Gerard Jackson
BrookesNews.Com
Monday 6 October 2003

It seems there is nothing like a surplus to resurrect several economic fallacies. Writing in Rupert Murdoch's Australian Mr Des Moore, a former deputy Treasury secretary, argued that it's "highly unlikely that a fiscal stimulus equivalent to about 0.5 per cent of GDP would exert inflationary pressures on prices or wages, particularly as the economy would still be growing below its potential."

The fallacy here is the belief that a fiscal stimulus, meaning tax cuts, can be inflationary. No fiscal stimulus can add a single dollar to demand, unless it was paid out of government cash balances. Fiscal policy, unlike monetary policy, changes the pattern of spending without changing total spending. When governments increase spending by raising taxes, it's obvious that they have reduced the disposable incomes of those it has taxed without raising total spending.

Take as a simple example the case of a parent who gives his children an extra $10 a week in spending money even though his own income has not risen. No sensible person would argue that the parent's generosity has increased total demand. Yet this is precisely our economists argue when governments cut taxes.

The classical economists fully understood this situation as a case of transferred demand. In a very eloquent essay James Stuart Mill mocked the notion that transferring demand from one person or agency to another could increase total spending (Of the Influence of Consumption on Production 1829).

Mr Moore also argued that "A tightening in the eligibility to access such support, with particular emphasis on income and asset testing, would encourage increased participation in the work force and offer scope for significantly reducing the tax burden."

The problem here is that under Australia's mass of labour regulations any policy that "encouraged increased participation" would also raise the official rate of unemployment. Already Victoria's Labor Government is passing legislation that will raise the number of unemployed textile workers. In the light of these kinds of destructive economic policies I fail to see how hitting the unemployed with harder eligibility rules will relieve their plight.

The tragic situation of our unemployed is easily revealed by the fact that in Victoria there is "only one job on the Job Network at any one time for every 10 Victorian job seekers on benefits" (Herald-Sun 8/9/03). Considering this figure, it sounds outlandish for anyone to suggest that the unemployed can be drummed by well-heeled politicians into nonexistent jobs.

In short, Mr Moore's suggestion only makes sense in terms of free labour markets. In that respect, they are completely out of order in Australia.

Note: tax cuts can only increase demand through the process of increased investment in the country's capital structure. This is why cutting capital gains taxes in the US has been effective in promoting investment.

Gerard Jackson is Brookes' Economic Editor