Peter Smith

Humbug economics

Professor Warwick McKibbin, ex Reserve Bank board member, is on the conservative side of the fence. I would prefer he were on the other; at least then he would have a license to practice bad economics. He called for government spending on infrastructure to boost the economy, after the Reserve Bank reduced the cash rate to 3% to “foster sustainable growth in demand”.

I wanted to start with Professor McKibbin in the company of other experienced economists (like Chris Richardson of Access Economics and Bill Evans of Westpac – assuming they weren’t misquoted) before venturing into the spirit of Christmas with Wayne Swan and Bill Shorten.

The economy seems to be faltering. The latest national account figures showed annualised growth in the September quarter (trend figures) slipping to 2.6%, compared with 3.4% over the year to September, and with over 4% when measured earlier this year. This fits with anecdotal evidence of plant closures in the manufacturing sector, a gradually weakening labour market, and other softening economic indicators.

The Reserve Bank has responded by progressively reducing interest rates (the cash rate) from its most recent peak of 4.75% at the beginning of November last year to 3% now. What! Even though our glass is half full?

At the same time as all this is happening, Mr Swan is trying desperately to balance the budget. Oh my goodness, the experienced economists say, this is all contradictory. We need to boost government spending to complement monetary easing. First, these economists should relax. Swan is not actually going to balance the budget, at least in any meaningful sense. Second, moving to fiscal balance is not contradictory; it is complementary.

The Australian’s advice to the Government in its editorial last Friday was to pay more attention to experienced economists. The problem is that these experienced economists, along with Glenn Stevens, are all steeped in the mysticism of Keynesian economics. This is akin to being steeped in mounds of bulls’ droppings.

Spending money is not the same as making money. This applies to all countries at any time. But take Australia. We have to borrow overseas privately and publicly to fuel our excess of spending over income. Exactly how are we short of demand in any aggregate sense?

We may be stumbling towards becoming short of well-based production which matches available resources with profitable markets for the goods produced. Lower interest rates and the government absenting itself from more borrowing and wasteful spending will both help. They will work in tandem to encourage and make room for well-based private sector investment and production.

Of course, often so-called conservative economists give themselves an apparent get-out of left-wing nonsensical economic prescriptions by advocating infrastructure spending rather than just willy-nilly spending. It doesn’t matter, you have to make money, or have very sound plans for making it, before you spend it. Government borrowing and spending on infrastructure is worthwhile only if there are demonstrable net economic benefits; and such benefits are greater than those that would accrue as a result of private projects crowded out by government borrowing and spending.

Decisions by government to borrow and spend on infrastructure should be made in the cold light of day on the basis of objective advice; uninfluenced by this year’s economic news and noise. Infrastructure spending is for the long haul not for a day trip.

So Swan is sometimes right. He is right about getting the budget into balance, even if he will be ultimately undone by the Labor Party’s pathological addiction to spending money. But look, Swan always looks on the bright side of life and will be able to put a good spin on things however they turn out. His colleague Mr Shorten is also a cheerful sort and an inspiration to working folk. Both thought of the latest economic news (in Shorten’s case a statistically insignificant monthly dip in the seasonally adjusted unemployment rate) as Christmas presents for Australians.

Jeez Ma I’m worried about me job.

Don’t worry Pa, I drew some of our saving from the bank and spent it on dozens of bottles of Rosella tomato source. That should keep the factory goin for a bit. And we should keep cheerful. That Mr Shorten; he said the latest job numbers was a good Christmas present for all hard working Australians; and Mr Swan; he said that the interest rate fall was a good Christmas present too.

 Maybe we should ask Mr Shorten to buy extra tomato source Ma? Didn’t the bank just tell us that the interest rate on our savings was going down again?

Oh well Pa, let’s say Merry Christmas to Mr Swan and Mr Shorten, and God bless us everyone!

Bah Humbug!

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

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