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Why Joe Hockey (and most others) haven’t adapted to economic change

“Chapter 1: Economics:
The Study of Choice.”

 

“Ultimately, Economics is the study of choice.”

Economics Textbook.

 

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:

  1. 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.
  2. 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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32 comments

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  1. David

    Damn interesting and thought provoking article Ross. My immediate response is to answer your….
    “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.”

    Easy peasy…1 and 2 in no particular order.

    Best wishes

  2. John Fraser

    <

    "1The 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."

    Its called …… dumbshit politics.

    Abbott mastered it decades ago.

  3. kasch2014ay

    I KNOW THIS UPSETS PEOPLE, BUT THERE IS NO SUCH THING AS “THE ECONOMY”. THERE IS A DAMAGED LIFE SUPPORT SYSTEM ON AN OVERPOPULATED PLANET. THAT SITUATION NEEDS TO BE MANAGED. ALL ELSE IS HISTORY AND NONSENSE. TROUBLE IS, ALL THE VESTED INTERESTS AND PEER – GROUP BASED DISCIPLINES ARE SO FAR REMOVED FROM THAT TRUTH, THEY WILL NOT WAKE UP UNTIL IT IS WAY TOO LATE. UNTIL THEN THEY WILL STRUGGLE TO CONTINUE IN THEIR ROLE AS BLIND PILOTS FLYING BY MEMORY, AND REJECT ANY ATTEMPTS TO DRAG THEM OUT OF THEIR COMFORT ZONE BEHIND THE CONTROLS.

  4. rossleighbrisbane

    Actually, there’s no such thing as “VESTED INTERESTS AND PEER – GROUP BASED DISCIPLINES” either. Or as Maggie said, there’s no such thing as “society”. Gees, even numbers are an artificial construct.
    But as I said in the article, economics is the study of scarcity and the choices we make to manage this scarcity. It obviously, therefore, includes concerns about our “OVERPOPULATED PLANET”, but I guess,kasch2014ay, you must have missed that bit in your close reading of what I wrote.
    In terms of upsetting people, writing in CAPITALS is generally considered to be shouting. Shouting at people generally upsets them, so if you don’t want to upset them, I suggest that you use the SHIFT KEY and not the CAPS LOCK.
    However, if you think that shouting and asserting your point of view is a good way to change people’s mind, please continue doing exactly that and just ignore my suggestion.

  5. DanDark

    Thanks for a great article rossleigh, The Abbott and his rabble are wrecking the joint on purpose, so they can blame labor like they do everyday in everyway and then when they Fix what wasn’t broken in first place they will want the accolades, that’s what its about Glory for the soulless halfwits, The Rabbit and his cronies are just playing politics, they haven’t got the people of this country at heart, they have played politics for 7 years now with the Head Knob in Charge,

    I don’t see a future in this country for my younger kids at all now, It was something that never crossed my mind with my older kids in their 30s now, but this country and the pollies dont care about the kids, hence the out of control unemployment figures for young people, the lack of education opportunities for country kids, treated like second class citizens by the GOV

    They only care about the LNP party and the jerks who sit in Parliament and their families and children, hence Abbotts daughter and her free 60 grands worth of education… Australia is stuffed, its too far gone to be resuscitated, Its on life support with not much hope of a recovery, someone will just flick the switch soon and it will be all over for everyone except the fat cats of the joint…

  6. diannaart

    I remember Economics, sort of – that’s what they taught the C and D classes in high school (and maybe the B classes) – a very long time ago. Those of us in the A class, who were considered good at maths, English, science and so on, were not taught Economics.

    Has anything changed since my years at high school? I guess I should add that I was in the ‘A’ classes, consequently never taught economics.

    Was Hockey in the A class at school?

    Am I simply a prattling oldie and none of this has any relevance today? Because I don’t think economics is any kind of discipline given that whatever version (Keynes or John Stuart Mill or even Marx) there can be no rational thinking applied to ALL humans ALL of the time.

  7. rossleighbrisbane

    Tsverky and Kahneman have done some interesting stuff on Behavioural Economics, which sort of takes into account that people are unpredictable, diannaart.

  8. Lee

    If religion and politics can be considered disciplines then so can economics.

  9. stephentardrew

    Unpredictability only operates within certain constraints because people generally accept some formal belief system around which they shape their opinions. If not societies would be random conflations of incoherence. Empiricism demonstrates that facts are much more useful than opinion however we seem to be emotionally immature and rather than reason we are often driven by emotions. The neo-con idea of trickle down has been demonstrated to be empirically false yet the indoctrinated advocates cannot let go of entrenched beliefs because it would undermine their egocentric, unyielding investment in what is primarily illogical. Rigidity rather than unpredictability and flexibility is what is hurting innovation and rational change. Local unpredictability does not make for global unpredictability when in fact stupidity is very predictable when people hold to irrational beliefs.

    So Rossleigh you can certainly conflate 1. and 2.

  10. Florence nee Fedup

    More likely blind faith in their neoliberal policies. Maybe they see the way demolishing all that exists as needed to bring about what they see as reform.

    Listening to no one. Telling no one.

  11. Florence nee Fedup

    Everything in life is bout choices. From the time we wake in the morning until we sleep at night.

    The choice we make depend on what we want.

    Not good for all

  12. mars08

    “More likely blind faith in their neoliberal policies. Maybe they see the way demolishing all that exists as needed to bring about what they see as reform.”

    More likely the LNP (and 21st century Labor) have been shouting the screeching the same simplistic, hysterical bullshit for so long…. they’ve finally backed themselves into a corner.

  13. Paul G. Dellit

    For my money, the single scariest economic factor at play in the Australian economy is the Australian Government, not because it is besotted with Hayekian socially divisive trickle down wealth creation theory, which plainly doesn’t work. The one thing which I believe should cause all of us to lose sleep at night is the government’s manifest incompetence.
    We seem to be getting inadvertent broadcasts at regular intervals from the economic cockpit like “Do you know what this button does? . . . Oops . . .”
    And as far as our health system goes, we’re in some kind of operating theatre groundhog time loop with us on the operating table drifting in and out of consciousness hearing snippets of the surgeon’s discussion with the nurses: “Oh god, can anyone see the $7 co-payment, or did I forget to take it out before I sewed him up? . . . Nurse, pass me the scalpel. This time I’m going in through the back passage and I’ll remove the $5 Medicare payment AND the $7 co-payment while I’m at it. Should’ve done that in the first place!
    Well, you get the picture. It’s not only the Budget failures we should be worried about. If this Government reaches its mid term point and is still lurching from one policy failure to the next, and one administrative stuff up to the next, anyone with skin in the Australian economic game will start to become nervous and wonder whether they should keep playing.
    As we know, one of the most powerful drivers of the economy is market expectation, and at this stage our ship of state appears to be crewed by hamfisted, inebriated first-timers and heading for the rocks.

  14. rossleighbrisbane

    Yeah, well, I didn’t presume 1 and 2 were mutually exclusive, stephentardrew…

    Although 1 IS less scary if 2 is also true, because there’s almost no chance that they’ll do it successfully.

  15. revolutionarycitizen

    Except for the part where in Wayne Swan’s last budget he predicted unemployment would reach 6.25% even though he had already increased government spending by 50%, right? Was it his plan to ramp up unemployment as a pretext for instituting Soviet styled communal employment in the salt mines?

    Do you people read the conspiracy theorist nonsense that is in some of these articles before publishing them?

  16. rossleighbrisbane

    Thanks, revolutionarycitizen, always appreciate your attempt to look like a Marxist while attempting to peddle your ideas on a more succesful site than than the one where you normally publish your drivel just so more than three people read it.
    Perhaps people would like to go and read how much you appreciate Milton Friedman’s theories.
    Nah, I suspect most people know better.
    Still, next time could you actually attempt to actually justify the sort of economic policies I was criticising rather just parrot, “Labor was crap”.

  17. Kaye Lee

    Perhaps rc and I read different articles.

    I agree that economics is about choice….it’s about priorities and how you achieve them. The number mechanics aren’t really the point. There are plenty of ways to fund things you want. Deciding WHAT you want is the crucial step and it seems the Coalition want the poor to suffer and the planet to die. I’ll talk numbers if you want but the intention is obvious. They are prepared to steal our children’s future for short term “gain” which is every day becoming a more questionable prospect as to them having gained anything meaningful at all. Who have they helped? How have they made the world a better place? Who’s standard of living is getting better?

    It’s scary when Abbott admits he is not looking 16 years down the track. If governments refuse to plan for the future then who will?

  18. donwreford

    As government drive down wages, the politicians do not have to increase their salaries as their money goes further without having to give themselves a increase on their salaries.

  19. rossleighbrisbane

    Actually, Kaye Lee, I can find no “conspiracy theory” references at all in my post. I don’t mind people who disagree, but people who disagree without reading it or attempt to disagree with me about something that I didnt say, I alwaya find dodgier than Christopher Pyne attempting to argue that the Gonski report wasn’t worth reading because the last thing he read had pictures in it!

  20. revolutionarycitizen

    “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.”

    I rightfully poked fun of the above piece of hyperbole.

    Kaye, no politician looks past the next election, none, because that’s all that matters, getting re-elected.

    Is Smokin’ Joe some Keating/Costello incarnate? No, not even close, is he better than Swan, sure, not a great bar to leap over. Problem being, in a desperate rush to get elected both Abbott and Joe promised to keep the two greatest spending initiatives of the previous government without first seeing where the money was coming from.

    Have they sold us down the river, sure, no more than the last bunch of clowns, just the previous bunch of clowns got a free pass at the ABC and a better media team so no one cares. That, and this bunch of clowns will be followed by an even worse bunch of clowns, and it will continue on.

  21. flohri1754

    Right on, rossleighbrisbane …..

  22. jagman48

    rc i get tired of your repeated drivel. Who voted Wayne Swan as the world’s best treasurer ?

  23. Kaye Lee

    Wayne Swan made some mistakes. Promising a surplus was silly. Caving in to the miners on the MRRT was disappointing but at least he got a mining tax started. We should now be discussing broadening the base for the mining tax rather than GST but no….we can’t tap into Gina’s billions that she worked so hard for.

    But to say Hockey is doing a better job than Swan makes it obvious you do not want a truthful conversation.

    In one breath you say no politician plans beyond the next election but you then complain about the education funding reforms and the NDIS. The carbon price was an initiative for the future but no….coal is the saviour of humanity.

    Sorry rc, your argument holds no water. The Abbott government is unquestionably the worst government I have ever come across. Their arrogant blatant ‘feathering the nest’ for the big end of town is beyond the pale. Explain to me why they would choose to repeal laws that would help crack down on corporate tax evasion and slash thousands of jobs at the ATO so they do not have the staff to pursue those wealthy bastards that pay no tax.

  24. stephentardrew

    Oh dear Kaye those nasty facts just disappear up the stovepipe of dogmatism. Who cares about the suffering of the poor and marginalized. Hard headed economic rationalism has no ethical basis it is simply a dogmatic set of absolutist non-empirical contestable beliefs that are not concerned with issues of justice, equity and utility. Economics without moral philosophy is moribund, dry, intellectually thoughtless, habituated, zombie, dogmatism framed in terms of narrow minded reductionism. Adam Smith was, after all, a moral philosopher which is more than I can say for this lot.

    Intelligence is the capacity to wrap a broad variety of imperatives around a dynamic system of ideas that represent the equitable distribution of goods, both physical, and psychological. The notion of sacristy is crap when productive capacity is held in abeyance by austerity ideologues who have no rational basis for harming others in the name of wealth accumulation by the 1%.

    Far be it for ideologues to see beyond their narrow self-gratifying irrational dogmatism of victim blame and retribution.

    These people are ethically challenged ignoramuses.

  25. stephentardrew

    John:

    Another case where hubris undermines long term planning and moral responsibility to all the people of this country. When are these political fools going to be required to understand logic, causation and moral philosophy as prescribed by our internationally renowned philosopher Peter Singer. He is given justifiable praise internationally while ignored by the fools that think they know better than some of our most important intellectuals.

    Just damn that science, logic and ethics thing. I know better because, well, I just know better so shut up, listen, and do what your told.

    We are being ruled by intellectual and scientific ignoramuses. No wonder the shit hits the fan as we stumble from Howard and Costello to Abbott and Hockey who are straight out ethical illiterates.

    It’s all down to the magical Gombo in the sky.

  26. David

    Well said Kaye Lee…i note there are a few 2 bit economists floating around this particular thread…they are are giving me a few laughs if bugger all else. Hockey better treasurer than Swanee, that one should be the joke in every Xmas cracker, those than can afford them.

  27. Andre Poublon

    Personally, I think people have beliefs and then find the evidence to support it. Much like those that are convinced the Bible says what they mean and not what it says.

  28. mars08

    hmmmmm… sooo… These days, Mr Hockey says that the budget is not expected to return to surplus until 2019-20. And the LNP has been screeching…. incessantly… for years and years… that ANY budget deficit is unacceptable. After all, we KNOW there’s a deficit and debt crisis, right?

    I suppose that means that the Coalition will refrain from buying the mercenary “aspirational” vote like Howard did so many times.

  29. Kaye Lee

    The bribes are already happening in marginal seats and they will ramp up in the next two budgets.

    “Treasurer Joe Hockey says it’s “completely incorrect” his first budget was too ideological or unfair, but promised fairness will be central to political debate about tax and federation reform in 2015.

    Mr Hockey has also hinted strongly that a support package for families that includes greater support for families with kids in childcare and a revised paid parental leave scheme will form the centrepiece of his second budget.”

    They are going to push PPL and childcare, no doubt with rebates for nannies. I wonder what else is coming.

  30. David

    Found this statement from Hockey laughable nonsense as I do with majority of his utterances.. “Treasurer Joe Hockey says it’s “completely incorrect” his first budget was too ideological or unfair, but promised fairness will be central to political debate about tax and federation reform in 2015.”
    To equate this Govt and fairness, particularly regarding tax, is like calling Abbotts treatment of Julia Gillard all fair and hugs and kisses.

  31. Florence nee Fedup

    Kaye, you are correct, the biggest mistake was saying, and keep on saying they would bring in a surplus. What more they were aware that a surplus was not economic but political promise.

    They should have dropped saying they would concentrate on what they were doing along. Good governance and economical management.

    It allowed Abbott to continue on with his predictions of ruin, because of debt. All rubbish as we know.

    Labor was continuing with fiscal consolidation over the term, the deficit was slowly trending down. For this they received no credit.

    At he same time, Labor was putting in place the necessary policies, investing in human and physical infrastructure for the future, Yes investing, is not creating debt, as Abbott was successful in conveying to the public.

    Great things, some costly were happening.

    Things such as Gonski, to enable a highly educated workforce.

    NBNCo, providing state of the art communication, essential for future prosperity.

    NDIS, enabling our disabled to be cared for, have a chance to fully participate in society.

    CEF suit of bills that enabled us to move to cleaner, efficient and cheaper means of powering out industry.

    Yes, the things that count. Education. Modern communications. Cheap energy, Infrastructure for the future.

    Getting trapped into saying they would deliver a surplus, which means nothing in itself hid all,

    Yes bad politics.

    Politics is all about choices and what we want.

    Do we want Abbott’s extreme neoliberal society. Did he bother to ask us?

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