ERA MEDIA RELEASE Wednesday, 11 August, 2010
Humbug from politicians on government spending
It is clear that Australia led the world in handling the global financial crisis by acting fast with stimulus spending, to help save big banks from insolvency and to preserve and generate jobs. Australia also had a legacy of negligible government debt.
But both stimulus spending and the abolition of government debt have come at a price. Stimulus spending needs to be repaid, primarily from taxation. And the low government debt was achieved by withholding crucial funds from health, education, public transport, housing, infrastructure, disability programs and the transition to renewable energy use.
ERA deplores the moral vacuum of the government’s and the opposition’s election platforms, which squander funds for short-term, hip-pocket benefits (pork barrelling) in place of long-term investments and greater funding for the environmental and social crises which now face our nation. In particular we need to invest more in renewable, clean energy production as well as greatly increased funding for essential public services, especially for the poorest Australians.
Last week we learned that Rio Tinto made $6 billion profit in a half year – more than twice the already exorbitant profits made by the big banks. How much of the excess profit obtained by Rio Tinto, banks and other wealthy corporations will be going to the federal government to put in place long-term developments which will ensure that we leave a sustainable social, environmental and economic future for our children and grand-children? Most economists agree that profits obtained from commonwealth land which is leased to mining companies for the purpose of extracting mineral resources should be adequately taxed for the benefit of all.
Governments should never borrow money from overseas for essential services, capital works or infrastructure development. Where affordable Australian sources of capital are not available, the government should use its constitutional right and ability to spend money directly into the economy on infrastructure projects, to be paid back either interest-free or at low rates of interest. There are workable solutions to the looming crises we face. However they have not been developed thus far because few politicians have had the insight or courage to advocate them.
In 1993, Professor John Hotson from the University of Waterloo in Canada succinctly summed up the situation at ERA’s National Economic Conference when he said “Could anything be more insane than for the human race to die out because we couldn’t afford to save ourselves?”
ERA MEDIA RELEASE Monday, 16 August, 2010
Mining profits should be adequately taxed
The federal election campaign has highlighted the issue of the extent to which income not tied to productivity should be taxed in the national interest.
Most economists in Australia agree that where land owned by the Commonwealth is leased out to mining companies for the purposes of extracting mineral resources, the profits obtained by those companies should be adequately taxed. The resources tax should be geared to the magnitude of the profit obtained in excess of that required for a modest but acceptable return to investors and shareholders. With particular attention to circumstances where a substantial portion of that profit flows overseas.
According to SMH economics editor Ross Gittins (Aug 14, 2010) this super profits tax is
“.. necessary to give Australians a fairer share of the profits from mining the now hugely more valuable coal and iron ore deposits the community owns. Exploitation of these resources is subject to royalty charges levied by state governments, but these payments have failed to keep up with the resources' higher market value ”.
Unfortunately this issue has been allowed to become a political football. Policies directed at adequately taxing the immense profits enjoyed by some mining companies in order to fund a reduction in company tax more generally, and other investments such as superannuation benefits for all, have been described in some sections of the media and the body politic as "a great big new tax". But this description is wholly fallacious and misleading.
Gittins also said “ It's not hard to see why miners would object to paying more tax, but the tax was recommended by the Henry tax review and it is hard to see why these eminent economists would advocate a tax that could damage the economy “.
The reality is that implementation of the progressive tax reforms advocated by the Henry tax review will merely provide a redistribution of the tax burden within the business community, to its ultimate advantage as well as being in the long-term national interest.
It is also regrettable that some mining companies have seen fit to spend a large amount of money on advertising their opposition to the proposed tax reforms during a federal election campaign, especially in a manner which can be construed as being partisan.
ERA MEDIA RELEASE Thursday 18 November, 2010
Australia’s debt bubble is yet to burst
University of Western Sydney’s Prof Steve Keen has compared debt to GDP ratios for various components of Australia's private and public debt (public lecture in Adelaide, 24 September 2010).
Specifically, he showed that government debt has grown to only around 3% of GDP, while personal (mostly credit card) debt is now around 10%, business (largely corporate) debt is around 60%, and mortgage debt has escalated to a whopping 80 +%.
This comparison brings into stark relief the difference between government debt and all other forms of debt. And it puts into proper context the recent stimulus spending of the Rudd/Gillard governments and the associated increase in public debt. Considering that the increase in public debt has served to partially offset the reduction in corporate debt (i.e., corporate deleveraging) in the wake of the GFC, in order to ameliorate any possible increase in unemployment, one is forced to conclude that some of the recent criticisms of the magnitude of Australia's stimulus spending are at best misguided.
The elephant in the living room is, of course, mortgage debt. Australia's housing bubble is yet to burst, although there are signs that a significant correction in housing prices (more specifically, domestic land prices) cannot be far away.
Dr Steve Keen’s presentation is accessible from the ERA website www.era.org.au
ERA MEDIA RELEASE Wednesday, 10 November, 2010
A price on carbon should be revenue-neutral
Whether or not it is true that the burning of fossil fuels is driving climate change, there are other good reasons for constraining the use of carbon-based fuels. For example, exhausts from conventional internal combustion engines are contributing to human health problems. And a price on the use of carbon will discourage the use of petroleum and other fossil fuels which are rapidly depleting. What is left of these commodities will be required by future generations for purposes other than power generation or running automobiles.
Some have argued that a cap-auction-trade system with offsets cannot deliver the needed emissions reductions, and is more open to corruption than other ways of placing a price on carbon use. If this is correct, then a tax on carbon fuels becomes the most economically efficient means to convey crucial price signals and spur an environment of carbon-reducing investment. And it must be phased in so that businesses and households have time to adapt.
Ideally, a price on carbon will be revenue-neutral: in the case of a carbon tax government can soften the impacts of added costs by either paying back the tax revenues (“dividends”) or by reducing other taxes (“tax-shifting”).
We believe any imposition of a carbon tax must be offset by a commensurate reduction in other taxes currently imposed on energy use. Less polluting forms of energy obtained from sustainable sources will be free from such tax.
A measure as simple as this will prevent the price of power, petrol, and everything else from increasing under a carbon tax.
ERA MEDIA RELEASE Wednesday, 12 January, 2011
Competition is not a panacea in banking
In his submission to the current Banking Inquiry, Assoc Prof Steve Keen said:
“ Banks have an innate desire to issue more debt than is good for the economy as a whole ... This caused an apparent boom prior to the financial crisis, while the slowdown in the rate of growth of debt was the main cause of the crisis itself ... Increasing (banking) competition once again, without ensuring that lending is restrained relative to incomes, and that it is directed away from households and speculation and towards business and investment, would only exacerbate problems caused by earlier introductions of unbridled competition in the 1980s and 1990s”
The focus of policy on banking needs to shift from microeconomic issues - like the degree of competitiveness - to the issue of the impact of debt on the economy. In particular, there should be an effective means to control banks’ tendency to create too much debt. Increased competition will only amplify this tendency.
Lending for property should be based on the rental income (actual or imputed) of the property being purchased. The debt that can be secured against a property should be limited to (at most) ten times its annual rental income. The object of this reform being to make leveraged speculation on asset prices much less likely than it is today.
The next financial crisis will only be avoided if leveraged asset speculation is curtailed.
ERA MEDIA RELEASE Wednesday, 8 June, 2011
The madness of seeking a budget surplus at any cost
An investigation of Australian federal budgets during the last 60 years reveals that budget deficits are the norm and that budget surpluses are the exception. Only during the neoliberal years 1996 through to 2007 was it fashionable to maintain budget surpluses, and these surpluses were sustained by allowing an unprecedented build-up of private debt. The global financial crisis (GFC), beginning in 2008, exposed Australian banks to cost pressures to which they were unaccustomed, and obliged the federal government to engage in a significant level of deficit spending in an attempt to stimulate the Australian economy and prevent it from sliding into recession - which it achieved successfully and ahead of the rest of the world.
There seems to be a widespread belief today that the impact of the GFC has passed and that Australia is now on the pathway of recovery and sustained growth. Both the federal government and opposition believe this story, which flies in the face of evidence that the overall economy is contracting (despite some buoyancy within the mining sector) and warnings from some economists that the GFC is far from over and that a global double-dip recession is likely. According to Professor Bill Mitchell, an internationally recognised Australian researcher in the field of modern monetary dynamics,
" when budget deficits rise significantly, as they have in recent years, we know that this is because private spending is so weak and output growth is weak or contracting"
Thus in circumstances where aggregate demand is falling, exports are declining, house prices are falling, and under-employment, homelessness and poverty in certain sectors is increasing, it is alarming to see political parties competing with each other to push the budget into surplus as quickly as possible. Both seem obssessed with the mantra surplus good, deficit bad.
However the existence of a surplus simply means that citizens have paid more tax than was needed. It also implies austerity budgeting - cuts to vital social services and infrastructure spending, which can only serve to reduce aggregate demand further - adding to under-employment, poverty and homelessness.
ERA MEDIA RELEASE Thursday, 12 April, 2012
Australia needs banking reform
Much of the global financial turmoil experienced in the last few years may be traced to excessive levels of private debt associated with errors in the modus operandi of commercial banking institutions, which are permitted to create almost all of our money supply as debt in the form of bank credit money. Current regulations allow each bank to create a volume of money some 10 to 20 times the magnitude of its capital.
This system puts enormous leverage in the hands of large banks, which is often misused. Thus far too much lending has gone into supporting purely speculative activity, especially in the financial markets. That distorts the markets, inflates asset prices, increases the fragility of the banking system, encourages financial fraud, and serves no useful purpose in the real economy.
On September 21, 2011, Congressman Dennis Kucinich introduced a Bill in the U.S. Congress to radically reform the operation of the U.S. financial system, some of its highlights being:
1. The Federal Reserve will be replaced by a Monetary Authority created under the Secretary of Treasury, with quasi independence.
2. All new money will be created by the Monetary Authority and spent into circulation on socially useful projects.
3. The supply of money in circulation will not be allowed to become inflationary or deflationary in and of itself, but will be sufficient to allow goods and services
to move freely in trade in a balanced manner.
4. All deposits in depository institutions will be treated as transaction money and will earn no interest.
5. Lending will entail only the transfer of deposits, and will have an interest rate cap.
It is time for Australian parliamentarians to follow the lead of Congressman Kucinich, and introduce a banking reform bill tailored to Australian requirements to the Australian Parliament. Such a bill also should enforce the separation of commercial banking from investment banking, and should undertake splitting up financial institutions considered "too big to be allowed to fail" into more manageable parts.
Whether immediately successful or not, the existence of such a bill would be timely and would oblige elected representatives to give the issue of banking reform serious consideration, given widespread collapse of bubbles financed by excessive levels of private debt and as well as ongoing corporate and individual deleveraging. As global economies continue to worsen, governments are likely to come under pressure to seek out alternative policies to the failed prescriptions pursued by the economic mainstream.
ERA MEDIA RELEASE Monday, 30 April, 2012
A budget surplus at this time will destroy jobs
As the Australian economy is now contracting, it is clear that the promise by the federal government to achieve a budget surplus is a foolish promise which should never have been made. The budget deficit should never be a target for government decision making. It makes no sense to say that we need to “balance the budget” without recourse to more significant economic targets – such as full employment and price stability.
The most obvious reason is that the government doesn’t control the budget outcome. The budget balance is the difference between total revenue and total outlays. So if total revenue is greater than outlays, the budget is in surplus and vice versa. It is a simple matter of accounting. However, we cannot conclude that changes in the fiscal outcome reflect discretionary policy changes. And the reason for this uncertainty is that there are automatic stabilisers operating -- fiscal instruments which influence the rate of growth and help counter swings in the economic cycle.
Prof Bill Mitchell (University of Newcastle) explains it as follows:
Just because the budget goes into deficit doesn’t allow us to conclude that the Government has suddenly become of an expansionary mind. In other words, the presence of automatic stabilisers make it hard to discern whether the fiscal policy stance (chosen by the government) is contractionary or expansionary at any point in time. Thus, governments that pursue fiscal rules like a balanced budget ... are actually denying the operation of the automatic stabilisers. Source: http://bilbo.economicoutlook.net/blog/?p=18937#more-18937)
Moreover, with the political climate as it is, if parliament does try to do something to “solve” the supposed problem of a budget deficit, it is likely that it will err on the side of too much contraction and thus not only undermine economic development and job creation but also thwart their desire to have smaller deficit to GDP ratios. Far better to pursue the real issues and let the budget deficit be whatever it has to be to support the maintenance of a prosperous real economy where everyone who wants a job (and hours of work) can be satisfied and the structural adjustments that will be required as the economy move towards lower carbon usage can be achieved. In pursuing appropriate outcomes for employment growth and infrastructure development, in a few years, the politicians will also be able to “enjoy” lower deficit to GDP ratios.
We urge politicians to curtail their debate about deficit reduction and instead shift the policy focus to infrastructure investment, climate change, urban development etc. With appropriate public outlays, the increased development and employment would see the budget outcome take care of itself.
ERA MEDIA RELEASE Wednesday, 4 July, 2012
Bring back community and public banking
Today's massive too-big-to-fail private banking corporations have demonstrated that they have little or no interest in community lending, but rather they are doing their own proprietary trading - trading for their own accounts - which generally means speculating against local interests. They engage in high-frequency program trading that creams profits off the top-of-stock market trades; in speculation in commodities that drives up commodity prices; leveraged buyouts with borrowed money that can result in mass layoffs and factory closures; and investment in foreign companies that compete against our local companies. Moreover they have used their allowed leverage to provide funds for Ponzi scheme manipulators and those who speculate on rising asset prices, leading to asset bubbles. The social irresponsibility of large banks also is exemplified by an item in this week's news concerning a major British bank (Barclays Bak) which was fined almost half a billion dollars for engaging in four years of market manipulation that has hit smaller banks and mortgagees around the world.
There is another way to do banking; rather than feeding off the community, banking can feed the community and the local economy. Australia used to have public banks within every state, acting in a complementary role to private banks and dedicated to community lending, in addition to a national public bank (The Commonwealth Bank, before it was privatised by the Hawke-Keating government). The branches of these banks all provided home mortgages, personal loans and business loans to their local communities, and their competition with private banks helped to keep the latter prudent and honest. Unfortunately they have all but disappeared from the scene during the past three decades. However a community-based banking alternative to private commercial banks - the credit unions and building societies - has largely survived, notwithstanding that a number of building societies have transformed into commercial banks. Credit unions are non-profit, community-minded organisations with fewer fees and less fine print than the big risk-taking banks, and their patrons are not just customers but owners, sharing partnership in a cooperative business. Unfortunately their share of the banking market remains but a tiny fraction of the total.
The federal Treasurer's exhortations to the public to move their money between banking institutions, in order to keep them honest and competitive, has made very little difference to the situation. What might make a louder statement would be for local and state governments to divest their funds from the largest banks, but a major problem in doing so is finding alternative banks large enough to take the deposits. An obvious solution is for states (and also perhaps large cities) to re-establish their own banks, capitalised with their own rainy day funds and funded with their own revenues as a deposit base. The profits obtained by state-run commercial banks could be used by state governments to assist in supporting local business activity, as well as infrastructure and other socially useful projects. The U.S. state bank of North Dakota has an outstanding record of success in this respect, and its operations have largely contributed to that state possessing the best set of economic statistics within North America. State banks, together with cooperative banking institutions, can provide a meaningful and effective alternative to big private bank financing. There is a growing global trend to community-oriented and cooperative banking, and we believe Australia should be part of that movement.
ERA MEDIA RELEASE Tuesday, 23 October, 2012
Debts which cannot be repaid will not be repaid
The current global economic crisis is largely due to the pile up of debt to the banking system. Much of this debt should never have been created, since all it did was fund disguised Ponzi Schemes that inflated asset values without adding to society’s productivity. Here the irresponsibility and moral hazard clearly lays with the lenders rather than the borrowers.
The real question is not whether this debt should or should not be repaid. But rather, what is the most appropriate mechanism for not repaying it? The standard means of reducing debt - personal and corporate bankruptcies for some, slow repayment of debt in depressed economic conditions for others - would have us mired in deleveraging for one and a half decades, given its current rate.
The economy will tend to develop more slowly than is needed to absorb new entrants into the workforce, innovation will slow down, and justified political unrest will rise - with potentially unjustified social consequences. We don’t need to speculate about the economic and social damage such a future history will cause - all one has to do is remember the 1930s.
A prima facie alternative to 15 years of deleveraging would be an old-fashioned Jubilee of debt forgiveness. But in our modern capitalist system this faces two dilemmas. Firstly, a debt Jubilee would paralyse the financial sector by destroying bank assets. Secondly, in our era of securitized finance, the ownership of debt permeates society in the form of asset based securities (ABS) that generate income streams on which a multitude of non-bank recipients depend, from individuals to councils to pension funds.
A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.
The broad effects of a Modern Jubilee would be:
1. Debtors would have their debt level reduced;
2. Non-debtors would receive a cash injection;
3. The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
4. Bank income would fall, since debt is an income-earning asset for a bank, cash reserves are not;
5. The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
6. Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.
ERA MEDIA RELEASE Friday, 24 May, 2012
Former federal government minister Alexander Downer, who is now consulting to the private sector, has argued that foreign investment is essential to develop Australia’s economy*. However this well-trodden argument can be misleading. Economic Reform Australia maintains that money can be added to the economy in several ways, including funds obtained from foreign investment, however it is often overlooked that the federal government can always create the funding required for specific projects. This contrasts with funding which is currently done through structured loans from both local and foreign private banks.
The most common misconception in regard to the creation of money by a sovereign government (e.g. the Commonwealth of Australia) is that it will cause inflation, which is true if it is done without regard to the general economy, for example in an ad hoc manner. However there is no economic reason for supposing that central-government created funding is inherently more inflationary than is bank-created funding. And in any case, inflationary pressures will always be minimised if due regard is given to the economic conditions.
The promotion of foreign investment in order to inject money into the economy introduces a major risk to Australia’s control of its resources, particularly when the investment is from foreign government enterprises. The main practical advantage of foreign investment is that it is generally associated with incoming project expertise. However expertise also can be developed or hired in Australia. Relevant companies can be created here and their workforces built up from many sources or trained as required.
Ownership, and particularly land ownership, enjoys a major strategic advantage. This is by virtue of the owner's control of the case made out for business expansion, the manner in which the enterprise is developed and used, its activities and their nature, and future sales.
As the federal government has the ability to purchase assets, particularly major ones, on behalf of Australian users, it is duty-bound to exercise this option for any asset with the remote possibility of strategic value to Australia or of disadvantage to Australia if it is owned by a foreign enterprise.
State, territorial and local governments cannot create money, and therefore do not possess the powers enjoyed by a sovereign central government. This is evidenced by the fact that the lower levels of government are duty bound to have balanced budgets on average (i.e. over the longer term), while the federal government is not so obliged. So the federal government should either fund such projects directly or alternatively pass the funds on to the relevant state governments.
We don’t need foreign investment for the sake of investment funds. We may need expertise, but that’s a different process that should be developed for Australia’s benefit.
Other countries utilise the spending power of central government in support of national strategic economic objectives. Australia would be foolish not to do the same.* Interview of Alexander Downer by Sabra Lane on ABC Radio National PM, Thur 6 Sept, 2012
ERA MEDIA RELEASE Friday, 2 May, 2014
With the Abbott government secretively negotiating away our economic sovereignty under the looming Trans-Pacific Partnership with the corporate juggernaut of the United States and other Pacific Rim jurisdictions, Free Trade is more topical than ever.
Usually passed off as an uncomplicated good thing, Free Trade dogma has a secular history. Born as a reaction to the restrictions involved in state monopolies and the economic system known as mercantilism [which emphasised commercial war, demo-graphic growth, positive specie trade balances and the like], Free Trade doctrine came into its own with the Industrial Revolution.
Antagonistic to labour market regulation and protectionism and laissez faire domestically, Free Traders have always been globalisers. They see the `free’ market as self-regulating nation-ally and internationally with countries ideally specialising in niche export marketing often at the expense of domestic production and commerce. Free Trade ideology remains recognisably deregulationist and an essential tenet of militant neo-liberal extremism.
The idea of Fair Trade goes further than the principle and practice of paying an ethical price for coffee. Equitable tax reform is very much a part of the Fair Trade concept. This addresses concern about corporate tax evasion which is crippling the revenue base and service delivery of the public sector, apprehension even amongst the most fiscally conservative of developed states.
In the developing world, the longstanding problem of transfer pricing to avoid taxation at the source of wealth production to transfer value to jurisdictions which are relative tax havens is rife. In May of last year Kofi Annan released a report Equity in Extractives showing that tax evasion by resource companies is hamstringing growth in Africa.
Here in Australia the mining vested interests have successfully fought off their obligation to pay a fair share of tax for extracting finite public resources. Notions that Australia can afford to be a cut price quarry without much in the way of a manufacturing or public sector are rampant in the finance sector, press and now government circles. Government plans to reintroduce work choices under other names are part and parcel of this plot against the people.
On the contrary the Australian economy and society must be a high wage high tech economy if our democracy is not to wither. Australia must be the Scandinavia of Asia. This can never be whilst we try insanely to compete in a race to the bottom with countries which do not permit free labour organisation, rights of assembly and free speech. Rational tariff protect-ion and trade restrictions ought to apply against firms and states which compete unfairly on cost in this way, dumping in our markets with export subsidies and undercutting Australian wages and conditions.
This is not protection for protection-ism’s sake or the featherbedding of unviable industries. It is the positive construction of a level playing field through state and community action for a just and economically and ecologic-ally sustainable future linked to a rational foreign policy.