An economy is not like a household budget

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

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

• 
• • Warwick Smith
  • theguardian.com, Thursday 8 January 2015 23.57 GMT

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

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. 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.

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 toalways 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.

What India's spinners are doing wrong

V Ramnarayan in Cricinfo

Ashwin goes round the wicket far too often  © BCCI

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As someone who watched the great Indian offspinners of the past from close quarters, it is frustrating to watch their modern contemporaries failing to follow some of the basic principles of the discipline.

Before I go into the specifics of the offspin bowling on view in Sydney, with particular reference to India's R Ashwin, I will venture a sweeping statement about Indian bowlers, one that I'll be delighted to be corrected about. On the evidence of the last eight to ten matches I have watched, they give the impression that they do not practise bowling enough. The evidence - circumstantial, I admit - is there for all to see, as they spray the ball around match after match with seemingly no control over length and line. My suspicion was strengthened by what I heard from someone who followed the team around in England and was witness to their practice routine: a lot of gym work and physical training on the field, but not much bowling in the nets. 

This is in sharp contrast to the way Indian bowlers in the 1970s and '80s trained. Spinners and fast bowlers bowled for hours at the nets. Not only does inadequate net practice make you inaccurate in a match, it also denies you the confidence you need to go all out to bowl in an attacking mode, because you are not sure you can land the ball where you want it. You can only play safe then by, for instance, choosing to push the ball through innocuously with greater confidence rather than trying to spin it sharply.

Nathan Lyon of Australia shows much more self-belief than others of his ilk, as did Graeme Swann not long ago. Both give the impression of being well-oiled machines, evidently well primed before they bowl the first ball in a match. Unfortunately even Lyon does not demonstrate great skill or common sense when bowling to left-handers, choosing to go round the wicket the moment one arrives at the crease.

Ashwin, too, is guilty of this seeming lack of application of mind when it comes to bowling to left-handers. Prasanna and Venkataraghavan (and Harbhajan Singh, too) seldom slipped up like this. They preferred to bowl an annoyingly constraining leg-and-middle line to left-handers, to a field that included a slip and gully (or a lone slip after the batsman had settled down and the wicket was not doing much), and always with a forward short-leg waiting for the bat-pad catch. It took a left-hander extraordinarily strong off his pads to force them to go round the wicket. A left-hand batsman will normally feel much more comfortable facing an offspinner coming round the wicket than otherwise.

So when does an offspinner go round the wicket? Mainly to right-handers. Here again, you don't have to look beyond Prasanna and Venkataraghavan. Except when they occasionally did so just to break the monotony of bowling to well-set batsmen, they went round mainly to force the batsman to play, on wickets yielding turn and perhaps bounce. That way, they also reduced the angle and enhanced the chance of lbw decisions, which excessive turn could negate from over the wicket. Two cardinal rules while bowling from round the stumps to right-handers: always have a man at slip, and never change your line. Stick to the off stump or outside it, except when you push one through with the arm from middle to off for an attempt at a clean-bowled or slip catch. The trick is to induce false shots by sticking to the same line and length but altering the angle of delivery.

Going round the wicket also often works against batsmen strong on the sweep. I have seen many such batsmen top-edge catches against this angle of attack.

Watching the Indian bowlers in Sydney, it is difficult indeed to believe that they are sure of their length and direction, or that they have the confidence to bowl to get wickets. The only time they seem to bowl attackingly is when they bowl short - with disappointing results.

In addition to resorting to modern tools of analysis and training, I am sure India's bowlers can benefit from watching videos of former greats or seeking their advice. Ashwin, for one, could be a transformed bowler if he approaches Prasanna or Venkataraghavan for guidance and puts into practice some of their lessons. They could help him improve his finish and follow-through, for instance. I'm sure they are just a text message away.

Cricket - It's all in the angle

Jon Hotten in Cricinfo

How hard is it to deal with a ball that comes at you from "out of the umpire"?  © AFP

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Imagine the scene: David Warner and Chris Gayle are invited to face up to the world's fastest female bowler. Their challenge is to do what they have done to many of the great male bowlers and hit the ball over the boundary. They not only fail to do so, they miss every ball in the over. Waiting in the pavilion, Kevin Pietersen refuses to come in rather than be embarrassed out in the middle.

As David Epstein describes in his wonderful book The Sports Gene, something roughly equivalent to the above did take place in baseball, and it may contain some valuable information for the development of bowlers.

Back in 2004, some of America's top MLB sluggers were invited to the annual Pepsi All-Star Softball game in California to face the fastest softball pitcher in the world, Team USA's Jennie Finch (a few months later, Finch would win an Olympic gold medal at the Athens games).

There are some key differences between baseball and softball. The softball itself is bigger, and the pitcher's mound is 43 feet from the batter's plate, as opposed to baseball's 60 feet six inches. Finch's fastball travelled at around 65mph, meaning that it arrived at the batter in around the same time that a 95mph fastball took to cover the longer distance. And to a top baseball slugger, a 95mph fastball is all part of the day job.

In practice at the All-Star game, Finch threw four pitches at Albert Pujols, a legendary hitter. He missed every one. During the game itself she struck out Padres outfielder Brian Giles and Mets catcher Mike Piazza.

Word spread. Finch took part in a TV show, This Week In Baseball, and struck out lots more top players. Then she met Barry Bonds, seven-time National League MVP, at a spring training camp. She threw 12 fastballs past him before he managed to connect, and he succeeded then only because Finch told Bonds where the pitch would go.

Another baseball legend, Alex Rodriguez, refused to face her at all.

So what was happening?

The key difference was the angle of Finch's delivery. She propelled the softball not in the slingy overarm style of the baseball pitcher but by raising her arm high above her head and then swinging violently downwards in a wide arc, eventually releasing the ball from somewhere around her knee.

A baseball, or a softball, travelling across their relevant distances and speeds, takes around 400 milliseconds to reach the plate. Because at least half of that time is required simply for the body to initiate any kind of muscular action, the batter is not simply watching the ball and then hitting it. There is a large measure of anticipation involved.

Over the course of a career, a baseball slugger has seen many thousands of fastballs, and in doing so has built up a kind of mental directory or template of what one looks like. Thus, as the pitcher's arm comes over, he already has lots of other occasions to compare it to, and the body reacts accordingly.

As Epstein points out, once the template is removed - as it was by the new angle of Finch's delivery - the batter is simply trying to produce an almost-impossible physical response.

Research has shown that the same is true in cricket - a batsman facing fast bowling is picking up a complex series of clues from the bowler's approach and delivery stride that aid in hitting the ball.

The other day in the Big Bash, Andre Russell was bowling to Luke Wright when the ball slipped from his hand and flew at shoulder level towards the batsman. Wright managed to lay his bat on it - actually it flew over the boundary - but his shot was a desperate swing, and his head was averted as he made contact.

The rarity of the beamer means that it doesn't fit into the pattern of the many thousands of other quick deliveries that Wright has faced up to, and so requires a different "template" to deal with. He was fortunate that Russell does not bowl at express pace. Bret Lee's accidental beamer to Shane Warne in the MCC game at Lord's last summer badly injured Warne's hand.

The information emanating from baseball isn't just about beamers and other fluke deliveries, though. It made me think about the low arm of Lasith Malinga, and how hard batsmen - especially those facing him for the first time - find it to pick up a ball they describe as "appearing from out of the umpire".

This is just a small change of angle compared to a baseball pro facing Jennie Finch, and yet it is hard for batsmen to have any sort of pattern recognition. Shaun Tait had a similar effect.

In a format like T20, where a handful of deliveries can have a big impact on an innings, it would be no surprise as the game develops to see bowlers introducing more radical changes of arm angle alongside other deceptions.

India and Pakistan: The fault is not in our stars

Badar Iqbal Chaudhary in The Dawn

Updated a day ago

In the hands of zealots and fanatics, the stories become an argument against all peace initiatives, making the journey all the more strenuous. —Reuters

“The fault, dear Brutus”, Cassius says in Shakespeare’s Julius Caesar,” is not in our stars, but in ourselves”.

Years and years of ‘Aman ke Aashas’ and cabinet level meetings, of confidence-building measures and sari exchanges, of showing up at swearing-in ceremonies and civil society initiatives ... and then they all come tumbling down.

Slowly, painfully, assiduously we pick up the beads and start threading them. Each pearl is accounted for, each step pondered over, but then one slip and the process has to start afresh.

Extravagant, excessive preparations are made to make an omelette of reconciliation. Then a singular egg turns out to be bad, and the food gets spoilt.

It is not that we do not comprehend the need to establish friendly relations. The inevitable falling back to the narratives of peace and of building goodwill, the talks of overcoming the barriers and the friendly gestures all betray the understanding of the necessity of peace that persists among members of the public. If there was a lack of will, these processes would never have initiated, ab initio.

When the anger subsides, the realisation returns that belligerence is not a sustainable model; it cannot persevere, it has to stop.

Why, then, do these initiatives fail time and again?

It is because the animosity is too deep, the sentiments too fragile, the composure too fickle and the hurdles too many. It is this peculiarity which exists in men the world over, but most of all in the men of the subcontinent – the unyielding hubris, and the vanity. That is all it takes to lose focus of the objectives.

All it requires is one Vikram Sood and one Amir Liaqat, and a single moment of commentary in the presence of a jeering, thumping crowd.

All it demands is a single brainwashed soldier, who knows nothing better, and a moment of inhumanity that clouds the mind, to undo years of hard work.

This then gets shared, accumulates airtime, gains public attention and plays on the minds of the two nations – the nations, mind you, who are not wary of barbaric reactions themselves.

Gojra and Gujrat; Babri mosque in Ayodhya and Sri Krishna Ram temple in Karachi; the forced conversions in Uttar Pradesh and the forced conversions in Upper Sindh; all indicate to one aspect of the two nations: despite the animosity, and the overbearing pride in individuality, we are not too different.

We are more alike in treating our minorities than we would feel comfortable to admit.

In the hands of zealots and fanatics, the stories become an argument against all peace initiatives, making the journey all the more strenuous.

Patriotism becomes analogous to war cries, and public representatives, forever ready to pounce on a chance to gain some cheap publicity, dish out threatening statements, basking in their bubbles and relishing the short-lasting pertinence.

Unfortunately, the hawks always take over the narrative in these moments. The cardinal rule of perception is that the more intense, the more enduring statements would be perceived more readily by the public. These bring in ratings, and popularity. They ring home with the fable that has been etched in the conscience of the two countries. In the river of peace, the few ripples of pugnacity get noticed, and the relative sustaining calm gets easily ignored.

Philosophy believes the solutions do exist. Saadi Sherazi, the Persian poet had written:

Garat Khoway man amad nasazawar;
Tu khoway naik-e-khawaish az dast maguzar

[If my nature does not bode well with you, you don’t have to lose your own good nature because of it.]

Or like Marcus Aurelius, one of the five good emperors of Machiavelli, puts it: “The best revenge is to be unlike him who performed the injury”.

One of the two nations would have to show magnanimity; one of the two would have to sacrifice; and one of the two would have to take a leap of faith.

The warmongering would have to take a backseat, despite the excesses from the other side. Hearts would have to be won, foremost. Paranoia would have to be placated. Without this, the current state of affairs would persist.

Building any relationship requires working, but the one that comes with this much baggage requires the most. This is a rut, escaping from which requires considerable courage, ability to forgive and a lot more forbearance than we have shown the capability of.

The fault is not in our stars, but in ourselves.