In the Financial Review on Wednesday (3 June), twenty-one “prominent Australian economists” signed onto an article in which they more or less endorsed the Government’s economic policies, which means they have endorsed not only the way the money has been spent but also the amounts.
“Better,” they say, “to be debt free.” But this not being a perfect world, and with ourselves in the midst of recession, they go on to argue this:
“As any home buyer knows, debt can help us build assets now that we couldn’t otherwise afford, and we can repay the costs when the assets bear fruit.”
They are also as adamant about the value to the economy of the billions of dollars that have been handed out.
“Cash handouts of nearly 2 per cent of GDP are being paid to middle- and lower-income Australians. There is no more effective way to stimulate the economy quickly.”
Well, there you have it. They could not be more clear. If there is no more effective way to stimulate an economy, then there is nothing more to say.
And just to make sure that we all appreciate that they are writing this in full knowledge of the fiscal consequences, they specifically state that this expenditure “has converted a sizeable expected cash surplus next financial year into a deficit of nearly 5 per cent of GDP.”
Well let these economists have their views. That is the mainstream position, found in a thousand texts and by now having been taught to millions of economics students around the world.
Give me an economist for the first seven semesters of his studies, as it is said, and we will have him for life. These standard macroeconomic conclusions are all that an economist educated today can be expected to know.
Yet the reason that these 21 economists have felt the need to go into print on these issues is because they are perfectly aware that these conclusions are not unanimous. And what’s more, they know that there is an unease about all of the debt that has built up and the billion of dollars that will one day have to be repaid.
The fact of the matter is, that should it turn out that these have been quack remedies, the equivalent of bleeding the unwell and applying leaches to the sick, we are going to know.
Because there are some of us who believe that what is being done will actually make economic conditions worse, with the potential to slow recovery, reduce real incomes, lower employment, push up inflation and cause investment to fall back.
Spending money we do not have on infrastructure with no net value was once seen by economists of a bygone era as about as wrong a policy as one could possibly invent. We are therefore about to find out, in the next year or two, which set of economists – the ones practising today or the ones who have almost entirely disappeared – were in fact right.
We have certainly built up debt. The question is whether in a year or two we are going to look back at all this as a period of temporary insanity that on more sober reflection ought to have been avoided.
What every economist once knew was that economic growth and higher employment were the result of production. Yes, yes we know that still, but now we act as if something called demand is the very essence of what we need.
But what we really need is production of the goods that people wish to buy, and more importantly, of the investments that will actually add to our ability to produce.
What was also once understood is that we live in an exchange economy. Production is not a one-sided process, but requires at least two for an exchange economy to operate.
Production is now almost entirely for the market. Goods are produced by one group, sold for money, and then the money received used to buy what others have produced.
Demand without that prior act of supply, is a form of deceit. Somebody receives something others have produced but gives back nothing in return. The hope is that in the years ahead the economy will grow and the debts that have been run up can be repaid with the higher tax revenues the government will receive.
Nor should it be thought that this is an argument against public spending as such. But unless our aim is to create debt without the ability to repay that debt, public spending must be targeted at what will create future value.
Build roads that goods can travel along at a lower cost, and these outlays repay themselves in higher national productivity.
But to build school libraries or to insolate houses or to build loss making broadband networks will not create any additional value with which to repay these expenditures. We will have the debt, but no extra output to repay any of the monies we are so madly spending now.
I used to say during the surplus years from 1998 to 2008 that we will all have seen what went on but that in the end no lessons will have been learnt. The years of surplus, which we are depending on even now, were not, I think, appreciated enough or understood.
To go back to the far more profound economics of the pre-Keynesian era, it was then perfectly recognised that economies do go into recessions.
It was in the nature of free market economies that every so often there would be a series of events that would lead to a disorganisation of markets. And wherever this disorganisation might start, it would transmit outwards and affect industries far removed from the original disturbance.
We have had just such a series of events which commenced within the housing market in the United States and which infected the financial system of most of the world.
Everyone knows financial systems need protection. Bank guarantees actually meant virtually no money had to be spent. Once confidence was restored, the banking system could go on its way. Beyond that, there was probably little else that had to be done.
The theory of the cycle also used to point out that recessions end by their own devices and if we do not take actions to make things worse they end in a relatively short period of time.
Governments around the world have, nevertheless, decided to spend their way to recovery. They have diverted an immense proportion of our productive apparatus into useless, valueless forms of output.
Billions of dollars of expenditure are now on their way and the associated debts are building. How grateful should we be for any or all of that? In my view, not very grateful at all.
So let me end by pointing to some disagreement I have with the twenty-one. They make the analogy with someone who borrows to buy a house. Individuals who borrow to buy today borrow the purchasing power of others. One person earned the income but someone else got to spend.
This is a transfer of actual income between two persons which occurs at some moment in time. With the debts governments are running up, the transfer, if there actually is a transfer, is from the future to the present. A form of time travel; what physics cannot do, economics apparently can.
And then this business about there being no better way to stimulate an economy than cash handouts to consumers. If the aim is to increase employment, then the process is that someone is given money, the money received is used to buy goods, and after all of the costs of running that business have been met, there may be, but not necessarily is, an increase in profits.
It is then, but only then, that more employees might be put on or those who are already employed kept on.
If cash handouts are the way to go, the cash should go directly to business. Lower taxes, especially payroll taxes, would avoid the middleman. It would put money directly into the hands of firms who would not have to first hand over their valuable goods to get that money, which is the case right now with the money going to consumers.
If we were serious about protecting jobs and driving the economy forward, we would concentrate on lowering the business cost of employment.
It is not buying more that creates growth. It is producing more that creates growth. Why that is so hard to understand I will never know. But hard to understand it definitely is.