Blind to the Damage Caused by Government Spending

The Global Financial Crisis began some time during the second half of 2008 and ended sometime before the middle of 2009. The collapse of Lehman Brothers is seen as the start of the true panic with the implementation of the Troubled Assets Relief Program (TARP) under George Bush Jr more or less the ending of it. You would find hardly a single economy anywhere that was still in a state of rapid decline after the middle of 2009. Were there any?

There was, of course, an immense amount of hysteria. The kinds of over-the-top scaremongering that was common foresaw the world’s economies plunging back into the kinds of depths last experienced during the Great Depression, which would have required unemployment rates of over 20%. Given this “chicken without a head” reaction, the cry went out for a stimulus which duly arrived in one country after another. The fact that unemployment rates, rather than rising by around 15 percentage points rose only around two, is now attributed to the rapid response of Treasuries all over the world.

Kevin Rudd is amongst those who believe we should be grateful to him for saving the Australian economy in the same way, I suppose, that Barack Obama would like the American people to thank him for his own stimulus. And sure enough, all of those economists mis-educated on Keynesian models may feel some kind of vindication since their worst case scenarios never occurred. But then again, neither did recovery.

Because, you see, the problems currently facing our economies has virtually nothing to do with the financial crisis itself but are, instead, due to the effects of the stimulus that came after.

The fact of the matter is that economic theory is in a dreadful state. Keynesian economics has utterly failed to achieve recovery in any single economy anywhere it has been applied. So when I read this, as published by Tim Harcourt on The Drum on Monday, it fills me with that kind of despair because it is pretty obvious that economists are not yet prepared to give away these models whose policy advice has only made things worse. What Tim wrote was this:

In case you missed it, Australia, unlike many other industrialised countries, avoided the worst economic crisis that has bedevilled the global economy since the Great Depression (note the term they use in the USA – ‘the Great Recession’ – rather than the more technical and even benign-sounding ‘GFC’ that we use in Australia).

I’m not sure what missing this crisis means but from the unemployment rate of 4.1% in March 2008 we went to an unemployment rate of 5.8% in June a year later. There was then a drift downwards so that by June 2011 the rate had fallen to 5.0%. But since then it has all gone backwards so that the latest number is 5.7%, it will soon pass the worst number achieved at the height of the GFC and we will be into six-point-something not long after that. And it’s not in spite of the stimulus that this will happen but because of it.

Let me quote myself in an article of mine that was published in Quadrant in March 2009.

There have been few periods in which so many forms of financial and economic uncertainty would have confronted the average business at one and the same moment. That business confidence has evaporated and an economic downturn has gained momentum is a matter of no surprise to anyone. The fact of recession is a certainty; only the depth to which it will descend remains in question.

But just as the causes of this downturn cannot be charted through a Keynesian demand-deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand, and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.

What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.

And that is exactly where we are right now. We have tried to spend our way to recovery and as a result are in the midst of a deteriorating economy, that is we are in the midst of a recession that will be deep, prolonged and potentially take years to overcome. It has certainly not been overcome as yet.

As for the reasons that the downturn here was not as bad as it has been elsewhere, there are four parts to the explanation that I can see.

There is firstly the extraordinary fiscal situation the government inherited. We not only had no deficit, we actually had no debt. Australia was the only country in the world not to have any public debt whatsoever, a situation that it is almost impossible to imagine returning any time soon.

There was then the mining boom built on the back of the Chinese stimulus. That has gone, in large part because the Chinese must now themselves deal with the problems that their own stimulus created in their own economy. But we have added to our own slowdown in mining through a series of policies that have made miners more reluctant to invest in Australia.

Third, our banking system was almost entirely untouched by the financial crisis which spread internationally due to the ownership of various toxic assets generated in the US financial system. Our banks were fine so Australia had no problems of this kind to overcome.

And lastly – but this will make little sense to most people – the RBA kept interest rates up rather than pulling them down. No quantitative easing in these parts with the result that the national savings we generated were used more productively than elsewhere. You can’t stop governments from squandering what they squander, but at least the private sector was kept on the straight and narrow.

My worry remains that even though the evidence that the stimulus did no good continues to mount, the economics profession refuses even to examine the theoretical basis for the policy advice it offers. But there will come a reckoning at some stage since it is the advice of economists which is largely at fault.

In the meantime, the Prime Minister likes to congratulate himself on his rapid fiscal response to the downturn in 2009. What he is doing is taking credit for creating economic conditions which will keep our living standards depressed for a very long time to come.

Two stories share the front page of The Times today, that might make the front page anywhere and the other that would be about as noteworthy in Australia as the results of the Stanley Cup Finals. On the less important side, someone in the Labour Party has had to resign because of branch stacking in some constituency.

The other is that shares have soared because the new Governor of the Bank of England has said rates are coming down. And they had to bring someone from Canada to do that. Glenn Stevens would have been a much much better pick but then shares would not have soared as much.

From Catallaxy 5 July 2013.

You will have to forgive me for first mentioning that yesterday I went to a meeting on climate change in the House of Lords chaired by none other than Nigella’s Dad. We even spoke a few words to each other but I doubt he went home and blogged about meeting me.

But it was a serious meeting with a serious proposal that the Coalition should look at seriously given that we already have a carbon tax in place which, given the future state of the Senate, may not be removable in the first instance.

There was a presentation on what the speaker, Ross McKintrick, described as a “Temperature Index Tax”. You start with a carbon tax put in at a very low rate and then you index the tax based on movements in some particular temperature, with the proposal based on the recorded temperatures in the tropical troposphere since they are apparently especially responsive to changing concentrations of CO2. The size of the tax then depends on actual outcomes which could even go down depending on what happened to the actual temperature. There were then three additional features:

1) It is an “instead of” tax and not an “addition to” tax. For carbon taxes to be effective, there must be no other carbon abatement programs. The rest should then be completely repealed and no new programs added in.

2) The tax must be revenue neutral. The revenue raised cannot be used for any other purpose except lowering other taxes. Otherwise the tax becomes a source of regulatory inefficiency.

3) It must always be understood that the carbon tax as described is a price instrument, not a quantity instrument. Major issues if the attempt is made to use it for both.

Since Nigel Lawson has about as much belief in AGW as I do, the aim is to find some mechanism that will allow an each way bet on what temperatures will do. If you think they will go up a lot you get your abatement taxes and everyone is in agreement. If they don’t go up, then no one has to do anything and everyone is content that a contingency plan has been put in place. Various forms of futures markets also become operable which allow for hedging. The suggestion that the superannuation of global warmists be related to the tax revenues raised has an appeal but that was an idea raised from the floor and not part of the proposal.

I’m afraid I cannot link to the report on the primitive machine I am using but I suspect that if you go to http://www.thegwpf.com you will find the paper there under the title, “An Evidence-Based Approach to Pricing CO2 Emissions”.

From Catallaxy on 4 July 2013.

You know, I like this not because of what it says about Obama, but because of what it says about Tony Abbott. Abbott is quoted in The Telegraph (The London version) from an interview in The Wall Street Journal.

“The Rudd-Gillard government has been a highly statist government, the Brown government reverted to statism with a vengeance in Britain, and Obama is the most left-of-center government in at least half a century.” (At this, the media minder shifts in his chair.)

“Now I’m not being critical of Obama,” Abbott adds, soft-pedaling his response in a way he probably wouldn’t have a few years ago, when he was a minister in the Howard government. “He’s following a well-trod path. But I think it is a fact that the Obama government is a much more statist government than the Clinton administration.

It warms my heart to hear such things said. Not just that he has characterised them so well but that he appreciates the difference. My strong suspicion is that he does not think running a highly statist government is a good thing.

From Catallaxy 4 July 2013.