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March 11th 2013 print

Peter Smith

The horse still comes before the cart

Keynesians should be grateful to the cult of climate change. If not for evangelical warmists and their economy-wrecking nostrums, your advocates of demand-side stimulation would be the biggest dills on the public stage


The December quarter National Accounts came out last week. They provoked the usual misconceived, uninformative, Keynesian-type analysis. First to the Accounts themselves.


Apparently the economy grew by 0.6% in the December quarter, and by between 2.9% and 3.1%, compared with the same period in 2011 depending on whether you look at the trend or seasonally adjusted numbers. This is far from doom and gloom territory. However, the quarterly growth rates appear to be trending down and growth is uneven across the economy, hence the recent upward creep in unemployment.

One way put the latest quarterly number in perspective is to compare it with the average quarterly growth rate during the last seven years of the Howard government, when it was 0.9%. This might not sound like much difference, but 0.6% a quarter is an annualised 2.42%, compared with 3.65% under Howard. One has the economy doing no more than treading water; the other has it making very respectable headway.

At face value, national accounts tell us where we’ve been. As fascinating as that might be to historians, policymakers and pundits want to know where we’re going and how best to gee things along. The accounts can be helpful but not when they are put, as they always are, in Keynesian blinkers.

In the blinkered world of the Keynesians the only thing to be seen are kids scoffing ice cream, women buying clothes and things, or toffs treating themselves to Lamborghinis. Entirely missed are the delivery vehicles coming from behind and the distant factories, employing labour, pumping out the products and paying wages to buy the aforesaid ice cream, clothes and Lamborghinis. It’s all a matter of expenditure in this world.

So we have this curious analysis from the ABS, picked up by the media, which breaks the quarterly growth in production down into constituent contributions of spending. I will look at the seasonally adjusted numbers rather than (the better) trend numbers because that’s where pundits concentrate their attention.

Apparently government added nothing to growth through its consumption expenditure. That’s a blessing and I don’t want to diminish it, but whoever thought that consumption expenditure by government would ever add to growth?. Household consumption expenditure was recorded as adding a paltry 0.1%, which wouldn’t have pleased please Gerry Harvey. But again, who would have thought that simply spending money on all sorts of goodies would contribute to growth. We clearly live in a spendthrift’s paradise.

Then, for example, we have net exports which apparently added a whopping 0.6% to quarterly growth. In buying more from us than we buy from them, foreigners are also beavering away and adding to growth, which is very good of them. Take note Pauline Hanson.

OK, irony aside, none of this way of portraying growth is wrong from an accounting point of view. Everything that is produced is either “bought” by someone, or held in inventory by the producer. However, it gives rise to the most egregious red herrings. We constantly hear refrains among the educated about aggregate demand and domestic demand and consumer sentiment. These things tells us nothing about the health of the economy, what might be holding it back, and what should be done to spur growth.

Demand — in other words, spending — is a product of economic growth; of production. It occurs because things have been produced and income earned. The cart doesn’t come before the horse.

The ABS produces another set of figures which are much more illuminating than are the expenditure figures. They are gross value added, in volume terms, by particular sections of industry. Comparing the December quarter in 2012 with a year earlier, these show, for example, that agricultural output fell by around 10%; that mining output rose by over 9%; and that manufacturing output fell marginally. The published figures cover all industry groupings broken down into constituent parts. These are the figures that carry meaning.

We should not be asking about spending levels or about consumer sentiment. We need to ask about investment and production in particular sectors of the economy and, as the case may be, what is holding it back. An enquiry of this kind will throw light on impediments to growth. Currently it is likely to show that restrictive labour practices, red tape, green tape, the carbon and mining taxes, and taxes more generally, bulk large. If some of these impediments are eased or removed, investment and production will expand, as will incomes, and expenditure will take care of itself.

This Keynesian concentration on demand which seems to run through the ABS, the Reserve Bank, Treasury, private sector economists, and the media, takes us away from the principal game, which is to grow production.

I am convinced that John Maynard Keynes, and his followers from the Thirties to today, would represent the biggest blight on clear thinking in modern times, if the global warmists had not appeared to steal their thunder.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics