The economics of rort

A BER under the saddle  

The most recent construction industry data released by the ABS make your eyes water with the immensity of just how strangely managed the economy is. 

Economies were once upon a time designed to produce goods and services sought by the community. The direction of economic activity was determined by the wishes of the community as expressed by their decisions to buy one set of goods rather than another. 

No longer. Now we have a vast and growing overlay of public sector spending where it is governments who increasingly decide what to produce with the end no longer the goods and services we as a community want. Now the primary aim is to create jobs. If there is actually any net value produced along the way, so much the better, but if not, well then, never mind. 

The table shows the latest quarterly and annual data on Value of Work Done for Building and Construction. Unless you believe it makes no difference to our future what has been produced, these are numbers that should make you ponder just what is going on. 

Value of Work Done for Building and Construction  

Percentage Change  

                                                            Private Sector                   Public Sector                                                           to Private Sector 

                                                       Quarterly      Annual      Quarterly  Annual

Residential building                           -2.1%         -6.6%              11.0%        61.6%

Non-residential building                   -1.4%       -24.3%              36.5%        98.7%

Total building                                       -1.9%       -13.3%              33.7%        94.5%

Engineering construction                  -2.7%         -0.7%               -6.1%        10.9%

Non-residential construction            -2.3%         -9.0%                3.8%        28.2%

Total                                                       -2.3%         -8.1%                4.0%        29.0%

                                Source: ABS – Construction Industry (December 2009)

And what is of particular value in these statistics is that with these we can separate out expenditure within the private sector from expenditure by governments. I cannot think offhand of any others that make this explicit distinction and what a difference it makes. 

In the two columns on the left are found data on construction by the private sector for the private sector. The quarterly data are just as negative as the annual with the contraction across the year a very unhealthy -8.1%. Non-residential building during the previous twelve months fell by -24.3%.   

It is not possible to find a recovery of any kind in the private sector figures. This is a continuation of recession, resources boom or not. I do not think such depressing numbers will last forever since the business cycle does eventually turn up. But however much we are in a hurry to declare recession at an end, in my eyes we have not quite reached that point yet. 

Now look at the data for the public sector in the two columns on the right. Here is found a different story entirely. 

These are the results of the so-called “Building the Education Revolution” (BER), the insulation program as well as other similar but less well known public sector construction programs. These are the results, in other words, of enormous waste and destruction of value as story after story we hear about these programs confirms. 

You may be sure when it is private sector to private sector activity, both sides of the contract have done everything they can to ensure value for money, particularly the buyer who is unlikely to spend where no return is expected. 

How different it is for the public sector, especially driven by madcap Keynesian ideas that any old spending will do so long as it gets people into jobs. There is, at best, the most minimal effort made to ensure costs are contained and net value really is being created. 

The tales now emerging of the rorts in the system are astounding. There has been little evidence of a genuinely serious effort made to extract positive value in amongst all of the billions (!) that have been spent. 

And unlike with private sector spending, there is nothing in the fact that the money has been spent that demonstrates there has been the slightest bit of productivity growth. Since public sector spending does not go through the market, a dollar spent is a dollar recorded as real growth no matter what was produced. Dig a hole and fill it shows up as real production in our national accounts. 

Does no one understand that the resources used up in production are a cost? Is it not perfectly well understood that unless what is produced has more value than the resources used up, the economy has gone backwards, not forward. 

With the public sector, whether there has been any net improvement in the state of the economy no one can tell. We only know that the money has been spent, with the probability that productivity has actually been raised vanishingly small. 

We will be paying for these expenditures for a very long time to come. You may wonder when your next serious personal tax cut is going to be. When you see data like these, you can be sure it will not be anytime soon. 

Crowding Out  

What the data also show is the clearest evidence of what is referred to in the economics literature as “crowding out”. When governments increase their outlays it typically comes at the expense of private sector outlays, that is, private sector activity is crowded out by public. 

The ways in which government spending has driven up construction costs have made uneconomic projects that would otherwise have been viable. The phenomenal number of projects coupled with the lack of discipline in ensuring costs were contained (BER becoming a “Builders Early Retirement” fund) has seen construction costs rise resulting in a transfer in activity away from the private sector to the public. 

It is only the public sector that can keep piling one wasteful project on top of another without having some kind of device sounding a loud and clear warning. In the market, the device is the absence of a profitable return. Expenditures on goods or services that cannot find a profitable market lead to a series of signals that tell a business to stop doing whatever has caused such losses to pile up. 

In the public sector, what is there? What is the process that alerts the Prime Minister that his projects are failing and that they need to be wound down? Is it only when the evidence is so overwhelming and as with the insulation program individuals are literally dying and houses are burning down? Is it only when the vastly exaggerated construction costs for BER projects come to light? These are signals, of a sort, but they are hardly the kinds of signals we should be needing to rely on. 

The Nature of a Keynesian Stimulus  

The tragedy remains that we still teach economics at the macro level as if spending is of itself a productive activity. Just spend money, governments are told, and everything will take care of itself. 

If ever there was a form of advice that should never have been unleashed on the world, that has got to be it. It is very difficult to get governments to take their 12-step program to fiscal restraint without filling their heads with such nonsense. It takes a goodly number of lessons learnt and economic bungles endured to convince these hardened narcissists that their preferred patterns of expenditure are not the way forward for the nation as a whole. 

Every morning I pass a newsstand on the way to work and no matter how early I walk by, there is a chap sitting there selling the papers. And then at night, on the way home, I pass that same newsstand and that same chap is still sitting there, just as he is if I happen to walk past during lunch. 

It is this fellow, along with the millions of other working people in this country, who pay the taxes that are being so disgracefully wasted in harebrained schemes of almost nil social utility and zero net value added. 

There are better things to be doing with our scarce resources than having them wasted on job- and wealth-destroying public works.