The poisonous mind rot of Keynesian economics never seems to go away. I hate to throw an apple of discord into the middle of the party, but this sentence from our new Treasurer should not be allowed to go unremarked. From The Australian today:

Following the election result on Saturday, incoming treasurer Joe Hockey said the Coalition’s victory would encourage consumption. ‘You can go forward and spend your hearts out because we’re going to have a good Christmas,’ he said.

Perhaps I have misjudged what was being said. If the point was that the economy is turning up, real value adding production is going up and you will therefore be able to buy more at Christmas, well OK, although I would not be entirely sure what the point was since in such circumstances you can spend at other times besides Christmas.

But if this is an attempt to get the economy to grow faster through encouraging higher consumer demand, then we are back on the same old Keynesian merry-go-round.

Spending of all kinds draws down on your resource base. Whether it’s by consumers, businesses or government it uses our resources up. Only some of that spending, that drawing down on resources, will eventually add back even more than has been drawn down, and this is almost entirely made up of productive business outlays and innovation that help build the economy.

Not being able to separate the building up from the drawing down is the largest mistake a government can make. Governments can no doubt do all kinds of beneficial things but it should never think that it is making the economy stronger when it is re-distributing the output of industry. The only thing that makes an economy stronger is productive investment, and the benefits do not even occur until the investments are brought on stream and are contributing to the production process. Until then, it is all a negative. It is all drawing down.

I perfectly well understand that Treasury, like economists everywhere, are deluded by the nonsense of Y=C+I+G. Hopefully this government will be different but it won’t be if it believes that strong consumer demand is good for the economy. It is absolutely the other way round. It is a strong economy that is good for consumer demand. The government’s job is to make the economy run better, and if they are going to keep their eye on the ball, it is business investment with a tiny addition of government investment that are the ingredients required. Nothing else will do.