Government spending addictions are not cured by just one more fix. No matter the economic circumstances, one more fix makes things worse and prolongs the cure.
We have had a catalogue of claims from noted economists and even from that paragon of fiscal virtue, the IMF, that fiscal tightening is problematic when economic conditions are parlous. The IMF recently commented, with apparent chagrin, that it had underestimated the effect of austerity measures in Europe on economic activity.
Numbers of economists here encouraged Wayne Swan to defer achieving a surplus this financial year. As we know, he finally agreed, earning the distinction of keeping intact the long-running streak of Labor government budget deficits. This year will bring the eleventh consecutive deficit, stretching from Hawke in 1990-91 through Keating, Rudd and Gillard. Fortunately, we had John Howard and Peter Costello in-between, otherwise we would now be a lookalike European basket case.
The theory which seems to unpin all left-wing governments is that they can afford to borrow and spend when things are good and must borrow and spend when things are bad for fear of making them worse. They have insuperable difficulty in seeing any flaw in this theory. And so it is, the principal purpose of any conservative government is to pay down the debt. That’s it really. Anything else is embroidery.
Once the debt is substantially paid down, left-wing political parties, making unaffordable spending promises, become electable again. Is this merry-go-round inevitable? It is while large numbers of otherwise sensible people mindlessly assume that it is possible to collectively consume more than is collectively produced. And, there is no sign of the force of this assumption dwindling in the face of experience. In fact, lobby groups for every cause imaginable (relieving poverty, healthcare, education, promoting the arts, and so on), relentlessly pursuing the unachievable, give it impetus by creating a permanent sense of injustice.
The glimmer of hope lies in economics though, unfortunately, not in most economists, besotted as they are by Keynesian fallacies. Economics, when properly understood and sold, is the key to a bigger pie and should appeal to those who think it is morally indispensable to extract wealth from the productive and distribute it to the unproductive. This latter battle of ideas is now irretrievably lost. Modern-day progressives-cum-socialists, now forming an incipient plurality of voters, led and moulded by a hopelessly corrupted media, have won the day. The only cause now is to prevent their victory from becoming pyrrhic and impoverishing us all. In other words, we have to save them from themselves for our sake too.
Adam Smith and John Stuart Mill and others explained it simply enough many years ago. Surely we should all be able to grasp it in this ‘more enlightened age’. Wealth is created by those who produce. To produce they need to invest capital. The counterpart of capital is savings. The pool of savings (capital) is scarce. When government taxes and borrows it commandeers savings and reduces the supply of capital to producers. Society becomes poorer. There are all kinds of bells and whistles around this story, but it is indisputable at its core and true whether the economy is soaring or sinking.
Take the current situation in Australia, or in Europe, or in the United States, where economic growth is anaemic at best and where governments are spending much more than they are receiving in revenue. The principal problem is that businesses are not investing and producing to their potential. Policy has to be single-mindedly directed towards helping to solve that problem.
Okay, let’s solve it by the government hiring more superfluous public servants and paying them from taxation or borrowed funds. They will in turn buy shoes, clothes, and cars, and suchlike, and increase the demand for these goods from numbers of grateful businesses. Sage nods of agreement follow.
But wait a minute; why do we need the middle men? Why not get the government to buy the shoes, clothes and cars directly and distribute them for free?
All of a sudden, put this way, most people would think it silly, except perhaps for the Greens, maybe. But why is it silly? It is silly because the government will have to tax or borrow the money from those who produce the goods. This will correspondingly reduce their ability to save and supply the capital that business needs to grow and employ more people.
Of course, weaning an economy off government over-spending (by, for example, sacking redundant public servants) will cause some dislocation as demand falls for the various goods related to the spending. Unemployment will initially rise. There is no help for this. If over-spending were to continue unemployment would eventually rise still further.
When complaints are heard about the economic effects of fiscal austerity, think of them as the bleatings of an addict in the throes of cold turkey. At the same time, remind the progressives/socialists among us that a vibrant and healthy private sector, freed from the over-burden of government, is the key to generating the wealth they will be aching to confiscate when it is their turn on the government benches. That might possibly win them over.
Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics