Category Archives: Remix

A remix of other posts and articles [from others] so they cater for an Australian audience.

How Many Jobs Do the Well Off Create?

One would be forgiven for believing that all good economic outcomes must flow down from the wealthy to the masses, given how much of our tax code has been designed for such an effect. Capital gains tax rates, superannuation tax rates, and negative gearing are just a few of the ways our federal tax system has been tilted to enable the wealthy to accumulate ever more wealth by retaining a high percentage of their financial earnings after taxes. And politicians keep dishing out the favours.

The economic argument that is presented to justify this approach is based on the mistaken belief that if we allow the rich to keep more of their income they will invest it in creating more private sector jobs. In other words, by granting more tax breaks (and often favourable treatment under the law such as removing, weakening or simply not enforcing regulations that are in the public interest), the belief has been that the wealthy would use their higher after-tax earnings and expanded access to national resources to invest in new ventures and businesses that will employ more people.

Now of course it is true that some of this untaxed income does end up in job-creating investments, but a large percentage is simply saved or used to purchase existing assets as investments and does not flow back into the economy in ways that increase sales and employment.

Unfortunately, this approach to economic policy has taken root in both of our major political parties. The decade-long pattern of tax cuts, deregulation, and lax financial oversight has continued irrespective of who holds office.

Rather than creating a bigger economic pie for all, these policies have resulted in the extreme concentration of wealth at the top in levels not seen since before the Great Depression, while the wages of the typical worker have been losing ground to inflation for more than a generation. Workers are getting less and less of the pie. It doesn’t take an economist to realise that this can’t go on forever without serious consequences.

Capitalism can and does take many different forms since it is a product of the rules we design and how we enforce them, along with the culture and ethic of the time. It is deeply troubling that the version we have been shaping via tax policy and legislative action for the past several decades is highly self-destructive since it is parasitic to the primary driver of economic growth: broadly distributed incomes (not to mention the negative impacts on a nation’s democratic institutions and shared natural resources that typically accompany such concentration of financial power).

The good news is that since markets are made, they can also be remade. We have gotten into this situation by changing the rules and we can get out of it the same way. But first we must gain a clear understanding of what makes modern economies work well so we implement the right kinds of changes.

Under capitalism, the economy grows with sales, not savings. This simply means that it is the general spending levels in the economy that matter most for investment and job creation, not the amount of cash that corporations and billionaires have accumulated.

Businesses hire only the number of people they think they need to produce the output they think they can sell. And businesses build up capacity only when they can forecast an increase in sales sufficient to cover debt service and obtain a return on their equity.

Sales drive capitalism, and sales come from incomes being spent, not profits saved. This is why we see corporations holding onto cash or buying back their own stock during recessions instead of investing in new growth.

We’ve been focused entirely on the wrong end of the problem. Tax cuts for the top do very little for the economy, and when allowed to continue for over a decade, often lead to extreme levels of wealth disparity and unhealthy shifts in power relations: dynamics we observe all too often today.

It is imperative that we restore incomes and jobs from the bottom up if we are to return to rising real wages for the majority of working families.

The responsibility for this lies both with policymakers and business leadership. Fiscal policy (how we tax and where we target spending) must play an important role in maintaining a robust economy, in addition to a more responsible corporate culture that takes a long term view of prosperity for all stakeholders.

For policymakers, it isn’t that federal tax cuts are never beneficial to the economy. Rather, it is that we are giving them to the wrong people. Rather than lowering taxes on hedge fund profits and real estate investments, we should be evaluating lifting the tax free threshold and cutting the GST from essential goods and services. Such changes would result in more spending in the economy, creating more demand for goods and services. More sales for businesses = more jobs.

Entrepreneurs rapidly respond to increased market demand for goods and services with new products and services. This is the kind of organic bottom-up, sales-led growth that sustainable and balanced economies require. Instead we create ever larger pools of managed funds chasing returns in assets.

Fiscal policy should also recognise that an increase in minimum wages and raising incomes for our senior citizens in retirement will spur more sales and healthy economic growth than a similar increase in take home pay for the wealthy. And as the issuer of the currency the federal government needs to take seriously its role in supporting domestic employment. In addition to tax policy and spending on infrastructure modernisation and other programs serving the common good, it could also effectively end unemployment by paying for transition employment for anyone between jobs, thereby also stabilising private sector employment levels.

Jobs don’t come from rich people. When we see the big picture, it becomes clear that capitalism runs on sales, not savings. We need growing incomes and spending across the entire population to create more jobs, not accumulation of cash hoards for a few.

We are asking that our politicians to stop pandering to millionaires, and focus on what will help our economy grow. Raising minimum wages, lowering taxes on wage earners, and ending tax favouritism for unearned income is a good place to start. There is so much more we can do to create a far more prosperous economy and enriched society.

This has been a remix of Geoff Coventry’s article at Patriotic Millionaires for an Australian audience!

Why We Should Love Government Deficits

The calls for cutting the federal government’s budget and perhaps even balancing it have continued and are likely to grow louder during this political season. Don’t listen to them unless you want to see a fall in your net financial assets! Government deficits, by definition, create private sector wealth, while surpluses drain it. It’s simple accounting.

To understand this, start by imagining a world in which there is no government and no foreign countries. All economic activity in Australia would take place domestically and be carried out by our private sector firms and households. As a group, they would earn what they spent. If all Australian firms and households spent $1000, then–because one of them was standing on the other side of the cash register for each of these transactions–Australian firms and households would earn $1000. It is logically impossible for them, as a group (though not as individuals), to spend more or less than what they earned–the values must be identical because it’s really double-entry bookkeeping. Every transaction that takes place is both spending (for the person buying something) and income (for the person selling something).

Now create a government. It is only at this point that it becomes possible for one sector (private or government) to spend more than they earned or earn more than they spent. For example, say over its first year in existence, the government takes in $100 in tax revenues but doesn’t spend any of it. You might have something like this:

Government Budget Surplus and Private Sector Deficit

In this case, the private sector spent $1000 on the goods and services it created (which is what created the $1000 in income for them), plus they spent $100 for taxes. The government, meanwhile, earned $100 in income (via taxes), but spent nothing. The government budget is thus is surplus, while the private sector has gone into debt–by the exact same amount, of course. It is impossible for it to work out any other way. The balances must add to zero because, as the last column indicates, total spending must equal total income in a closed system. And with the government in surplus, the private sector goes into debt.

On the other hand, look at what happens when the government spends in deficit:

Now it is the private sector that gets the surplus! In this scenario, the government has collected no taxes, but spent $100 on goods and services produced by the private sector. This creates enough income for the private sector for them to actually save money rather than go into debt.

What the above means is this: government deficits create private sector wealth, while government surpluses drain it. There is no trickery here. When the federal government spends in deficit, it does so by putting financial assets, usually in the form of Treasury Bonds, in the hands of the public; when it spends in surplus, the net quantity of Treasury Bonds held by the public declines. Thus, federal government deficits not only create the extra demand necessary when the economy is at less than full but it puts money in the bank, too. And Australia could never be forced to default on the debt because it is denominated in dollars Furthermore, this is exceedingly unlikely to be inflationary under current conditions..

So, next time you hear Frydenberg or Morrison or Shorten or Bowen or a Coalition or Labor MP talking about reducing the deficit, be sure you put that into the proper context. They are talking about draining your savings account! That’s hardly a sound policy when we have over one million underemployed.

This has been a remix of John Harvey’s article at Forbes for an Australian audience!