California here we come
At least some of those who make policy are beginning to see the problem. From the weekend press:
German Chancellor Angela Merkel on Saturday signaled that she expected next week’s G20 summit in Canada to focus on budget consolidation rather than continue with stimulus packages to strengthen the global economic recovery as favored by US President Barack Obama.
In May 2009, now more than a year ago, here on the online version of Quadrant I published a note on the economic fallout of our Keynesian stimulus. I pull it up from the vasty deep because it underscores just how much damage this Keynesian economics has caused, not just to us but around the world. What is interesting to me is that at the time I had thought I was being highly critical of the stimulus and economic policies. Reading today what I wrote then makes it all too clear that I was nowhere near hard enough.
What does seem to have been properly captured in what I wrote then is the ending of the period of actual crisis, the wastefulness of the various stimulus programs, the difficulties in generating economic momentum, the inability to lower unemployment, the deepening of our economic problems, the worsening of our debt and the budgetary difficulties, and the fact that they will be with us for years to come and will eventually need to be reversed. Everything has gone pretty well according to script yet little in these words convey the sense of amateur hour in our economic management.
Because even though I think of governments as generally incapable of managing any major project, who could have known just how badly run the program to install insulation or “Building the Education Revolution” would be. At the time, only its bizarre costs were apparent relative to any conceivable good they might do.
What I also did not quite appreciate was the general willingness to accept that these obviously flawed programs would be taken as a proper response to the crisis and a perfectly sensible price to pay.
And what has truly taken me by surprise is the willingness to let the government increase its own level of spending without any apparent recognition that we are in the midst of a massive transfer of wealth from the community in general to the government in particular.
Two matters therefore stand out to me a year later. First and foremost, the Keynesian economics upon which all of this expenditure was based seems to have receded from public debate. Occasionally someone will raise the need for a further stimulus with the American President being the most notable example.
But really, for all practical purposes, the rush to raise public spending to stimulate growth has disappeared. No one mentions Keynes or Keynesian economics nowadays certainly not in a nice kind of way. No one says how well served we have been by this expenditure. Had the stimulus been a success, we would have never heard the end of it. Instead, silence reigns.
Even with the settling down of our economies, which any student of the business cycle would have known would happen just as it did, no one discusses how worse than useless that Keynesian stimulus has been. All they can say – but this would have been sayable but not provable no matter what had happened – is that things would have been worse without the spending.
We will therefore continue to teach that economies are driven forward by increases in aggregate demand when everywhere you turn there is the most direct evidence that this is simply not true. No one appears to have learned a thing.
And right there before us we see the fantastic harm that the stimulus has caused with the introduction of a “super profits” tax in the mining industry. The Government is desperate for money, and this is how they are going to make ends meet.
The notion of crowding out, as we economists typically think of it, is that the increased government spending leads to an increase in interest rates. Those higher rates then reduce the level of private sector investment. The private sector is thus said to have been “crowded out” by the public. The effect on business, because it takes place through market outcomes, is all very subtle and indirect but no one doubts it happens.
With the resources tax, however, the plundering of the private sector is direct and unmistakeable. This is no mere crowding out as the private and public sectors compete for funds. This is pushing out. The government intends to raise taxes on the single most successful industry in the country to finance its own programs and cover its rising level of debt. No subtlety here. The government intends to take investment funds out of the hands of the mining industry and use those funds for purposes of its own.
Mining investment must fall as taxation levels rise. Justify the tax any way you like, that is the result. There will be less mining activity in Australia so that we can Build the Education Revolution.
A year ago I would have thought this would have been seen as the act of economic vandalism it is. No one could possibly believe we as a community will end up better off with a diminished mining sector but a larger public sector. No one could believe we can improve our retirement incomes by tearing down productive industry.
But apparently there are millions who believe just that, and some of them even work inside Federal Treasury.
You would think that with examples all around us, from California to Greece, of high and unproductive government spending driving economies into fiscal desperation and long-term decline, that there would be some appreciation of the immense dangers in following such policies. If there is, there are few signs of it in the way our economy is being run.