Peter Smith

Put no credence in the crackpot consensus

The latest March quarter GDP figures disappointed the market. Apparently economists had expected seasonally adjusted growth of 0.8% and it turned out to be 0.6%. As these figures, particularly when first published, are uselessly unreliable it is passing strange that anyone tries to estimate them in advance and even stranger that anybody takes notice.

Let’s analyse the situation. The stock market has fallen recently most every day. Each day investment pundits attribute the fall to this or that piece of news plucked capriciously from the airwaves. The lower than expected GDP figures, based on pure guesses by numbers of economists roaming in packs, fitted the narrative.

My conclusion is that GDP would be totally unaffected, and the stock market would benefit, if all economists and investment pundits simply disappeared from the face of the earth or at least, to be kinder, from TV screens and newspaper columns.

In fact, so far as can be judged, the GDP figures were not awful. Not good, but not too bad. Growth over the year to March was estimated at about 2.5 per cent, whether based on seasonally adjusted or more reliable trend figures. This is less than the average of around 3.4%, which Australia has experienced over the years since, say, 1980, but is far short of a recessionary omen.

Economists, with less excuse than ordinary folk, tend to underestimate the resilience of capitalism in the face of adversity and government ineptitude. They tend to be “captured by the moment” almost as readily as are those trend-hugging investment pundits.

To take an example; Shane Oliver in the Daily Telegraph wrote that “we are dangerously close to recession”. Listen to this for a piece of ‘brilliant’ economic analysis.

“What’s more if you scratch below the surface the economy is actually quite weak. Thanks largely to a sharp fall in capital goods imports the trade sector contributed to a very strong 1 percentage point to growth in the March quarter   [without which]   growth it would have been negative.”

This comes under the category of; if we hadn’t scored twice we would have lost. Dr Oliver should understand that if capital goods imports had not fallen then capital investment would have risen and offset, one-for-one, any attenuation in growth attributable to the trade sector.

It just so happens that our unimaginably inept government, unlike its European counterparts, has not been in power long enough to completely stymie the economy. And the closer comes an Abbott victory; the more fresh impetus will be breathed into the economy. The outlook, I suggest, is auspicious.

And there is good news now. No Gerry; it is good not bad. Australian households are saving more. Chinese factories churning out consumer goods for Western consumption haven’t yet noticed the difference but it’s happening nonetheless.

The household saving ratio is now running at over 10% of disposable income, compared with rather than less than half of that immediately before the GFC and around only 1 per cent in the first half of the 2000s. This means that businesses wanting to invest and expand have access to more domestic financial capital.

However, it’s not hard to find a modern-day economic commentator tutored in the silliness of Keynesian economics, with a bizarre and contrary point of view.

David Bassanese wrote this in the SMH: “Indeed perhaps the biggest disappointment in the March quarter national accounts was the sluggish growth of consumer spending which accounts for just over half of the national output.”

Who knew? Well dimwit Keynesian economists know. Apparently, in their world, the more we spend the more we get. Consumers spending money madly at Harvey Norman et al are really producing national output. Spending and virtue are one.

Leaving aside the flawed premise that eating, say, chocolate is the same as, or can occur before, growing and harvesting cocoa, manufacturing, packaging and transporting the final product, most manufactured consumer products are imported. Their purchase counts little to our national output.

Maybe Shane Oliver and David Bassanese should get together and compare notes on the national accounts and their interpretation. Mind you, I don’t want to pick on just two economists. Most, so far as I can tell, do not understand the national accounts. It’s their Keynesian education which is at fault.

Undoubtedly, they would be assiduous in distinguishing causation from correlation in the normal course. But they see spending rising with production and income in the national accounts; and they give primacy to spending. It defies commonsense to think that spending generates production and income rather than the reverse. But that’s Keynesian economists for you. Everywhere you will hear them (listen to the Reserve Bank for example) talking about demand (spending) as though it were the determinant of economic growth.

John Stuart Mill is turning in his grave. He thought he’d won the debate well over a century ago. Some bad economic ideas are worse than a bad smell. They don’t just hang about they go into hibernation. They fool us into thinking that they have gone, before some celebrated crackpot economist, in this case John Maynard Keynes, resuscitates them.

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

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