The Sine Curve Life

Life on the slippery slide

Here in Oz we've just had the main annual federal budget. Debt is the big word being bandied about, because the government has announced that government debt will hit about $58 billion in the next year, and about $300 billion over the next 3 or 4 years. This after a decade of record surpluses - the contrast has exercised feeble minds mightily.

Politically the Opposition is on the verge of firing up the old Howard debt truck from 1996, which the idiot had driven around various places to try to highlight how much debt the socialists had apparently lumbered us all with. It's not clear to me whether Howard may actually have been the sole person on that side of politcs who actually believed the debt scare rubbish, even to this day. He certianly made it his mission while in power to pay down all government debt, which was miniscule by world standards.

The thing is, it's a storm in a teacup and they know it. But it plays beautifully as a political tool. The government hasn't realised the need yet, that I've seen evidence of, of countering it with a similar simple story. The average punter doesn't (rightly) care for economic theory, so relies upon a certain amount of gut instinct backed by simplistic Dick and Jane Take the Dog for a Walk type stories. So when the conservatives jump up and down about loading future generations with debt, it hits all the right nerves.

The simple facts of the matter would be good place to start in countering this strategy. Firstly it's absolutely vital to note that both sides of politics here and in much of the rest of the world sign-up to exactly the same economic theory (which is why the same problems are occurring in countries with 'Left' parties in charge and 'Right' parties in charge). What has recently been called neoliberalism, but more technically is really neo-classical economics. Which is a hybrid of classical economic theory from the 19th century, and the corrections Keynes forced upon it in the early 20th. (Incidentally Keynes alone is not the saviour in our current situation, as some would have us think, but he did provide some of the key insights. But those who just 'go back to Keynes' will miss vital aspects of what's going on.) This theory is very interested in what's called the economic cycle. Which most of us are familiar with via its manifestation in aspects of our own lives, such as housing prices. Prices go up, then down, in (supposedly) endlessly repeating cycles. Roughly the shape and periodocity of a sine curve, as above, although technically not really a sine function. But it's that basic up-down-up-down-up-down pattern which is the root of the theory.

For the neo-classical crowd these cycles all swing around an equilibrium point, which is the economy in a sort of balanced state. So the up parts of the cycle represent 'booms' away from this equilibrium point, and the down bits are the 'busts' or recessions. All the modelling federal treasuries do for example assumes that no matter what the current state of affairs, everything will always return to that nice equilibrium point eventually, given enough time. So if you're in a recession, you can project inevitable growth a few years out to bring you back to the equilibrium point again, which will happen no matter what you do. The best government can try to do is soften the ups and downs, but there's no need for them to worry about the return to balance - that, apparently, will always take care of itself, just with more or less pain for people along the way. The 'free market' is an integral part of this picture, because it's what's apparently responsible for this elastic springiness of the cycle about the equilibrium point - it's the free market that ensures things always return to good, 'competitive' balance, because competition is what levels out the ups and downs.

It has a nice elegance about it, doesn't it? Steve Keen likes to quote the old joke about economists, who when shown something working very well will say "well that's all very nice, but does it work in theory?" They love the elegeance of models such as the economic cycle, and as Keen again brilliantly points out, everything which gets called 'economic reform' is actually nothing more than people changing the world to make it better match some economic model.

So under this model, we're currently in a down phase, and a pretty big one at that. Over the past century the wisdom has been that in this part of the economic cycle governments should not be afraid to take on a lot more debt, to soften the down part of the cycle and hoepfully accelerate the return to the equilibrium point, and then back into an up phase again. (Which in wide-view is actually the public taking on the private debt which is stopping economic activity.) Which is exactly what the current government in Australia is doing, so the bleating of the Opposition about debt is such obvious self-serving bullshit that it's only the fact so many don't know the first thing about economics that they can get away with it. Also it's little said that the Holy Economic Cycle is really only even mentioned in down times, with a veritable orgy of euphoria in the up times that makes absolutely no mention of putting the boom dollars to longer-term use. The euphoria of the up phases is always a mindless, lemming-like celebration of excess.

Having rode the last profound up phase throughout their last stint on the front benches, the Opposition managed to convince many that this was all their own doing, and that debt was always an evil thing. But it's a travesty of the economic ideas they themselves believe in. Firstly, as above, governments aren't responsible for the cycle itself, that's the 'market' at work. So to take credit for a boom is nonsense. Secondly if you subscribe to the cycle, then you know debt is essential to its health, in returning the down phase to the next up phase.

So the current government and ones like it around the world are doing all the right things at the moment, under the theory they believe in. And it is having some effect, in softening the crash landing. Unlike the Great Depression last century, when the likes of Hoover thought that government intervention would just turn everybody into evil socialists. So they did pretty much nothing, and we saw the outcome.

Hoover, one of a modern line of Neros

There should be not the tiniest bit of mileage to be had by political opponents around the question of debt, unless they want to rip up their membership of the neo-classical club. And in fact here in Oz it's a fundamental piece of cheek for the Opposition to do this, because it was they who spent like there was no tomorrow during the last boom, mostly on cash handouts and tax cuts that left the country with no increased infrastructure or other worthwhile investment to show for all of the money. (The $300 billion they spent in the years between 2004 and 2007 alone, on top of the normal government revenues, would if saved have seen us through the last year without having to dip much into the red ink at all. And their tax cuts are now a permanent lead weight on the annual budget which some poor government will have to wind back, no doubt with extreme unpopularity.)

But having said all of that, what if the neo-classical ideas are just wrong? What if what's really going on is being missed? Neither side of politics would then have much to offer us, nor will treasuries or central banks or, and especially, most economists. More on that next time.