“Chapter 1: Economics:
The Study of Choice.”
“Ultimately, Economics is the study of choice.”
How do people choose between a number of alternatives?
“One strategy to use is what Amos Tversky (1972) called ‘elimination by aspects.’ Someone using this strategy first decides what aspect is most important (say, commuting distance), establishes a cutoff level (say, no more than a thirty- minute commute), then eliminates all the alternatives that do not come up to this standard. The process is repeated, attribute by attribute (no more than $1,500 per month; at least two bedrooms; dogs permitted), until either a choice is made or the set is narrowed down enough to switch over to a compensatory evaluation of the ‘finalists.’”
Nudge by Richard Thaler and Cass Sunstein
So let’s go back to Economics 101 for a moment. The first thing that many textbooks start with is explaining scarcity and the role of choice within economics. It’s carefully explained that we have limited resources and the economics is the study of how we choose to use these resources.
Politicians of all persuasions have been good at reminding us about the “scarcity”, but not so forthcoming when talking about the “choice” side of the equation. Recently, the most obvious example has been the Liberals attempt to tell us that we have no choice but to accept a co-payment for trips to the doctor, other Medicare will become “unsustainable”. Overlooking for a moment the fact that the $7 was meant to go to a separate medical research fund and we were assured it wasn’t meant to discourage people from going to the doctor, it’s clearly not our only way of making Medicare “sustainable”. Even the most feeble minded person could see that raising the Medicare Levy to 5% would very quickly reduce the immediate shortfall in Health spending.
“We couldn’t do that,” is the immediate reaction from a number of people. And while they may have compelling arguments for not doing it, the fact remains it is a choice. It may not be the best one and it may be politically risky, but it is still a choice that we could make.
Now, I have two fears and I’m not sure which one is correct:
- The Abbott Government has a plan to cause massive unemployment as an excuse to drive down wages and reintroduce WorkChoices by another name such as WorkyabastardsyouhavenoChoice.
- The Abbott Government really are as dumb as they appear.
I am unsure which of the two I find more frightening.
Returning to economics, the first point I wish to make is one that John Kelly made in a previous post on this site: Do Taxes Fund Spending.
We’re encouraged to link government spending and the Budget with our external borrowing. That’s even more dodgy than suggesting that when I give my son money for a school excursion then I’m risking my credit rating because I didn’t bank it. The Australian Government could run an enormous Budget deficit without increasing its overseas borrowing.
Why doesn’t it? Well, there are repercussions to such things. For a start, overseas perceptions that the government is mismanaging its finances can lead to all sorts of problems. People become reluctant to invest in the country and the credit rating may be reduced, leading to higher borrowing costs for the government. And, of course, it could also lead to a devaluing of the currency.
Too much spending could create shortages and shortages lead to inflation. If you announce that your going to build umpteen hundred new schools then you risk creating a shortage of builders which drives their wages up, which in turn makes it more costly to build up a home, which leads to less houses being built which drives up the price of houses.
Market economics, of course, would suggest that this price rise would be only temporary because the higher price would lead to less demand which would eventually create a glut leading to a brake on inflation. However, this theory hasn’t always worked in practice.
Historically, from the 1970’s through to the end of the century, inflation was a major concern for many countries, including Australia, and Budget Surpluses are one of the ways that governments can help contain inflation. The surplus, naturally, shouldn’t be too large or else the risk of creating a recession comes into play.
So let’s consider Australia’s current position. Inflation has been under control for the past couple of decades, apart from the odd jump in the price of bananas or houses. Interest rates are at historic lows. Growth is slowing. Unemployment is rising. And until the recent slide, it was generally conceded that our dollar was far too high.
All this suggests that the government should be targeting spending to ensure that we don’t slip into recession, rather than trying to reduce its own expenditure. Aiming for Budget Surpluses is primarily about fighting inflation. If anything, inflation caused by shortages would be helpful to getting the Budget back into the black because it would suggest increased economic activity, and higher wages would lead to bracket creep where we all end up paying a greater percentage of our income in taxes. A recession, on the other hand, would lead to less revenue from taxation.
Instead of a clear statement of purpose from the Abbott Government, we have Mr Hockey and his rather confused messages. One day, he tells us not to let Santa down and go out and spend, spend spend; the next he tells an interviewer that the government is just like a household and you have to put money aside for the future. Subtext: We think that you should spend because it’ll help us out, but we also think it’s irresponsible of you to do so.
When he releases an economic statement telling us (or perhaps parroting a phrase he’s been told by someone who actually knows something) that the government will be using the Budget as a “shock absorber”, while at the same time announcing the slashing of hundreds of government programs.
I’ve heard Liberals tell us that the government can’t just print money. Of course, governments can and do. It’s called the Mint. However, printed money has very little do with the total supply of money. The real reasons for governments restricting their expenditure are either due to the other economic circumstances such as inflation, or else they’re political reasons.
Like I said, at the start, economics is all about choice. And it appears that the current government have started by using Tsverky’s method of eliminating one of the choices – we don’t want any inflation – rather than looking at the whole situation and asking what outcome we actually want.
Then again, perhaps the outcome that they actually believe that high unemployment and an economy in recession will give them the excuses to implement their ZombieWorkChoices agenda, all the while blaming Labor for the “mess we inherited”.
Sorry, I keep forgetting. This a “No excuses” government.
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