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?

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.

[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.

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).

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!

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.

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.

UPDATE: The stimulus passed, bugger! Commentary to come tomorrow.

Senator Xenophon joined forces with Coalition senators to defeat the $42b 'stimulus' package, proving once again that politics can save us from...politics! Nick Xenophon's desire to benefit his own interest groups at the expense of the economy has, for now, saved the economy from this horrible 'stimulus' package.

"What happened in the Senate this afternoon was that the Government voted for jobs and the Liberal and National parties voted against jobs," Mr Swan said.

"The actions of the Liberal and National parties in the Senate and their actions in the House over the past week have effectively sabotaged the Australian economy." -- Source

Mr. Swan clearly has no idea how economics actually works; instead he, along with fellow economic illiterates Rudd and Gillard, continue to attack opposition to their 'stimulus' on the grounds of emotion rather than economics. They are joined by the Business Council of Australia, one of the many interest groups they cater to,

The chief executive of the Business Council of Australia, Katie Lahey, said: "The critical thing right now is to maintain and underpin confidence in the Australian economy, and we think the package the Government has put forward will be important in doing that." -- ibid

If this stimulus passes, it may give the impression that jobs are being saved -- but as Bastiat said, it's about looking beyond the immediate effects to see the damage this thing will cause elsewhere. Lets say it saves 500,000 construction jobs. Great, right? What you don't see are the 1,000,000 jobs that were never created thanks to this package distorting the nature of the economy. It will prop up areas of the economy that are full of, you guessed it, malinvestment -- all of which was caused by the same people who claim to have the solution! It will drive wealth from productive areas of the economy and subsidise people who shouldn't have been in their respective industry in the first place. The result of this wealth destruction is that as a nation we're all poorer.

My message to Australian politicians is this: Liberals and Independents, if you really care about jobs and the welfare of the economy, block this 'stimulus' package with everything you've got. I don't care how you do it or what your motives are (personal interest groups). Likewise, to the Labor party, don't back down and give these Independents or Liberals what they want (money for their interest groups)! We need politics to fight the politicians so that hopefully nothing gets done (i.e. they can't cause more damage) and then maybe, somehow, we can luck our way out of this mess.