Man.... He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.

It is a historic irony that when this phrase, the Forgotten Man, was revived in the 1930s, it was applied, not to C, but to X; and C, who was then being asked to support still more Xs, was more completely forgotten than ever. It is C, the Forgotten Man, who is always called upon to stanch the politician’s bleeding heart by paying for his vicarious generosity.

I would also like to quote from Friedman's 1991 discussion of Gammon's law and healthcare as it seems relevant - there is no doubt in my mind that Rudd is going to come out soon, whether as an election promise or a radical pre-election move, and propose to drastically increase federal involvement in healthcare.

"[Gammon] was led to enunciate what he called "the theory of bureaucratic displacement." In his words, in "a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like `black holes,' in the economic universe, simultaneously sucking in resources, and shrinking in terms of `emitted production.'"

I suggest everyone read the full (brief) article as it will hopefully shed some light on why more government involvement in healthcare is a bad idea.

"Shutting it [the government healthcare venture] down is an admission of failure, something none of us is prepared to face if we can help it. And they need not shut it down. Instead, in entire good faith, the backers can contend that the apparent lack of success is simply a result of not carrying the venture far enough. If they are persuasive enough, they can draw on the deep pockets of the tax-paying public, while replenishing their own, to finance a continuation and expansion of the venture. Little wonder that unsuccessful government ventures are generally expanded rather than terminated."

Sounds familiar doesn't it.

I was recently asked to do some work involving choice modelling as a method to calculate 'willingness to pay' for things such as job losses; wetland expansion; waterbird breeding; number of endangered species; and so on. What I do not understand[1] is why it is even necessary?

I'm a firm believer in subjective rather than objective values and that the nature of human beings is that values are constantly changing. You can measure values at a point in time – you can say that because I traded an apple for an orange at point x, I valued the orange more at that point in time (and the person I traded with valued the apple more at that point in time). But values change – an hour later I may prefer the apple. You also cannot prescribe a monetary value to that trade – money itself is an economic good, subject to the same changing preferences and diminishing marginal utility as any other economic good. It would be like trying to say the apple and orange transaction was worth a total of one pear.

Choice modelling does not measure past actions (exchange), it merely relies on a survey asking people to reckon their demand curves based on a few options…no doubt due to the impossibility of mapping a full schedule of preferences. But that means that, by necessity, a certain number of alternatives must be excluded from the menu of options over which a person can hypothetically spend their money. The result is that the conclusions about people's 'willingness to pay' will be misleading at best[2].

In the surveys, people are asked to choose between certain 'costs', but how can a choice be made, unless there is some common unit of measurement by which to calculate human vs. environmental vs. other costs? Value is subjective, therefore so is cost, meaning information about human cost is not directly observable…the only information we have about human cost is revealed through voluntary exchange; through trade. In a voluntary exchange, each person reveals that the thing they acquire is ranked higher on their personal value scale than the thing they give up.

For example, environmental degradation for one person may not be another person's degradation. A farmer viewing the encroachment of the wetland onto his cultivated field may regard it as damaging while another person may find it beneficial. Without reference to the impact on a decision-making individual the whole idea of an environmental cost is nonsensical. So if that’s the case, then we’re back to the problem of comparing human valuations.

The only solution that I can see – the solution that works elsewhere – is a price system, which implies private property rights and the freedom to voluntarily exchange that property. Anything to the contrary will lead to superficial or misguided claims and potentially damaging policy recommendations. To put it bluntly, we need a free market for water.

How about this as a solution: instead of the government forcing everyone to pay additional fees to create more wetlands, create a holding company (which owns the land) and auction off shares, say one billion shares at whatever price people are willing to pay, to anyone willing to buy. Then if the majority wanted to preserve the wetlands, waterbirds and endangered species, as owners of the land, they could reduce the amount they supply for irrigation. If the farmers value the water more than the residents value the wetlands, then they will outbid them for water. They are not going to drain the thing dry; and as with every good, water has a diminishing marginal utility. The first x amount of water has far more value to the farmer than the remaining y. It is likely that residents will value y more than the farmers and will therefore outbid them. This is just one of an infinite number of potential ways the market could fix the problem of water shortages and is the beauty of the market system; we can never know in advance how it will solve problems until it does.

Yes, market prices would probably end a lot of farmers, but it is the only fair way. Why is it that only government is allowed to buy up water – why not allow private citizens to do it as well (they are ultimately paying for it anyway). Under a private system of ownership – or even a quasi-private one in which water rights would be created then bought and sold freely between whomever was interested (if the government wanted to keep land ownership but sell water) – the water would go to the people willing to pay for it. If people actually had to pay market prices for water, and that water were privately owned, it is doubtful that the kind of waste that has occured and is still occuring would exist today. Government policies have resulted in misallocated resources and development that cannot be sustained. The solution, as with most things, is not more government involvement and 'choice modelling' to determine how much they can plunder from the populous without a voter backlash, but a free market in water.

---

[1] I do understand: there are a lot of socialists in charge who will not even comprehend a non-governmental solution. As a socialist system cannot calculate, they are forced to resort to these 'second best' solutions.

[2] Not only that, but due to 'budget and time constraints', something called 'benefit transfer' has been developed, where preferences from prior surveys on different (but 'similar') issues are used to estimate 'willingness to pay' for a new scenario. The problem with this is that it makes little sense to talk about how much people value something independent of them being in a specific situation where they have to make their choice. How much people value things will always be contingent on the time and place and therefore 'benefit transfer' will be even more misleading than a normal choice model.

Treasury Secretary Dr. Ken Henry has stated what everyone already knows: if the stimulus is wound down early, jobs will be lost. Absolutely. No one is denying this. But the problem from a year ago has not changed one iota: government spending cannot create permanant jobs. The state takes its money from the private sector. It does not produce its own wealth. It cannot create any kind of meaningful employment.

"If all the stimulus scheduled to impact in 2010/11 was cancelled that would mean a further detraction of 1.5 per cent from GDP (gross domestic product) growth and the loss of up to an additional 100,000 (jobs)," he said.

The jobs are going to go anyway. I think what Dr. Henry means is that he wants to delay the job losses as long as possible to give his lackeys down at the Reserve Bank enough time to kickstart another fiduciary boom. You see, if we can get enough funny money into the economy before the stimulus is wound down then these jobs created out of nowhere suddenly look sustainable and indeed necessary to businesses around the country. They get misled into thinking we have all been saving more than we actually have been and that capital is abundant when in fact it is anything but.

Eventually we have to bear the costs of these inflationary policies. The longer we delay it, the more painful it becomes. But, luckily for Dr. Henry, Kevin Rudd and Glen Stevens, they will all have retired on fat government pensions by then. Ah, the beauty of short-term solutions!

In other news, Jesús Huerta de Soto has given a speech on the causes of the crisis which everyone should check out if they have the time.

Have a good weekend.

The recent interventionist policy enacted by ACT chief Minister John Stanhope represents a gross misunderstanding of the nature of competition. It will result in nothing more than higher prices for consumers to protect a small minority of businesses. The only reason independent retailers fail to succeed is, quite simply, because they are not profitable enough to stay open. Whether this is because they are not efficient enough due to poor economies of scale, labour costs, or some other reason is irrelevant.

Funnily enough, "...the architect of the ACT policy is John Martin, who was a long time commissioner at the Australian Competition and Consumer Commission with special responsibility for small business." So a man with a vested interest in helping out a particular lobby group, small business, is using his coercive powers in government to impose legislation that consumers do not want. Why does this not surprise me? Apparently, "...Mr Stanhope is turning the ACT into a test bed for interventionist polices aimed at improving competition policy." In other words, he is using flawed logic of 'more firms = more competition = lower prices' to justify his intervention.

As long as the government stays out of the way, which also includes not providing favours to the big three retailers, a free market dominated by a few firms is not a bad thing. The cheaper prices provided by Woolworths, Coles and IGA provide everyone in the economy with additional income to spend elsewhere (the savings they now make they can use to acquire more goods than they could before). This savings will then be spent in other areas of the economy enabling everyone to gain additional products and will also create jobs in the process.

If people honestly wanted to support small retailers, they would vote with their wallets. The minister should remove the intervention and let the people speak through their own actions rather than using the strong arm of government to impose his views on others. The big three cannot charge monopoly prices without illegal coercion (bribes, intimidation, etc), government-created barriers to entry (regulation, etc) or other government involvement (political favours, subsidies, etc). The only way they can keep competition out and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter.

To me, that sounds like a win for everyone involved, unless of course you're a small business lobby group or a politician handing out and receiving favours.

In a "better late than never" move, the RBA raised the cash rate by 25 basis points to 3.25 per cent earlier today based on stronger than expected "economic conditions" and "measures of confidence". This was not entirely unexpected, as we reported last month the only way rates would remain at 3 per cent was if the incumbent Labor party had enough sway to 'persuade' the RBA to hold rates.

The only way to artificially keep interest rates down is to increase the money supply – whether through the purchase of government securities, increasing the amount of cash in the economy or lowering the discount rate (encouraging banks to borrow more).

Record growth in M3 thanks to the loose money policies around the world following the last 'bust' (2001ish) saw the pressure on interest rates soar considerably leading up to the crash and instead of further raising rates[1] – a move that was necessary to allow the prior malinvestment to liquidate and for prices to coordinate downwards – the RBA simply flooded the financial sector with additional money thereby preventing any restructuring from occurring.

The structural flaws in the economy – a capital structure still swarming with malinvestments that are not aligned with the intertemporal (time) preferences of the consumers – have resulted in inflated prices in several industries such as housing, construction, banking and finance.

"As soon as deflation makes itself felt, there will be immediate attempts to combat it—often when it is only a local and necessary process that should not be prevented," Friedrich August von Hayek.

Inflating the money supply is a short-term solution that cannot create any additional long-term wealth. Real savings are the barometer for investments that can be successfully carried through to completion: by inflating the money supply the RBA merely deceives investors into thinking the pool of real savings is larger than it actually is. It gives them the impression that consumers have forgone current consumption thereby freeing up more capital for longer-term projects aimed at increasing the productive capacity of the economy.

Think of inflation as you would drug taking: it is disastrous for long-term health, but it can work wonders and make you feel great in the short-term. Likewise, deflation is akin to a drug taker going through withdrawals – it can be quite painful in the short-term but will result in improved long-term health. Unfortunately, the nature of politics is that only one option, inflation, is viable.

Following the outbreak of the 'credit crunch', the governments fearmongering strategy was put into good effect to gain short-term popularity and, more importantly, push for favoured policies that have turned a necessary market correction in a few selected industries into a much more severe, economy-wide problem.

To offset the inflation set in motion by the reckless monetary pumping of the past year, the RBA is raising interest rates. This will attract foreigners seeking a higher yield and should therefore strengthen the dollar relative to other currencies in the short-term. It can only be expected that the RBA will to continue to breach their policy of abstaining from currency manipulation to keep the $AUD below one $USD under the guidance of their mercantilist think bots in an attempt to avoid a slowdown in export growth. This directly contradicts their attempt at keeping inflation at bay and will instead lead to further increases in the money supply and, consequently, price inflation.

Despite relatively small 'inflation' – the CPI figure is up 1.5% YoY, the record amount of pumping undertaken by the RBA cannot be swept under the rug; it will have a serious effect on the wider economy in the future. While businesses are reducing their risk by reducing leverage, banks are still increasing their loans year-on-year (we never came close to having a 'credit crunch') within the banking sector, to consumers and into mortgages.

Unfortunately for the economy, the seeds of the next fiduciary inflationary bubble have been well and truly sown.

"The market rate of interest cannot be lowered by a credit expansion except for a short time, and even then it brings about all those effects which the theory of the trade cycle describes," Ludwig von Mises.

The Australian economy has been flooded with a fresh batch of cheap money. The level of savings is below 5% of disposable income. Private debt is still over 150% of disposable income. Housing is as expensive as ever. The 'stimulus' simply, at best, kept people employed where they happened to be (hint: areas of malinvestment), at worst further distorted the distribution of labour and capital structure of the economy. Public debt is at record highs. Unemployment will continue to get worse as the stimulus wears off and the jobs that were 'saved' are once again, necessarily, 'lost'. Price inflation will rear its head (of course with a mighty lag thanks to the heavily manipulated CPI) and interest rates will have to rise further.

The above are hardly what you would call solid pillars of growth. The economy is anything but healthy and any recovery will not be sustainable.

Unless the free market is given permission to work and the necessary liquidation and restructuring allowed to occur, problems will continue to appear and will be addressed, again and again, by policies that only deal with the immediate, visible effects; effects caused by the very policies designed to combat them! The result will be bigger government, higher inflation and our very own 'lost decade'.

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[1] Of course the best way would be to leave interest rates - effectively the price of borrowing money - for the free market to determine. Government price controls never, ever end well.

It has to. The extreme—unprecedented—moves that respective governments, policy makers and central bankers have taken in the past year are going to have an effect on the long-term health of the economy.

Let us take a brief look at what happened and what is still taking place in Australia.

In response to the crisis the RBA followed the lead of the central banks of the US and UK and increased base money considerably—from approximately $47 billion to over $72 billion, an increase of over $25 billion in just four months, something that has never been done before in Australia.

Although we don’t know exactly where the money went (the RBA does not comment on particular counterparties), based on the data it is safe to say that it went into the banking sector, either to encourage banks to keep lending to each other or simply as a direct subsidy by taking securities off the bank’s balance sheets and giving them cash in return.

The thing is, unlike the US and UK where the massive increase in base money is still sitting in reserves at their central banks (they receive a ‘safe’ level of interest and are keeping the reserves on hand for future asset write-downs), the Australian banks have already decided to use the new money. I’ll touch on where it has gone in a moment, but for now this means that at least some of the new money has already entered the wider economy and will have to have an inflationary effect at some point in the future. Historically it can take up to two years for an increase in the money base to end up in the CPI (a horrible, heavily manipulated figure)…but who knows this time. What it has done though, in the short term, is keep assets inflated, preventing prices in financial markets, housing, credit markets and so on from adjusting downwards.

So where has the money gone? A quick glance at the data for long-term securities reveals that a lot of the new money has probably entered that market with the amount invested, both public and private, increasing significantly since the money was injected. So the banks are monetising at least part of the government’s deficit with RBA-created money. This is important to note, because fiscal spending is not inflationary under one condition: when you as an individual buy a government bond. When you do this you are making a loan to the government; you are putting part of your cash holdings into the hands of the treasury. There is then no increase in the total quantity of currency or credits available and hence no inflation.

Now, when the banks buy government securities from their new reserves, as I suspect they have been, it is just as inflationary as effects of issuing more paper money. It is under this scenario that the government’s fiscal spending will create future inflation as the loans funding it are not sourced from real, productive savings: there are now more dollars chasing the same amount of goods.

Loans are still relatively stagnant, reinforcing the view that the banks are choosing to invest the new cash in relatively safe long-term securities instead of issuing new loans (although there’s hardly been a ‘crash’ in loans – loan growth is still close to 10% YoY and appears to be turning upwards).

So what does this all mean? For one thing, it appears the banks received a good ol’ fashioned bail out, although the RBA was much more covert in its efforts than the Fed. While this will probably prop up the financial sector in the short term, it can’t be good for the wider economy as prices, production and consumption have failed to coordinate…I have no doubt one of the reasons the market hit records recently is because a lot of the new money was being channelled into the stock market (it often is).

In the short-term the RBA is going to be under pressure to raise rates – I wonder if they can hold out until the election next year (Rudd and Swan will be putting a lot of pressure on them to hold off till then). I’m not sure if the RBA will fight the upwards pressure on interest rates by issuing more money (the only way they can keep it down) or if they will let rates rise…if they keep rates down until next year then inflation will be guaranteed in the medium-long term.

On the subject of inflation/deflation, the best indicator for future inflation has to be M3—coincidently, it is a figure that has been rising at near record levels over the past couple of years (34.8% from July 2007 – July 2009[1]).

Gold is also a good leading indicator for inflation; the AUD gold price (indexed) historically trends close to M3.

The above seems to indicate that inflation rather than deflation will be on the cards for Australia in the near future. Yes, there are plenty of bad debts that need to be written down but I don’t think we have to worry about deflation: the RBA will monetise most of the toxic assets and prevent the money supply and prices from falling too far. It is politically suicidal—for both Glen Stevens and the government—to allow deflation to occur on their watch.

This leads me to the fiscal issue. The reckless “stimulus” undertaken by the government has to have caused massive structural instabilities and further malinvestment in the economy. Rather than let the necessary restructuring occur, they have simply—at best—delayed it. At worst they have caused even more malinvestment and imbalances that will radiate throughout the economy for several years. It’s important to understand that the government can only create what it has first taken from someone else. All of the jobs the stimulus created are temporary in nature—they cannot be maintained unless the government keeps spending. They are not in areas demanded by the preferences of the consumers but by the fancies of Julia Gillard. Building roads to nowhere and new gymnasiums is wealth destruction plain and simple.

If the stimulus is wound down—a necessity to restore economic health—and the inflationary fears forecast above both take hold, stagflation is a distinct possibility. Especially considering that once rates start to rise again the glaring bubble that is the property market will come under stress and put further pressure on both the mortgage industry and jobs related to it (housing, construction and so on).

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved," -- Ludwig von Mises, Human Action

However, we do have more room to move than the US and UK (we actually export stuff and so have a larger pool of real savings to exhaust through government waste and bank subsidies), so it might be possible for the powers that be to keep this fiat regime going and avoid the necessary deflation (or hyperinflation and a collapse of the currency).

The beauty of monetary inflation is that it is never the same and does not necessarily affect the same industries. Loose-money policies at home and overseas could very easily create another asset bubble in our economy. Only time will tell.

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[1] M3 growth has only matched this rate twice in Australia over the past 40 years. Those years were 1973 and 1989 and were followed with two recessions.

Building on what Drwasho wrote back in June, I have to say, I’m really not sure. There’s a good reason to believe both could happen but as always timing is the hardest part to predict.

The case for deflation is a strong one – commercial bank credit is in freefall as banks look to let their commercial loans run down and don’t seem to be replacing them with new investments. This has to have a strong deflationary effect on the economy and it’s unlikely any amount of prime-pumping on behalf of the Fed can counteract it. In fact, a lot of the new money is simply sitting in excess reserves, likely going into treasuries or simply collecting interest from the Fed (a new ‘tool’ in the Fed’s arsenal – paying interest on excess reserves) rather than funding new loans.

The deflationary theory is hardly new; it’s exactly what happened during the great depression. Rothbard, in America’s Great Depression, highlighted a few key reasons as to why deflation occurred despite the low interest rate, cheap money inflationary policy pursued by the government of the day. They are:

1)     Lower interest rates further discouraged the banks from making loans or investments. Just when risk was increasing, the incentive to bear risk—the prospective interest-return—was being lowered by governmental manipulation.

2)     The enormous increase in bank failures. With over 1,000 banks failing every year, bankers knew in their hearts that no bank (outside of the nonexistent ideal 100 percent bank) could ever withstand a determined run.

3)     Foreigners lost confidence in the dollar, partly as a result of the program, and drew out gold;

4)     American citizens lost confidence in the banks and changed their deposits into Federal Reserve notes;

5)     Bankers refused to endanger themselves any further, and either used the increased resources to repay debt to the Federal Reserve or allowed them to pile up in the vaults.

Today a lot of the conditions that prevented the politically ‘desired’ inflation from occurring back in the 1930s don’t exist. For one, we have a fiat money regime rather than a gold standard making it harder for foreigners to convert their US dollars to gold or other assets without losing value. Another big difference is that government’s around the world enacted a policy of deposit insurance, thereby preventing mass bank failures (creating ‘zombie banks’ instead) through bank runs. But aside from those two differences, the other points still hold true.

It’s important to remember that Bernanke is well schooled in the great depression. His problem is not that he doesn’t understand why inflation didn’t occur; it’s that he still believes inflation is the correct solution and is therefore looking to prevent the above from causing deflation this time around. He’s going to go all-out in an attempt to reinflate the bubble rather than let the necessary deflation and restructuring work its magic.

So can he do it?

This is what I’m not sure about. It’s going to be very difficult to get people to leverage up this time around. What we do know is that Bernanke will stop at nothing in his attempts to reinflate the bubble, an effort which may amount to nothing more than blowing air into a broken balloon. Excess reserves have increased astronomically, as they did in the great depression, but the question is whether they will make it into the money supply or not. At this stage every attempt has been fleeting with banks quite happy to buy up treasuries or simply take the small, but safe, return that the Fed pays them.

Will the new powers the Fed is after allow Bernanke to charge a negative interest rate on excess reserves, forcing banks to buy existing securities or create new loans, thereby increasing the true money supply? Will the growth in the public sector, public works, ‘stimulus’ and so on create enough spending to drive inflation faster than the private sector is deflating? These are all very curious questions and unfortunately, at this stage, no one knows. We’re stuck in limbo and all I can say is that the next several months are going to be very, very interesting.

Concerning Australia, this time around we have China. While in the great depression we were one of the hardest hit due to our export dependence and protectionist policies pursued by our major trading partners, this time we have a centrally-planned major trading partner in China instructing their factories to keep production up and, therefore, demanding our commodities. The export-focused, mercantilist policies of the Chinese government, while depriving their own citizens of deserved wealth, are in effect a subsidy for the Australian economy. By artificially keeping their currency low and subsidising their export industries they’re not only increasing demand for our raw materials but are supplying us with goods that are cheaper than they would be if China was a more free market orientated country. Yes, this is a bad thing for the Chinese people, but it’s good for Australians.

This leads me to believe that it won’t be as bad here as it will be in Europe and the US, despite our government rolling out the third largest stimulus package behind only the US and Korea (on a per-capita basis). The biggest threat to Australia is the growing size of the public sector, of increased regulation and the massive debt that we, and future generations, have been laden with for no good reason.

It seems, as with the US, Australian banks are finding it difficult to (likely voluntarily) create new loans to replace the ones that are running down. I’m more concerned, at this stage, about inflation in Australia than in the US. The RBA has been a bit reckless with their monetary policy – for example, they just increased the currency stock by $4 billion – an increase of almost 10% on the existing supply. This is money that won’t be sitting idle; it’s being spent and will have an impact on prices, perhaps not immediately due to the winding down of credit, but it will in the future. What happens when the banks start expanding credit and the RBA’s cash injection is already flowing?  This, together with the irresponsible spending by the government will have to force interest rates to rise if we’re to have any chance of avoiding price inflation.

When the government’s stimulus proves to be ineffectual at providing long-term jobs we’re probably going to be faced with rising inflation, rising interest rates and rising unemployment. But with an election looming, we probably won’t hear anything about that until Rudd is sworn in for a second, and probably final, term. The Keynesian solution adopted by this government requires endless doses of government spending, deficits and new money which will only lead to a growth in the welfare state, inflation and wealth destruction. The real solution is simple: get the government out of the way and let the necessary coordination between prices, costs and wages take effect.

It's late and for some reason I'm trawling the drivel that is the Australian media and stumbled upon a couple of articles which are correct but at the same time horrendously wrong in both their analysis and economics.

The first article - and let me add that as it involves a union it comes as no surprise - states that "...a China FTA could create 12,000 jobs for Australia but take away another 170,000 in the manufacturing industry." Now I'm not questioning their numbers - I'm sure the source (a report paid for by the Electrical Trades Union (ETU), hah) is reliable enough - I'm questioning the conclusions they derive from it. Dean Mighell, secretary of the ETU, goes on to say:

"People in the factories, people on the farms, small business people should have real and serious concerns about the implications of free trade agreements," he said.

"The ETU commissioned this report because we think that if we entered into a free trade agreement with China it is the death knell for our manufacturing industries and many of our food-producing industries."

Dean is correct but the solution he's after, for the government to prevent free, voluntary exchange between individuals is not something the government needs to involve itself in. By 'protecting' the manufacturing and food-producing industries by preventing the "dumping of goods into Australia" and other 'evils' that will lower the price of consumer goods in Australia, he is depriving every Australian of a potential increase in their standard of living. Yes, some small interest groups may lose their jobs, but the cheaper prices brought about by the increased competition will provide everyone in the economy with additional income to spend elsewhere (the savings they now make they can use to acquire more goods than they could before). This savings will then be spent in other areas, increasing demand, replacing the jobs that were 'lost'. Not only will we lose no jobs (in the aggregate), but we've all gained additional products, or wealth (of course, government intervention in the form of rigid wages, union barriers to entry and so on can restrict or delay the reallocation of labour resulting in unemployment).

The second article - the one I'm more peeved about - involves the OECD scratching the back of a fellow socialist and "new world order" advocate, Kevin Rudd.

"Australia's fiscal stimulus package seems to have had a strong effect in cushioning the decline in employment caused by the global economic downturn," it said.

"Less by the end of 2010 than if no fiscal stimulus measures had been taken," it said.

Now I'm not sure what these guys at the OECD get paid but if it's more than $0 then it's too much. They plainly state the obvious - that the stimulus prevented job losses - without going into any kind of in-depth, critical analysis at all. Of course the stimulus prevented job losses! It simply protected or insulated industries and jobs which are victims of catastrophic, unsustainable malinvestment and prevented the necessary realignment and restructuring of jobs, wages and prices. Is this sustainable in the long term? No, unless of course they plan to inflate yet another bubble and continue the boom-bust cycle, a policy that Hayek noted would eventually collapse on itself or, worse, lead to full blown socialism. To quote [emphasis added]:

"The great problem in all those instances is whether such a policy, once it has been pursued for years, can still be reversed without serious political and social disturbances. As a result of these policies, what not very long ago might merely have meant a slightly higher unemployment figure, might now, when the employment of large numbers has become dependent on the continuation of these policies, be indeed an experiment which politically is unbearable.

"Full employment policies, as at present practised, attempt the quick and easy way of giving men employment where they happen to be, while the real problem is to bring about a distribution of labour which makes continuous high employment without artificial stimulus possible. What this distribution is we can never know beforehand. The only way to find out is to let the unhampered market act under conditions which will bring about a stable equilibrium between demand and supply. But the very full employment policies make it almost inevitable that we must constantly interfere with the free play of the forces of the market and that the prices which rule during such an expansionary policy, and to which supply will adapt itself, will not represent a lasting condition.

"These difficulties, as we have seen, arise from the fact that unemployment is never evenly spread throughout the economic system, but that, at the time when there may still be substantial unemployment in some sectors, there may exist acute scarcities in others. The purely fiscal and monetary measures on which current full employment policies rely are, however, by themselves indiscriminate in their effects on the different parts of the economic system. The same monetary pressure which in some parts of the system might merely reduce unemployment will in others produce definite inflationary effects. If not checked by other measures, such monetary pressure might well set up an inflationary spiral of prices and wages long before unemployment has disappeared, and—with present nation wide wage bargaining—the rise of wages may threaten the results of the full employment policy even before it has been achieved.

"As is regularly the case in such circumstances, the governments will then find themselves forced to take measures to counteract the effects of their own policy. The effects of the inflation have to be contained or 'repressed' by direct controls of prices and of quantities produced and sold: the rise of prices has to be prevented by imposing maximum prices and the resulting scarcities must be met by a system of rationing, priorities and allocations.

"The manner in which inflation leads a government into a system of overall controls and central planning is by now too well known to need elaboration. It is usually a particularly pernicious kind of planning, because not thought out beforehand but applied piecemeal as the unwelcome results of inflation manifest themselves. A government which uses inflation as an instrument of policy but wants it to produce only the desired effects is soon driven to control ever increasing parts of the economy." - Friedrich August von Hayek: Studies in Philosophy, Politics and Economics, pp. 270–76

Apologies for the long quote but I felt it necessary. Back to the theme of this post, the horrible economic (or lack of) analysis provided by the Australian media (it's expected from the OECD), I think I'm going to have to create some kind of award for the worst piece of Australian economic/political journalism, perhaps on a monthly basis, just to highlight how completely oblivious they are on the entire subject. They, well the majority, just blindly regurgitate what the 'experts' tell them without a second thought. Did no one teach these people how to think?

Just one final word on the Hayek quote, mainly the final part about the government being "...driven to control ever increasing parts of the economy." This is something we're seeing in the US as well as here, governments get involved in the first place and then blam the market for problems caused by that very involvement, such as: creating a telecommunication monopoly, turning it into a quasi-private monopoly then blaming the market for it; maintaining a quasi-private health market which drives up the costs for everyone; inflating the money supply causing a financial crisis (and later inflation); and so on. What's the governments response to all of these government-created problems? More government, more regulation and more control. That simply equates to less individual freedom, higher prices and shortages/restrictions of some kind.

We need reform, but not the kind our politicians are currently undertaking. In fact, if you took everything Rudd and his legion of do-gooders have done since coming to office, doing the polar opposite wouldn't have been such a bad policy response.

Every high school or university student who studies economics and even the average layman who reads or listens to the media and the politicians is of the belief that inflation is a price phenomenon. They’re told that higher inflation and, consequently, higher interest rates are the result of higher prices – a nice little semantic trick, a renaming of terms which leads people to believe exactly what the government wants them to.

The “official” definition of inflation is akin to putting the carriage in front of the horse: a general increase in the price level occurs because of inflation, not the other way around. Prices don’t just rise for no reason; they rise because of unforeseen events (e.g. a natural disaster or drought causing a supply shortage or government regulation/price controls) or through the debasement of the currency – otherwise known as monetary inflation.

What I want to know is why so many smart people never ask the question: where do higher prices come from? To put it more succinctly, how is it that, with technology and productivity improving on a daily basis, prices go up rather than down?

The answer is in fact quite simple: prices rise year after year because the government (through their agency the Reserve Bank) increases the quantity of money in circulation. Let’s have a quick look at the data and see how much the money supply (M3) has increased since 1982 relative to Total Average Weekly Wages and the Price Level.

Quite staggering indeed. Over almost thirty years the government has increased the money supply by a whopping 1,363%. Wages, on the other hand, have only increased by 276% - but does that mean we’re 276% wealthier today than in 1982? Hardly. If you take a look at the increase in prices, they’ve risen by 193%. Yes, we are all wealthier today than we were in 1982, 78% wealthier in fact [1], and I should hope so too!

The issue I have is the endless improvements in technology and productivity are not being transferred entirely to the consumer, to the average Australian. The government, through the constant debasement of the dollar, takes a large percentage of the said gains for their excessive existence, wasteful ventures and to fund the welfare nanny state. This is effectively a hidden tax on everyone who is paid in Australian Dollars.

Not only that, but there are countless other problems caused by debasing the money supply aside from just theft, it: encourages malinvestment by suppressing interest rates and thus unemployment and wasted resources; keeps the poor poor (more on that in a bit); creates dependency on the state by eroding savings; encourages improvidence; and many, many more, including the eventual collapse of the monetary system itself (e.g. Germany, Zimbabwe). As Ludwig von Mises said,

“With regard to these endeavours we must emphasize three points. First: Inflationary or expansionist policy must result in overconsumption on the one hand and in mal-investment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”

So how do they do it? When the Reserve Bank increases reserves the new money has to flow somewhere. That ‘new money’ usually enters through the financial services industry through favourable credit conditions allowing them to lend to households, or invest on the stock market, real estate, and so on. If that doesn’t work, the government can always increase its deficit and oblige banks to monetise government debt (like they just did). The increased spending through “stimulus” and “infrastructure investment” enables the newly created money stock to enter the economy and therefore drive up prices [2].

As the first recipients of the new money, the banks and government are still buying at ‘normal’ prices – prices that haven’t yet adjusted to account for the recent increase in supply. This is how they secretly tax anyone earning or holding Australian Dollars – the increase in prices caused by the new money filters its way through the economy and the people who receive wage increases last – usually the poor – are the ones who are taxed the most. The financial sector, as early recipients – and usually the rich – benefits the most (after the government).

“To cover the fact that a central bank is merely a cartel which has been legalized, its proponents had to lay down a thick smoke screen of technical jargon focusing always on how it would supposedly benefit commerce, the public, and the nation... there was not the slightest glimmer that underneath it all, was a master plan which was designed from top to bottom to serve private interests at the expense of the public... the system is merely a cartel with a government facade,” G. Edward Griffin

Next time you hear a politician spouting off about how they’ll “fight inflation”, remember that they’re the ones who are causing it. All they would have to do if they honestly cared about lower prices and helping the 'battlers' would be to stop creating money, to cease deficit spending and to return to sound money. Unfortunately most, if not all politicians in Australia, don’t actually care about the 'battlers' so long as their own taxpayer-funded trough is kept full. So what’s the solution going forward? There are lots of ideas out there, from a return to a gold standard to free banking (i.e. banks being allowed to issue their own currencies) among others – but at the end of day the only thing that really matters is that ability to manipulate the money supply is taken away from the government as soon as possible.

“A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army...We must not let our rulers load us with perpetual debt,” Thomas Jefferson

We can always dream.

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[1] Issues with the wage and CPI data aside (e.g. average wage may be higher but there may also be more unemployment. Likewise the CPI excludes a lot of 'everyday' items that may have risen significantly more than the figure suggests).

[2] There are other ways too – e.g. the Reserve Bank could always simply buy up assets for itself.

The latest ongoing debate amongst our political nomenklatura is about the $14 billion hard-earned tax dollars that are being spent on knocking down and rebuilding school buildings. When you consider that fourty-two percent (yes, 42%) of Australian families either don’t pay tax or receive more in government benefits than they pay in tax, this amounts to a significant ‘investment’ in education – but is it actually going to provide any long-term benefit for Australia or is it simply yet another example of the broken window fallacy [see Bastiat or Hazlitt], in other words a colossal waste of resources?

I’ll spare you the banter that’s being thrown around in parliament (a brief summary: Labor is defending the spending, saying it will “…modernise school facilities and support jobs in the local community,” and that it represents “…value for money;” the Liberals are calling it “wasteful and reckless spending.”) and instead focus purely on the numbers and whether or not it will ‘stimulate’ the economy – which was, after all, the whole point of it.

Fourteen billion dollars ($14,000,000,000) equates to almost $1,800 for every tax-paying Australian (assuming only 8million people pay tax). Now that’s a significant amount of money those taxpayers no longer have to spend or save – in other words, our omnipotent government has decided that they know how to spend the money better than you, the person who earned it. Whereas the taxpayer earns their income by satisfying the infinite and ever changing wants and needs of the consumer (whether as an entrepreneur or employee of an organisation that does), the government is under no such obligation. They’re not bound by profit or loss; indeed, on the contrary, all they care about are the various interest groups to whom they sold their souls to move up the political ranks.

The stimulus spending on education will not help our economy one iota. Yes, it will create, or rather maintain jobs in the building and construction industry. But at what cost? Going back, what about the $1,800 that taxpayers no longer have to spend or save? Lets assume this money was saved in a bank – that money would added to the national pool of savings which, due to supply and demand (and the subsequent reduction in the interest rate), would lower the cost of borrowing for businesses who would then been able to expand (invest) and spend on ‘productive’ consumption – that is, consumption that will enable future production and increase the total productivity and wealth of the nation. Not only that but it would create jobs in the process; jobs allocated by the market rather than through bureaucratic whims. The difference? One is sustainable while the other can only continue for as long as the stimulus does.

To answer my initial question, will the ‘stimulus’ of knocking down and rebuilding schools help the economy? Will it enable an increase in future production? Will promoting malinvestment and creating jobs in areas where they’re simply not needed achieve anything other than furthering political careers by gaining support from certain unions and interest groups? Unfortunately, no.

“Experience shows that nothing is operated with less economy and with more waste of labour and material of every kind than public services and undertakings. Private enterprise on the other hand naturally induces the owner to work with the greatest economy in his own interest,” Ludwig von Mises

Aside from boosting GDP statistics in the short term, the only thing that will be achieved by this stimulus (aside from shiny new school buildings for the kids of course) is a delay in the necessary reallocation of scarce resources from areas of malinvestment to areas where they’re most urgently needed. The reckless spending embarked on by this government is incredibly short-sighted and there is no doubt that in the process they have lowered the standard of living for all future Australians.

Hey everyone,

So Justin is going to be away for a little while and I've been staring at the home page of aussienomics for the past few days blankly, waiting for some sort of inspiration to descend or arise upon me... sadly nought.  I do have several small thoughts that I guess I can post as regularly as I can until I come up with something long and profound to post.  In any case, feedback and interaction makes the experience better for all of us.

Recently I watched the movie 1984, based off the novel written by George Orwell.  I don't recommend people watch the film, unless you want to see the fantastic acting performance by Richard Burton.  The book is sensational, I'm about 10% of my way through the book myself.  What hit home to me today is that governments around the world are heading for that dystopian destination.  I once thought that it was virtually impossible for that level of tyranny to occur within my life time... I now believe differently.  Sadly, the level of apathy and disengagement of the population has me worried about the future.  My beef is not with the politicians, as they are just men and women with the same power complex that average individuals possess.  My discontent is with you, the person reading this article and the persons who are not reading this article.  My disappointment is with all of us, past and present, who have allowed, either actively or passively, this monstrosity to occur.

What am I talking about, it's simple: legalized tyranny.  In this country you cannot defend yourself with a weapon without fear of imprisonment, they restrict the ability to defend yourself by making it virtually impractical to have a gun in your home and use it for self defense.  The crazy thing about it is, people actually think this is a great idea.  My response is this, if a murderer breaks into your home, which scenario would you prefer:  1) Call the cops and wait 10-20 minutes before they arrive OR  2) Have the means and ability to personally defend yourself without fear of imprisonment for manslaughter?  How about economic tyranny... an income tax, a GST, a corporate tax, property tax, capital gains tax and now, the upcoming carbon tax.  I've said it before, one day the government will find a way to tax you for every breath of CO2 you exhale.

Last in this tirade, but not least, the inflation tax... the debasement of the value of the money you keep in the bank.  I've discussed this previously, but did you know that the money you keep in the bank depreciates in value despite the interest you earn in the bank?  The central bank of Australia (i.e. the RBA) continues to print and print money, perpetuating a fraudulent banking that loans money into existence.  Now as I wrote this sentence I know that people's brains have 'glazed over', they don't know what I'm referring to.  The term 'fractional reserve banking' is a foreign term, much like 'magna carta' or 'habeus corpus'... concepts and principles too difficult to invest time for learning.  And what is the price for this ignorance, this intellectual slavery to our overlords... it is not the suffering that we are enduring now, no that would be too obvious.  The penalty for our unconsciousness is the fact that people LOVE to be enslaved and will defend tooth and nail to 'return to Egypt, for it was better for us there...'.

This is an angry post, and I am angry at all of us... we must wake up before it is too late and we all end up distracted by 'Dancing with the Stars', 'Master Chef' or 'Gossip Girl' and surrender our brain, wallet and soul into the hands of a Beast.

Dr Washo

 

PS    Love mercy, truth, freedom, knowledge, wisdom, understanding and love itself rather than entertainment, lust and greed.

There are quite a few people who still think it was the "free market" or "Capitalism" that failed. On the contrary, it was the government, regulation and central banking that failed. Lets see what the dictionary has to say:

Main entry: cap·i·tal·ism
Function:noun
Date:1877
: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

Hmm, no, we definitely never had Capitalism...Maybe this is what we have:

Main Entry:mer·can·til·ism
Function:noun
Date:1838
1 : the theory or practice of mercantile pursuits : commercialism
2 : an economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies

Ah, that sounds better! This crisis was caused by Mercantilistic (Keynesian) policies, not Capitalism. There is no 'flaw' in Capitalism. Allowing the free market to do its thing with minimal interference is the road to relative wealth and prosperity for all. A continuation of the failed policies of the Mercantilists will slow any potential recovery. Unfortunately it appears our omnipotent leaders have decided they want more of the same; indeed, it will be owed to what we have left of the free market when we eventually get out of this slump, not the actions of Rudd, Swan and Gillard which have been nothing but detrimental to recovery.

There's an excellent piece in today's Mises Daily by Chris Brown which highlights a lot of what I've been saying over the past several months: fiscal 'stimulus' is nothing more than a colossal waste of resources. Here's an excerpt:

"It turns out that Australia's Prime Minister Kevin Rudd is going around town breaking windows by, well, demanding they be built. There are over 35,000 construction and maintenance projects planned across Australia over the next 12 months. This includes AU$49 (US$39.4) billion dedicated to "nation building infrastructure," or crudely AU$2,200 in taxes for every man, woman, and child residing in Australia."

As long as people continue to believe that jobs are all that matter, we're doomed to repeat the mistakes of the past over and over again. Even if the 'stimulus' increased GDP in monetary terms and allowed us to stave off a technical recession, it will not create any additional real wealth or production in the economy; at best it will merely divert it.

Elsewhere, the RBA released their latest financial aggregates. Nothing too surprising in there, with monetary growth (M1, M3, broad money, money base, currency etc) all remaining about 15% YoY. Two noticeable changes were the increase in term and other non-government deposits by almost 30% YoY indicating that people are increasing their savings which is a good thing. A more worrying sign is that lending to the government by all financial intermediaries (AFI's) was up 273% YoY, a perfect example of the government squeezing the lending industry. At some stage the banks are going to have to increase the interest rates on their loans at which point the RBA will need to decide whether they a) sit back and watch (possibly raise rates too); or b) start printing money to keep rates down, thereby causing inflation.

Interesting times indeed...

Never in a thousand years would I have guessed that two industries with massive government involvement, namely Australia Post and Compulsory Superannuation schemes, are receiving flak for under performance. Hah!

AUSTRALIA'S superannuation funds recorded the second worst investment performance among the 30 OECD countries in 2008.

Forced superannuation tends to result in a misallocation of scarce resources to uses that are not optimal for many people. It's the classic "one size fits all" mentality that plagues all socialist policies; regulatory solutions that consequently stifle the free market's innovation and creativity and in the process restrict competition by raising entry costs. Friedrich Hayek referred to this as the "pretense of knowledge" syndrome infecting central planners. If the government really cared about its people it would stop meddling; order and fairness come out of the spontaneous interaction of thousands of voluntary free market transactions, not from latest political scheme concocted to win votes.

Our superannuation industry is heavily regulated by the government and hence utterly inefficient and wasteful. It's no surprise that they performed so poorly when the only people who gain are those who sit on the massive cash piles - and once you remove or make very difficult not to let them sit on the massive cash pile, the incentives to do well are virtually gone. On the contrary, you'll probably get calls from both the people on the pile and their governmental allies for increases in forced Super contributions!

The OECD Pensions at a Glance 2009 report also notes Australian seniors had the fourth highest rate of old-age poverty in the OECD in 2006, more than double the average.

"Public pension spending is only 3.5 per cent of national income in Australia compared with an average of over 7 per cent of GDP in OECD countries.''

This is a classic Argumentum ad populum, where "...if many believe so, it is so." Just because the rest of the OECD -- the ones who appear to have an old-age 'problem' that makes ours pale by comparison -- force their people to subsidise old age doesn't make it the right solution for us. In fact, the correct solution would be to abolish all future public pension spending and end this mess before it gets out of control (people currently on pensions should continue to receive it - this is a delicate issue and needs to be phased in slowly as the government promise of a pension has caused many people to alter their intertemporal preferences and hence over consume).

At the end of the day, the state's involvement in retirement security creates calculational confusion, resource misallocation, mismanagement and free riding. The real cost of the current mess will be borne by future taxpayers, who are paying for the pensions of the present retirees but can expect to receive little in return. As I've mentioned before (here and here), retirement and government pensions are a state-created concept full of economic inefficiencies, promoting waste and irresponsibility. We need to let people decide for themselves, to let individuals and families make rational and responsible decisions that enable them to provide for their old-age needs. Phasing out old-age benefits and returning to sound money so that people can actually save for the future would be a good start.

For the second part of this post, Australia Post is raking in the complaint letters! Consumers have no alternative as the government forbids competition so their only recourse is to complain; in a free market they would simply vote with their wallets and Australia Post would be out of business if they didn't clean up their act,

Australia Post received 65,000 complaints in 2007 about failures to redirect mail.

"Australia Post and its staff need to be a little more responsive to the problems that people can encounter," he said.

"[It needs to recognise] that this is a real problem for Australia Post and can cause real disadvantage and inconvenience to people is part of the solution."

Mr McMillan says the organisation's response to complaints also needs to be addressed.

This has been covered to death, but with no profit motive, I'm not optimistic that they'll address their "issues"...there's no incentive to!

As usual, with all of these problems, the simplest solution is often the best: get the government out of the way and let the free market work.

You can't make make this up: the government has decided to introduce new credit laws to punish "dodgy lenders". Not only does every lender now have to be licenced which in itself adds operating costs and red tape, but they're also subjected to laws requiring them to let borrowers "...request a variation to their credit contract if they suffered financial hardship." It's good to see that a voluntary contract between two parties is now worthless in this country. What's next, laws against usury?

It's always the same with the government: if the existing regulation doesn't work then just add yet another layer that strips even more liberties, adds more red tape, increases the costs for private enterprise and ultimately hurts the consumer, the very people they're trying to "protect". As interest rates rise thanks to cumbersome regulation and the inflation of the money supply, watch the government get even more heavy-handed in the loan industry. They will probably condemn lenders for charging "too much", like they can possibly determine what is "too much" or "fair" without the market's price mechanism. Then they'll force down rates, banks will stop lending (they'll probably simply invest themselves) and the politicians will "fight" the huge underground consumer loan industry they created that doesn't take your house, it takes your fingers.

The banks don’t prey on the poor. They offer them a service; no one is forcing them to agree to it. The price is right for them at the time they take the money, that’s perfectly legal. The right to buy or not to buy is vital to economic well-being and, of course, to personal liberty. Individuals need to be responsible for themselves and try to avoid the losses that result from mistakes. If people are constantly bailed out, the loss comes out of the public purse (or the lenders) and they are relieved of personal responsibility. They can then waste and lose just as much as their inherent laziness may dictate!

Remove all of the banking and lending regulation and allow the free market and competition to work. We're on a slippery slope to a place no one wants to go (politicians excluded) and these do-gooders who think they're saving the world are leading the charge, systematically removing individual liberties and freedom as they go. As Ayn Rand said, we support the smallest minority of them all: the individual.

As far as our political system is concerned, I'm not a fan. Left, Right, it's all the same, all part of the same corrupt system, the only major difference being from whom they take the money and to whom they give it. Then there's the independents and minor parties - in particular Nick Xenophon and Barnaby Joyce. They often hold the senate ransom to the highest bidder - in other words they sell their vote to whomever is willing to fill their constituent with the most plundered loot. Then there are the times they come up with various schemes and impose them on the population, the most recent being a move to stop petrol outlets from reducing petrol prices. Yes, you heard me: they're arguing for higher petrol prices and using "competition" to justify it!

Independent Senator Nick Xenophon and National Party Senate Leader Barnaby Joyce are combining to stop major oil firms and supermarkets from offering reduced petrol prices, in a bid to force out smaller competitors operating in the same locality.

The two senators are jointly sponsoring a private members bill which would require oil companies and firms, such as Coles and Woolworths, to charge the same price at two or more of their outlets if they are within 35 kilometres of each other.

Senator Joyce says the move will ensure greater competition and stop the larger operators from forcing out the smaller outlets and then charging whatever they want.

"This is a great step for our nation to make that," he said.

"We are piece by piece trying to build up a platform that says in our nation you have the right to go into business and not to be forced out by guerilla-like tactics of people around you."

Yikes. More like a great step backwards, Sen. Joyce! These two have obviously fallen victim for the neoclassic theory of competition where the only thing that matters is the number of competitors. Unfortunately the real world doesn't work exactly as the neoclassical models say it does - in fact, when the oil companies in 'cohesion' with the big retailers drive down the price of petrol it's a good thing as people now spend less of their income on petrol and therefore have more to spend or invest elsewhere, increasing their wealth and wellbeing. Yes, the smaller competitors will cease to exist because they are no longer competitive, but that's not necessarily a bad thing. The only way these "larger operators" can force out their competitors and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter. Whether or not they're charging above marginal cost is irrelevant; if other companies still can't compete, it's because their efficiency or productivity is such that it's not possible (profitable) to compete. This is a win for consumers who don't care who or how many firms provide them with their petrol, only that it's the cheapest possible.

These large firms are not able to "charge whatever they want", contrary to what Sen. Joyce believes. I think a real life example of how "predatory pricing" is nothing more than a myth that politicians use to justify additional regulation is called for here. I'll quote from Leeman in "The Limitations of Local Price-Cutting as a Barrier to Entry (1956)", who points out that Rockefeller himself failed to successfully utilise "predatory pricing":

"According to a widely accepted view, he softened up small competitors in the oil business by a period of intensive price competition, bought them out for a song, and then raised prices to consumers to make up his losses. Actually, the softening-up process did not work...for Rockefeller usually ended up paying...so handsomely that the sellers, often in violation of promises made, proceeded to build another plant for its nuisance value, hoping again to collect a reward from their benefactor...Rockefeller after a time got tired of paying..."blackmail" and...decided that the best way to hold the dominant position he wanted was to keep profit margins small all the time."

The reason large rather than small firms dominate so many markets isn't a result of "predatory pricing" but rather the result of taking advantage of economies of scale. They are then forced to maintain low prices for fear of potential as well as actual rivals. As long as competition is free, the only thing that can prevent this from happening is governmental interference.

Unfortunately Sen. Joyce and Xenophon missed this lesson. Thanks to their guerrilla-like tactics and the strong-arm of the government behind them, we are now forced to accept higher petrol prices than would exist in an unhampered market. A great step for our nation indeed!

It must be the most revered word ever uttered by a politician: "fair". All the people want is a "fair go"; a "fair wage"; "fair prices"; their "fair share"; a "fair deal"; ad infinitum. They use it every day to justify anything they please to cheers from the people. One policy where it is used without fail, which (almost) no one questions, is the progressive tax system.

Somehow a free society, one where individual property rights are vehemently protected, people are free to keep what they labour for, what they save, what they buy (i.e. their own property), is "unfair". Unsurprisingly, Professor Peter Whiteford from the University of New South Wales in last Friday's Australian Financial Review (AFR) reported that we now have the most progressive tax system in the whole of the OECD:

“Australia had the most progressive tax system in the Organisation of Economic Co-operation and Development, redistributing more tax from rich to poor than any other country.”

It's a good time to be poor in Australia, as the ..."poorest 25 percent receive 12 times the benefits of the richest 25 percent" while they contribute considerably less in tax (ibid). Of course, very few people are voluntarily in the bottom 25 percent. It’s the policies of government that encourages them to stay down there with generous welfare payments; minimum wage legislation; and an annual debasement of the currency of approximately 10-20%, creating a moving target that they're unlikely to ever reach. The government has effectively created a class that is solely dependant on the state for its very existence.

Here's a great quote from Lysander Spooner's No Treason No. 6: The Constitution of No Authority (1870):

"The highwayman takes solely upon himself the responsibility, danger, and crime of his own act. He does not pretend that he has any rightful claim to your money, or that he intends to use it for your own benefit. He does not pretend to be anything but a robber. He has not acquired impudence enough to profess to be merely a “protector,” and that he takes men’s money against their will, merely to enable him to “protect” those infatuated travellers, who feel perfectly able to protect themselves, or do not appreciate his peculiar system of protection. He is too sensible a man to make such professions as these. Furthermore, having taken your money, he leaves you, as you wish him to do. He does not persist in following you on the road, against your will; assuming to be your rightful “sovereign,” on account of the “protection” he affords you. He does not keep “protecting” you, by commanding you to bow down and serve him; by requiring you to do this, and forbidding you to do that; by robbing you of more money as often as he finds it for his interest or pleasure to do so; and by branding you as a rebel, a traitor, and an enemy to your country, and shooting you down without mercy, if you dispute his authority, or resist his demands. He is too much of a gentleman to be guilty of such impostures, and insults, and villainies as these. In short, he does not, in addition to robbing you, attempt to make you either his dupe or his slave.”

The only people who would lose in a truly "fair" system where people are entitled to reap the fruits of their labour are the politicians, their academic allies and the thousands of interest groups that exist solely to lobby the government for "favours". The progressive tax system along with other policies that target "fairness" or "equality" punish everyone from every income bracket, decimating productive activity by discouraging hard work and rewarding sloth and waste. If it is morally correct to forcefully take from some and give to others or to favour one party at the expense of another, where does it end? Would it not be better to just take everything anyone earns and redistribute it accordingly? The progressive economy we have is ever increasingly leading us down the road towards a command system. The whole moral compass or "fair go" justification for a progressive tax system is one big reductio ad absurdum, unless of course socialism IS the goal. One wonders if Julia Gillard ever gets elected whether or not she will take these logical steps and lead us into poverty, sorry, “equality”.

What is wrong with a system where the people who have earned money are entitled to keep it in its entirety? Surely individuals who have proven that they can best satisfy the wants and needs of consumers, who continually seek to make cheaper and better products than their competitors, can be trusted to provide benefits for "society" more than politicians who earn their stripes by conciliating pressure groups and supporting projects that will win them votes. Surely the entrepreneur who time after time risks his own money to finance products and drive down prices for everyone is better placed than a politician who never risks his own money and is always subject to bribes and corruption. Surely a system where savings and wages aren’t continually eroded is better than the constant debasement of the currency under the guise of maintaining a “steady price level” where inflation and unemployment often run rampant.

Abolish the income tax and return to sound money by taking the ability to inflate away from the Reserve Bank and the state. That is the key to achieving growth, wealth and a “fair go” for everyone, not more regulation and big government aimed at saving people from themselves.

The prevailing opinion on the streets is that capitalism has failed and the government is a necessary evil required to "fix it". This opinion is so well ingrained it's almost impossible to sway with logic and reasoning; indeed, people seem to be passionate in their hatred towards the "greedy banks" and support of "job creation". This all follows the media storm around the banks raising interest rates despite the RBA keeping rates on hold, with a follow-up RBA study indicating that, contrary to what the Commonwealth bank was claiming, funding costs have not increased.

The issue of the whole central banking system aside[1], why is everyone so worried about the banks charging an interest rate (which is the price of borrowing capital) higher than it costs them to acquire? That's like saying because it only costs a bookstore owner $5 to produce a book, they shouldn't be allowed to sell it for above $6, as that's a "fair price" and anything above that would be "exploitative" (as determined by some all-knowledgeable bureaucrat). Let's not lose sight of the fact that every exchange is voluntary and no one was or is coerced into borrowing money (government "incentives" to take on debt aside!). The real issue, of course, is the government intervention that prevents competitors from entering the banking business. As long as the government doesn't restrict competition, no one is able to either exploit labour or remain in a "monopolistic" or "cartel" position for long.

In other news, I also noticed that today's Financial Review (Australian Edition) contained an article showing that of the OECD nations, Australia has the most progressive tax system - we outstrip even the quasi-socialist European countries as far as wealth redistribution and welfare 'nanny' state goes[2].

Finally, I've updated the Recommended Reading section with some great books and essays which anyone is free to read or download. One in particular is "The Myth of the Failure of Capitalism" by Ludwig von Mises, a short essay addressing the fallacious views that the market and not the government is to blame for this crisis. Here's an excerpt:

The crisis under which the world is presently suffering is the crisis of interventionism and of state and municipal socialism, in short the crisis of anticapitalist policies. Capitalist society is guided by the play of the market mechanism. On that issue there is no difference of opinion. The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop.

Click here if you would like to read the full essay.

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[1] I personally think we need a return to sound money and free banking to avoid political manipulation of the money supply -- which, by the way, has been increasing by almost 20% YoY for the past decade. I'll provide a nice chart showing this growth within the next week.

[2] As with the above, I plan to write about this sometime in the next two weeks.

One of the arguments I've noticed flying around the blogosphere lately by uninformed (I say uninformed because I do believe they've been legitimately misled by politicians and their court economists - this isn't entirely their fault) individuals is that the stimulus payments will help us fly out of the global financial crisis ahead of the rest of the world and put us in a great position to pay off the debt 'down the road'. These individuals have debated with themselves two perceived alternatives: one, to plunge along with the rest of the world into the depths of the global financial crisis; or two, take on (public) debt and 'stimulate' our way to prosperity, only to worry about the debt during the next 'boom' when it will be far easier to repay.

The first misconception, or fear, that we'll plunge further into the doldrums of the crisis if no 'stimulus' is undertaken by the government is only partially true. If the government sat on its hands but continued to take tax and other revenue from the people (while 'doing nothing'), less resources would be available for the people to spend, save and invest and therefore the economy would be worse off. The appropriate action for the government to take is an immediate reduction in taxes aligned with a cut in spending. This would provide the private sector with additional capital that they can then use in line with consumer preferences and 'stimulate' the economy (unlike government spending which is more often than not wasteful and not in line with preferences). The cash handouts issued by the government were nothing more than wealth redistribution disguised as good policy as the majority of tax revenue is collected from the top echelon of Australians, the very people who saw none of the stimulus.

While the fear of inaction is partially justified, the response of the incumbent government was not and is nothing more than political opportunism of the lowest form. At the end of the day, regardless of how many flawed economic models or cherry-picked statistics the government produces to justify itself, every dollar 'injected' into the economy must first be taxed or borrowed out of the economy. Thus, as mentioned earlier, it's nothing more than income redistribution. It does nothing to increase productivity or employment and therefore nothing to create additional income - and that's the best case scenario! More likely, government expenditure will weaken the private sector by directing resources toward less productive uses (e.g. more consumption and less productive investment) and thus impede economic growth.

Before moving on to the issue of deficit spending, I would just like to address one obvious argument that always seems to arise: that government spending takes from 'savers' and gives to 'spenders' which produces multiplier effects (more spending, growth), ad nauseum. To answer this justification of government spending, lets look at two types of savings (obviously there are more - real estate, shares, and so on, but that's irrelevant here): one, people simply hoard cash in their mattress; and two, people 'save' it in a banking deposit account. In the first case, the only way someone could believe that this would be bad for the economy (result in a 'deficiency' of aggregate demand) is if there exists confusion between 'money' and 'wealth'. If people accumulate money for the sake of accumulating wealth (e.g. stuffing it in their mattress never to be seen again), the price of commodities will continue to fall relative to money, therefore 'deficiencies' in aggregate demand will never result. If there is less money chasing the same number of goods, everyone else holding money will benefit through an increase in their purchasing power. The second case on the other hand is more straightforward, with any money deposited in banks being subsequently lent to others to spend. So regardless of what people do with their money it will be used!

To move on to the second claim that a deficit is not an issue because it will be easy to pay off in the future, let’s take a look at the area where there is an apparent "consensus" amongst economists: deficit infrastructure 'investment'. It's true, our highways are probably collapsing; our schools are dilapidated and badly in need of upgrades; and our public transport systems are third world. But the solution is not more tax dollars funnelled into this bottomless pit of bureaucratic waste. These services should be privatised: yes, roads, rail, buses, all of the so called 'social' infrastructure should be placed in the hands of the market, the only system that is capable, reliable and efficient enough to own and operate them. The fact that most people can't even consider private roads (beyond the token quasi-private toll roads) shows how effective the government run education system has been at manipulating and misleading people with false economics, filling the minds of entire generations with an inert fear of the market and into believing the fallacy of "public goods". Privatised infrastructure and the market price system - aligning investment with the preferences of the people rather than bureaucratic whims - is the only way to avoid further infrastructure waste.

That issue aside, lets examine the claim that infrastructure is one of the best ways to 'stimulate' the economy. The first claim is that it creates thousands of jobs, but one need not look far to show the stupidity of this idea. Yes, infrastructure will create jobs, but only because it is displacing them from where they are more urgently needed (it's impossible to tell if they are actually needed in infrastructure because that sector of the economy is socialised and is therefore guesswork at best - the price system is the only efficient method of allocating labour and capital). The only way the government can create these jobs is by taking money from the private sector, thereby replacing efficient jobs (that may well never be created) with inefficient and unsustainable jobs with the overall gain to the economy quite possibly negative! Only by chance can the government stumble onto a productive investment that increases future growth and productivity, but the amount of capital that is certain to be wasted in other projects will more than offset the potential gains.

The idea that these projects are justified because they're funded with borrowed dollars instead of tax dollars is equally ludicrous. The money from deficit spending has to come from somewhere and as the government produces no wealth of its own, we either have to print the difference, raise future taxes or do a bit of both - all of which hurts the economy. By borrowing, the government raises interest rates for the private sector, restricting the available capital for business. If they decide the debt is too hard to service with future tax dollars alone, they will start printing, resulting in inflation that takes real value away from the private sector and anyone who holds dollars. Whatever the government does to finance the deficit they will crowd out private investment and waste resources through countless pet projects, pork barrelling and other bureaucratic waste.

Finally, there is often a claim that there are "idle resources", in other words unemployment in the economy and that government deficit spending helps to re-employ them. The problem with this, as Henry Hazlitt clearly outlined, is that "...unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play." Allowing these forces to work by removing their causes - government intervention - is the road to recovery, not the foolish notion that more wasteful debt and spending by government will somehow fix our economy.

When Wayne Swan claims that his spending will still be "flowing through the economy" for ten years, he's correct: his reckless spending will alter future economic growth for the worse. Economic growth results from producing more goods and services (not from redistributing existing income), and that requires real savings and productivity. We're going to be paying for the reckless socialist policies of this government for many years to come and only when people begin to realise the fallacies behind big government, stimulus and deficit spending do we have a chance at reversing this course.

Usually when I see the name 'Simon Crean' in the press I shudder slightly and wonder what kind of BS I'm about to read but on this (rare) occasion, he's actually correct.

"I do not have a problem with a branding exercise that promotes as a marketing tool why [an] Australian product is good quality, value for money, because there's plenty of things we can promote in that regard."

"There's lots of markets we can't get into, and that's why we have to spend so much effort breaking down those markets and getting access," he said.

"We won't do it if we join the downward spiral to protectionism, and mandating the purchase within a country is protectionism; pure and simple."

Now, he's correct in that there's nothing wrong with a branding exercise - anyone should be free to start their own 'Buy Australia' marketing campaign - but the government should avoid getting involved. Unfortunately I think that, on the contrary, Crean is implying that the government will provide assistance to this campaign, which amounts to nothing more than a subsidy to local producers. These are the kind of indirect subsidies that often 'slip through the cracks' as most people are completely ignorant (due to a lack of economic understanding) towards them. Indeed, they quite often blindly support them under the guise of 'nationalism'. What I want to know is if people really care, why don't they campaign for voluntary funding? Surely that's better than forcefully taking funds from the population, many of whom will see no benefit at all from the campaign.

As far as the anti-protectionism stance, kudos to Mr. Crean (although one has to question his motives - resource revenue from China, in other words more money for his trough, and the possible backlash that could occur perhaps?). I wish the same could be said for his new apprentice, the young 'up-and-comer' and new Employment Participation Minister Mark Arbib (yikes, you can't make this stuff up), is "...listening to union demands for a 'buy Australia' policy". I used to have the misfortune of occasionally watching him talk before work (daylight savings shifted the programming!) and disagreed with almost everything he had to say - mind you, I wasn't agreeing with the Liberal representative either. I fear if he gets anywhere near policies that promote "jobs" or "local industry" or (insert union rhetoric here), he'll be quite successful at dragging our economy through the mud. I think Comrade Rudd even has him lined up as a future Labor leader - what a scary thought!

Every day we see examples of people automatically resorting to the law and the cold hard fist of government regulation at the first opportunity without even considering that perhaps, just maybe, they should simply take some personal responsibility for themselves. In this example, I’m speaking of a report released today that "...reveals that more than 50 per cent of people surveyed [survey of 800 adults] support a ban on junk food advertising that targets children". Not only that but apparently 9 out of 10 people surveyed want more government regulation associated with the "...use of toys and cartoon characters as advertising tools". What I want to know is why are people always so willing to give up more and more personal liberties to achieve their own selfish, subjective goals? Who decides where the endless regulation ends; at what point do we cease trying to control people as if they're nothing but mindless robots who can't make choices for themselves? This brings me to a statement by the Director of the Public Health Advocacy Institute, Mike Daube, who says that "...the health of children needs to come before profits",

"This survey puts the junk food industry on notice that it has to reduce the vast amount of promotion that is just swamping us," he said.

"Any survey that tells you that over 90 per cent of people want action surely has to tell the junk food industry this the time to back off."

The problem is that just because the majority of people in a survey by the Obesity Coalition (one can’t but wonder how the questions where phrased and what the demographic of the people surveyed was) want more regulation doesn’t mean it’s the correct policy. As Mises would say, that a fact is deemed true by the majority does not prove its truth. Also, wouldn’t the only logical way to protect kids completely from ‘junk food’ be to either ban the products altogether or resort to the method the Soviets used and simply ban any kind of advertising or marketing, with just generic products remaining? Those issues aside, let’s examine this a bit further.

One, advertising does not possess the coercive power that Mr. Daube thinks it does; it can’t force products on the children of the world. Advertising is not selling; it’s a mere statement of words. When on the one hand, selling a product to a child without the parent’s consent or contrary to the parent’s wishes constitutes a violation of the parent’s rights (as legal guardians), statements of words - provided they do not constitute fraud - do not violate individual rights. Therefore, the mere statement of words, including statements used in advertisements, should be free of legal restraint.

Two, it should be the parents responsibility as to what their children should and should not do and not that of the state. The parents are the ones who are responsible for their children. They raise them until they’re able to take care of themselves and in the process they are responsible for what their children eat, what they wear, what they do before and after school, what they watch on television and what they buy in stores. If parents don’t like what their children are watching on television, then it’s their responsibility to turn it off. If parents don’t like or approve of what their children are buying, it’s their responsibility to stop such behaviour, certainly not the governments.

Three, in a free market no marketer or advertiser can survive without two key values: favourable word-of-mouth communication and repeat purchasers. These are derived from providing a quality product and engaging in honest dealings and result in goodwill or a favourable reputation for the product or business. It’s the competition for this reputation that protects consumers from unscrupulous, devious and manipulative advertisers and salesmen. An excellent reputation is something every business strives to achieve – it takes years to earn, by satisfying customers repeatedly through honest dealings and quality products. Not only that, but if the state regulators didn’t intervene, I’m positive there would exist far more ‘independent regulators’, private enterprises that test foods and give them their ‘stamp of approval’, providing an indicator for customers (there are examples of this already, although for them to work properly they have to be free of political and regulatory interference – we don’t want a repeat of the debacle that was the rating agencies involved in the financial crisis!).

Finally, no one is "forcing" these kids (or rather, their parents) to buy these products. To suggest that man is nothing more than a mindless automaton that responds only to impulses and possesses no free will is absurd. People are free to choose whether to accept or reject a product by a company and don’t need some greater authority imposing their will, their own subjective values, on others.

Contrary to what Mr. Daube believes, the profit motive is the best way to improve the health of our children, not regulation, for all parents need to do is adjust their buying preferences towards healthier products and the producers, the entrepreneurs, will respond accordingly to fill this void. This is because, despite the best efforts of the government to prevent it, the capitalist mode of production excels in supplying the ever changing demands of consumers with more, better and cheaper goods in line with their preferences. If 9 out of 10 people did indeed want junk food advertisers to cease targeting their children, they should simply stop buying their products. Forcefully imposing your will on others through the use of government is never the correct means of achieving a desired end and will only result in further destructions of liberty and freedom down the road.

The latest GDP figures and the responses from our 'leaders' reminds me of Thomas Dolby's 1982 song, "She Blinded Me With Science," referring of course to the colloquial British concept of deliberately confusing someone (in this case, multiple people) by giving the impression of highly complex knowledge. Mr. Rudd dropped this today in response to a 0.4% growth in the GDP figure:

"Today's figures demonstrate that the Government's economic stimulus is working and it is positioning Australia as the best performing economy in the world," he said.

"Had we pursued the strategy recommended by [Opposition Leader] Mr Turnbull - not to invest and not to provide cash payments to pensioners, carers and others - Australia would be in recession today."

Even if the stimulus is the reason GDP recorded a small gain (it's quite probable), that's not necessarily a good thing. GDP is one of those figures that measures all spending, regardless of how destructive it is. In other words, the government could just as well build hundreds of battleships, have a fight to the end in the middle of the ocean until one remained, and GDP figures would record impressive gains thanks to all of that spending. The question we need to ask is this: are we wealthier for it? Are we wealthier for the billions of dollars that were squandered on plasma TVs and the like instead of being saved and invested productively? When I say productively, I mean expenditure for the purpose of increasing future consumption, an expansion in the capital base. Government expenditure -- and 'stimulus' payments, are usually (if not completely), squandered on unproductive expenditure, or destruction of the capital base. While both of these will show up in the GDP figures, only one actually improves the wealth of the nation.

So while the politicians can slap each other on the back and take "credit" for further destruction of real wealth, try to look beyond the statistics, most of which have a built in bias towards disguising the true cost of government and over-counting benefits.

I’ve been thinking quite a bit over the past few days as to why the people in charge and the leading economic “thinkers” consistently fail to see the real, fundamental causes of the current crisis. The guys in charge are smart people – they wouldn’t be where they are if they hadn’t proved that. I think the reason lies somewhere deeper than that, that it must lie in their failure to reject the axiom of "government exists to serve the people," and therefore by deduction legal plunder by government is justified for the good of society. If they were to reject this axiom, then the blame would begin to be apportioned to the right people and this is a risk that governments aren’t willing to take. As Mises said,

"It is impossible to invalidate the economists demonstration that all privileges hurt the interests of the rest of the nation or at least a great part of it."

Indeed, it is impossible to refute these demonstrations, unless you maintain the above – and incorrect – axiom. For if you believe that government, by forcefully "helping" a few people is justified in their impoverishment of the rest of the nation, then your entire idea of what is “valid” takes on a different definition as well. Any decision is automatically justified when this axiom is upheld; if you create 100 jobs for troubled teens by robbing a few wealthy farmers, the decision is “justified” and “proof” that government is a necessary evil. Even if the economist can demonstrate that while the money taken has created 100 jobs, it has likely cost 150 other jobs (government created jobs are always less-optimal than private created jobs and thus there is a deadweight loss to society) from ever being created, they will still vote for the policy anyway (well, everyone except for the farmers!). In their minds they have done the right thing, when in reality they have wasted resources and prevented 50 people from obtaining productive work. As Thomas Woods said (cited in Jeffrey Tucker here), “the reason people miss fundamental truths about economics is that economic thinking usually requires at least two steps of logic to arrive at truth, whereas the common man is only willing to take one step at most.” But this doesn’t explain why professional economists, highly intelligent and very well paid, fail to take this second step; they fail to move beyond the axiom of government and therefore miss the real economic truths.

So perhaps this is the reason why they come up with endless cock-and-bull theories of economics to try and explain something that is so obvious. There “must” be a better way they say; there “must” be a way government can fix all of the woes of society, when the real culprit is staring them in the face. They don’t even consider that the axiom they start every thought process with is incorrect. Take this recent example, a speech given by Luci Ellis, head of the RBA’s “Financial Stability Department” (what an amusing name!), where she spouts fallacy after fallacy, trying to find the real cause, because she simply can’t even comprehend that the real cause is in fact herself and her fellow government officials across the globe:

"Perhaps the most basic underlying driver of the crisis was the inherent cycle of human psychology around risk perceptions."

It’s fair enough that people will lose confidence once they realise they've been duped into believing the pool of capital was larger than it actually was but it's hardly the "driver" of the crisis. So she assumes that human psychology operates in "cycles" and this must be the cause of economic fluctuations!

"But there is also recognition in many quarters that low interest rates were not – and shouldn’t be – enough to cause such a crisis on their own."

In other words, the central bankers of the world have decided that they're not to blame (of course lots of other factors were involved, but this was the main culprit).

"A lack of appropriate financial regulation in some countries is widely regarded as one of the important causes of the crisis."

Sure, you undertake "quasi-deregulation" but stay heavily involved in market manipulation, maintain control of rating agencies and so on. She concludes that we obviously need more regulation rather than less government tinkering!

"Perhaps most crucially, many internationally active banks failed to perceive, or appropriately manage, the risks involved in certain financial products and markets, and regulators did not make them do better on this front."

When there's massive credit expansion, no risk of a bank run, no personal repercussions for the people in charge, obscene cases of moral hazard...she wonders why risk is priced cheaply? Of course, as above, the solution is better regulation. If only the right people were in charge!

"In this environment, banks’ perceptions of risk increased, and they started to tighten lending standards. A feedback loop started to develop. Banks were becoming more risk-averse, but so were their customers, who started to pull back on spending. The major industrialised economies of the United States, euro area and Japan were already experiencing economic contractions by the first half of 2008."

Yes, so banks and consumers alike realised that they were living a lie, they found out they had been duped by the central banks and government of the world and, gasp, started to accumulate capital in an attempt to restore the wealth that was destroyed in the boom?

"However, it appears that good quality borrowers can still obtain and roll over credit."

As they should be able to...it's the marginal borrowers who were only able to stay in business because of the low interest rates that need to fail for economic health to be restored.

Her "countermeasures" are too long to list here...but they basically involve bailing out the entire financial sector to restore "confidence". She wants to "de-risk" everything. Finally, she wants to increase regulation across the board...because now they're so much wiser, they won't possibly get it wrong again.

I think she honestly believes that the only reason we had this crisis was because people decided they'd had enough which triggered the vicious "feedback cycle". Then to fix it, simply restore confidence and you'll get a "reverse-feedback cycle" and we can start another "cycle of human psychology?" It sounds fantastic doesn’t it; it’s so simple, and allows her to step back, wipe her hands clean, and get a good night sleep now that her conscience is clear.

Personally, I can't support a system of economics that operates with the above axiom, that "hurts the interests of the rest of the nation" to support certain interest groups. I believe that economics should seek to identify actions that can "benefit the interests of the whole nation." To me, economics is therefore one and the same with individual freedom, justice and liberty. What is it going to take for the people who maintain the “government” axiom to take the second step of logic? I honestly don’t know, and even if they do, most are paid far too handsomely (in the case of economists) or already rely far too much on the welfare state and productive labour of others to start doing something about it now.

Continuing in the same vein as the previous post, the unions are protesting a two year delay in the aged pension as announced in the recent federal budget,

The Federal Government is facing a protest from two of the country's biggest blue-collar unions against its plans to raise the pension age to 67 by 2023.

The Construction, Forestry, Mining and Energy Union (CFMEU) and the Australian Manufacturing Workers Union (AMWU) say it is unpalatable to expect people in arduous jobs to work to that age.

The pension age increase was announced in the Federal Budget and unions say they will fight the decision.

Is anyone surprised? Union officials deciding to fight a measure that will delay their opportunity to feast at the public trough by two years. That's expected though and isn't the real issue here: government and the pension itself. The two year delay is a classic knee-jerk response to the looming old-age crisis and while the government can claim it's a "responsible reform to meet the challenge of an ageing population and the economic impact it will have for all Australians" until the cows come home, it's a policy that will, at best, keep the system running for a few years longer. Unfortunately it does nothing to address the real problem: artificial disincentives to work and save and a heavier reliance on the welfare state.

Why does the government feel the 'need' to get involved in welfare? Quite simply because they created the 'need' to. While in the past family, markets, mutual aid, charity, and work (savings) were ways people provided for themselves, the lure and security of the trough has removed or severely diminished most of those. The whole thing is just one big contradiction: on the one hand, government forces companies and individuals to contribute to a super fund, bemoaning a lack of savings and the looming crisis, while on the other hand they're firmly committed to a policy which continuously diminishes the purchasing power of the dollar! While hypocritically pretending to fight inflation, they encourage massive amounts of credit expansion and constantly increase the amount of money in circulation. There is simply no incentive for the average Joe to save when the government will simply inflate it away (and psychologically obscure this danger with the 'security' of a pension).

Old-age security is too important to be left in the hands of the state but the first step to fixing it isn't to simply delay the pension age. The solution is to bring back incentives to save, cease debasing the dollar and put some responsibility back into the hands of the people. The unions can fight for the pension all they like, but if by the time they hit 65 or 67 it's worth considerably less (as far as purchasing power goes) and reduces them to near-poverty, they might find that the old-age 'security' the state provides them and unions 'won' for them isn't so secure after all.

Here's a perfect example of why a "retirement age" is is just another invention by the government along with unions and other interest groups who want people to exit the workforce before their time that amounts to nothing more than a big waste of resources,

British adventurer Sir Ranulph Fiennes has reached the summit of Everest on his third attempt at conquering the world's highest mountain, a spokeswoman said.

The 65-year-old arrived at the top of the 8,848-metre peak just before 10:00am (Australian time), she said.

He began his latest attempt to climb the mountain three weeks ago, according to the BBC, and now becomes the oldest Briton - and the first British pensioner - to scale the mountain.

Joking about his advanced age, which in Britain brings free travel on some public transport, Me Fiennes was quoted by the BBC as saying: "It's amazing where you can get with a bus pass these days." -- Source

If a 65-year-old can climb Everest, surely people can keep working (especially desk jobs!) well into their 70s and beyond. Rather than just play golf and watch TV all day they could be using their skills productively. That said, everyone should have the option to retire, regardless of age, but the government should stop providing endless incentives to exit the workforce once you turn 65 (pensions, discounts, access to super, and so on).

It goes much deeper though -- there's a huge disincentive to save in our society with the constant debasing of the dollar, debtor bailouts, heavy taxes and so on. Rather than forcing people to save (super) and providing them with a pension and other benefits if that's insufficient, a return to sound money so that savings aren't forever eroded (indeed their purchasing power would increase over time) would be a good start to bringing back some incentive to save.

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.

Analysing and critiquing the entire budget would require a significant time investment and a substantially long piece of work. Unfortunately, as a ‘wealth-producing' member of society, I don't have the time to do that (unlike the government, who employ thousands of staff to compile this extravagant, multiple-hundred page document with someone else's money). So instead, I'm just going to look at the key points (namely, what the Treasurer mentioned in his speech).

Before I get started, lets just quickly touch on how the government plans to pay for most of this, as Mr. Swan claims that "...every single cent of new spending for the coming year has been more than met by savings elsewhere in the Budget." However, he also mentioned that he's going to sell $60bn worth of government bonds - that's not savings, but it is a good sign that they plan to monetise the debt through inflation in the future (the RBA will have to either print to buy the bonds or to keep interest rates at the 'target' level). By issuing bonds and paying an above-market "safe" return (otherwise no one would buy them), it starves the market of private capital and credit; it means that increasingly, private savings are being siphoned away from productive investments and into wasteful and counter-productive government expenditures. These bonds represent nothing more than credit extended to companies and projects that are proven market failures. Creating these bonds is a way of institutionalising the principle of buying low and selling lower, all "backed" by future tax and inflation.

Enough of that though, let's get to the budget.

The Working Families Support Package
Mr. Swan announced $55 billion dollars to support so-called "working families...[who] demand little more than a fair go". This is in the form of tax initiatives, child care, education, housing, and other "essential" components of family budgets.

Tax Cuts
Apparently the proceeds of the boom were "skewed" to those already "doing well" and that the people "doing well" weren't paying their fair share. "Fair" is a key component stressed throughout the budget - indeed it's mentioned six times in this relatively short speech. But what is fair? The common definition of fair is:

"...free from favouritism or self-interest or bias or deception."

To me, Mr. Swan's version of "fair" sounds like the usual lie perpetuated by governments of both sides (left & right) to distribute income to whoever they're more "fair" towards. Indeed, when you look at the facts, the tax burden isn't fair at all![1]

A more recent report by the Treasury[2] shows that the bottom 20% of taxpayers account for 6.5% of taxable income but only 2% of tax paid, while the top 20% accounted for 45% of taxable income and 59% of tax paid! Looking at the above table, it's also clear that most of the tax benefits go to the so called "working families". Sorry Mr. Treasurer, but they're asking for much more than a "fair go".

Whenever the government takes tax money and doles it out to someone other than the person who paid the tax, it becomes no different from a common thief. And even if it does dole the money out to the person it took it from - then what's the point of taking it in the first place? It becomes a legitimate exchange, a role the private sector is more than capable of performing. It's utter nonsense to say that the government will spend tax money for the "wealth" of our nation; the common thief would do the same, as would the person it was taken from had he not been stripped of his wealth by the government. If this is nothing more than welfare, then simply state as much. But please don't cloud it with false economics, as if somehow the "...backbone of our economy" is a class that gives more than it takes (it is, but it's not the class Mr. Swan thinks it is!).

Child care costs
The government plans to "...ease the burden of child care costs". Everyone who has a child (assuming they fit into the "backbone" category) gets a $7,500 payment along with a 50% child care rebate, for a total cost of $1.6 billion over four years. Again, this is nothing more than welfare. Not only that, but it also has far more severe consequence: it will obscure incentives and reward poor people who have children. Rather than giving people a "fair go" and lowering the tax they pay, it's giving them more money than they even pay in tax (they can actually make a profit off of another tax payer)!

This is a policy that rewards childbirth, warps the marketplace and blurs economic reality for parents, resulting in a perverse outcome: more children born into poor families. It will serve to increase the welfare state we live in, but also boost the pool of future voters for the Labor party. I can really see how this is going to help the economy.

Education costs
So to help all of the families that were lured into having more babies, the government is also going to educate them in the ways of the state. For a meagre $4.4 billion over four years, and further taxes for the top 20% of income earners (paying the majority of taxes already obviously isn't "fair" enough!), "...eligible parents will be able to claim a 50 per cent refund on eligible education expenses for children undertaking primary or secondary school studies - up to $375 for a primary schooler and up to $750 for a secondary school child each year". So not only is it cheaper for poor people to have more children, it's cheaper for them to provide for them as they get older. No doubt this army of children (the new welfare class?) will grow up to be ardent supporters of government, because they "owe them" so much for "helping" them throughout the years.

Improving housing affordability
We're now "helping" the very same people all the other spending promises are "helping" by providing affordable housing, at a cost of $2.2 billion dollars. If the government was really interested in helping the welfare class, they could start by ceasing their debasement of the dollar, the hidden tax on the poor that makes it very difficult to get away from the trough. It's much easier to become productive and achieve wealth when the target isn't constantly moving away from you. Likewise, artificial credit expansion only raises the price of houses - along with all of these grants that are supposed to "help" the poor. They're nothing more than a subsidy to the building and construction industries!

Supporting older Australians and carers
Welfare for the elderly-at least Mr. Swan doesn't hide this under the guise of economics. But who's going to complain about more money for the elderly and carers? Unfortunately, the presence of the state in retirement security creates calculational confusion, resource misallocation and mismanagement along with harmful free riding. The real cost of this will be borne by future taxpayers, who are paying for the pensions of the present retirees but can expect to receive little in return. If the government really cared, they'd remove forced retirement and let individuals and families make rational and responsible decisions that enable them to provide for their old-age needs. A good start, as above, would be to cease immediately the debasement of the currency so that people would be more able to calculate how much in the form of savings they would actually need to retire on.

Easing cost of living pressures
More powers for the ACCC as people are worried about "...the cost of essential goods such as groceries and petrol". Nothing to see here - a simple justification for government expansion on the basis of a government created problem (again, the debasement of the currency results in higher prices: it's the low-income people who struggle to keep up with government-sponsored inflation).

NEW ERA OF RESPONSIBLE ECONOMIC MANAGEMENT
Mr. Swan is claims he's going to be responsible, yet just released a budget deficit that's going to take 20 years to repay. Apparently, he's simply redirecting spending to "...more pressing priorities". It's the fall in revenues that's to blame, not the increase in spending. Of course! We need these services! The government always knows where to best allocate other people's resources for their own good (you see, people can't be trusted to make decisions for themselves). The most bamboozling quote of all is this one,

"Mr Speaker, some Australians have been asked to bear a greater burden than others, that's true. But in the end, if we're to beat inflation and build prosperity, we have no choice. We simply cannot go on as before, spending irresponsibly, and allowing inflation to build."

I'm not quite sure what Mr. Swan is trying to say here. Inflation is purely a government phenomenon. It's caused by the inflating of the money supply: I can't print dollars, my neighbour sure can't, and other countries can't. If he was serious about stopping inflation, why not return to sound money and cease debasing the currency? I agree about ceasing government spending, but this budget is the highest spending budget in our history. Mr. Swan is trying to have his cake and eat it too: he's contradicting himself.

MEETING OUR COMMITMENTS
For one, only half of Australian's voted for you Mr. Swan. Where was the "none of the above" option, where I'm able to opt out of paying tax and also opt out of all of your "help"? He continues with "...we will begin tackling the big challenges on Australia's horizon, by providing long-term plans, not short-term bandaid fixes." Translation: we're going to plunge the country into long-term debt and wealth destruction, big government, and a removal of individual freedoms, rather than let the market fix itself (which would likely happen in the short-term!).

Education Revolution
The education promise is $5.9 billion dollars over five years to increase the skills of our workforce. How, again, does Mr. Swan know what skills our workforce needs? In plainer words, how is it possible for bureaucrats, so disconnected from the real world, to know what the market demands more than the market itself? Surely entrepreneurs would be better placed to determine the type of workers they need and invest in their education and training accordingly. The education industry in this country is a government-protected monopoly that forcibly restricts competition and needs to end.

Better hospitals and health services
By pumping yet more money into a health system that's riddled with free rider and moral hazard issues is not the solution to our health woes. If people had to bear the costs of their own decisions - whether through insurance, savings, or charity - they would likely be far more responsible with their own wellbeing (by the way, "insurance" isn't the perverted system we have now. Only government could be so deluded to think that planned, optional procedures should be covered by insurance). Rather than piss away more billions on "educating the people", give them some responsibility back!

Tackling climate change
We're getting more funding for "green" alternatives. One can only wonder how far we'd already be down this road if governments removed their subsidies on "dirty" energy and people had to pay the appropriate price for these products. It's always a good laugh when government-run energy companies plead on prime-time television for people to cut back on their electricity usage. It's the perfect example of why government can't be in business and shouldn't be providing services - they have no idea how the price system works! Can you imagine if McDonalds started advertising, telling people to stop consuming so many burgers?

Supporting business
I'm sorry, but if you want to "support" business, remove all taxes and regulations (and no, I don't want quasi-deregulation, which can cause far more problems than it prevents).

Regional and Rural Australia
Mr. Swan here provides more welfare for "rural" Australians, who choose to live there of their own free will, yet constantly plead for aid (out of someone else's pocket). One thing to note is the funding for "water for the future", which brings "...a comprehensive and coordinated approach to water supplies". Only when the government manages a resource, such as water, are we faced with shortages. If the market, the pricing system, was allowed to work, there would be far less squandering of this precious resource than exists today. As per the above example, the government is an organisation who actually advertises - even forces people in the form of water restrictions - to not use their product! Ridiculous!

Indigenous Australia
More welfare for the indigenous, like they need any more "help" from the government. Welfare only increases their dependence on the teet of the state. Welfare is a key cause of unemployment. If they would level the playing field (by ceasing any and all involvement), there wouldn't be any need to supply a continuous stream of "aid" to this cause.

National security
Mr. Swan promises more funding for the military and mentions part of our overseas network. Obviously the Labor party is no different to the Liberals in foreign policy - both seem to be heavy advocates of cooperating with the U.S.'s "empire building" policy, as much as they try to disguise it otherwise.

INVESTING IN THE FUTURE

"Mr Speaker, this is a Government of nation builders.

We have no intention of hoarding the strong surplus for its own sake. This money is not ours, it belongs to the Australian people."

How correct he is (on the latter part). The only problem, of course, is his government isn't giving any of it back to the people it was taken from. On to the more pertinent issue of "nation building", our infrastructure may or may not be lacking, but why is the government best placed to decide where investments should be made? Why should we hand over more power and money to the government, further entrenching government employees in their overpaid, underworked jobs? We don't need more government involvement, we need less. Government lacks the incentive to fix problems, especially in infrastructure. Even with incentives, there's the calculation problem associated with allocating the use of resources, as I mentioned earlier with water and electricity shortages. Private markets, on the other hand, excel in this area. Whilst they may not be perfect, resources are used efficiently to solve the most urgent demands as revealed in the system of profit and loss. As the government lacks this mechanism, everything becomes arbitrary at best and political at worst.

Building Australia Fund
See above, $20 billion dollars for "critical" infrastructure that the government can't possibly know is critical. At best they can have a guess (surveys and so on?), but without the price mechanism, it's impossible to know what people really want.

Health and Hospitals Fund
Mr. Swan pledges an initial $10 billion dollars on hospitals, equipment and so on. Please see the free rider and moral hazard issues above. "Free" healthcare is not only not free, but it can't work (well).

Education Investment Fund
You wouldn't be far off if you thought these sums were from some kind of fantasy land, because there's over $17 billion going into education. But when money grows on trees (or you can print it), who cares, more for all! See above (Education Revolution).

COAG Reform Fund
$78.6 billion for the states (I love how he includes the .6 - what's $6,000,000 when you're talking in billions and it's not your money anyway?). I wonder what strings are attached to this payment...

Future Fund
$3.9 billion dollars for retired public servants - not only have they done nothing productive throughout their lives, living off the fruits of the private sector, but they haven't even provided for themselves in retirement (although to be fair there was no incentive to - the government does promise to take care of them!).

Australia's Future Tax System
This is the scary part because it's so vague: we need something that "builds the nation"; one that's "fairer"; "respects the environment and demographic challenges"; makes us "internationally competitive"; and "creates incentives to invest in our productive capacity". One would think, reading that, that Mr. Swan was advocating for the removal of the tax system, such is his play on words! It's clear that our leaders are floating off in some mystical utopia, because as long as the system stays in its current form or goes the way Mr. Swan wants - towards big government - it's unlikely any of the above will be achieved.

CONCLUSION
Despite all of the big talk, behind the smoke screens Mr. Swan has carefully laid out, at the end of the day the government has plunged the nation into major debt that is going to take considerable amount of time to repay, all on the back of fear mongering tactics and economic fallacies (see the issue with "jobs" in the previous post).

The money for deficit spending has to come from somewhere. It either comes from taking on more debt, printing the difference, raising taxes, or some combination. When the government takes on more debt, it raises interest rates for private borrowers, thereby hurting the economy. As the RBA fixes interest rates (at present, probably too low), it will have to print money, resulting in inflation that takes real value away from the private sector. Finally, if the government raises taxes to pay for the deficit in the future, then it again takes from the private sector. Regardless of how it funds the deficit, the government will crowd out private investment and redistribute or even destroy wealth, thereby slowing economic recovery.

No matter how much Mr. Swan will assure you to the contrary, the world will not come to an end if government "does nothing". Indeed, we'd probably all be better off. The real motive behind sinking us into debt is the love for higher taxes and for higher government spending for their own sake, or, rather, for the sake of expanding statism and collectivism as contrasted with the private sector. It's hardly a very cleverly hidden agenda but for some reason most people still can't grasp it. And no, I doubt the Liberals would be any better.

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[1] Ann Harding and Neil Warren, "WHO PAYS THE TAX BURDEN IN AUSTRALIA? ESTIMATES FOR 1996-97" Discussion Paper no. 39, February 1999

[2] http://taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_3-03.htm

Mr. Rudd states that:

"Treasury's advice to be published in the Budget tomorrow is that the measures that we have put in place will support Australian jobs and significantly reduce the length of the Australian unemployment queues," he said.

"This Treasury advice finds that if the Government had done nothing national unemployment in Australia would have been forecast to reach 10 per cent."

He might be right. We might have had more job losses in certain areas of the economy; it's impossible to attach a figure to this (the Treasury wizards can guess all they like - I recall them saying in 2006 that this boom was going to stay strong for 'many decades to come'). But are job losses necessarily a bad thing? The whole reason the world is going through this recession is because there are fundamental structural problems throughout the world economy. There are resource misallocations, misallocations caused by irresponsible monetary and fiscal policy that need to be fixed. Any attempt to prop up prices, or jobs, by injecting capital into areas of said misallocation is a bad idea. It prevents the market's corrective mechanisms from working; it destroys yet more wealth even after the errors of the bubble have been revealed. Hasn't anyone ever told the people in charge that throwing good money after bad is never a smart thing to do? I suppose if your job involves spending the fruits of other people's labour, with no personal repercussions, then it doesn't matter how much you squander, especially if it wins you votes.

But let's not skirt around the issue: this was never a matter of economics. Our leaders may be very well aware of the fallacies of "stimulus" (although this author is sceptic) and are only pushing these plans for political considerations; in that case, it's an attempt to prop up pet industries (infrastructure comes to mind) and increase the size and power of government (i.e. them). Assuming, as we are told, these expenditures are temporary, what happens when the resources shift out of these areas? There's no way for the government to know where consumer, saver and investor preferences lie and therefore they have no idea whether they will survive in the long run. As I've said before, if these projects actually had merits, they wouldn't need to justify them with moral or sentimental reasoning. Simple accounting would be sufficient!

As Mr. Swan keeps telling us, "...tonight's Budget is about three things - jobs, nation-building and a path back to surplus". To look further at the issue of jobs, we need to ask the question: is it that hard to create employment? Keynes suggested we should bury old bottles with money in them, cover them with garbage, then let ordinary incentives get people out there digging. But this misses a fundamental point: employment is not a goal in itself. Wealth, value and production are the goals. Stimulus may create jobs, but it's likely a net destroyer of wealth.

Can government spending attract resources that are currently unemployed? Given that most of the labour force is currently employed, and that leisure does have a value, it's doubtful. More likely, it will simply divert resources (capital, labour) and increase the cost of capital and labour for the private sector, preventing them from expanding and creating jobs themselves.

Arguably the largest issue with stimulus and deficit spending is the debt created to finance it. Either higher taxes in the future or inflation (through the monetising of the debt) are required. In either case, future wealth will be lost as productive activities are penalised. Will the wealth created today, if any, be worth the cost of future losses in wealth? I highly doubt it.

So if massive stimulus packages and "nation building" investments aren't the way to get ourselves out of this mess, what is? The first thing to keep in mind is that spending that prevents or inhibits the reallocation of resources from areas of malinvestment will only prolong the current recession. Not only is this type of spending not better than nothing, it's far worse than nothing.

We need to allow market adjustments to take place. Prices and wages need to be allowed to realign; only when this happens will economic activity resume and will wealth again be created (of course, if other factors: productivity, technology and so on, somehow manage to increase at a greater rate than that of government wealth-destruction, it is possible to achieve a net gain in wealth in spite of the gross government waste).

Government should also be reducing tax to reduce the demand to hold money and increase the desire to lend, borrow, invest, and consume (notice that tax cuts aren't directed by the whim of a bureaucrat: private individuals are able to allocate resources in line with their own, voluntary, preferences, making them more likely to be sustainable).

However, it's important to realise that a cut in tax must be followed by a cut in government spending. Otherwise there will simply be tax increases or inflation in the future to pay for the tax cuts today. In other words, any cuts must be sustainable.

Finally, it's critical that we overcome the fallacy of "jobs" and instead focus on what matters: wealth. A jump in job data does not necessarily equate to an increase in standards of living; let's not forget that some of the poorest places in the world have close to "full employment". Stimulus and grandeur spending promises are nothing but a recipe for wealth destruction. With wealth creation, jobs will follow and prosperity is increase for everyone. With a focus on jobs, it's unlikely that wealth will follow. Indeed, we're more likely to see "trickle up poverty" than "trickle down wealth". Contrary to what they tell us, the free market, or a focus on wealth, is a plan for the people; a focus on jobs, or big government, is a plan for the politicians and wealth destruction. The free market had nothing to do with this crisis: interference in the market by government, the refusal to allow production and consumption to coordinate, is what caused this mess. More of the same will not restore prosperity, it will only destroy it. Blaming 'greed' is akin to blaming gravity for airplane crashes.

Tonight's budget should go down in history as one of the most irresponsible acts ever committed by an Australian government. Deficit spending of $60 billion dollars, or almost 10% of our GDP, will be a burden we're going to have to bear for decades. Unfortunately I fear that the propaganda machine, already in full gear, will distort public opinion to the contrary. The budget will go down as our "saviour", and the old Keynesian mantra of "imagine how bad it would have been if we did nothing" will be utilised to it's full extent. It's a rigged debate that the market can't win.

While Federal Finance Minister Lindsay Tanner says the latest retail sales figures[1] show the Government is taking the right steps to fight the economic downturn, the truth is probably the opposite. While I'm going to ignore the blatant issue with cause and effect (we have no idea based on the evidence alone whether the stimulus worked or didn't work. What if retail sales are up on some unrelated issue?), the downturn we're experiencing is a response to an artificially inflated economic structure, not a lack of consumption and spending.

Loose credit, courtesy of the Federal Reserve in the US and our own RBA, was lured into certain sectors and industries in an unsustainable way, known as malinvestment. The natural response is for failed businesses to sell off assets and allow the labour and capital currently held up in those industries to be reallocated.

Some real good news would be further declines in retail spending, which would perhaps indicate that consumers were taking on less debt. They might be saving more. They might be adjusting their time preferences and thinking about long-term plans rather than short-term wants. Unfortunately, it seems that the stimulus is serving its purpose: prolonging the downturn and the misallocation of capital so that the political muppets can claim a victory based on some government statistics.

All of the above (less debt, more savings) are pre-conditions for recovery. The sudden increase in retail sales is only good news if one adopts the crude theory that economies are sustained by consumer spending. Consumer spending is simply the 'reward' for the real foundations of growth: real savings and investment. I find it highly unlikely this recent jump in retail sales are a result of an improvement of those foundations; the more likely answer is that it was caused by further capital destruction for short-term gains.

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[1] Source: Sales surge 'shows stimulus success', ABC Australia, 06/05/2009

Mr. Brumby yesterday announced that he will ‘stimulate’ 68,000 jobs through a capital works and training program. But in doing so he ignores the century’s old lesson of one Frédéric Bastiat; he ignores the unseen and only focuses on what is immediately in front of him.

The creation of these jobs is financed by taking money from the taxpayer. In doing so, their wages are reduced by the same amount that those of the building industry are increased by. In effect, there are no jobs created. All that will occur is a reallocation of jobs—as public spending is always a substitute for private spending. While it may well support one worker in place of another, it adds nothing to the economy when taken as a whole.

The claim that public infrastructure spending “creates jobs for the workers” is an incredibly dangerous proposition. It serves no other purpose than to automatically qualify the most absurd spending decisions. If a road or railway has sufficient utility to justify the capital outlay then that argument alone should be sufficient in justifying its creation. But if, as is the case with Mr. Brumby, that’s not possible to do, he’s forced to resort to the fallacious position of “creating jobs”.

When considering your support for these programs, ask yourself this: what would the taxpayers have done—and can no longer do—with the same billions that are now being spent on public enterprise. There’s no question that these projects will give jobs to certain workers. That’s what’s seen. But it deprives other workers of employment. That’s what’s not seen.

Throughout the Howard years the Liberal party preached, as if gospel, that by delivering budget surplus after surplus they were and still are the only party to be trusted to ‘responsibly' manage the economy. In contrast, Labor is demonised as ‘irresponsible' economic managers due to their spend-happy history, which, at present, they appear to be living up to.

This constant debate of Labor deficit vs. Liberal surplus floods the media every day, both sides trading blows with seemingly no resolution in sight. In this brief article I'd like to set the record straight: both parties are wrong and both will cause considerable harm to our economy.

The Surplus
The legacy of the Liberal government as they'll relentlessly stress was the art of maintaining a budget surplus throughout their term in office. They call this fiscal responsibility, prudent management or some other play on words that makes it sound as if a surplus somehow helps the taxpayers. On the contrary, budget surpluses are not surpluses at all; they are simply a result of the government charging too much in taxes. When Peter Costello tries to equate that a budget surplus is, in effect, the same as if a private company made a profit, all he's doing is demonstrating his dishonesty.

Firms make profits by satisfying the most urgent needs of consumers. They manage to keep costs low enough to earn a differential between said costs and the market price of their products. This is in sharp contrast to how the government does business: rather than meeting the needs of consumers, the bulk of government products and services are provided for the people who pay relatively little in taxes.

A government surplus is earned by seizing property from citizens and then not permitting those same citizens to use the services that they are financing. If someone in the private sector attempted to act in this way they would be prosecuted for theft and fraud. Perhaps next time Mr. Costello orders a meal at an expensive restaurant he should pay the bill and then be told that it's "unfair" to "working people" and that the meal will instead go to someone "more deserving".

Throughout their term the Liberal government, while keeping a budget surplus, failed to decrease the size of government at all; in fact, the size of government grew, making it oh-so-easy for Labor to just continue the big government trend at a faster rate.

A budget surplus is NOT a good thing. It is quite simply money that the private sector no longer has to spend. Entrepreneurs have that much less money to meet the demands of consumers; the very needs that the government claims to be "helping" with their spending policies. While the logical response to a surplus should be to lower taxes, the relentless greed for other people's money that is inherent in any government - left or right - the plunder of citizens under the pretence that it's "for their own good", instead results in the opposite - more spending!

This leads us to the budget deficit.

The Deficit
In stark contrast to the Liberal party, Labour claim that budget surpluses are evidence of the government ‘underspending'. To them, it's not because taxes are too high. Indeed, they baulk at the suggestion of a tax cut, because the result is that the government will be deprived of revenue that it "needs" to help the "battlers". Using this logic, if surpluses aren't the result of too much tax, then the huge budget deficits that Labor enjoys running are not the result of taxes being too low but rather too much spending (and they should cut spending and not raise tax to end them).

The current Labor leader, Kevin Rudd, is a self-proclaimed "economic conservative". Funny how as soon as he was elected he discovered a great number of exceptions that required more funding and moved from economic conservative to socialist, spouting phrases such as a "new world" and how everyone has to "do their part [i.e. pay more tax]".

Deficit spending hurts Australians more than surpluses, on that there is no question. The so called (Keynesian) justification for it, to "fill the void" left by the private sector, is a myth that has been disproven so many times that it's not worth citing. Deficit spending only diverts capital resources from more desirable to less desirable uses, with a side effect of increasing the size of government. That aside, here are some other side effects of deficit spending:

• Higher interest rates (if the government borrows domestically)

• Increased inflation (if the RBA monetises the debt)

• Weakened export markets (if the government sells debt abroad)

• Tax hikes

• All the above in some combination

In addition, while the deficit spending is continued, entrepreneurs in the private sector will have to guess about the particulars of the deficit accommodation, hedge as best they can, and take their chances. If they guess wrong, they stand to lose a lot of money. While the private sector may be good at satisfying consumer demand, it's not very good at guessing what (or where) the next "road-to-nowhere" is going to be. As a result of this, many would rather stay liquid until the deficit is gone to avoid potential losses.

The result of every deficit and all of this increased government intervention for "our own good" will, in the end, have to be paid for by the taxpayers. Rather than selling government owned enterprises to private entrepreneurs or raising the prices charged to the customers to a level where no deficit remains, the government interventionists would rather take from the "wealthy". Somehow it's "fairer" for these people to bear the burden of someone else's consumption. The problem is that this imaginary pool of money that the rich people are "hoarding" can't last forever; there's only so much the interventionists can take before they start simply taking from each other! To quote Ludwig von Mises,

"The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. In recommending a greater allowance for the schools he simply stresses the point that it would be a good thing to spend more for education. He does not venture to prove that to raise the budgetary allowance for schools is more expedient than to raise that of another department, e.g., that of health. It never occurs to him that grave arguments could be advanced in favor of restricting public spending and lowering the burden of taxation. The champions of cuts in the budget are in his eyes merely the defenders of the manifestly unfair class interests of the rich."

Left? Right? Irrelevant.
What we need is a balanced budget. We need to gradually remove governmental services and move towards a smaller government, not a larger one. This involves a progressive decline in government expenditures, privatisation of government enterprises, a reduction in the regulation burden and massive tax cuts (to follow the spending cuts - remember, we don't want a surplus either). We need to ween the dependant class off the ‘welfare teet' that we've created and Kevin Rudd is intent on expanding. We need to work harder and more efficiently, save more, invest more, and produce more. That's the only way to increase wealth and income for everyone. If these reckless policies continue, the "trickle-up poverty" effect will destroy a considerable amount of wealth and lower the standard of living for all Australians (except of course the politically connected, or nomenklatura).

Earn or Learn: that's the message the government is now sending to the Australian Youth,

"Any Australian under 25 will need to be either working, studying or training under a new plan agreed to by the Federal Government and state and territory leaders."

The government, together with the unions[1], have progressively increased the cost of youth labour to the extent that the government feels obliged to pass yet another law to fix "youth unemployment". This is nothing more than a bandaid policy aimed at fixing a problem caused by government intervention. Rather than forcing youth to do what a group of bureaucrats think is "right", how about first they allow them to choose whether or not they want to work or study. As it stands right now, with the minimum wage at a staggering $14.31 per hour (set to increase further in 2009), it's no wonder fresh high school graduates can't find work. They're products of an education system that leaves them barely qualified to operate a dishwasher yet alone function in the workforce; they're being systematically dumbed down by compulsory state-run education and this move will do nothing but add yet another taxpayer-funded burden to our economy.

Businesses are already being subsidised by 'free' government education. They don't see the need to invest in their staff because they're (being forced into) paying for training already. As the direct beneficiaries of training and education, if the government gradually removed their involvement in the education industry and allowed the market to function, business should and would bear the costs, voluntarily. It would probably be a lot cheaper, practical and relevant to boot! Who can honestly say that what they learnt in high school is useful to them in the workforce; I had to 'unlearn' most of what I was taught as soon as I left!

If our leaders are serious about 'helping' "...young people avoid slipping into long-term unemployment", then they should repeal the minimum wage laws. They should let people work at the level where the cost of labour is equal to labour productivity. Every young man and woman willing and ready to work should be allowed the opportunity to do so. A free labour market would welcome young people, which would not only exhort and restore the spirit of work but also improve labour skill and know how. The labour productivity of Australian youth would likely rise and exceed the ominous minimum levels that presently condemn millions to idleness.

On a more cynical note (seem to be doing this a lot these days...), what's the bet that the next Australian Bureau of Statistics (ABS) unemployment data will show a remarkable decline in unemployment, considering that the government has literally made it illegal for under 25's to be unemployed. Kevin Rudd will be grinning with glee at the success of his latest scheme...but it's just a superficial, statistical, (at best) short-term 'gain', just like every other government initiative designed to "help us". The cost to production, to wealth, whether in lost labour or the cost to the taxpayer who has to foot the bill, will be untold.

---

[1] Just a quick note: I have no problem with voluntary unionism so long as they're not backed by the government, don't receive government handouts, 'favours' and so on and don't make any contributions to government or party officals. In other words, unionism is fine as long as the union doesn't engage in coercive or violent activity (sadly, that's the definition of the modern union!).

From the Sunday Herald Sun:

TATTLETALES are dobbing in their neighbours, workmates and former lovers for being tax cheats. More than 152 people a day are informing on friends, business associates and workmates, delivering a windfall of millions of dollars to the Australian Taxation Office.

Well isn't this a flashback to the 1930's where Stalin's NKVD trained their agents specifically in the art of manipulating people to report on their family and friends. As Professor Robert Higgs has shown, crisis generally leads to rapid government expansion as people fall victim to the "siren song" that the politicians know how to sing all too well. As Margaret Atwood's poem "Siren Song" begins:

This is the one song everyone
would like to learn: the song
that is irresistible:
the song that forces men
to leap overboard in squadrons
even though they see the beached skulls.

Fear leads to the misconception, the confusion, that the protective arm of the government is the solution to our woes. The government inevitably expands and becomes more involved in everything to do with our lives. Finally, once the situation "returns to normal", the government may contract, but not to pre-crisis levels; it stays involved with the inevitable trajectory (if it's not stopped) being the creation of a total state.

Encouraging people to "dob in their mates" sets people against each other and will eventually result in an all against all. This divide and conquer mentality is exactly what happened during the creation of the Soviet state. To steal from Prof. Higgs again,

In the present regard, it works every time because the people falsely believe that those who sing it [the siren song] are their protectors, rather than their exploiters. Until people learn to disregard the state's siren song of beneficence and protection, they will continue to suffer and die as victims of the state's wars, foreign and domestic. People yearn for security, and they look to the state to provide it, but they are calling upon a wolf to guard the sheep.

Don't let yourself be blinded by fear or state propaganda: ignore the Siren Song!

Finally, Kevin Rudd has indicated that the First Home Buyers grant is coming to an end,

"It's had a real effect, we're still measuring its full effect, but I think it's very important that as a community we understand that deadlines are imposed for a particular purpose," he said.

"It's had strong useful results so far, but I've got to say, that all good things must come to an end." -- Source

The property industry is already complaining, with Stockland's managing director Matthew Quinn coming out and saying "...we think that the market, the first homebuyer market, does have another six months to go before all of that underlying demand is soaked up and it will result in a rush of buyers towards the end of June" [ibid].

I'm not sure exactly what he means by "underlying demand" but I can only assume he means that an artificial lowering of the price (through low interest rates, first home buyers grants) will increase demand. Well obviously; the lower the price of any product, ceteris paribus, the greater the quantities that buyers will be willing to purchase. Add to that the constant trickery that interest groups have using on home buyers, such as: "you've just been wasting money on rent for the last 5 years, wouldn't it be nice to own your own place instead"; "it's just another, safer, form of investment!; and "interest rates are so low, plus this homebuyers grant will only be around for a while, if we keep enjoying life and decide to buy in five years, who knows how high they're going to be!" and you get more people buying homes -- younger and younger -- at the top of the credit bubble.

The government has misled, even if only indirectly, millions of people into levels of debt that they can't possibly service and even if they can, a lifetime of debt repayments. A house is not an investment. It's a consumer good that you have to upkeep. It's also a liability that you have to deal with if you lose your job. Fair enough, there may be non-economic reasons for home ownership, but if you're doing it because "house prices always go up", then it's time to consider renting instead. The government never offers you money to do intelligent things with it. As Ronald Reagan once said, the nine words you should be most afraid of in this world are "I'm from the government and I'm here to help".

Good riddance to the first home buyers grant; it was nothing more than a subsidy to the housing industry (and those related to it, building etc) at the expense of the taxpayer. It never helped the economy, it merely diverted resources from more productive means. In fact, as I mentioned earlier, I would go the other way and say it has (together with artificially low rates set by the RBA) probably resulted in many, many young Australians having a debt burden that's going to weigh them down for years to come, destroying families and lives in its wake.

There is a growing consensus amongst economists and pundits alike that stimulus packages, job protection and other means of “insulating” the economy from “market failure” are in the interests of all Australians. The argument goes like this: the private sector has dropped off, it is afraid to invest, to spend, and it’s only appropriate that government picks up the slack, or the “idle capacity”, until the situation improves. This is the foundation of Keynesianism, and ignores the need to destroy unneeded capacity and the capital deployed there, as quickly as possible, as the surest means of sustainable recovery. The cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. All of this can be brought about automatically only if the competitive forces of the market are given free play.

The Keynesians are correct in one sense: the current stimulus and budget will have short-term benefits in terms of measured GDP. But then again, so do natural disasters and I don’t think anyone would be advocating the need for another round of Victorian bush fires or Queensland flooding.

Economists and politicians will relentlessly cite carefully selected and “adjusted” data to stress the successes of their programs, but one thing they neglect to tell us is that the results will only be temporary. Not only that, but they come with an immeasurable (debt and malinvestment) cost to the economy in the long run. But in the words of the master himself, “in the long run we’re all dead”, so who cares? It is the political dream: being able to boost the statistics in the short term, to justify increases in government involvement, with complete disregard to what will happen in five, ten, twenty years down the road. This is the attractiveness of Keynes: whether the theory itself is correct or not is irrelevant!

Whilst socialist policies currently being implemented may cause GDP to rise (or fall less) in the short term, it is not the same thing as causing an increase in prosperity or wealth. GDP, a flawed (government) statisticians' tool, builds in a bias towards disguising the costs of government and over-counting its benefits. Government spending doesn’t “spur” economic growth; it doesn’t “fill the void” left by the private sector; it only diverts capital resources from more desirable to less desirable uses. This is yet another fallacy of Keynesianism - they chronically confuse "income" in terms of paper money with real income in goods and services. Of course it is possible to increase paper money income to any amount by debasing the currency. But real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more. This is why we can't get too carried away or be too impressed by the economists and politicians citing the increase in dollar incomes, in dollar GDP, to show that we've never had it so good!

As pointed out in the Wall Street Journal "Review and Outlook" of March 6, 2009, “Recessions don't last forever, but bad policies can prolong the pain.”

Recovery and growth are impeded, not stimulated, by the threat of less competitive labour markets, regulatory uncertainty, the threat of increased protectionism, certain higher tax burdens in the future, especially on capital income, and the use of the tax system explicitly for purposes of redistribution of income.

As Adam Smith put it many years ago in a 1755 paper,

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

The cost in lost freedom as a result of current (socialist) government policies may be immeasurable. The cost to our economy will be enormous. We owe future generations better. We owe them a free and prosperous country. History and theory show us the way to achieve both, and it’s not through the fallacies of Keynes.

So, are we all Keynesians now?

Thankfully, not yet.

THE amount of tax paid by the average Australian has jumped by up to 40 per cent in just five years, according to new statistics -- Source.

Who would have guessed, taxes are increasing already! Just wait until the bill arrives for the Rudd National Broadband Network, stimulus packages and various other 'nation building' projects. Perhaps a return to the 1950s of 75% tax is on the cards in the near future?

Wow, would you look at the size of government soar!

Could we be on the way back up? I think so thanks to all of that Ruddness we're lucky enough to be getting! Stay tuned for an upcoming post on economic growth and government size.

The original post on 01/04/2009 was revised slightly and reposted on 09/04/2009

Mr. Rudd, along with his counterparts in the UK and US, are using this apparent “failure” of capitalism to further their socialist and power goals: a "New World" with the ultimate goal of increasing the size, power and control of the state. They are seeking to extend and expand the sphere of their operations, their interference in everyday life, leaving little room for anything to happen of its own accord, under the manifesto that Government Knows Better [1].

"Government debt paves the way for government control. Consider: Debt leads to taxation to pay interest. Taxation leads to more economic control over the people by the same government that ran up the debt in the first place. It's hardly extreme to conclude that escalating debt is part of a plan, such as a plan to establish a new world order." -- John F. McManus

The state has a poor investment track record, and its attempts to soften today's 'financial crisis' impact merely push malinvestment into the future, adding to today's debt burden in the process. Government's focus instead should be on the creative destruction of capital resident in over-capacity sectors of the economy.

The “false god of unrestrained financial markets” basis on which their respective propaganda machines are endeavouring to convince people to accept further intervention is unfounded in fact. We have not had “unfettered free markets” as they will have us believe. To see just how far we have strayed from a market-economy, or capitalism, one simply has to look at Karl Marx’s Communist Manifesto, which reveals their intentions [italics added].

1. Abolition of property in land and application of all rents of land to public purposes. – We currently have Eminent Domain laws in Australia, allowing government to seize land at will. This manifesto is not completely fulfilled but it’s hardly ‘free market’ – where individual property rights are of the utmost importance and there is no 'public' land.

2. A heavy progressive or graduated income tax. – Our tax system is one of the highest in the world. Not only that but there are countless ‘hidden’ taxes. A recent report by the Regulation Task Force estimated that the regulatory burden is effectively a 25% hidden tax-slug on all Australians [2].

3. Abolition of all rights of inheritance – While there is no direct inheritance tax in Australia, recipients must pay full capital gains tax on income and assets acquired from deceased estates.

4. Confiscation of the property of all emigrants and rebels – Not yet at least, albeit "hoon" laws come close.

5. Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly – We have been operating with a central banking cartel, the Reserve Bank of Australia, since 1911 (formerly known as the Commonwealth Bank until 1959). It alone is allowed to produce legal tender, and central banks are the cause of many of the world's current woes.

6. Centralization of the means of communication and transport in the hands of the state – The Rudd government is rolling out a National Broadband Network and a National Internet Filter. Much of our road network along with the majority of our public transport is either state-owned or extremely regulated (e.g. taxis).

7. Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan – The Government is seizing control of various industries through "bail outs” and other forms of market manipulation. Even before the crisis they effectively controlled production in many industries through subsidies and tariffs.

8. Equal obligation of all to work. Establishment of industrial armies, especially for agriculture – Not yet, but how far away can it be?

9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country – Not yet.

10. Free education for all children in public schools. Abolition of children's factory labor in its present form. Combination of education with industrial production, etc – Our ‘private’ schools receive the same amount of state funding as our public schools. True private education doesn’t exist.

Australia scores seven out of a possible ten of Marx’s Communist Manifesto. If this is not proof enough that we have not had “unfettered free markets”, then let us look at the method used to justify or support policies without valid economic argument. Manipulation in the form of moralism is used to refute logic; against theory is emotional prejudice; and against argument is reference to ‘the will’ of the state.

The crisis we are suffering is not a failure of free markets. It is the failure of interventionism and of the state. Anti-capitalist policies led to this crisis: central banks around the world manipulating interest rates and money supply; the regulatory burden (which has been poorly drafted by lawmakers and poorly executed by inefficient watchdogs); and  excessive levels of taxation (and the distortions they cause to the real economy); to name a few.

The so called ‘greedy capitalist’ leaders of big enterprise, contrary to the free market, no longer cared whether or not they satisfied the needs of the consumer in the best and least expensive way. They worried only about keeping up “relations” with state officials, protecting their interests with regard to tariff rates, wage negotiations before arbitration boards, and in governing bodies of cartels. In return, they contributed to non-busi­ness concerns – election funds, public welfare institutions, lobbysts and the like. This is not capitalism. This is not the “unfettered free market” at work.

If the state continues to use price, wage, interest rate and other controls to thwart the market and stop it from acting as a regulator of production then crisis is inevitable. Our current crisis as we degear from a leverage burden some 20 times global GDP has little to do with a failure of the free market, and more to do with the heavy hand of government intervention.

"A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings." - Ludwig von Mises, Human Action.

Only time will tell. It's going to be interesting period in history to say the least.

---

That's right folks, the government estimates that the new National Broadband Network (NBN) they're going to fly solo with will cost working-aged Australians (15-64) approximately $2,935 each. That's assuming the project is completed -- our government has a bad habit of either quitting mid-way (i.e. after an election) or having the project substantially increase in both duration and cost.

• Government rejects all five private sector bidders for the national broadband network, saying they do not provide value for money.
• National broadband "fibre-to-the-home" network now to be built over eight years by a company established by the Government.
• Network will give 90 per cent of homes, schools and businesses a connection of 100 megabits a second, 100 times faster than now.
• Those remaining will get a service of 12 megabits a second through wireless technologies.
• Will support 25,000 jobs a year for each year of construction, with 37 000 jobs in the peak year of construction.
• PM Kevin Rudd says infrastructure project is the biggest ever undertaken by an Australian government.
• Majority share of the company will be held by the Government, with private sector investment capped at 49 per cent.
• Up to $43 billion will be invested by the company in the project, including the $4.7 billion already allocated by the Government.
• Once the project has been up and running for five years, the Government will begin selling its stake in the company. -- Source
  

The government, in their wisdom, decided that the private sector couldn't provide 'value for money'. I suppose nothing would provide government with value though, those pesky private sector companies actually have to think about their customers and shareholders, while the government doesn't pay for anything themselves -- they simply take it from the taxpayers! How is the government creating these jobs? Everyone knows that the government doesn't produce anything, don't they? These 'jobs' are simply jobs that the private sector can no longer create (productive jobs I might add). They're jobs for something the people, individuals, aren't demanding: not only that, but they're jobs plus a layer of bureaucracy, in other words wasted capital.

All day the government has been stressing this is 'stimulus'; yet it's nothing more than fulfilling #6 on the Community Manifesto! We're moving further and further towards a socialist state and the noose around our necks has just been tightened again. If they really wanted Australian's to have fair internet, they would remove all of their regulations and controls on the industry; they would allow the market to function. But we all know Rudd doesn't have the people's interests at hand.

Then they have the galls to say they're going to start selling their stake -- that will surely end well! Why don't the government just skip this middle step (the NBN) and allow private competition with previous government monopolies (Tel$tra) to be free and unhampered!? Privatising this network, when the time comes, is hardly fair: the government has taken from taxpayers around the country to fund this project and is going to ask us to pay them, again, for the privilege of privatisation? Why is the government entitled to the revenue from this taxpayer funded project? It's ridiculous.

I'm not looking forward to being an Australian taxpayer when we eventually have to pay for all of this Ruddish. Expect either inflation (courtesy of the banking monopoly the government has: the RBA) or massive tax hikes or both in the future -- perhaps a return to the 1950s of 75% income tax is on the cards?

Is anyone surprised? Perth taxi drivers decided to protest a minor weakening of their state-created and enforced monopoly of the roads,

About 40 taxi drivers have a held a stop work meeting at Perth Airport to protest against the State Government's decision to extend a trial of peak period taxis.

The previous government instigated the year-long trial which allowed more cabs on the road at peak hour on week day mornings.

Last week the Government agreed to extend the trial for another year, but reduce the number of peak period plates allowed on the road each day by half.

A Spokesman for the Taxi Industry Forum, Stephen Satchell, says peak period plates do work, but they need to be specific to weekends and areas like Northbridge and Fremantle.

"Tourism is down, business is down, our economy is going down, and our Minister has put more taxis on," he said.

"It doesn't make sense." -- Source

You're right Mr. Satchell, it doesn't make sense. There is no reason at all why the current taxi drivers should have a monopoly on the Perth market, one that's protected by threat of force (by that I mean government guns/prison). All it does is distort the market with the end result being poor service for the consumer. Anyone who's had the displeasure of dealing with the Perth taxi monopoly on a Friday or Saturday night can sympathise with this argument.

We need to deregulate the industry, abolish 'taxi plates' and allow any entrepreneur who wants to compete for fares with the big boys his right to do so. These 'peak period plates' are the perfect example of government creating a 'solution' (I wonder how many taxpayer dollars were spent devising and now regulating them) to a government created 'problem'. It's perverse.

If you give people money to do something, of course their going to do it. From the ABC:

The Federal Government says strong uptake of its solar hot water rebate is proof that its economic stimulus package is working.

More than 6,000 Australians have applied for the $1,600 rebate since it was introduced last month.

The Environment Minister Peter Garrett says it is good news for jobs and small businesses.

"This marks a really, really positive day for Australian industry, for the solar hot water industry, for the retailers, for the installers, for the plumbers, for the tradies, this is going to drive economic activity through the sector," he said.

"It 's environmentally friendly, it stimulates the economy and it's stimulating local jobs and local manufacturing. That's the critical thing.

"So we have positive proof that the Government's decision in the economic stimulus package to provide a non-means tested rebate for solar hot water systems is paying us immediate dividends."

Absolutely. Everyone who has applied for or installed a solar panel is benefiting immensely, along with the solar industry and all of their employees. But this was not the way to go about doing it. Mr. Garrett is missing the bigger picture: who did you steal from to pay for these rebates? What industry is now suffering or was never created because you wanted to subsidise the solar energy industry? How about you stop subsidising electricity (excuse the wikipedia reference but I'm feeling lazy: the Australian government pays $9-10bn a year keeping the electricity price down) and then maybe people would actually choose for themselves where to get their electricity?

Stop complaining about people using too much power causing outages or killing our planet. If you allow the market to determine how much individuals are willing to pay for electricity (hint: scrap the subsidies/rebates etc), in other words let the price system work, we wouldn't have power outages. The electricity companies in Australia are just one of many government institutions (water, transport are others) that actually advertise telling people not to use their product! What kind of self-respecting business goes around telling people not to buy their product?!

This is just another state band-aid on a state-caused problem at the taxpayers' expense. Wake up and smell the bacon Mr. Garrett, quit wasting our money.

The Motor Traders Association is suggesting that we destroy all of our old vehicles to "stimulate" the industry,

The Motor Traders Association of NSW has written to Treasurer Wayne Swan explaining the benefits of the initiative, while the Motor Traders Association of Australia (MTAA) has commissioned think tank Access Economics to produce economic modelling on the costs.

The MTA NSW has asked the Government to pay up to $3000 to crush cars more than 10 years old.

Once the car was destroyed the owner would get a certificate to be presented at a car dealership to receive $3000 off a new car.

That sounds logical, right? Wrong. They're confusing need with demand. Just because the government and interest groups think we all need to replace these old vechicles, it doesn't me we're entitled to them. We have to produce something, to accumulate purchasing power before we can demand ! However, I do agree with the comment below that this will help the auto industry, in the short term about this there is no doubt,

"We need to help the industry, including 103,000 small businesses that make a living from the car industry and 318,000 workers."

While this "stimulus" may create more work for the car industry and small businesses supported by it, it's actually just a diversion of demand to this industry from others. While these guys are out building cars that no one is actually demanding , other products, the ones people do actually demand, are never created. If the arguments put forth above are really true, then why doesn't the government immediately wreck our old plants, planes, houses, whatever and recycle (or just junk) the old parts? How do they know when something needs to be replaced? Quite simply, they don't.

There exists an optimum level of replacement, a period when the benefits derived from replacing an old piece of machinery overtake the benefits of keeping it. This isn't for the government to decide, it's for the individual. They alone should decide if the vehicle has no value to them anymore and needs to be replaced.

Even if this "stimulus" does increase GDP in monetary terms (i.e. raising prices or 'national income'), it will not be creating any additional wealth or production in our economy: it will destroy it. It's the same reason why most natural disasters result in an increase in GDP, because GDP only measures output, not real wealth.

The sad thing is, this policy is just stupid enough to appeal to the economic illiterates that run this country.

The Reserve Bank of Australia (RBA), a group of government-sponsored bankers given the task of keeping the banking, finance and currency cartel going on behalf of various interest groups, decided to leave rates on hold at 3.25pc during their last meeting. Their decision was received with mixed results: the politicians were slapping themselves on the back, citing their 'stimulus packages' as having cushioned the economy while the homeowners and other debtors were moderately critical.

The minutes of that meeting which were released today have revealed that they believe "...the domestic financial system remained strong and the monetary policy transmission process was working to deliver large reductions in interest rates to end borrowers, particularly households."

Well that's true enough. The artificial reduction of interest rates below what the market rate would be will distort the capital structure of the economy and encourage malinvestment in areas such as housing. Why shouldn't people be able to buy houses that they can't afford, right?

"Early indications were that the monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect, but the size of this remained unclear and it would take some time for the full impact to come through."

"The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings."

The real reason behind the RBA's decision to leave rates unchanged is the dreaded "liquidity trap" that they all fear. The theory behind this stems back to Keynes, where he said that if the rate of interest falls to a level where people prefer to hold cash rather than debt (due to the low level of interest), then central banks have lost "...effective control over the interest rate". This view is supported by central bankers around the world, including the RBA. Here's a good argument outlining the flaws in this theory.

Interest rates need to rise, not fall. Monetary and Fiscal policy will only cause long-term misery. Eventually -- I don't know when -- the stop-go inflationary policy of the central banks will have to end. Each time we have a recession (a necessary restructuring process) and it's 'cured' by said policy, the capital structure of the economy is further distorted. The Austrian's tried to let their government sort out their woes in the 20s and 30s with spectacular results,

“Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin.” -- Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19.

We can't turn stones into bread as Keynes suggested. Printing money doesn't create any wealth. If we continue down this path, unrestrained government spending will result in the "eating of the seed corn", or capital consumption, as Mises noted after witnessing the Austrian demise. There's a point at which the interventionist welfare state will have exhausted "the reserve fund" of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the state.

The government today announced it's going to slash the number of skilled migrants allowed into Australia to "save local jobs",

"We don't want people coming in who are going to compete with Australians for limited jobs."

Senator Evans says he sees little chance of a change to policy next year.

"What we'll look to do is run a smaller program and keep the capacity to make sure we can bring in any labour we might need as the year develops," he said.

Surely the opposition would object to this, given that the economics behind it are completely false? Nope, not our Malcolm,

Opposition Leader Malcolm Turnbull says the Government should act to cut further if unemployment worsens.

"We've been calling for the Government to cut its immigration intake for months now in light of the worsening economic situation so this is a welcome move," he said.

"It's good that they've finally recognised the gravity to the threats to jobs in Australia and acted to reduce the immigration intake."

...and of course the union has chipped in with their thoughts as well,

The ACTU says it is prudent to make the cuts when unemployment is on the rise.

If the goal of both sides of the political fence is to impoverish us as a nation, then a job well done to all involved! This is just further evidence that neither side has a clue about what's going on and the whole political system in Australia is a sham: left, right - the only difference is who they steal from and who they 'redistribute' to.

Rudd is planning a "Robin Hood" budget for later this year, stealing from the wealthy (savers) to pay for the poor (debtors). I always thought that Robin Hood stole from the state (the kings, royals and their friends) and gave back to the people? This is equivilant to the king stealing from his people then handing (some of) them back a small amount and asking them to say thanks! It's just another step towards a larger government, creating disincentives to work and save along with wealth destruction and moving us ever closer to serfdom. How much longer can this nanny state continue? Not only have they already horse drawn and quartered capitalism in this crisis (capitalism was NOT the cause!) but it's almost as if they're deliberatly getting every policy response wrong.

Our leaders wouldn't have anything to gain from socialism, would they? Great.

Nothing depresses me more than listening to Julia Gillard, I don't think anything she says makes sense. From the ABC,

"The political party in the Australian Parliament that is spitting in the face of the Australian people and refusing to recognise that mandate is the Liberal Party, with Mr Turnbull dithering on one side, looking over his shoulder to see what Mr Costello is going to say to him next."

What Julia doesn't understand is that their new IR laws will destroy jobs. Unfortunately she can't see beyond the few short-term jobs it will "save" and definitely can't see thousands of jobs that will never be created because of these "reforms". Of course the unions are in full support,

Ms Burrow says a national union poll shows workers want new laws to protect them during the global financial crisis.

"People know that the rights and protections that are in the government's IR bills are more important than ever in an economic downturn," she said.

"Unfair dismissal protection is absolutely central to people's security, they must be put in place."

Any policy that increases the cost of labour above the market rate (when I say market rate, I mean the fair rate) will increase unemployment and lower the standard of living of the nation as a whole. The government has made it nearly impossible to tell if someone is 'employed' or not, the ABS definition is a joke:

"Employed persons comprise all those civilians aged 15 years and over who worked for one hour or more in the reference week or who had a job from which they were absent. Work is taken to mean work for one hour or more during the reference week, undertaken for pay, profit, commission or payment in kind, in a job, business or farm, or without pay in a family business or farm."

Needless to say, even if you aren't 'employed' according to the above definition (one hour a week? are they kidding?), you have to fill several criteria before you're considered 'unemployed'. If you saved for a rainy day and never have to step foot in a Centrelink office, chances are you're not unemployed by their definition.