Political donations and the destruction of democratic scrutiny

Posted on January 22, 2015 by Warwick Smith

This is an expanded version of an article originally published at The Guardian.

By Warwick Smith

Published by the Transnational Insitute.

Abstract

Many corporations donate to both sides of politics. One of the reasons they do this is to ensure both major parties in an election have sympathetic policies. When both major parties share a policy stance it is effectively removed from democratic scrutiny. The focus of political campaigns and media interest is on areas of policy conflict, the rest is passed over in silence. Corporations often purchase political silence in order to avoid scrutiny of unpopular activities, such as junk food advertising targetting children or the exploitation of gambling addiction.

Corporations don’t give their money away for nothing. There is an understanding (rarely made explicit) that large campaign donations buy political access and favourable consideration in policy development and legislation. Why else would a corporation, which is bound by law to pursue profits, make these donations? Interestingly, many businesses give money to both sides of the narrow political divide; sometimes different amounts, sometimes exactly the same amount. In the lead up to the 2013 federal election in Australia, for example, Inghams gave the opposing Labor and Liberal parties each $250,000, Westfield gave them each $150,000 and ANZ gave them each $80,000. By my count, over one third of donors (excluding individuals) gave to both the coalition and Labor during 2012/13. This is not unique to Australia but occurs in all democracies. For example, in the Unites States, a Center for Responsive Politics analysis found that 48 out of the 100 biggest non-individual donors to gubernatorial election campaigns donate to both sides.

Donating equally to both sides is clearly not about helping one side win. It’s an implied threat: “if you don’t treat us well we’ll give you less and they’ll be ahead.” When both major parties have the same policy on an issue, it effectively removes that issue from democratic scrutiny. This is the aim of many political donations from businesses who stand to lose from policy changes that would be popular with the electorate. Only areas of difference between contenders end up being discussion points during elections, the rest is passed over in silence.

Such a big deal is made out of the few policy differences between major parties that during campaigns they can appear to be poles apart. However, the main contenders in most developed democracies are actually very closely aligned with respect to political ideology and policy – particularly economic policy.

Silencing debate

During their last term in office, the minority federal Labor government in Australia were more or less forced by independent MP Andrew Wilkie to attempt to implement restrictions on poker (slot) machine gambling. Prior to the discussion of reforms beginning, gaming industry lobby groups were giving similar amounts of money to both major parties but slightly favouring Labor. As soon as Labor started talking seriously about reform, the donations began to dramatically favour the opposition Liberals. The leader of the Liberal party, Tony Abbott, came out strongly against the reforms and they were eventually abandoned.

During the period in question, surveys showed that a large majority (70-75%) of Australian voters supported poker machine reform to limit the impact on problem gamblers and their families. The voters lost that one as they often do when wealthy industries are lined up against them.

The gambling interests won the game and showed the Labor party that they weren’t bluffing. The gaming industry has effectively paid to have the issue taken off the national political agenda. The view of the voting public is no longer relevant. There are many more examples of this process where corporate and other wealthy entities punish reformists by shifting financial support. The best-documented examples in recent Australian political history are the mining and carbon taxes and the Future of Financial Advice (FoFA) reforms. There has been plenty of coverage of these issues so I won’t repeat the stories here.

Once a policy issue is effectively silenced, ongoing donations to both major parties help to entrench major party dominance. Large donations to both the Liberal and Labor parties further marginalise minor parties who may seek to break the silence on policy issues that the corporates or elites have purchased. In Australia, the Greens are strong advocates of poker machine reform so donations that advantage the major parties over the Greens are still worth making for corporates who want this issue out of the spotlight. When it’s a two horse race, the outcome is relatively easy to control.

A consequence of this donation-driven approach to politics is that many areas of open political debate between and within major parties are in policy areas that the wealthy elite don’t care much about, like same sex marriage or abortion, or represent divisions between corporate interests. Of course, some vestiges of ideological differences remain and show up in areas such as industrial relations and welfare.

Ideology and history

Industrial relations is a good policy area for revealing the complexities that I’ve so far ignored. In the same way that I have just argued that corporate donations purchase policy and legislative consideration, you could argue that union donations to the Labor party purchase industrial relations policy. However, this would be a gross simplification as the labour movement and the Labor party are intimately entwined in much more than just a monetary sense and industrial relations policy has been at their core from the beginning.

Of course, business interests have also been at the heart of the Liberal party for its entire existence. Have they been corrupted by business interests or was that their platform from the beginning? We can track some of this movement over time and see which parties have shifted and in which direction.

Shift in Political Compass scores for major UK political parties from 1972-2008

The political divide between left and right has historically been much greater across the English speaking democracies than it is today. There was a time when the parties of the left were drawn from and represented the working class and the parties of the right were drawn from and represented business. Then businesses started courting the parties of the left and drawing them right. An economic consensus, neoliberalism, emerged during the 70s and 80s that enlisted politicians of all stripes. The Thatcher, Reagan and Hawke/Keating (Australia) governments prosecuted this agenda in their respective countries, irreversibly changing the political economy of the English speaking world. Neoliberalism is essentially pro-business at the cost of democratic control and social cohesion and once it was the consensus position of all major parties, its march was beyond the capacity of democracy to halt. As has been noted by others, neoliberalism is nothing new, it’s simply capitalism expressed in the absence of effective labour opposition.

These changes followed the oil shocks of the early-mid 1970s and were the result of extremely effective political opportunism on the part of business lobby groups. The high inflation and low economic growth experienced as a result of the quadrupling of oil prices was just the opportunity the industry groups (particularly the financial industry) needed to push for radical reform. The Nixon administration’s abandonment of the gold standard in 1971 had opened up the potential for entire new fields of financial business, the repercussions of which are still being felt today. The extraordinary growth of the financial industry in the intervening four decades began with the collapse of the Bretton Woods agreement in 1971 but was really given strength by the economic reforms of the 1980s and 90s that occurred across the developed world.

Beyond the cash

It’s clear that policy formation and the legislative agenda of major political parties is not explained simply by following money trails. However, the money trails are our best portholes into the rest of the opaque process. Who attends fundraising dinners with senior politicians that cost $10,000 a plate? What do they talk about? It’s easier to spin a story to voters about why you watered down regulations than it is to tell the bankers whom you mix with socially and professionally why you couldn’t help them out. Personal relationships matter to politicians as much as to the rest of us.

Sitting in the middle of this process are the lobbyists and think tanks who invent public rationalisations for policy positions that serve their clients’ interests.

“Among all the things I’m going to tell you today about being a journalist, all you have to remember is two words: governments lie.”

US journalist I.F. Stone to journalism students

Lies are most effective when the liar believes them. The first step in effective lying is to convince ourselves of the lie. This is where the think tanks and lobbyists come in, telling politicians, for instance, that financial regulations have to be eased because compliance is onerous and damaging to the efficiency of business. Too much red tape chokes economic activity. I’m sure many in the current Coalition government in Australia really believed this reason for watering down financial advice regulations but I guarantee the idea originally came from the banks or their lobbyists who simply want to continue to offer advice that is in their own financial interests, rather than those of the customer.

This is a complex and dirty game dominated by political donations, vested interests, personal ambition, class and power. Voters are a part of the game but representing their interests may not be a politician’s top priority. Politicians will only act on behalf of voters if no wealthy or powerful group objects – or if the party in question is boxed into a corner by a hung parliament or a combination of marginal electorates and strong community action.

Everywhere that democratic power has existed it has been under siege from wealthy interests. If the people are to recapture and maintain control of their democracies then they must insist on transparency in political financing and be resigned to never ending vigilance and protest. The extent to which corporate interests have removed issues from democratic scrutiny needs to be more broadly understood and communicated. A democracy taken for granted rapidly becomes a plutocracy.

Author Bio

Warwick Smith is an economist, ecologist, philosopher, businessman and writer. He has very broad professional interests including the application of evidence in public policy formulation, political philosophy, taxation economics, environmental economics, and the history and philosophy of economics.

Warwick blogs at reconstructingeconomics.com, and tweets @RecoEco.

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Interview on economic rent taxes on Sydney’s 2ser breakfast radio

Posted on January 21, 2015 by Warwick Smith

This morning I was on 2ser‘s breakfast program with Mitch Byatt discussing the proposal in my recent Conversation article that we should be increasing taxes on economic rent (unearned income). As usual with such a subject much of the interview was taken up with explaining what economic rent is. It would be good to change the name but the horse has bolted. I like the term unearned income, I think that captures it pretty well.

You can listen to the six minute podcast of the interview here.

Thanks Mitch and 2ser.

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Guardian article on economic myths

Posted on January 12, 2015 by Warwick Smith

Repeat after me: the Australian economy is not like a household budget

By Warwick Smith

Originally published at The Guardian.

Our political and economic thinking has been warped by bad analogies to the point where we can’t see the real economy. The Abbott government is happy to play along.

‘National governments with their own currency bear absolutely no resemblance to a household or a business.’ Photograph: Scott Lewis/flickr

Friday 9 January 2015 10.57 AEST

To prosecute its economic agenda, the Abbott government has relied on the constant repetition of economic myths. I’ve previously dealt with the myths of the budget emergency, the debt crisis and the endlessly repeated lie that the carbon tax was wrecking the economy – but these are only the most obvious myths and not necessarily the most important.

This week, Mathias Cormann repeated one of the other great myths of modern government financing, saying that it was “unfair to rob our children and grandchildren of their opportunities [in order] to pay for today’s lifestyle”.

The suggestion that future generations will have a reduced standard of living because of our government debt needs some unpacking.

What is it that limits the standard of living of people in 2030? It’s the goods and services that those people can produce. As Warren Mosler is fond of saying “goods and services cannot be sent back in time in order to pay for past spending.” The standard of living of people in 2030 will be a factor of the number of workers and their productivity, not how much debt their government carries from the past. So where does government debt fit in?

As I’ve explained elsewhere, the finances of a sovereign government with its own fiat currency bear absolutely no resemblance to the finances of a household or a business. The federal government can create money. They don’t create all of the money that they need for all their expenses because that would cause out-of-control inflation.

The obvious conclusion to be drawn from these two uncontroversial facts is that taxation and borrowing are not the limiting factors on government expenditure, inflation is. Acknowledging this completely turns the mainstream commentary on government financing on its head.

The federal government does not need anybody else’s money in the form of taxation or borrowing in order to spend. They can create money. The reason they tax and borrow is to take money out of the economy so that their spending does not cause inflation or affect official interest rates. In other words, taxation and government debt are tools for economic management, not for revenue raising.
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You may have to sit with all this for a moment and calm the voice in your head that is telling you it can’t possibly be true. Our political and economic thinking has been so thoroughly colonised by the finance industry that we often find it difficult to see the real economy. The real economy is the labour of workers combined with capital and land to produce goods and services.

How did the massive postwar government debts impact on the lives of people living in the 1950s and 60s? It didn’t. These are often referred to as the “golden years” where inequality fell and the standard of living rose at a dramatic pace. Could the workers in the postwar years send their goods and services back in time to support or pay for the war effort? Of course not, it’s a ludicrous proposition. Abbott and Hockey’s suggestion that future generations will suffer because of today’s government spending is just as ludicrous.

The only way in the real economy that future generations can suffer because of today’s government debt is if the government raises taxes or cuts spending in order to repay the debt and this causes higher unemployment. This is never necessary and governments who advocate this (like the Abbott government) have fallen prey to household finance analogies.

While there is spare capacity in the economy, inflation risk is low and there is room for greater government expenditure. One simplistic measure of spare capacity is unemployment. While there is excess unemployment there is room for more (targeted) government expenditure. In other words, sovereign governments have the capacity to always maintain low levels of unemployment if they use inflation as their expenditure cap rather than taxes and borrowing.

If unemployment is the only price future generations pay for today’s government debt and the government can always lower unemployment by more spending, what’s the impact on future generations of government debt? None. Why then don’t we just go on a massive spending spree and have huge debts? Because spending beyond the productive capacity of the real economy would cause inflation.

The costs of too much government expenditure are felt immediately afterwards in the form of inflation and are not borne by future generations.

Hopefully now you can see the full picture. Government expenditure today is not limited by taxation or borrowing but by inflation risk. Government expenditure in 2030 will not be limited by taxation, borrowing or previous debt but by inflation risk. When you’re first presented with these facts it can seem like a magic pudding or a perpetual motion machine but that’s just because we’re used to thinking about finances from a household or business perspective.

National governments with their own currency bear absolutely no resemblance to a household or a business. All of the frequently used analogies give a distorted picture of the reality of government finances. To get a clear picture you need to peel back all the layers of finance speak and look at the real economy.

There are many important conversations and debates we should be having about government finances, the role of government, productivity, consumption and leisure. We cannot have them while the government and media commentators perpetuate myths about how our economy actually functions. Ultimately the material standard of living of future generations is going to depend on the productivity of workers and on a safe environment and climate. Now there’s a policy conversation worth having.

On 12 January 2015, this article was amended to attribute a quote to Warren Mosler.

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Tax economic rent, not productive activity – The Conversation

Posted on January 12, 2015 by Warwick Smith

How’s this for fundamental tax reform? Target the rentseekers

By Warwick Smith, University of Melbourne

The first incarnation of the now-gone mining tax focused on economic rent. Is targeting powerful rent seekers too hard? AAP/Kim Christian

Tax is back in the spotlight with coalition MPs and the Australia Institute talking about getting rid of some of the exemptions to the GST. There has also been a lot of talk about whether or not corporate Australia is paying their fair share of tax. Many big companies, including Apple and Google have been in the firing line because of the small amount of tax they pay on their Australian earnings. Some suggest that our corporate tax rate is too high and this creates a strong incentive for multinationals to shift taxable income to other countries.

Lowering our corporate tax rate and shifting to taxes that target economic rent could help resolve structural problems with our tax system, create a more productive economy and reduce incentives for corporate tax dodging. Such a tax shift could be designed to be revenue neutral or to increase overall tax take.

Even for many economists, economic rent is a slippery term that’s difficult to grasp. Economic rent is unearned income. This means that it has no clearly associated cost of production.

Unearned income can be obtained in many different ways but is almost always derived from privileged access to something scarce. The market power that monopolies can employ to raise prices generates economic rent. A rise in land values beyond inflation generates economic rent for the owner (the “earned” income from real estate is the actual rent or value derived from the use of the land). Unearned income also comes from artificial scarcity created by government policy. Taxi licenses and poker machine licenses are clear examples.

When a communication company uses a part of the electromagnetic spectrum for profit making, nobody else can use that wavelength. The auctioning of electromagnetic spectrum is an effective type of economic rent tax. The spectrum gets put to efficient use and the public is compensated for giving up a shared resource. The company then profits according to how well they use the resource rather than simply because they have a monopoly over it. There is bipartisan support for the auctioning of electromagnetic spectrum but the principle can be applied much more broadly.

The same logic sits behind mineral resource rent taxes – such as the first incarnation of the now-abolished mining tax. When the international price of a resource goes up, those who own the resource (every Australian) receive little benefit. The benefit goes to the mining companies even though they have done nothing to facilitate those price rises and they don’t own the material whose price has risen. This is unearned income and could be taxed in order to return the income flows to the public.

Most businesses in Australia would greatly benefit from a tax shift to economic rents with a commensurate reduction in company tax and the abolition of inefficient taxes such as stamp duties and insurance taxes.

Vast sums of money that are currently directed towards rent seeking would be redirected into productive activity, generating employment and diversifying the economy. Boom and bust property cycles would be flattened due to reduced speculation and, as a result, the broader scale ups and downs of the business cycle would be somewhat moderated.

While the 2010 Henry Tax Review recommended many rent-based taxes (including land tax, gambling taxes and a resource rent tax) as well as taxing environmental degradation, very few of the recommendations were endorsed, let alone implemented. The most significant of the recommendations that were implemented (even if somewhat half-heartedly), the carbon tax and the mining tax, have recently been repealed, primarily due to the inevitable backlash of the rent-seekers.

The political hurdles to serious tax reform are very high. However, the consequences of not reforming the tax system are severe. Tax reform policies are easy prey for opportunistic political opponents. This is why we need some clear principles for tax reform that are clearly explained to the public.

Liberal politicians should favour shifting taxes off productive business and onto economic rents and the exploitation of shared resources because such reforms target market failure and free up productive and sustainable businesses to flourish. Labor politicians too should approve of these principles because they reduce taxes on labour and shift them onto the rent seekers who contribute little to society. The inherently progressive nature of most rent taxes should also appeal to The Greens, the Labor left and the increasing number of others concerned about economic inequality.

Our politicians will need courage to stand up to powerful individuals and groups who have an interest in maintaining the status quo. They can get that courage from the rest of us who stand to benefit from a taxation system that supports a more productive and sustainable economy.

The Conversation

This article was originally published on The Conversation.
Read the original article.

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A Mea Culpa and Some Comments on MMT and Fiat Currency Economics

Posted on January 12, 2015 by Warwick Smith

It has recently been pointed out to me that some of my writing on monetary economics has not given proper attribution to the intellectual tradition behind the ideas that I present and that this gives the impression that these are my ideas. I’m embarrassed to admit that the criticisms are spot on and I have made a major misjudgement in how I wrote these articles (one in The Conversation and one in The Guardian). I apologise unreservedly to those who may have felt aggrieved by my actions.

I have a history in public policy activism and I have approached my recent popular political and economic writing somewhat from an activist standpoint where I viewed the main game as advocating and causing public policy change and increasing public awareness. The branch of monetary economics known as modern monetary theory (MMT) has something of an activist element to it where a minority who hold an accurate view of how things are and, perhaps to a lesser extent, how things should be, are vying for airtime against the overwhelming majority who hold (or at least communicate) a false perspective on monetary economics and public finance.

I thought that I could add a new voice and a new strategy to that struggle by simply writing about monetary economics from an MMT perspective but as if it’s just the uncontroversial (among economists) truth about monetary economics rather than a minority view among economists. I think the complexities of intra-discipline disagreement are impenetrable for newcomers and will put most people off investing the effort to understand the arguments.

Taking this line of thinking led me to make a serious misjudgement in what I wrote and how I wrote it because MMT is more an intellectual and academic discipline than it is an activist movement and, as such, people’s careers and their professional profiles are at stake. Again, I apologise to the people whose work has inspired some of my writing who have not been properly acknowledged including Warren Mosler, Perry Mehrling, Bill Mitchell and Steven Hail.

I wrote to the Guardian editors requesting a couple of additions. They agreed to add attribution to a line early in the article that credits Warren Mosler but not to make further edits post-publication. I’m a strong believer in owning up to mistakes and trying to remedy them when others are affected.

I believe MMT faces serious challenges in part because of its name and the way it is usually presented. A better name would be something like Fiat Currency Economics because MMT is not a theory but is primarily just a description of reality and the clear consequences that flow from that reality. No economist that I’ve found has any clear and well reasoned refutation of MMT to offer. All attempts at refutation appear to rely on misunderstandings or misrepresentations. This is why I took the approach of not referring to MMT at all in the pieces that I wrote. Nevertheless, I still should have referred to the people whose work contributed to or provided the ideas for the articles and I greatly regret that I did not. I promise I will not make this mistake again.

Below is a list in rough descending order of significance with respect to influencing my views on monetary economics.

Perry Mehrling’s Coursera course The Economics of Money and Banking
Warren Mosler’s book The Seven Deadly Frauds of Economic Policy
Various presentation given by Steven Hail
University of Newcastle’s CofFEE report on the Job Guarantee
Professor Bill Mitchell’s blog – this is the most comprehensive of the sources here but it’s low on my list because I came to it quite late in the formative period of my thinking on money and finance.

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Why the federal budget is not like a household budget – The Conversation

Posted on December 17, 2014 by Warwick Smith

This government is fond of comparing the economy to a household budget – but there is one really major difference. AAP/Lukas Koch

By Warwick Smith, University of Melbourne

Treasurer Joe Hockey is experiencing difficult times. Deteriorating terms of trade and an uncooperative senate mean that he cannot deliver the surplus when he said he would and he cannot continue to cut government expenditure without risking a recession.

I have some comforting news for Joe Hockey: the importance of the whole deficit/surplus thing has been greatly exaggerated – with a lot of help from Joe himself of course. The focus on deficits and surpluses distracts us from what’s really important in the macro economy.

Hockey and Abbott are very fond of using household analogies when discussing government finances – Hockey again compared Australia’s economy to a household budget in his Mid-Year Economic and Fiscal Outlook. However, a government that is sovereign with respect to its own fiat currency bears no resemblance at all to a household. Such a government creates the money we all use, either physically on a printing press or, more importantly, electronically in the accounts of financial institutions.

Licence to print money

Everyone understands that governments can create money. Most people also understand that governments don’t just create all the money they need for all the things people want because it would cause inflation. Inflation is the devaluation of money. If you have a really good season for growing apples and there is a glut, the price of apples falls. Similarly, if you have a glut of money, the price of money falls. That’s inflation.

So, here lies the key insight. Inflation is the limiting factor for government expenditure, not taxes or borrowing. A government that can create money doesn’t need your money from taxation or from borrowing in order to spend. There is no limit to how much money a sovereign government can spend, but if government spending plus private spending exceeds the productive capacity of the economy then you get inflation.

The real calculation faced by government should not be about how much money the government has – it has an infinite amount. The calculation should be about the capacity of the economy to absorb government spending without driving inflation.

Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.

The slowing Australian economy combined with the dramatic fall in global oil prices mean that inflation is set to fall and unemployment is rising. This is precisely the kind of environment into which the federal government could spend without borrowing (i.e. create money). Times like these represent opportunities for the government to finance productivity improving infrastructure and provide much needed services for nothing. I know it sounds too good to be true but this is the reality of a fiscally sovereign government.

The government could spend more

Can the government just spend as much as it wants on whatever it wants? Of course not, the result would be out-of-control inflation. Can it spend a lot more than it currently is without substantial negative consequences? Absolutely.

The much discussed “quantitative easing” in the US, UK and EU is an example of this kind of spending (though very poorly targeted). The US Federal Reserve has created trillions of dollars out of thin air and used it to buy risky financial assets and government bonds in order to take the risk off the balance sheets of financial institutions and improve their supply of money. The money was created with keystrokes on a computer which simply credit the accounts that these financial institutions hold with the Federal Reserve. There has been no runaway inflationary impact of this “printing” of trillions of dollars.

This reality of fiat currency is very difficult for many people to grasp but it’s not quite the magic pudding that perhaps it appears to be. When a government creates money, it isn’t creating value from nothing. The value lies in the human and capital resources that are underutilised in the economy. The money created by the government is simply the lubricant needed to mobilise these resources.

So, productive government spending is limited by the capacity of the economy to provide the goods and services that the government wants to purchase plus the goods and services the non-government sector wants to purchase. During economic downturns, and especially in recessions, there is spare capacity in the economy which can be employed by government. It’s possible, with this in mind, to quite easily return to the post-war days of genuine full employment even during an economic downturn.

Some basic realities

Until people understand the basic realities of monetary economics we cannot have a meaningful discussion of government finances. Rather than worrying about deficits and surpluses we should be asking whether the economy would benefit from greater or lesser government expenditure or taxation. This calculation balances unemployment, spare capacity, and the need for infrastructure and services against inflation risk. It’s a complex calculation but the underlying principles are pretty straightforward.

Let me just restate for emphasis: the need for balanced federal budgets is a myth. Like many myths, it does have some factual historical origins. Back when currencies were backed by gold it was possible for governments to go broke. Because modern currencies are not backed by anything material, sovereign governments cannot run out of money and can never be insolvent in their own currency. Somehow, mainstream political thinking hasn’t kept up with the dramatic changes in the monetary system that occurred more than 40 years ago.

The first of our politicians to really understand this and to communicate it effectively to the public will have at their disposal the tools to completely reshape our economy for the better. I know politicians can be slow off the mark but 40 years is long enough. It’s time they caught up.

The Conversation

This article was originally published on The Conversation.
Read the original article.

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The perils of the last human: flaws in modern economics

Posted on December 2, 2014 by Warwick Smith

By Warwick Smith, University of Melbourne

The ConversationThis article was originally published on The Conversation.
Read the original article.

Are we really in charge of our own destiny? Flickr/Michael Shane, CC BY

Nietzsche’s much quoted line “God is dead” was not, as it is often presented, a statement of triumphant atheism but was a warning and a call to action. We had killed God with rationalism and science. With God had gone our moral compass and our sense of purpose and we had nothing to replace them with but science and logic.

This is an existential problem because, as David Hume famously proved, you can’t argue from “is” to “should”. We may be able to use science to help us get what we want but we cannot use science to tell us what to want nor to tell others what they should want.

This is where the field of economics has stepped in. Human well-being, according to mainstream neoclassical economics, is fundamentally about the expression of individual preferences. The more money we have the more preferences we can express and, therefore, the freer and happier we are. Boom, Nietzsche’s existential problem solved.

Jeremy Bentham, An Introduction to the Principles of Morals and Legislation said:

Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do.

The utilitarianism that underpins neoclassical economics simply equates money with choice and choice with the freedom to pursue pleasure and avoid pain. The freedom to buy.

Economists tell us that economic growth is, therefore, the key to progress. Growing the economic pie gives more people more options and that is the goal of society. It’s a technocratic system where we believe any problem can be solved by better application of theory.

This technocratic focus on economic growth has brought unprecedented material prosperity to the western world. As a result, major political parties around the world have ceded authority to the technocrats. The utilitarian calculus that sits beneath our economic system is never questioned. Instead, political debate centres on how to balance the trade-offs and whether to compensate the losers in the race to gain wealth and consume.

I’m very fond of boats myself. I like the way they’re contained. You don’t have to worry about which way to go, or whether to go at all – the question doesn’t arise, because you’re on a boat aren’t you?”

Tom Stoppard, from Rosencrantz and Guildenstern are dead.

Crusing, helmless

What’s missing, of course, is any basis on which to evaluate the direction that society, or indeed humanity as a whole, is taking. We’re on a giant cruise ship and we are completely free to explore and enjoy. However, there is nobody identifiable at the helm.

The issue of climate change is a perfect illustration. Our headlong rush for economic growth and consumer items is altering the very climate of the planet and we appear powerless to change course. Despite dire predictions from the world’s scientists very little action has been taken. The very notion of human induced climate change and the actions required to arrest it clash so fundamentally with the modern mantra of “gain wealth, forgetting all but self” that many simply refuse to believe it.

The economic constraints on freedom are extremely powerful. Risking economic security for the sake of the future climate borders on inconceivable in a society dominated by individualistic social hierarchies of wealth and the cult of celebrity.

Financial institutions lend ever more and more money to investors who pay more and more for real estate based on the assumption that others will pay more still. The result is that the average citizen has to spend their whole life in debt peonage to banks just to have a house to live in. They are no freer to challenge the financial system than feudal peasants were to challenge their lords.

Our farmers are similarly trapped by debt into fossil fuel based farming. Most can’t afford to take risks experimenting with more sustainable farming practices when they owe a million dollars to the banks for farm machinery.

Even those who do make climate action a priority in their lives find that there’s nowhere meaningful to take their petitions and nobody to read their letters. There’s nobody at the helm. Lines of accountability and power are so scrambled that even those in the highest political offices in the world appear powerless. The cruise ship sails relentlessly on.

Avoiding life, purposefully

In “Thus Spoke Zarathustra: a A Book for All and None”, the work that Nietzsche considered to be his most important, he warns us about the perils of the last human being, a possible future for humanity in which we are mindlessly naïve, happy and healthy but lack all spirit, vitality and creativity; that is, we lack life itself. Nietzsche would be horrified by the modern cult of happiness seekers, seeing the pursuit of happiness and the avoidance of pain and suffering as being equivalent to the avoidance of life itself. Embracing life necessarily means embracing the painful and the difficult elements of life as well as the enjoyable and easy parts.

Instead of avoiding life by weaving a path that avoids discomfort, Nietzsche says we should master ourselves by embracing our inherently conflicting natures. He reaches back to ancient Greece, to the opposing but complementary elements of humanity represented by Dionysus and Apollo. Our modern capitalist society has subordinated the disciplined, considered and directed Apollo into the service of the hedonistic goals of Dionysus. If we can heed Nietzsche’s advice and value personal balance and self-mastery we can orient our lives towards an intentional vision for the future. For Nietzsche this was not about having a goal for the future but instead having an orientation for right now. The difference is subtle but extremely significant.

Our economic system funnels our will into the pursuit of material prosperity and comfort. This is the very opposite of freedom. It stifles creativity and forces our life energy inwards instead of outwards, turning us into what Nietzsche describes as “the sick animal”. Despite our material prosperity we suffer from “affluenza” and write self-help books to each other in an attempt to diagnose and treat the panoply of mental and physical afflictions caused by our wealth.

The fact that our economic system is a social construct means that we have made a choice, even if an unconscious one, and that we can remake that choice.

Instead of being bound to self-centred and self-destructive consumption by an economic system embedded with values we had no choice in, let us take Nietzsche’s advice and orient ourselves towards an intentional vision of the future. If we each bring our vision to bear on our political engagement we could lift the political and economic discussion out of its Dionysian opium den and develop a system that reflects what we truly value.

An shorter version of this piece won the New Philosopher writer’s award III.

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What will you lose when the carbon bubble bursts?

Posted on November 25, 2014 by Warwick Smith

By Warwick Smith

Last week I attended a panel discussion on whether or not the bursting of the carbon bubble would cause the next global financial crisis. The event was organised by the University of Melbourne’s Faculty of Business and Economics and the four high profile panellists were Ross Garnaut, John Hewson, Jemma Green and Tony Wood.

I’ve been to a lot of events like this but this was the first where the discussion was grounded on the assumption of meaningful action to avert climate disaster. Instead of the usual doom and gloom with respect to the future climate, the well-informed panellists were mostly discussing the financial implications of the beginning of the end of the fossil fuel era.

Ross Garnaut and Jemma Green told us that the great China driven resources boom of 2003 to 2011 is not coming back. Resource prices are higher than they were in 2003 but much lower than they were in 2011. The massive investment in new mines and mining infrastructure in recent years in Australia has missed the boat and many of those investments will not even return the capital invested in them, let alone make a profit. According to Jemma Green, Australian companies whose only interest is coal, have fallen in value by 60%, on average, since 2011.

There was supposed to be something of a debate but the most striking thing about the whole event was the level of agreement among the panellists. The first and perhaps biggest thing the panellists all agreed about was the great significance of the joint announcement made last week by the US and China with respect to their carbon emission targets. All of the panellists concluded that this was a game-changer and that it signalled a high likelihood of a significant international agreement being reached next year with respect to post 2020 global emissions targets.

The discussion really centred around the risk faced by fossil fuel investors with all of the panellists indicating that investments in carbon intensive sectors were high risk in the current political climate. Nobody seemed to really seriously entertain the idea that the write-down of fossil fuel assets would cause another global financial crisis though John Hewson did suggest there are risks to the financial systems of some economies that are overexposed to fossil fuels – like Australia’s.

John Hewson also prompted us to ask how honest our super funds are being about our carbon exposure risk. Will we lose a lot of our retirement funds when the inevitable write-downs of fossil fuel assets occur? Are the energy and mining companies themselves being honest with their shareholders about their risk exposure?

Tony Wood from the Grattan Institute made a great point with respect to the action taken by carbon exposed companies. Their natural reaction to the changing carbon policy landscape is to protect their company in the short term while they implement plans for long term adjustments to the new reality. Their short term actions are aimed at stalling policy change for long enough for their long term strategy to be implemented. On the face of it they may seem to be denialist and obstructionist but in the background they’re getting ready for a carbon constrained world. This is simply the rational actions of profit maximisation – something they are obliged to prioritise.

The panellists all agreed that there was an oversupply of coal and that coal demand would peak before supply, causing even lower prices than we see today. The enormous investment in coal mines and coal export infrastructure in Australia would largely be wasted. In particular, they warned against governments spending public money supporting the coal industry, as the Queensland government has just promised to do with the construction of the rail line to the Galilee Basin.

I sense a dramatic paradigm shift occurring. Investment in carbon intensive industries is no longer just a moral issue relating to climate change but has become a financial risk issue. Major investment managers are starting to pay attention to climate change action and policy and the impact they have on investment returns. Divestment campaigns combined with the threat of stranded carbon assets and overinvestment in supply have already seen many carbon exposed stock prices tumble. Many analysts believe this is the beginning of the slow but inevitable demise of the fossil fuel era. For those of us concerned about climate change these developments, along with last week’s China/US emissions announcement, are sorely needed reasons to be optimistic about the future.

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Hockey’s G20 plan says economic growth is more important than a civilized and humane world

Posted on November 20, 2014 by Warwick Smith

By Warwick Smith

Joe Hockey with other G20 finance ministers. Photo: Getty.

Punishing the unemployed in Australia for the lack of available jobs is not enough, Joe Hockey wants all of the G20 countries to adopt his cruel policies.

The Australian Government’s growth strategy prepared for this month’s G20 meeting in Brisbane insists that cutting benefits for the unemployed is an important tool for stimulating economic growth. The idea is that this will force more people off unemployment benefits and into work.

There are several unsupported assumptions that sit behind such measures. The biggest of these assumptions is that there are a lot of people out there who could find work but choose instead to live the high life on their $250 per week unemployment benefits. These are the worst of Hockey’s “leaners” who exist at the expense of the “lifters”.

The most obvious statistics that make a mockery of Hockey’s world view are the Australian unemployment and job statistics. There are currently around five unemployed people for every job vacancy. We know for a fact that there are many unemployed people who are desperate for work who cannot find work, particularly young and over 50s job seekers. So, even if we accept Hockey’s ridiculous assertion that there are a lot of bludgers out there who are intentionally unemployed, what good would it do if we motivated them to look for work when there aren’t enough jobs anyway? This is far from unique to Australia, we have relatively low unemployment compared to much of the G20.

I spent a while in the mid ‘90s supervising Jobskills teams. Jobskills was an early version of work for the dole targeted at the long-term unemployed. Most of the young people in these programs really wanted work. They weren’t disabled, didn’t have obvious mental illnesses nor obvious drug or alcohol problems but many of them would have really struggled to hold down a regular job. Some couldn’t keep a short series of instructions in their head long enough to complete the list. Some just didn’t seem to have a sense of time or struggled a bit with normal social interactions. They wanted to work and were capable of producing work but you wouldn’t employ them by choice if an efficient and independent worker was your priority.

People like this find employment through well targeted programs that support them, train then and match them with willing and understanding employers, not through being denied unemployment benefits. One certain consequence of Hockey’s proposal would be to dramatically increase the motivation to seek a disability pension. Those involved in making such assessments would likely feel more inclined to grant disability pensions for fear of what would otherwise befall such individuals.

There is another group of people on unemployment benefits who would qualify as bludgers in Hockey’s world. They rarely rate a mention. These are artists and other creative people of various types who are pursuing their passion and often giving generously to their community. Making a living from art is extremely difficult and few manage it to any reasonable standard of living but producing art and trying to make a living out of it is an artist’s version of job seeking. Comedian Will Anderson referred to his six month stint on the dole as an “unofficial arts grant” while he tried to make it as a stand-up.

I personally think that if an artist can survive on the meagre $250 a week unemployment benefits plus whatever they can make from their art then that’s a reasonable price for the community to pay for their contribution and for the potential to nurture the occasional great talent. A culture of art and music enriches all of our lives.

It is only through art that truly radical ideas can be expressed because the truly radical is often outside of our linguistic repertoire. Some of those who dwell on the edges of society, including many artists, musicians, writers, comedians and activists, serve as our jesters, oracles and social barometers. Somehow forcing them to get a “real job” would be a loss for us all, not least the other keen job seekers whose job they might get. In the absence of generous funding of the arts through other programs, unemployment benefits are more than a social safety net, they are also a creativity safety net.

Bear this in mind: by many measures Australia is the richest country in the world at the richest time in world history. In the 2012/13 financial year Australia spent only $8.5 billion on unemployment benefits (that’s Newstart plus Youth Allowance). It might seem like a lot but eight billion dollars is little more than pocket change for the federal government with total expenditure of around $400 billion. We’re giving nearly twice as much in tax breaks for the richest Australians’ superannuation this year as we spend in total on unemployment benefits. Don’t listen to Hockey when he says we can’t afford things, it’s just a matter of priorities.

One very important fact that you won’t hear Joe Hockey state is that inequality is bad for economic growth. He says he want’s growth but Hockey also wants to implement a whole raft of policies, including these harsh measures against the unemployed, which will increase inequality in Australia. Even the conservative International Monetary Fund is urging governments to reduce inequality because doing so will promote growth. Not only are Hockey’s policies inhumane and uncivilised but they are also counterproductive when it comes to his stated goals. It makes you wonder what his real goals are doesn’t it?

Posted in Australian politics, Inequality | Tagged , , , | 1 Comment

To attack rather than build is now the norm, but the Coalition’s negative campaigning is backfiring

Posted on November 7, 2014 by Warwick Smith

Attacking a policy simply because it is open to attack can result in painting yourself into an awkward policy corner

First published in The Guardian Friday 7 November 2014

By

Tony Abbott in Manly.

Tony Abbott in Manly. Photograph: Don Arnold/WireImage

The Abbott led federal opposition in Australia was an extremely effective one. More disciplined than anybody forecast. They focused like a laser beam on any action by the Labor government that could be effectively attacked. It was primarily a negative opposition, with the biggest promises being the undoing of Labor’s legislative and infrastructure agenda. Abbott opposed the NBN, the mining tax, the carbon price, poker machine reform and much more.

There’s obviously nothing compromising about attacking a policy with which your party has a historical philosophical opposition. However, attacking a policy simply because it is open to attack can result in painting yourself into an awkward policy corner.

It’s almost universally agreed by economists and policy experts that a carbon price, through a tax or trading scheme, is the most effective and efficient method for reducing emissions. Julia Gillard opened herself to attack over the carbon price because of her promise during the election campaign that there would be no carbon tax under her government. The Coalition leapt on this broken promise and attacked the Gillard government relentlessly.

Once in government, the Coalition’s opposition to the carbon tax/trading scheme left them in a very awkward position because the domestic and international political climate was such that they couldn’t do nothing but, because of their campaigning in opposition, their climate policy couldn’t be a trading scheme and it couldn’t be a tax. That left us with Direct Action. It’s a garbage policy that pays polluters not to pollute, with no price signal for the rest of the economy. Direct Action rewards the most profligate polluters because they are the ones who will most cheaply be able to reduce emissions and it offers no assurance that emissions across the rest of the economy will not rise.

The smarter members of the Coalition know full well that the carbon price they dismantled was more effective and efficient at reducing emissions than the Direct Action plan they have replaced it with but inefficiency and ineffectiveness of climate policy is a small price to pay for power.

A market based approach to dealing with environmental externalities such as pollution fits perfectly within the Liberal party’s political philosophy. Plans like direct action that involve selective rewards to individual companies are precisely the kind of piecemeal initiatives that the Coalition have traditionally opposed. This third rate policy that goes against traditional Coalition philosophy is just one of many prices they have had to pay for their election strategy based on negativity.

The Coalition opposition to the National Broadband Network is similar, though more complex. The initial Coalition position was simply to oppose the NBN and cancel the project if they won power. Upon unseating Malcolm Turnbull as opposition leader, Tony Abbott, in a move of tactical brilliance, made Turnbull shadow communications minister. This was clearly designed to politically destroy the publicly popular Turnbull as it made him the spokesperson for one of the Coalition’s most unpopular and indefensible policy positions, one that Turnbull himself, one would hope, probably didn’t agree with.

Among proponents of faster broadband infrastructure in Australia, Turnbull is alternately credited with saving the NBN and despised for being the harbinger of the Coalition’s much derided “NBN light”. Turnbull took the Coalition’s policy from no fast broadband to an investment in a “mixed technology” broadband infrastructure program that would deliver faster broadband to 98% of Australian homes and businesses – but still a fraction of the speed promised by Labor’s NBN.

Clearly the Coalition are not the only ones practicing negative campaigning. It’s become the norm. Small target politics is a result of relentless and effective negative campaigning from both sides of the narrow political divide and from vested interests outside of politics. It’s much easier to pick holes in somebody else’s work than it is to create defensible work yourself. The coalition’s negative campaigning during the 2013 federal election (well, actually during the entire six years of the Labor government) will also have a lasting impact on federal Labor who will likely be much more cautious next time they are in government.

The major parties are now likely to be more imbedded than ever in this negative mode of campaigning and it will take a concerted effort from the public and from the media to drag them out of it. We need to make it clear that critique of the other is only one small part of a valid campaign platform that should be founded on a positive vision for the country. The critique of other parties’ policies can then be related to how they fail to promote or create this vision.

The reality is that very few people voted the Abbott government into power. What they did was vote the Gillard/Rudd government out of power. This negative mandate resulted in a government that few were prepared for and who surprised so many with their first budget. Before the election we knew very well what the Coalition were opposed to but we knew very little about what they stood for. Will we be saying the same about Labor at the next federal election?

Posted in Australian politics, democracy, Political philosophy | Tagged , , , , | 1 Comment