Written by our Economic Forum. Our Aussie Economist
One of the focus areas for the Federal Treasurer, Dr. Jim Chalmers, in his 2023-24 Budget Speech on May 9th was rightly inflation and the cost-of-living (COL).
“In this environment, inflation remains our primary economic challenge – It drives rate rises; it erodes real wages – Which is why this Budget is carefully calibrated to alleviate inflationary pressures, not add to them.”
“At the same time, we understand Australians are under the pump right now. That’s why providing responsible, targeted relief is the number one priority in our Budget. Our $14.6 billion cost‑of‑living plan will: Provide help with power bills. Create more affordable housing.”
But the one-and-only policy measure to address this was redistributing more of taxpayers’ hard-earned money. This is the proverbial ‘rearranging the deckchairs on the Titanic’. Not the RMS Titanic but the COL Titanic.
“We are delivering up to $3 billion in direct energy bill relief for eligible households and small businesses, co‑funded with the states. More than 5 million households will have up to $500 deducted from their power bills in the next financial year.”
“We are increasing the maximum rates of Commonwealth Rent Assistance by 15 per cent. This will provide up to $31 extra a fortnight for people renting in the private market and community housing. We’re going to help drive this with a new tax break for build‑to‑rent projects, cutting the managed investment trust withholding tax from 30 to 15 per cent.”
Putting aside for the moment the lack of any real solutions to COL and the unintended bad consequences of these redistribution policies, they are inadequate to say the least. This inadequacy can be clearly seen in Exhibit A below regarding “food inflation” and “CPI housing utilities” including energy. In the just the past two years, the former rose from 0.7% per year to 8% and the latter from 120.8 index points to 141.7.
But far more important than having a statistical numbers ‘battle’ over redistribution adequacy, is the inadequacy of redistribution as a real solution to COL and without unintended bad consequences. Let’s turn to one the greatest economists and economic historians of the 20th century to help break this down. That would be Professor Murray N. Rothbard in his book Power and Market: Government and the Economy.
“Government coerces consumers into giving up part of their income to the State, which then bids away resources from these same consumers. Hence, the consumers are burdened, their standard of living is lowered, and the allocation of resources is distorted away from consumer satisfaction toward the satisfaction of the ends of the government.”
In other words, COL is pushed up by a ‘double whammy’ of tax and spend. Both ‘crowd out’ the productive and competitive private sector [ie tax-payers] in favour of the unproductive and anticompetitive public sector [ie tax-consumers]. The latter includes, not just politicians and bureaucrats, but also activists and cronies. Thus, the supply-side of the economy shrinks.
“Government cannot spend money until it obtains it as revenue—whether that revenue comes from taxation, inflation, or borrowing. … Inflation is the basically fraudulent issue of pseudo warehouse-receipts for money, or new money. … [In short,] government is inflating the money supply.”
Inflation means more-and-more dollars end up chasing fewer-and-fewer goods and services. Thus, the demand-side of the economy expands. In sum, prices rise when either supply decreases (eg COL) or demand increases (eg inflation). They rise even more when both happen at the same time (eg COL + inflation). Exhibit B below shows these two happening as indicated by government debt ($ million) and money supply ($ billion).
“When the government takes from Peter and gives to Paul, it then creates a separate distribution process. No longer do income and wealth flow purely from service rendered on the market; they now flow from special privilege…distributed to ‘exploiters’ [tax-consumers] at the expense of the ‘exploited’ [tax-payers]. Caste conflict is thereby created, for [the former] benefits at the expense of [the latter].”
Such ‘robbing Peter to pay Paul’ is not only bad economic policy, as it does not solve the effect of inflation and COL which is caused by government printing and spending. But it is also bad social policy, as it strongly encourages ‘rent seeking’ which is about getting ‘free’ stuff at other people’s expense. Thus, Dr. Chalmers’ redistribution ‘medicine’ for inflation and COL, is not just an economic ‘placebo’, but a social ‘poison’. The result being yet more budget ‘snake oil’ from a Treasurer, who is channeling not just Dr. Strangelove, but also Dr. Feelgood.