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?

Financial analysts of the world unite

I know that some of you cannot go to the link which is behind the paywall, but in this case you might think about ways to read the whole article. Head off to some coffee shop or the local library. Perhaps even shell out the $3.00. But this is what you should read, which comes with a title that provides you with little sense of what comes next: Piano’s not the key to wealth. I might also mention that the article might also depress you unless you are in on the scam scheme yourself.

The best pianists, for all their thousands of hours of practice and performances, will earn crumbs compared to even second-tier fund managers. The salaries of the best doctors and barristers’ incomes are dwarfed those of money managers.

That’s because they are labourers, and labour is relatively cheap. Siphoning off a portion of capital income is real money.

And in no country is this truer than Australia, where regulation ensures $30bn flows into superannuation accounts every three months. Indeed, whoever wins the federal election will supercharge that flow as the compulsory rate of saving cranks up to 12 per cent by the mid-2020s. Labor, in one of the greatest transfers of wealth ever, wants a 15 per cent rate.

All this and more are from Adam Creighton’s visit to Omaha to listen to Warren Buffett and discuss money management with a number of the 18,000 who showed up to listen to what he had to say. There is then also this:

In advice to budding financiers, Buffett revealed the second and main swing favour of asset management: don’t become a good analyst, be a salesman. At 1.5 per cent a year, you’ll quickly be rich. The wonders of pay based on percentages can’t be oversold, especially in a world where financial assets are swelling faster than inflation and the population together. Managing $1bn entails no more labour than $10m but, for a fee of 1 per cent a year, the pay differs.

The best pianists, for all their thousands of hours of practice and performances, will earn crumbs compared to even second-tier fund managers. The salaries of the best doctors and barristers’ incomes are dwarfed those of money managers.

That’s because they are labourers, and labour is relatively cheap. Siphoning off a portion of capital income is real money.

And in no country is this truer than Australia, where regulation ensures $30bn flows into superannuation accounts every three months. Indeed, whoever wins the federal election will supercharge that flow as the compulsory rate of saving cranks up to 12 per cent by the mid-2020s. Labor, in one of the greatest transfers of wealth ever, wants a 15 per cent rate.

As wages stagnate and asset prices soar, the division of jobs between those who rely on wages and those whose “wages” entail a hefty chunk of capital income raises questions about the fairness of the tax system.

I’m as against Labor’s proposed interference in childcare wages as the next furious pundit. It is already a bottomless pit of public spending and any extra will be hoovered up by childcare centres. The proposal does nothing to unbutton the straitjacket on workers’ productivity imposed by Labor’s “quality framework”, which mandated maximum child-to-carer ratios among other feel-good imposts that abolished affordable childcare.

The last paras:

Regulation tends to benefit the better off, as it did in Omaha, where low-income Uber and Lyft drivers did a roaring trade. But too bad for them a federal rule in response to Nebraska floods outlawed “gouging” of consumers in emergencies. Without surge pricing, Omaha’s rich visitors enjoyed cheap $US7 rides between high-end hotels and bars.

“Why are you poorer than Warren?” Munger [the $2 billion dollar man] was asked.

“Well, why was Albert Einstein so much poorer than me?” he mused, after a long pause. Becoming a scientist is also a bad idea.

You have now read around a third, so you can decide whether to spend the $3. Nevertheless, it might be the best career advice you ever get. Still, I would rather be Albert Einstein than Warren Buffett, but that’s just me.

Where the cure is not only worse than the disease it is the disease

Front page story in The Oz today: Shorten unveils tax and spend ‘cure’.

Bill Shorten will claim the most significant reforms to Medicare since it was created by Bob Hawke in 1984, with a $2.3 billion expansion of bulk billing to cut out-of-pocket expenses and provide free services for cancer patients.

Outlining a big-spending ­agenda, the Opposition Leader also promised to restore $1bn in TAFE funding to meet critical skills shortages while revealing he would match the Coalition’s tax cuts for 10 million people and ­provide bigger tax refunds for a further 3.6 million workers earning less than $48,000 a year.

The government seized on Mr Shorten’s budget reply speech last night, claiming Labor could not be trusted to deliver on its promise because of a record of financial and economic mismanagement.

Whatever Labor promises, they will do, and then some. They will steal from everyone to the maximum extent, and then wonder why real wages and household incomes are falling. This is what I wrote back in 2009 about Kevin Rudd, as he launched Labor’s last venture in tax and spend.

It is quite astonishing to come across the economic and political philosophy of a prime minister and find that a self-described economic conservative turns out to be anything but. After years of seeing the phenomenal success of market-based economies in comparison with all other varieties of economic organisation, and having watched the fall of the Berlin Wall not all that long ago, there is a frightening recognition that amongst some people, nothing much at all has been learned. The same ideas that have populated and driven the Left for the past two hundred years just seem to come out of the woodwork at the first sign of an economy in trouble.

It was a long article from Quadrant – where the photo above is from. It should be a reminder of the mentality that lies behind whatever the ALP might like to pretend on the surface.

Near on forgotten as well are the Costello years of budget surpluses and ZERO debt. Labor thereafter drove us into our present predicament since they have never understood how an economy works, only how to squeeze whatever they can from out of the productive to finance idiocies like school halls, pink batts and the NBN.

ECONOMIC INCOHERENCE ALERT: There I was, minding my own business, quietly eating my lunch while reading the paper, when what should I come upon was this: Negative bond yields revive fears of secular stagnation. From The Financial Times in London reprinted by our own AFR.

All of the world’s largest economies now face problems with slower growth. The lesson of post-crisis economic management is that only large-scale fiscal stimulus will provide an effective remedy.

It is astonishing how economically ignorant our present generation is. Having watched the stimulus provided around the world after the GFC create only additional harm, these morons continue to plough the same furrow since they know nothing else, and cannot learn from what is right before their eyes.