Tuesday, April 23, 2013

The Grattan Report: Good News, Bad News.

The bad news? The Grattan Institute report is long and deadly boring: 86 pages and some 50 charts.

The good news? Its Overview (page 2) is superbly written and tells everything you really need to know about its content.

Thus, the problem.

The basic conclusion of the report is this: "To be sustainable, current budgets need to be in surplus".

Why must budgets be in surplus?

Because:
"Over the economic cycle of boom and bust, balanced budgets are much better than the alternative. Persistent government deficits incur interest payments, and limit future borrowings. As a result they can unfairly shift costs between generations, and reduce flexibility in a crisis. Yet in good times it is hard for governments to run a surplus. They are invariably tempted to spend money. Many voters prefer outcomes with no obvious losers" (page 2, repeated verbatim in page 10)
So, budgets must be in surplus as a rule to avoid the temptation, full stop: ("lead us not into temptation but deliver us from evil").

So, laid bare and in few words, that's the wisdom behind the Grattan report: deficits are evil, surplus are "much better".

Whatever appearances to the contrary (50 charts!), the Grattan report is not an applied economics work, but a morality tale. How can you tell? Check the usual buzzwords. That's the tale: "courageous leaders" take the "tough policy choices", against the wishes of "many voters [who] prefer outcomes with no obvious losers". It's the "responsible" thing to do.

In fact, unmentioned in that tale there is a propitiatory sacrifice: the "losers", to be scapegoated (this time, they may be looking at you). And there is a reward in the hereafter: all is done on behalf of the future generations.

How can I be so sure that this "study" is worthless? For at least two reasons.

More qualified people than me have explained this at length and you would do well checking with them. But I'll give a quick explanation: a government that issues its own currency doesn't need to borrow money, as the report claims. It doesn't need to collect money as taxes in order to spend, either. It creates its own currency. Monetary policy is, at best, an accessory.

But there is a simpler reason. The "erudite" report offers 8 pages of References. Among the authors cited, there are many luminaries, like Reinhart and Rogoff: 
"Some argue that high debt reduces economic growth... Their successors and financial institutions can then find it difficult to borrow at reasonable costs, and economic growth is often slow for a long time". (page 8)
Their epic and widely publicized debunking at the hands of Thomas Herndon, Michael Ash, and Robert Pollin last week deserves only a footnote. I mean, you wouldn't expect Grattan to revise their "work" in one week, just because its theoretical base was shown to be bunk, right? Besides, Herndon et al at least were included in a footnote, other serious criticism didn't even deserve a footnote.

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I don't wish to be rude. But there is no other way to say this: this report is among the stupidest things I've read in a long time.

When dealing with other people's lives, stupidity is a dangerous thing.

Update:
24-04-2013. The Grattan Institute's record for stupidity surprisingly didn't last long. Standard & Poor's broke it last night:
"Standard & Poor’s has warned that Australia’s AAA rating could be vulnerable in five years if the credit ratings agency doubts the government’s commitment to restoring the surplus, national debt keeps rising and the economy fails to self-correct".
The Moon is 96% full, according to this site, which may have something to do with the S&P announcement.

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