Lessons to be learned from the stimulus
The doubts now being expressed more widely about the value of continuing with the public spending approach to recovery seem to miss the point. There is, as we find from the media, growing recognition that the downturn is not going to be as bad as originally supposed and that the stimulus should be wound back sooner rather than later.
For what it’s worth, in my April Quadrant article I wrote:
What the present recession will share with all of its predecessors is that one day, and not all that long from now unless we really do mismanage the downturn, even this current recession will also be a creature of the past while everyone busily gets on with re-building their wealth.
So let us begin with this. Economies are cyclical. There will be downturns every so often but to treat each and every one as the end of the world as we know it is a form of short-term lunacy.
The lead in this public spending frenzy was given by the unbelievably incompetent Obama Administration who have decided not to let this crisis go to waste through a $787 billion stimulus that will potentially hobble the US economy for years to come.
That Australia mindlessly followed suit is just an unfortunate consequence of the Prime Minister’s poor grasp of economics. His article in the February issue of The Monthly is a treatise that ought to be examined closely. It was, of course, hammered from pillar to post as the threadbare piece of nonsense that it was, but that is no reason to ignore it for the lessons it can teach.
Because reading through this article and others that the PM has put his name to, offers a kind of protection from further excursions along the directions he outlined. The lessons that should be learned by our senior public servants in economic portfolios, along with the members of the Cabinet and the community itself, is that this is a PM whose economic judgement is faulty to the core.
Barack Obama’s is far worse, but there’s not much we here in Australia can do about that. But what we can do is protect ourselves from the anti-market fundamentalist beliefs of Kevin Rudd who has shown himself to be no kind of economic conservative whatsoever.
The other point to make is that if we are walking away from the stimulus packages as useless or worse, there is a tacit – definitely not explicit – recognition that the money that was spent – and is being spent – provided no added value to the economy. These are wasted funds which means we have wasted our scarce resources. We are undertaking projects whose social and economic return is far below their cost. We will take on debt that the projects themselves can never contribute to their repayment. They are just a dead weight cost to us all.
Economists have supported increased public sector spending during recessions going back to a time before Keynes was even born. The General Theory had no influence on that. What it argued that was different from that past was, firstly, that deficits did not matter and then, secondly, that the public spending could be on anything at all because the “multiplier” effects on secondary expenditures would push the economy forward. Both of these are identifiably wrong, and the present experience, even here in Australia never mind in the United States, ought to have now made it abundantly clear that this is the case.
There would be no reason to withdraw the stimulus if it were actually doing some good. That with recovery the pressure is now on to wind these expenditures back is a reminder that they were never value adding in the first place. They were just forms of welfare payments, and very expensive forms at that.
The equation of every classroom, the C+I+G of that ubiquitous Keynesian macro model, should now be put to rest along with other relics from the economist storehouse of discarded ideas. To believe that you can replace private sector investment with increased government spending on anything at all will one day be looked upon as an idea so absurd that it will be a wonder to the future how anyone could have ever believed it was actually true.