Stimulus spending – ‘a bill of goods’
Julia Gillard was interviewed the other night by Kerry O’Brien on the 7.30 Report. The building education revolution (BER) was the topic. It should have been easy for Kerry to skewer Julia. After all, if the reports in the Australian are only half right, she is presiding over a gigantic rorting of public expenditure on school buildings. Alas, Kerry was not on form. Even Julia’s insistence on pressing ahead with billions of dollars of expenditure without the benefit of receiving the results of her appointee’s (Mr Orgill’s) review of the scheme or the theatrical efforts of Tottenham Central school P&C on Parliament House lawns illustrating the rorting, failed to inspire the unusually insipid Kerry. Julia kept returning serve by reminding him of the necessity and virtue of the stimulus. We had to get that money out there quickly, kind of thing. If you can imagine the use of the word ‘stimulus’, with a nasal twang to it, used irritatingly, over and over again, to sidestep the issue of massive and wasteful overspending of taxpayers’ money, you get the drift of the interview. Game set and match to Julia, I thought ruefully.
Perhaps it has to get as bad as people dying, houses burnt down and businesses ruined, as with the ceiling insulation fiasco, before ‘the need for stimulus’ does not excuse any amount of, and any kind of, wasteful public expenditure. We are victims of who Thomas Woods (Meltdown) called one of the twentieth century’s crackpots. Crackpot or not, Keynes has spawned generations of economists and politicians who think that spending money is one and the same thing as making money. You might recall Michael Douglas’ character in the movie War of the Roses saying to his wife (Kathleen Turner), “It’s a lot easier to spend it than it is to make it, honeybun!” Well not according to the national accounts it isn’t.
The latest March quarter national accounts show that while business investment fell, the economy grew by an estimated 0.5 percent over the quarter. This growth was more than accounted for by public investment, which contributed 0.7 per cent to ‘growth’. Every one of those dollars spent wastefully on school buildings ‘made money’. They contributed to growth according to the national accounts. Building ablution blocks in the outback would contribute to growth as recorded in the national accounts. And, the more wastefully expensive they were, the more they would contribute to growth. What does it all mean?
It means that we have been sold ‘a bill of goods’ and, to mix metaphors, have swallowed it hook, line and sinker. Even the conservative Harvard economic historian Professor Niall Ferguson, who will be here in July to deliver a lecture for the Centre for Independent Studies, said (also recently on the 7.30 Report) that Keynes “had a great idea” of using “public borrowing to finance public works to try to galvanise economic activity”. A ‘great idea’; really, is it? While professor Ferguson’s main point was to say that the Keynesian solution might not work when governments were heavily indebted, he unfortunately gave further credence to the potential effectiveness of Keynesian stimulus spending.
Let us be clear about what Keynesianism is saying. It is saying that public spending will take up underused resources and spur activity and growth and taxation receipts. If stimulus spending works; it works. It should work to galvanise activity whether a government is in debt or whether it is not. If it works, capital markets would appreciate the value of what indebted governments were doing and would be supportive. But, in fact, of course, capital markets are far wiser than economists. They won’t buy this particular bill of goods. Keynesianism doesn’t work at all. It is simply that governments can get away with it when they are not heavily indebted. The adverse effects are disguised and governments simply claim, no matter the outcome, that things would have been worse if they hadn’t wasted our money. And this becomes gospel and is accepted, obviously by the Left but also, apparently, by those who should know better
What the national accounts show is that the economy (the real private sector one) went backwards in the March quarter. In fact it was worse than it appears, because resources hired using borrowed money were wasted on ceiling insulation and school buildings and probably other wasteful things that we haven’t heard about. Private non-dwelling construction fell. No wonder, there were probably no architects and builders to be had. You can obviously earn a lot more these days building over-priced classrooms than you can competing for business in the private sector, building factories and other commercial buildings from which real wealth, not phony wealth, is generated.