Using Government Debt in COVID-19 Crisis

After decades of neo-liberalism, especially the Anglo world, with demands to cut budgets, taxes and government services due to supposed unaffordable and unsustainable government debt, the truth is otherwise. Australia has relatively low government debt of little over 40% of GDP while household debt has become high and possibly unsustainable at more than 120%.

 

However, with the COVID-19 crisis and historically low interest rates, Australia is an excellent position to use debt attractive globally, in supporting the economy, not unlike the GFC period Labor government’s Keynesian money drop which allowed Australia to be less affected than most economies and not going into recession.

 

Following is an excellent article summarising the benefits and countering the supposed negatives of using debt in challenging times.

 

From Inside Story:

 

Before anyone asks: no, Australia does not have a debt problem

 

ADAM TRIGGS

 

30 MARCH 2020

 

And that means government spending is overwhelmingly beneficial in these crisis conditions.

 

Much is uncertain about the Covid-19 crisis, but two things are clear: government debt is about to become much bigger, and there’ll be no shortage of commentators who will say that’s a problem.

 

G20 governments have collectively announced more than $5 trillion in fiscal stimulus, with more to come. The Australian government’s measures, including yesterday’s $130 billion spending package, are broadly in line with other countries. So should we be worried about the consequent growth in government debt?

 

The answer is a clear and resounding no. Whether this new debt is justified depends on the benefit of the increased spending versus the cost of that spending and, in the current environment, the benefit is substantial while the costs are minimal.

 

Fiscal stimulus will avoid the current crisis turning into an economic catastrophe, a fact that appears to be well understood by the public. The lesson from the Great Depression is that my spending is your income, and your spending is my income. If we all stop spending at our local restaurants, the owners and workers in those restaurants lose their income. They spend less in other businesses, which lose their income too, producing a vicious downward spiral that ends in economic collapse. The solution is for the government and Reserve Bank to step in and substantially increase spending and support businesses to fill the gap until the private sector recovers.

 

Failing to expand government significantly would have catastrophic long-term consequences: huge increases in the number of unemployed people (many of whom will never work again), the destruction of thousands of healthy businesses (many of which will never recover), and the permanent destruction of income, wealth and the earning potential of our young people, to say nothing of increased suicides, increased mortality among the very young and very old, increased domestic violence, increased attacks on minority groups, the rise of political extremes and the increased probability of war. The benefits of increased spending are simply enormous.

 

Conversely, the costs of increased government spending are very low. These costs typically come in three forms.

 

The first is the potential for increased government spending to “crowd out” the private sector. When governments run budget deficits they are borrowing money from investors, money which is no longer going to other worthy investments. Increased demand on the limited pool of savings, in normal times, means higher interest rates (which make it more expensive for businesses to invest and households to borrow) and an appreciated exchange rate (making our exports more expensive than those from other countries). The increased government spending stimulates inflation, meaning higher prices for all of us. In normal times, then, increased government spending can hurt businesses, households and individuals.

 

But these are not normal times. Even before Covid-19 the world was awash with savings, which is why interest rates and inflation were so low. The current crisis means even more savings, even less demand for those savings and even lower interest rates and inflation, and an exchange rate that’s less responsive to increased government spending. Put simply, the costs of increased government spending in normal times do not apply.

 

The second potential cost of increased government spending is the future cost of paying interest on that debt. This is minimal in the current environment. The interest rate the Australian government pays on new debt is at its lowest level in history — just 0.8 per cent for money borrowed for ten years. Households and businesses can only dream of being able to borrow that cheaply. This is why it makes perfect sense for the burden of stimulating the economy to be placed on the government since it can borrow so much more easily and cheaply than households or businesses. This is also why it makes no sense to be asking households to access their superannuation (especially given they are already losing their jobs, taking wage cuts and watching their super balances plummet) or asking small businesses to take out loans (whether profit-contingent or otherwise). Stimulus should come from the lowest-cost supplier, and that’s the government.

 

Some might worry whether this increase in debt would mean higher taxes in the future, but there is no reason this needs to be the case. The reason a $10 million debt is a bigger problem for me than it is for Gina Rinehart is the same reason economists look at debt as a percentage of GDP — the denominator matters. The best strategy for reducing debt is to generate economic growth. The maths is simple. If the Australian economy resumes its long-run average growth rate after the current crisis, any increase in debt as a percentage of GDP will halve within twenty years. People would need to start having kids very early in life for this to become an intergenerational debt burden.

 

The third cost of increased government spending is that it can be unsustainable (meaning it can cause problems if that level of spending continues) or can destabilise financial markets. The sustainability of Australia’s current increase in spending is not a concern because it is temporary and doesn’t change the long-run growth rate of debt. Financial stability is not a concern given Australia’s debt is seen as a safe-haven by financial markets: this is why investors are willing to accept pathetically low interest rates for the honour of being able to finance our debt. Even if private investors stopped financing the government’s debt, or charged prohibitively high interest rates to do so, the Reserve Bank would take over that debt, safe in the knowledge that inflation is non-existent and the debt is denominated in our own currency.

 

All of this means that Australia won’t come out of this crisis with a debt problem. The International Monetary Fund ranks Australia’s fiscal position as being in the highest category possible, meaning there is ample room to substantially increase spending. The Australian government could increase debt by three-quarters of a trillion dollars — far more than anyone is suggesting — and still have less debt as a percentage of our economy than the average among its G20 peers.

 

Sadly, this will not prevent a flood of commentators and politicians in the coming months warning of an impending debt crisis in Australia. As soon as the health crisis shows the faintest sign of abating, or perhaps even before then, the government will face tremendous political pressure to cut spending and pay down debt. It is no doubt already facing calls to limit stimulus out of fears of future debt. To protect the living standards of Australians, it must withstand this deeply misguided advice.’

 

For more articles about Australian politics, populist politics, economics and government budgets click through.

Political Parties Hollowed Out and Identity Issues

Australian politics as with Trump’s America and U.K.’s Brexit has become hollowed out with declining membership, less organic policy development, more reliance upon both external policy development by trans national think tanks and promotion or opposition by media or PR.

An enforced focus upon immigration, population growth and refugees, or white nationalist issues, may risk bi-partisan support and ignore the immigrant heritage of Australia versus aggressive demands for a WASP white Anglo Saxon protestant and Irish Catholic culture to rule.

Brexit, Trump and Australian politics have obsessed about immigration.

Populist Politics and White Nationalism (Image copyright Pexels).

This is especially so among the less diverse above median age vote in regions, while Australia’s elites in business, government, politics and media also reflect the same mono culture or lack of diversity.

Further, positives and benefits of immigration are seldom cited and especially the leveraging of temporary resident churn over; whether students, backpackers or temporary workers who are net financial contributors supporting the tax base, vs. ageing and increasing proportion of pensioners or retirees in the permanent population.

From The Lowy Institute:

Hollowed out, but not unhinged

Judith Brett

The scenario put forth in Sam Roggeveen’s “Our very own Brexit” runs counter to the major parties’ economic realities.

Sam Roggeveen has written a lively essay on the current state of Australian federal politics, centred on the hypothetical scenario that one of the two major parties takes an anti-immigration policy to an election, overturning Australia’s post-war bipartisan commitment to immigration to gain political advantage. Such an election would be a referendum on continuing population growth, and bring to a halt our cultural diversification and our integration into Asia, which is now the largest source of permanent new settlers.

It sounds unlikely, but as Roggeveen argues, both Brexit and the election of Donald Trump were unlikely, rogue events that have overturned political assumptions. His scenario is not a prediction, he stresses, but a plausible, worst-case scenario arising from the current state of our political parties.

Our two major parties have become “hollowed out”, Roggeveen argues, untethered from their traditional social bases in class-based interests. Party membership and party loyalty have declined, leaving a more volatile and skittish electorate potentially vulnerable to the anti-immigration siren song of a party desperate to gain electoral advantage.

There are two parts to this argument. The first is that the parties have become hollowed out; the second that it is plausible that one of the major parties break the bipartisan support for the migration program.

First, the evidence is clear for the decline in rusted-on party loyalty.

However, Roggeveen does not, to my mind, have a sufficiently nuanced understanding of the reasons for this decline and writes as if it is mainly the result of a deficient political class.

In the early 20th century, when our current party system took shape, it made social and economic sense to have two parties based on two class blocks. Working and middle class, employee and employer, labour and capital – these spoke both to people’s everyday experience and sense of themselves and to competing economic interests. This is no longer the case. More than a hundred years later, Australia’s society and its economy are much more complex.

In developing their policies, parties have to broker compromises among various competing interests, and this undertaking is much harder today. To take a stark example: the problem Labor has in developing policies responsive both to its traditional union base and to the middle-class social democrats who flocked to the party with Gough Whitlam. Compared with the early 20th century, lines of class division have blurred, and new lines of difference have been politicised: gender, race, ethnicity, attitude to nature, and, after the fading of sectarianism, religion again. If the parties are failing, it is in part because the task of uniting disparate constituencies is harder…..

……Second, I do not find it plausible that one of the major parties would break the bipartisan consensus on immigration.

A minor party might succeed with an anti-immigration policy, but neither major party could afford the electoral risk. The 2016 Census reported that 49% of the Australian population was either foreign-born or had at least one foreign-born parent. Not all of these people will be on the electoral roll, but all who are citizens will be, and once on the roll, they will have to vote.

Because of compulsory voting, Australian parties do not need highly emotional and divisive policies to get out the vote, and to support them carries considerable risks. Both Brexit and the election of Trump occurred in polities with voluntary voting, where it makes electoral sense to risk courting an alienated minority. There is no doubt there is a nativist faction in Australia that would support a stop to immigration, but Australian elections are won and lost in the middle, which is occupied by increasing numbers of foreign-born voters and their children.

Also holding the major parties to their consensus on immigration is its contribution to the economy. Australia’s recent sluggish economic growth would be even slower were it not for migration. The housing and retail sectors in particular would be sharply affected by its halt. Our two major political parties may be untethered from their historical social bases, but they are not unhinged from contemporary economic reality.’

 

For more articles about populist politics, demographics, immigration and white nationalism click through.

 

Australian Brexit?

Sam Roggeveen of the Lowy Institute has written about the potential of an ‘Australian Brexit’ due to a global political transformation (ideology and strategy) towards radical white nativist ideas, isolationism and putting pressure on mainstream parties to comply, while being presented as organic or the ‘people’s will’.

There has been gross over simplification of Brexit to supposedly avoid bureaucracy, the EU, Europe and increasing antipathy towards immigration by ageing electorates through populist politicians.

However, many would suggest Australia had a form of Brexit upon colonisation via the First Fleet 1888 by the British, then after Federation in 1901 the bi-partisan ‘White Australia Policy’ inspired by British eugenics movement (and finally ended after mostly through opposition by NGOs, churches etc.).

Fast forward to the supposed crisis of Tampa when then Australian Prime Ministers helped start the demonisation of refugees with able support from mainstream media including Murdoch’s NewsCorp, then carried further by society in creating antipathy towards non-Europeans; a new proxy white Australia policy.

Further, there are clear links between ideology, political and media tactics of white nativism or white nationalism inspired by eugenics, which has been mainstreamed in the US and UK; with further links onto the fringes of Europe.

White nationalism, white nativism or eugenics all share a clear architecture including astro turfing, manipulation of media, fake news etc., that can also be linked to radical right libertarians or elements of neo-liberalism by global corporates, via think tanks, to deflect attention away from tax avoidance, interference in domestic policies, cast doubt on climate change etc.

Brexit for Australia?

The new conventional wisdom in Canberra doesn’t stack up

By Sam Roggeveen

November 5, 2019 — 12.00am

It is Canberra’s new conventional wisdom: the government’s unexpected election victory gives Prime Minister Scott Morrison stature and stability that his recent predecessors all lacked. The last decade of political dysfunction is behind us. The trouble is, this view is based solely on very recent events in one country alone. What if we took a global perspective over a longer period?

A political transformation has been under way in Western democracies for decades now, quietly and in the background for most of that time, though in recent years it has broken cover. In the US it produced Donald Trump, in the UK Brexit, and in Europe the rise of new right-wing populist movements.

Western democracy has hollowed out. It has happened in two stages. First, the public has drifted away from major political parties, the institutions that once connected them to the political process. In every Western nation, mainstream centre-right and centre-left parties are in decline. In the early to mid-20th century, party affiliation was a question of class, religion and family inheritance – you voted a certain way because your parents and peers did too. But for decades now membership of the big parties has fallen and the share of the vote they can rely on has decreased.

In response (and this is stage two), the big parties have found new ways to survive. They have evolved from amateur mass-membership organisations to small, professionalised outfits financially reliant on big donors and, increasingly, the state. Other than at election time, the big parties don’t really need the public.

So, voters withdrew from political parties, and the parties responded with a withdrawal of their own. The result is that the public square is left empty and politics is hollow.

In Europe, right-wing populist parties have done well because the minority of voters who are attracted to those ideas have slipped from the grip of the big parties. But as France’s Emmanuel Macron and Germany’s Greens show, the big parties are not bleeding votes only to the right, they are losing them in the centre and on the left too.

In America, the weakening of parties helped mavericks like Trump and Bernie Sanders, who tied themselves to the big parties out of self-interest rather than conviction.

In the UK and Australia, the decline of the big parties has produced a different kind of instability. In both countries the voting system makes it hard for small parties to win seats even though their vote share has increased. Yet as the big parties have become less popular, they have also become less stable and more vulnerable to shocks from outsiders and ambitious MPs. That’s what caused Brexit, essentially an internal Tory Party dispute stirred up by Eurosceptic backbenchers and Nigel Farage’s UKIP.

It is also what has produced the leadership churn in Australian politics over the last decade, a succession of tight election results, and two periods of minority government. Australians are abandoning the major parties at record rates. At the same time, these shrinking and insular parties are increasingly cut off from a bored and unengaged Australian public.

Lacking genuine connections to a deep social base, major-party MPs look to their peer groups in politics and the media for inspiration, which is where they got the idea that changes of leadership might fix their problems and why, for instance, Morrison borrows Trumpian language on “negative globalism”.

The 2019 election resolved none of these underlying problems. True, the Liberal and Labor parties have now changed their rules so that leadership coups are harder to mount, but this is much more than just a leadership issue.

Again, if we broaden our view beyond Australian shores, we can see why. Angela Merkel has been German chancellor for 14 years, yet in that period, German politics has been completely transformed – Alternative fur Deutschland, a populist party that didn’t even exist when Merkel took office, is now the official opposition in the Bundestag.

It would be foolish to assume that Australian politics, still dominated by two parties the public cares little for, is suddenly immune to upheaval on that scale.

Sam Roggeveen is director of the International Security Program at the Lowy Institute and author of Our Very Own Brexit: Australia’s Hollow Politics and Where It Could Lead Us.’

For more articles and blogs about white nationalism, immigration and Australian politics click through.