Cut public service salaries by 20%

Aside from essential services, of course. As for the run of the mill public servants, of which there are hardly any other kind, they should be part of the solution to the economic challenges we face. The greatest economic problem are the structural shifts in the economy which will affect private sector employees alone. Maintaining cash flow in the hands of individuals so that they can purchase the goods and services they need is essential.

It is also important that the structure of demand is maintained to the greatest extent possible so that we do not find businesses that will thrive when we return to normal times have disappeared.

If there are sacrifices to make, those whose jobs are never threatened because of public service contracts should be asked to contribute their fair share.

TEACHING MOMENT: Having just finished my first round of editing of my next book, Classical Economics and the Modern Economy, let me recommend it to one and all once it is finally published in June. Meantime.

Recessions do occur but NEVER because a deficiency of demand. When they occur, they are the result of a structural shift in the underlying economy. We are now in the midst of one of the most profound shifts in the international economy ever seen. Just the restaurant trade is facing a major fall in demand, along with airline travel, tourism and lots of other parts of the economy. The structure of the economy is under stress. The downturn which is inevitable is due to a structural shift, not a fall in demand. Everyone once understood that. Since 1936, it has disappeared utterly from economic discourse. I used to think this was obvious, but the reason I wrote this book was because I discovered that virtually no one understands this. We are all Keynesians now, except for myself and a handful of others. But there are others. After the failures of the stimulus after the GFC I thought there would be more, but obtuseness in settled theory is universal.

Nothing will prevent a downturn now, but what you must do is (1) ensure those who are now being temporarily displaced from their paid employment are receiving cash in hand so that they can buy what they need, and also so that businesses which will return to profitability after this disruption are able to maintain their cash flow. (2) It is the structure of demand that needs to be preserved, not the level. The level of demand will fall, but the crucial issue is that the structure of demand will also be badly affected. It is to maintain the structure that is crucial, not the totality. Demand is constituted by supply and supply will be falling all over the place (see Qantas). I only wish the Keynesian virus was not as virulent as ever.

Is Victoria going bankrupt?

I’d heard vaguely about selling off bits of Vic Roads but not about the rest. From ‘Disaster’: Union boss slams private sector involvement in VicRoads.

“The Andrews Labor government has already sold off the Land Titles and Registry Office and it appears VicRoads’ most sensitive functions are next in line,” Ms Darmanin said.

That is incredible! Labor Governments do not privatise. They do not “work in co-operation with the private sector to provide better services.” But what they often do, when they have run out of other peoples’ money, is look inside every hollow log to find spare cash when every other source of revenue has already been spent and committed.

Comes with this today: Extra $14.5bn spent on Labor states’ bureaucracy splurge.

Victoria and Queensland have supercharged their public sector workforces, hiring more than 100,000 new staff over the past five years at a cost to taxpayers of an extra $14.5bn a year in wages and salaries.

Staff numbers in the two biggest Labor states have swollen about five times faster than in NSW, according to analysis by the NSW Treasury, which found NSW had experienced the slowest growth nationwide in both headcount and dollar cost.

NSW Treasurer Dominic Perrottet, whose government has faced criticism over the adequacy of its workforce during the recent bushfires, said his state was focused on frontline staff and not “bloated backroom bureaucracy”.

Incredible difference in attitude between NSW and the Labor states. When and if Labor finally gets tossed out in Victoria, they will leave a disaster behind that no one will be able to fix. Socialists only know how to plunder. They know nothing about what it takes to create wealth and prosperity.

But what bothers me even more is how bizarre economic theory has become that no one working in Treasury can any longer even see what the problem is.

The long-forgotten supply side needs to be recalled

When I was the Chief Economist of the Australian Chamber of Commerce and Industry, this is what you never saw: Business Calls for Stimulus Spark. In normal English, this says, “Business Calls for More Money from Taxpayers”. There may be no better way to subvert an economy than through public spending. Modern macro is an economic death cult. It’s now more than a decade since the stimulus programs that followed the GFC were introduced, and still our economies remain stalled and stagnant. So let me take you to the words of Australia’s greatest Treasurer:

Mr Costello said fiscal and monetary policy had run out of puff and supply-side reforms such as deregulation were now the key to improving efficiency and ­restoring growth, as retailers pushed for a fresh look at lowering the company tax rate.

Despite the IMF again slashing its growth forecast for Australia from 2.1 per cent to 1.7 per cent — well below the government’s 2.25 per cent forecast — Mr Costello said he did not agree with the school of thought that it was “all doom and gloom out there”.

“We need to turn to another arm of policy which has been long forgotten and that’s the supply side,” he told a Citi investor conference in Sydney.

“After 10 years of deficits and 28 years of continuous growth, we could really get a boost by dealing with some of the imbalances that have built up in the economy.”

While the Morrison government has been under pressure to ditch its commitment to a budget surplus and pump-prime the economy by going into deficit, Mr Costello said he did not believe this held much appeal.

Remember the Costello approach? Cuts to public spending, continuous years of surplus and zero public debt. Worked like a charm. Just let me take you back to my days in ACCI. One of the questions I would ask the entrepreneurs who used to wander through our office is whether they had expansion plans sitting in their drawers that they would put into place if they had the extra revenue. And the universal answer was yes. The American economy has possibly never been as robust as it is today, and all of the efforts have been made on the supply side. That’s where the action is. Public spending as an economic stimulus is a dead end.

Have these people never heard about this thing called the market?

As I sometimes mention, the only area I really disagree with Donald Trump about is interest rates. Keeping rates high enough to sort out good investments from bad actually makes an economy more productive and growth oriented. The Fed is really trying to harm the President but may actually be helping him create the economic boom the American economy is surely enjoying. It is possible for rates to be too high, of course, but it is also very possible for rates to be too low. No chance in the world central banks have the slightest understanding of any of this, or at least little chance given how they behave.

Let me give you a very clear example of pandering to economic ignorance:

The big four banks are reaping an extra $14bn a year in interest ­repayments after withholding a quarter of all Reserve Bank rate cuts since 2011 while at the same time reducing term deposit interest rates in excess of official cash rate reductions.

An analysis of standard variable rates for mortgages and interest rates paid to savers, carried out by comparison website RateCity on behalf of The Australian shows standard variable rates have fallen by just 2.99 per cent since October 2011. Over the same period, the RBA has reduced the cash rate by 4 per cent.

The big four banks’ margin on average standard variable home loans has grown to 4.05 per cent over the cash rate, wider than the 3 per cent difference when the RBA began its latest round of monetary easing in 2011.

The margin is now double the 2 per cent margin that existed ­before the global financial crisis.

And while I can see why the PM has these views, since he, too, must think the lower the rate of interest, the stronger the level of investment will be. But this is just wrong.

Scott Morrison rebuked the big banks last week over their failure to pass on in full the RBA’s Oct­ober rate cut of 0.25 to a record-low 0.75 per cent. After the rate announcement, the CBA cut its owner-occupied rate by 0.13 per cent and ANZ by 0.14 per cent while NAB and Westpac cut by 0.15 per cent.

“Mortgage holders … have a reason to be disappointed in the banks, basically, profiteering,” the Prime Minister said.

He was only “disappointed” from which I assume he does not intend to wield any big stick at the banks. Hope so. Labor of course understands none of it:

Opposition Treasury spokesman Jim Chalmers said on Sunday Labor would consider, as part of a broader raft of potential packages, whether to increase the 0.06 per cent tax on the big four banks, plus Macquarie, to increase competition in the sector….

“All of these options should be on the table,” Dr Chalmers told Sky News.

Higher taxes to increase competition! What economic buffoons these people are.

The Reserve Bank is run by incompetents

Really beyond stupid. Purely destructive, but I suppose you can’t expect them to know any better since they are all students of modern macro: RBA cuts official cash rate to 0.75pc at October meeting. They continue with all of their economic insanity expecting that the next time it will work out. Pathetic.

I am running a seminar tomorrow here at the University about which I have sent a note to the History of Economics discussion thread in response to a book review just published praising some tract commemorating the 80th anniversary of the publication of Keynes’s General Theory. Let me firstly just remind you that Keynes was the source of this stupidity that lower rates will stimulate growth. No classical economist ever believed anything so nonsensical This is what I sent.

I hope I will be forgiven for buying into this but it does astonish me that with an unbroken record of failure going back to the 1920s that Keynesian economics continues to hold such allegiance among economists. Is there no one who will rid us of this turbulent presence? And perhaps it is only because I am about to present a seminar to our own School here in Melbourne that I find myself once again so irritated by reading of yet another volume of praise heaped on Keynesian theory, now refined into post-Keynesian, but Keynesian all the same. Let me just add these to the discussion.

First, it’s not as if pubic spending didn’t have a constituency before Keynes, and yet, when it was tried, it turns out that the “Treasury View” was absolutely correct, and has been every time “fiscal stimulation” has been tried – see the GFC for the latest example. Winston Churchill was the British Chancellor of the Exchequer and this is from 1929, from well before the stock market crash in October.

“Churchill pointed to recent government expenditure on public works such as housing, roads, telephones, electricity supply, and agricultural development, and concluded that, although expenditure for these purposes had been justified:

‘For the purposes of curing unemployment the results have certainly been disappointing. They are, in fact, so meagre as to lend considerable colour to the orthodox Treasury doctrine which has been steadfastly held that, whatever might be the political or social advantages, very little additional employment and no permanent additional employment can in fact and as a general rule be created by State borrowing and State expenditure.’” (Peden 1996: 69-70)

There is then this not-very-well-known quote from Keynes’s post-humus article in The Economic Journal from 1946, at least not well-known enough. That he was said to have stated that “I am not a Keynesian” is easy to believe when you see that he wrote the following.

“I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past’.”

This is the note I sent out to the School to see if I can get anyone to come along.

I am all too aware of how uninterested a modern economist is in the classical economics of 150 years ago. Nothing must seem more remote from the economic needs of the twenty-first century. So I will just say this.

  1. Classical economic theory provides a much better understanding of how an economy works than anything found in a modern text.
  2. Classical economic theory has infinitely more insight into how to create growth in a less developed economy than does modern economic theory.
  3. Both the Marginal and especially the Keynesian Revolutions have made economic theory less insightful. There is almost nothing worth knowing, beyond the absolutely obvious, from marginal theory, while Keynesian theory is just plain wrong. Almost none of it will help anyone make sense of the operation of a modern economy.
  4. Even if none of that were true – although all of it is true – if you wish to be a completely well-rounded economist, you should at least know something about the economic theories of the classical economists. This presentation will explain things to you that almost no one any longer has even the remotest idea of.
  5. The attachment [not provided here] is made of up a series of quotes taken directly from Denis O’Brien’s Classical Economics Revisited (1975, updated 2002). All of what he writes is accurate. None of it is any longer taught to anyone.

Unemployment in Australia

area chart of Australia Unemployment Rate from February 1978 to August 2019

The picture is of Australia’s Unemployment Rate since the present series began in 1978. There are lots of ups and downs but let me point out a couple of features.

John Howard is elected in 1996 where almost immediately Peter Costello delivers his first budget surplus which he continues to do year after year until 2007.

The GFC occurs around 2007-08 at which point the unemployment rate rises sharply. The idea we have not had a recession for 25 years or whatever nonsense is the modern idiom is obviously untrue. Things start to improve, as they automatically do following a recession, except that we soon see the effects of “go early, go hard” on the labour market. A peaks is reached around 2015 and has been coming down slowly ever since.

Leaving it to the market is so out of fashion, but that is the answer, and the only answer. Public spending, which never adds to jobs, does however diminish productivity growth. That real earnings are falling is just part of the story when governments attempt to direct the economy without a positive return on investment part of the way in which the economy is being steered.

A classic case of economic ignorance

I am in the midst of finishing off a book on classical economic theory from which, and only from which, you can discover just how fatal to economic health modern economic theory is. The Australian economy is not far from disaster, real growth is falling as are real wages. But this we find at the top of the front page of The Oz.

PUBLIC SPENDING KEEPS NATION AFLOAT

Here are the opening paras.

Surging federal and state government spending has insulated the economy from a dramatic plunge in growth, as business investment and household spending shrank, raising questions about the health of the economy.

The latest national accounts show annual economic growth fell to 1.4 per cent — the slowest since 2009 — as rapid increases in public spending and global demand for the nation’s coal, LNG and iron ore papered over weak or falling household spending and business investment.

That it is the public spending that is taking the economy to death’s door occurs to no one. Let me therefore take you to a bit from the introduction to my forthcoming book.

The chapter goes to some length in discussing the advent of Keynesian theory, which was summarised by Paul Krugman in his introduction to The General Theory which was published in 2006, seventy years after Keynes’s original publication in 1936.

“Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

1. Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
2. The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
3. Government policies to increase demand, by contrast, can reduce unemployment quickly
4. Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach.

“To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.”

There is no question that Keynes did indeed make each of these more than just thinkable. He was able to turn these propositions into the mainstream where they have been accepted by virtually every economist ever since. It is classical economic theory that has now become unthinkable. The result of the Keynesian Revolution has left things so that the classical alternative is not just no longer contemplated by anyone within the mainstream of economic theory, but that no one within the mainstream even knows what that alternative is.

I stumbled onto classical theory by accident but it has been so accurate in allowing me to understand what’s going on that I can never understand why others don’t sicken of this Keynesian trash. It has never ever in a single instance brought an economy from recession into recovery. It’s all set out in my Free Market Economics. How we ended up in this dismal place we are now in is what my next book will go into chapter and verse.

An idiotic idea so bizarrely stupid it defies sense

From this morning’s Oz a story I have just gotten round to now:

The Reserve Bank governor is calling for 3 per cent wages growth across the public sector, apparently to help the rest of us. Ratcheting up public sector pay would damage the economy far more than help it, undermini­ng economic growth, productivity, increasing inequality and further eroding respect for government.

Adam Creighton calls it “a bad idea”, but that is only because he is polite. It is actually an idiotic idea that is so bizarrely stupid that it demands that he explain how it could possibly provide any positive assistance to the economy whatsoever.

How does someone with so little understanding of how an economy works get to make such decisions? But you have to get to the last line of the story to find out why he wants the least productive people in the economy to absorb even more of our productive capabilities:

The Reserve Bank wants higher­ wage growth to boost inflation, which has hovered below its 2-3 per cent target for almost five years. Meeting an arbitrary inflation target is hardly justification to damage the economy and increase inequality further.

He wants the most securely employed people in the country, with the lowest contribution to output, to receive large increases in wages so that the inflation rate can rise even further. It really is infuriating.

Economic mis-management continues

As it happens I’m sitting at the airport at the Qantas terminal waiting on my flight when there is an article atop the paper about “Qantas boss warns climate hysteria threatens air travel”. Seems he’s not always as politically correct as he is at other times. However, what interested me here was the data on air traffic in Australia:

Business and consumer confidence is weak and there are no capacity increases likely in the near future.”

Unfortunately, with the present crew of economic mandarins on the job, both in Treasury and the RBA, nothing is going to change any time soon, because there on the lower left hand side of the page is another front-page story: “Rate cut likely after shock NZ move”. Here’s the first line:

“The prospect of negative official interest rates is hanging over the economy.”

That they are clueless about why the economy is growing so slowly is clear. Eventually they will be forced to start doing the right kinds of things, but it may take a long, long time and we will go through quite a bit of pain before they’re through. But it does make me ill to watch these people in action.

Australia may have the world’s most incompetent central bank

Cannot be sure since I don’t watch them all, but it’s gotta be a contender. Look at this from today’s AFR: RBA’s Lowe flags ‘extended period’ of low rates.

Speaking at the annual Australian Business Economists Anika Foundation lunch in Sydney, Dr Lowe also said the RBA board “is prepared to provide additional support by easing monetary policy” if growth in economic demand “is not sufficient” to lift inflation “in a reasonable timeframe”….

“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range,” Dr Lowe said.

So they don’t know that low interest rates slow economic growth. They’re not alone, but it would be nice if they were at least aware this is potentially a genuine consequence of keeping rates artificially low. But that isn’t even the issue. Their problem is that the inflation rate is too low!

This is unreal. They are trying to get the level of money demand to rise to create more inflation. Go on, explain your reasoning, if you can. Real demand will never rise since real supply, the basis of demand, will never rise with such policies in place. Do these people know anything?