Think NBN, pink batts and school halls

It is an anti-Keynesian article so I won’t complain a lot, but still it does get me down that no one any longer has much of a clue why public spending depresses economic growth. And it’s not as if Keynes wasn’t crystal clear about his own intent. His aim was to remove Say’s Law from within the midst of economic analysis. That he has most comprehensively done. Since only if you understand Say’s Law will you understand what’s wrong with Keynesian economics, and indeed all of macro and the policies that come with it, you will never get policy right until you see the point the classical economists made.

The article is Budget 2017: This is not the time to turn to Keynes and let me say how much I agree with this:

That brings us to the most contentious budgetary option of cutting government expenditure. By crude Keynesian closed economy logic, enthusiastically embraced by Kevin Rudd, Wayne Swan and federal Treasury during the GFC, reduced spending can be recessionary. But this is debatable in theory for an economy like Australia that is open to international trade and capital flows. It is also at odds with real world evidence.

Economic history is replete with examples of “expansionary fiscal contraction”. For instance, there were no economic downturns following the significant spending cuts undertaken by treasurers Paul Keating and Peter Costello in the 1980s and 90s; quite the contrary. More recently, Ireland has emerged as one of the ­strongest performing economies in Europe after severe public spending cuts.

Keynesian economics is also at odds with sound theory, or at least the theory that existed from the time of Adam Smith until the publication of Keynes’s General Theory in 1936. It has nothing to do with closed economy or open, nor whether we are a trading nation or not. It is that unproductive non-value-adding public spending drags an economy down (think NBN, pink batts and school halls). That is Say’s Law. That is what you need to understand.

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