Government in the Economy.

Background.

Over the whole of the twentieth Century there were economic discussions as to how government can guide the economy.

At one end of the spectrum were the Libertarians who believed government had little or no role in economics and should stay out of all fiscal and monetary policy. At the other end were the Marxists who believed that government knew a lot better than the people and it was their role to plan the economy and then to drive the plan.

Both basically agreed with the Pareto and Matthew Laws which said that 20% of the people would accumulate 80% of the assets and that the rich would continue to get richer as the poor get poorer.

The Marxists dealt with this by imprisoning and eventually killing the top 20% who gathered the wealth. A problem with this is that you had to do that on an ongoing basis. Another problem was that the people left behind couldn’t grow the economy and therefore the total size of the economy shrank rather than grew.

The Socialists had a better idea they thought you could just tax the rich and give it to the poor. This lead to money being taken out of the economy by the rich and invested offshore, thereby shrinking the economy and when it was given to the poor it was destroyed instead of being used as an asset to grow the economy further.

From the 1920’s it became fashionable to think that we could have a market economy that was regulated through government by taking on debt in the down turns and paying that debt back during the good times.

This led to a few problems:

1. Politicians couldn’t bring themselves to pay it back. When the polls were close they would always opt for more pork barrelling.
2. Nobody knew where to draw the line with government interference.
3. Another law of nature is that regulation leads to more regulation.
4. Interference never had a time frame and therefore overall government interference just continued to build.
5. Another law of nature is that the further away you get from the coal face the greater the cost. That is the more centralised the government the greater the cost of projects.
6. Government couldn’t help but to try and pick winners. They normally lose.

The Last Decade.

In the decade since the GFC all the problems outlined above have been played out.

1. We have heard for a decade that the surplus would come in the next year. 
2. There was absolutely no reason for the government to get involved in the national broadband network. There were several players involved with several different technologies. It should have been left to them. 
3. The regulation of the finance industry has created significant costs to all Australians. The result of high levels of regulation was the Hayne enquiry which is resulting in more regulation. You cannot regulate bad behaviour. You must educate not regulate.
4. As society becomes more complex new problems arise. In the 1970’s pathogens were perceived to be an issue in water used for swimming so, rightly or wrongly we measured E.coli levels. The debate moved on and we stopped measuring E.coli levels. But regulation once put in place are never removed.
5. It is recognised that if the government carries out a project it will cost three times what it would cost you as an individua due to bureaucracy and red tape.
6. Government tries to pick winners but then they skew the result by adding incentives that normally ends up with unproductive rent seekers winning the day.

The Here and Now.

Governments have taken it upon themselves to look after us so those without a job don’t starve, minority groups are uplifted to equal status, poor businesses can’t go bankrupt, and large corporations are encouraged to focus on virtues and not profits.

All this is achieved by the government printing money and then feeding it into the economy.

We have seen that the way the economy is supposed to work is that increases in productivity increase profits that are then re-invested into the economy to earn a 10 – 15% return. But what is happening now is that the money feed into the economy goes into the following directions:

1. To the unemployed who use it to for consumer spending and pay rent. This money goes to
   1. Offshore to buy the food and clothes.
   2. Investors who use the rent to pay off loans and consumer spending.
2. Capital to the public service that use it to:
   1. Build infrastructure. The vast majority of this goes to service industries and construction companies that buy inputs from offshore and feed and cloth themselves as well as pay for overseas holidays.
   2. Health. Buys inputs from offshore, pays wages which mostly go on consumer spending.
   3. Education. Academic and administration salaries which are used for consumer spending and building construction which ends up in inputs from offshore and consumer spending. 
   4. Policing. I think you get the idea.
3. Subsidies for industry. 

Industries such as renewable energy are subsidised, which means that they cannot make a sufficient return standing alone and need government funding.

The summarise government spending we can see that the majority goes to buy inputs from offshore and goes into consumer spending. That means a minor amount may be invested in assets that will create a future income.

The Result.

Government is printing money that is either going offshore or being consumed. This is being paid for from two directions, Government borrowings and trade surplus. 17 years ago the government had no borrowings. For most of the last 17 years we have had a trade deficit, which has resulted in up and coming borrowings of $1trillion.