A how-to guide to economic policy

For any single business, higher demand all other things being equal makes them more money and can often lead to an increase in the number of employees.

For an entire economy, higher demand has no bearing either on real incomes or on the level of employment.

This is straightforward and for me anyway, as obvious as the morning sun. It is the conclusion that comes from a proposition that now goes by the name Say’s Law.

There have been many examples in history where Say’s Law was shown to be an absolute truth in an economy. There have been even more where attempts to raise an economy from recession through increased public spending – through an increase in aggregate demand – have been abject failures. No stimulus in history has ever succeeded in pulling an economy out of recession, NOT A SINGLE ONE! The sad story since the GFC is the most recent, but there have been lots. Every single one made economic conditions worse.

On the other hand, we had the Peter Costello/John Howard years from 1996 to 2007 of the best economic management ever seen, possibly anywhere. Not only did we balance the budget for years on end, we ended up with zero national debt! Because of the idiocies of modern economic theory, even though this was done right there before our eyes, bad theory remains. Modern macro is economic poison, but it’s often lots of fun for both governments and the people who they spend the money on. And for everyone else, it looks sensible since higher demand must create higher levels of production. In reality, it is higher levels of production that allow for an increase in demand. That is why we are so much richer than a century ago. We produce more so that we can demand more.

We were reminded of all this here: John Howard and Peter Costello urge PM to keep building budget surplus.

John Howard and Peter Costello have urged the Morrison government not to squander the budget surplus on a short-term stimulus, while doubting whether monetary policy is still a useful economic instrument given the reduction in interest rates to historic lows.

“The government is absolutely right to be returning the budget to surplus and I think it’s right to anchor­ its fiscal policy to producing surpluses over the next four years,” Mr Costello, the nation’s longest-serving treasurer, told The Australian.

Treasury is filled with people who have no idea why this is the way to prosperity. Reserve Bank as well. A bit more here:

As forecasts for economic growth, household consumption and wages have been downgraded, and $21.6bn wiped from future surpluses, Mr Costello said he doubted whether monetary policy was still a useful economic lever.

“Monetary policy has run out of puff,” he said. “Once you get interes­t rates at near-zero levels, whether they’re at 0.75 per cent, 0.5 per cent, 0.25 per cent, it just doesn’t matter, it’s lost its power as an economic instrument and that is why when the Reserve Bank cut rates during the course of (last) year it had no discernible effect.”

Low interest rates are the other side of the Keynesian economic model, a disastrous shambles of a policy, which inevitably puts money into the hands of many more people who will not earn a productive return on investment relative to the proportion of borrowers who will do so if rates are higher. Interest rates are near zero everywhere and no economy has found low rates of any benefit. Only value-adding investment can raise living standards. High levels of public spending and low rates of interest will not do that, just as they never have.

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