My learned Crikey colleague Bernard Keane is one of the more adept political writers in the press gallery. But when it comes to matters of economics, Keane occasionally falls into a half-cocked Keynesian trap. In Keane’s world, the solution to too much spending appears to be more spending. The answer to too much debt is to accumulate more debt.
While Keane is entirely correct to point to Labor’s spending has generally remained less profligate than John Howard’s government (which took middle-class welfare to new highs, or lows), that is to excuse some of the more poorly constructed policies during the global financial crisis. Judging economic policy need not be a relative assessment.
On Monday, Keane claimed the “much-reviewed BER program supported tens of thousands of desperately needed construction industry jobs providing important infrastructure for schools … in fact the BER was probably the most successful non-cash stimulus program developed anywhere in response to the GFC.”
Determining the most successful “non-cash” stimulus is much like trying to work out the least painful way to kill oneself — pretty much all of the solutions are pretty awful. There is no doubt certain pockets of the community benefited substantially from the BER — construction companies, materials producers, architects. These chosen few were, of course, gained from the generosity of the anonymous rump. The masses of hard-working taxpayers who were considered so unimportant that their income be siphoned off (in the form of taxation) and handed to construction workers to build school halls.
Of course, those shiny new halls were no doubt appreciated, even if many weren’t actually needed. There were other policies that could have been pursued — like pressuring the states to cut payroll tax to encourage direct employment. This would have led to more jobs in areas that were able to be sustained by the market, rather than those that are reliant on government assistance to prosper.
Keane went even further yesterday, appointing Wayne Swan as some sort of economic savior, noting that:
“Labor’s decisions to ramp up spending in 2008-09 and 2009-10 … were fundamental to Australia withstanding the global shocks. And they are the reasons tens of thousands of Australians, maybe hundreds of thousands of Australians, kept their jobs. This may seem obvious to a lot of people, but there is a persistent campaign to mislead people into thinking they had nothing to do with it.”
In one sense, Keane makes an obvious and correct point: the stimulus packages did allow some Australians to retain their jobs. The problem is, those jobs came at a cost. By refusing to allow the market to correct past mistakes, the government perpetuated poor economic decisions. Swan does not appear to be a believer in Schumpeter’s “creative destruction” — the notion that after a boom, unprofitable industries need to end, with the economy adapting to changing circumstances.
What the stimulus packages ultimately achieved was to transfer wealth from the deserving (taxpayers) and the innocent (future generations) to certain pockets of the community.
This allowed people to keep their jobs, which prima facie is a good thing (lower unemployment benefit payments and improved morale are two obvious benefits). But if saving jobs is the only goal of economic policy, why not, at the first sign of economic weakness, create a policy of employing people to roam the streets randomly smashing house windows? Not only will the window smashing policy “create” jobs for the elite window smashers, there would be plenty of flow-on benefits — suddenly, there will be thousands of jobs for window makers and the window fitters. Plus, a greater demand for security guards to protect the wealthy from having their windows smashed. And of course fence builders to keep out those pesky government-employed window smashers. Not to mention lumberjacks who will be supplying the wood to build the fences or the truck drivers who will be hauling the windows and wood. Think of all the jobs …
According to Keane, this kind of policy may even avoid the “sort of large-scale misery we saw in the aftermath of the 1990s recession — lives ruined, skills wasted, careers wasted”.
The problem? Smashing and repairing windows creates no overall economic benefit. Instead, it creates an artificial demand, the cost of which will eventually be borne by future generations. What Keane ignores during his praise for the job-creating stimulus is that the victims from such spending have not yet been born, or are too young to vote. The fact that the beneficiaries of such policies very much do vote should not be lost.
So while thousands of people were able to keep jobs that otherwise may have been lost, they did so in industries that may well be unsustainable in the medium or long term. Much like the corporate welfare paid to car manufacturers (which Keane accurately criticises), stimulus payments that allow people to remain in jobs leads to a misallocation of resources — away from the innocent unto the undeserving.
While proponents of the stimulus point to Australia’s relatively low level of public debt to vindicate the moves, that argument ignores the nation’s substantial levels of private debt in the economy. Mortgage debt, for example, is higher in Australia than it was in the US before the GFC. Should a wobbling property market transfer to strife in the banking sector (as has occurred in the US and Ireland), the true folly of misguided stimulus spending will be fully revealed.
Bilge, Bollocks, and Neo-Austrianism.
If Schumpeter had had his way during the Great Depression, it would have destroyed the economies of the free world to the point where they were unable to fight off the totalitarians. He was “Crying Fire! during Noah’s Flood” as one economist of the day memorably put it.
To move to the current day, the policy Schwab advocates here would create a class of window-breakers: all the long-term unemployed who turned to crime when his “creative destruction” somehow destroyed their jobs without creating new ones. Anyone who wants to see the results of this liquidationist sentiment need look no further than the current UK and Ireland economies.
Nor do I recall my taxes going up to support building school halls. In fact, I recall the government giving me a cheque. Oh sure, if you believe in Barro-Ricardian equivalence (empirically disproved), have an infinite time horizon (impossible), think that governments run on a hard-money standard (they don’t), and can perform the mental gymnastics of thinking that an economy in recession is also running at full capacity (a contradiction in terms) then it’s possible that my great, great, great, great, grandkids might have to pay higher taxes. In any other circumstances (ie in the real world), expansionary programs in recessions pay for themselves by generating higher revenues and lower welfare payments, both immediately and into the future as the infrastructure created gets used and the high social cost of the long-term unemployed is foregone. This is called the operation of automatic stabilisers. Every economist in the world is aware of this – except for Sinclair Davidson, Rand Paul, and Adam Schwab.
PS: Taxpayers are the “deserving”, are they? In that case they should be happy to pay more taxes, so they can show how deserving they are. Perhaps Schwab could put this argument to the Minerals Council of Australia.
JAMESH said it all. Adam – suggest that you stick to what you know, whatever that is.
I like the way the problem in the last paragraph is switched to private debt – from public debt.
The BER was not a school halls program, while many school halls were built – it was much more than that.
My local public school is about to move into a a modern 2 story classroom block – built over old post war (ww2 not the Gulf) weatherboard buildings.
Many, many of these buildings were desperately needed. It was reported at the start of the BER – (before it somehow went bad in the press narrative); that builders where shaking their heads at some schools when they saw the condition of the old buildings they were replacing.
I agree many businesses should have failed – rather than being propped up, however – the construction and associated trades where not a cause of the financial crisis – banks like Macquarie, Goldman Sachs were.
I don’t think there would have been any ‘creative’ benefit in letting the construction industry fail.
Last point – most of the Govt debt is from falling tax receipts not the stimulus spending.
Thanks for that piece Adam. Good to see the pontificating of Mr Keane challenged occasionally.
And the ranting of Jamesh can be summed up neatly when he agrees that his grandkids might have to pay higher taxes. Of course they will if the madness of Labor spending is allowed to continue
Granorlewis: I could receive no higher compliment than your complete misunderstanding of what I wrote, which is that expansionary programs in recessions pay for themselves. John 1:5 and all that.