Government needs to consider policies that boost private demand for goods and services

Reuben Finighan (University of Melbourne) argues that the Treasurer’s comments show some understanding of the challenges presented by the new low-rate era, but the policies he promotes do not. Taking money from welfare and sending it to corporations risks increasing corporate saving while reducing consumer demand – the exact opposite of what is needed. 

A comparison of monetary and fiscal expansion

Phil Lewis (University of Canberra) compares the options available to stimulate a sluggish economy.

Interest rates could stay low for decades

Rodney Maddock (Monash University) writes in The Conversation that saving has tended to increase and investment to fall; more money is available but fewer people want to borrow, thus driving down rates. The trends will not likely change abruptly so we can expect low rates for a long time.

Australia’s banks are safe, so deposit levy is looking like a revenue grab

Andrew Schmulow (University of Melbourne) and Pat McConnell (Macquarie University) write in The Conversation that deposit accounts are already appropriately protected by regulation and the capital adequacy of Australia's banks, so the Government's Financial Stability Fund has little meaningful role in banking stability and can therefore only be viewed as a tax on banks (which is likely to be passed on to depositors).

A Greek tragedy—The failure of European political economy under crisis

Four excellent articles in The Conversation on the absurd outcome emerging in the European debt crisis. The articles neatly tie together most of the different aspects of eurozone policy and the Greek debt crisis.

• How the hard-line approach taken by the IMF and Germany, against the pluck shown by Greece not to be bullied into oblivion (and, in so doing, courting economic collapse?), is explained by game theory is the subject of an article by Partha Gangopadhyay (University of Western Sydney).

• Barry Eichengreen (University of California, Berkeley) reviews his original prediction that an exit from the eurozone would never occur, and why that turned out to be incorrect—albeit, in an extreme situation characterised by political incompetence and perhaps even a disregard for economic sensibility. 

• André Broome (University of Warwick) explains why the IMF has become the enforcer of controversial structural reforms to a country experiencing severe economic distress, the social consequences of which have been disastrous over the last seven years.

• Wesley Widmaier (Griffith University) explains that the early European ideal was not about free trade or convertible currencies—it was about enhancing the collective welfare as a means to political union. However, the economic dog nevertheless came to wag the collective welfare tail, leading to a shift toward more free market, hard money views.The result would see European economic institutions evolve to such an extent that they place financial rectitude and monetary stability ahead of growth.

There is probably one thread missing in these explanations, and that is the role of fiscal policy—but the role of fiscal policy in the eurozone is a vexed issue in any case. I've added a few editorial notes on this issue, but the topic could do with a much more extensive explanation.

Why the federal budget is not like a household budget

This is a timely article from Warwick Smith (research economist at the University of Melbourne) on the simplistic and misleading view that many in the public and the Parliament (and, alas, many economists) have of Government budgeting.

Managing Government finances is very different from managing a household Budget, and confusing the two approaches leads to poor public policy. The key differences include:

• Governments can compulsorily levy their income from taxpayers according to its needs, albeit that there may be some political pain and economic implications which may impose some limits
• Governments can (and do) print money (creating income out of nothing), with the only limits being balancing the inflation and exchange rate effects
• the need to balance budgets is a myth, which harks back to the days when currencies were backed by the gold standard

Treasury workshopped dealing with recession in 2003-04

The Treasury has released papers, under a Freedom of Information request, documenting how it's Executive Board considered dealing with a possible recession in 2003-04. The issues raised in the papers figured large in Treasury's advice to the Rudd Government in 2008, when considering a response to the global financial crisis.