If this is the most that can be said Keynesian economics is surely dead
An Open Letter on the Stimulus was forwarded to me last week. It was initiated by a number of economists who wished to show their support for the Government’s stimulus. It is worth going through to see the kinds of ideas that Keynesians bring to the table. Here is how it starts:
We the undersigned economists are convinced by the evidence that the coordinated policies of the Australian Labor Government have prevented the Australian economy from a deep recession and prevented a massive increase in unemployment.
Lest it be thought that this is a disinterested set of views by a group of economists interested only in good public policy, from the opening statement it is clear that this is an unpaid political announcement on behalf of the ALP. Why it should be thought that a group of university academics have any idea whether the Australian economy really was heading into deep recession and high unemployment is hard to work out. Such knowledge is the province of forecasters and policy people, and even then it is only an estimate. To assert without qualification – to actually have been “convinced” – is going well beyond an academic’s level of expertise.
Unlike most OECD economies we have come out of the Global Financial Crisis and the subsequent world recession with only one quarter of negative GDP growth and a smaller increase in unemployment.
The closest parallel to Australia is Canada which really is seen as the success story of the GFC. We had a downturn, a rise in unemployment and now carry a large level of debt that will affect public spending for years to come.
We note that during a recession automatic stabilizers (increase in total unemployment benefit payments and decreased tax revenues) lead [sic] to an increased government budget deficit. In almost all the OECD countries there has been a massive increase in unemployment and in budget deficits. In Australia both have been trivial by comparison.
“By comparison” is the right word. A fall in GDP and an almost two percentage point rise in the unemployment rate is not trivial. What has prevented worse has been the stimulus package, but it has been almost entirely the stimulus package in China. How the Chinese stimulus will work out over the next year or two will be an interesting question in itself, but there is little denying that it was the most important factor in keeping the Australian economy on track.
The Government Fiscal Stimulus package that was introduced was carefully crafted and implemented in a clever sequence. The first stage, the payment of $900 to most households, helped to boost confidence in the retail industry.
It may have boosted confidence but it was noteworthy in not having boosted sales. The failure of retail sales to revive since the stimulus is quite an interesting, and a still-to-be-explained phenomenon for those who think a stimulus does good.
The second stage of the stimulus package (the home insulation program, the Building Education Revolution, and the First Home Owners Grant) boosted the construction industry and created thousands of new jobs. Besides the employment effect, it also provided a much needed increase in the stock of public capital (better and greener homes, better schools) and prevented a sudden fall in house prices.
It is almost too much to believe anyone can see in this expenditure an actual improvement in the economy’s capital base. They were expenditure for expenditure sake. There is not the slightest chance the economy will be stronger as a result. Almost every dollar spent has with certainty returned less than a dollar’s worth of value added.
The last stage of the fiscal stimulus package (as it takes time to prepare plans etc.) was the infrastructure program that increased employment as well as increasing the stock of public capital and helping to overcome the significant short fall in Australian public infrastructure, and hence would increase future productivity, taxable capacity and the ability to repay public debt.
Whatever can they mean? Quite seriously, these are expenditures that if they have been made have come to the attention of no one. It is pink batts and BER. What else they have in mind is a mystery – they surely cannot mean the NBN – which is probably why no specifics are offered.
Just as a major corporation goes into debt to invest in its stock of capital, so does a government. Just as many householders have a debt to a bank or mortgage company, so does a government. A government has a budget deficit and a government debt, but it also has capital assets (roads, ports, better equipped schools, Broadband, etc.).
The notion that Government debt on forms of expenditure that cannot possibly earn a positive return is similar to business investments which are intended to pay their own way through added business profitability, shows a chasm between Keynesian thought and the modes of thinking of a market economist. In no other economy in the world would its economics profession even contemplate putting such stuff before the public.
The performance of the Australian economy has been outstanding: the International Monetary Fund (IMF) and the Organisation for the Economic Cooperation and Development (OECD) have show-cased Australia as a model economy.
What the IMF and OECD know about Australia they largely find out from our own Treasury. I will say this for Australia, the outcome here has not been as bad as the US and UK. Curious to think, however, what the IMF and OECD would see was different about Australia’s policy response to the GFC in comparison with theirs.
We hope that the economic achievements of the Australian Labor Government will be recognized by the population.
And back to the unpaid political announcement. All and all, it is pretty clear why this Open Letter has sunk into the waves. Whether any more will come of it over the last two weeks of the election campaign remains to be seen, but I have my doubts.