A common sense program for action

Let me see if I have this straight.

Public spending on wind farms will create jobs, save the planet, restore the economy to strong rates of economic growth and raise our standard of living.

And in spite of the obvious common sense of this program, there are still people who are opposed. I have to say, it’s incredible what some people will believe.

It’s good politics AND it’s good economics

Here’s the strategy:

Arthur Laffer has a simple theory of politics. It’s about as simple as his theory of economics. . . . The economic theory says that the lowest, simplest tax code will produce the most growth. The political theory goes like this: Politicians crave love from voters. So if you want to get a politician to do what you think is right, give him a plan he can easily sell, and make sure that plan will deliver a lot of crowd-pleasing economic growth.

George Bush Snr sat in the White House for eight years and didn’t learn a thing. Nor did the voters. Even here, we had a government that brought us lower taxes and ongoing prosperity so we rewarded them by bringing in the other side. There is, of course, more to the theory than we see at the final upper stage. And it is even possible he is right about what might happen next, assuming someone can be induced to actually take those crucial first steps.

His economic calculations have led him to believe that the U.S. economy is primed, after a decade of slow growth and middle-class income stagnation, to grow rapidly – it just needs a big tax reform bill that would lower rates and eliminate most deductions. . . .

This is Laffer’s unshakeable belief: that once voters elect a supply-side acolyte to the White House, massive growth will follow. That growth will please voters. Voters will reward the president’s party. And Republicans, he predicts, will go on to enjoy a generation-long lock on Washington – until, he says, voters forget the power of supply-side economics, and the cycle begins again.

I need hardly point out that the Reagan Revolution was based on Laffer’s complete appreciation of Say’s Law.

What is the defence against Keynesian theory

You may think I go on a bit about this Keynesian economics but it is the source of every government’s warrant to spend like there’s no tomorrow. So long as the universal view is that economies are driven by demand, there is no effective answer to decisions to spend. Since according to Keynesian theory, the spending ends up in jobs, and the multiplier effects ensure that, no matter what the original spending is on, it will lead to higher growth, even if the first round of such expenditure is a total waste, it all contributes one way or another to our prosperity. Once you have tossed Say’s Law aside – which specified that demand could only come from the supply of products whose revenues covered their production costs – there is no intellectual defence against public spending. Don’t you care about the unemployed? Are you not interested in economic growth? Then surely governments must spend to put people into jobs and raise our living standards.

No economist today has a ready answer to this that builds out of the economics we teach. Accept as valid that Y=C+I+G+(X-M) and you seem to me to be defenceless against public spending as a certain social good.

We worry about public sector waste, misdirected production, a tonne of money lost on useless green programs, a proliferation of public servants whose main role in life is to prevent other people from producing. We are apparently content to see government hand tax money over to businesses to complete projects that will never repay their costs. We do this because, at the back of everyone’s minds, there is the belief that it will all be to the good, as it stimulates growth and puts people into jobs.

Honestly, what is the reason not to do any and all of it if the Keynesians are right? Why not spend the money if it will create jobs that would otherwise not be there and stimulate faster growth that would otherwise have not occurred? It amazes me that whether this is actually true is never the issue. We discuss deficits and debt but the underlying premise, that public spending is good for growth, is never challenged. We build schools, hospitals, infrastructure and every dollar spent is seen as a net positive. But unless you understand in your very bones in what circumstances this is untrue, you will never rise up and bring this madness down. We are bankrupting our societies and slowly grinding our capital into the ground, but so long as we have Keynes to tell us it is all to the good, it will go on forever, until the collapse. And if Japan is anything to go by, it will continue even after that. If no one understands why it should be stopped, it won’t be.

The heavy burden of the Coalition’s Labor left

Let me dwell on the first para of this story in the AFR today titled, Abbott’s plan to axe RET:

The federal government is moving towards abolishing the Renewable Energy Target rather than scaling it back in a move that will cost almost $11 billion in proposed investment and which is at odds with the views of its own Environment Minister.

Let’s parse this sentence bit by bit.

Scaling back the RET is described as “a move that will cost almost $11 billion in proposed investment”. “Investment” is one of those hurrah words so that anything that can be described as investment is automatically given a warm reception. What cutting the RET will actually do is cut almost $11 billion dollars of waste. Eleven bil on more windmills and solar panels would not get you back ten cents in the dollar. Stopping such expenditure dead in its tracks will only promote future economic growth, or at least it will if the government doesn’t decide to spend the money itself in some other totally useless way.

The second bit is that this decision “is at odds with the views of its own Environment Minister”. This, alas, is one of the great problems with the Coalition. It really is a coaltion. Labor is too, but it’s a coalition of the left, the far left and the loony left, each branch of which could comfortably fit into the Greens. The Coalition is made up of conservatives, small-l liberals, libertarians, the centre right and the centre left. The centre left as it happens overlaps the Labor left and could also comfortably fit into the Greens. The centre left is a very strong tail that wags the dog.

I, however, and most others who voted for the Coalition did not seek to preserve the Green legacy of economic ignorance, nor for that matter did we seek to maintain the Martin Parkinson/Ken Henry school of Keynesian economic mis-management.


I don’t say you shouldn’t provide welfare. By all means provide welfare. Let us look after the sick, the aged and the disabled. But here, since the demands are near infinite, judicious allocations of funds will be required. But while welfare expenditures may be important for those who are unable to work or are too old to work, none of these expenditures will promote economic growth and future prosperity.

We do not have an infinite pool of productive resources. We must prioritise. Removing renewable energy targets is pure profit for the economy, a 100% benefit. So would getting rid of paid parental leave. Get rid of them both at once. I wish the NBN was also up for grabs since getting rid of it would also be a net positive.

And I should finally mention since I am throwing it all into the pot, do not raise taxes on anything in any part of the economy. If the kinds of revenues you are in receipt of are insufficient to pay for everything in the basket, then take some things out of the basket.

The Coalition’s Labor Left is a heavy burden that is weighing down good decision making.

Disproving Keynesian economics once and for all

I don’t allow comments on this blog mainly because I am not up to policing what other people say. But I read them and this today, from Rob, was stunning. Referring to my little rant on the uselessness of economic theory today, he wrote:

But at least it has advanced enough to tell us that for more growth, we need …. more broken windows:

The Lack of Major Wars May Be Hurting Economic Growth

Tyler Cowen is a professor of economics at George Mason University

I mean, what would a dead white male like Frederic Bastiat know anyway?

Tyler Cowen is, of course, a live white male, but given there are such things as negative knowledge – things that if you believe them make you dumber than if you knew nothing at all – it is possible for him to know less than Frederic Bastiat, dead though he may be. Let me quote from the opening of that column:

The continuing slowness of economic growth in high-income economies has prompted soul-searching among economists. They have looked to weak demand, rising inequality, Chinese competition, over-regulation, inadequate infrastructure and an exhaustion of new technological ideas as possible culprits.

An additional explanation of slow growth is now receiving attention, however. It is the persistence and expectation of peace.

Let me put it this way. There is bad economics, there is unbelievably stupid economics, and there is the belief that growth has slowed because there are no wars.

It is neither here nor there that there’s not all that much peace around anyway. But let me remind you of the greatest disproof of Keynesian economic policy in history. Everyone always points out that one Keynesian data point which is the so-called boom that came at the start of World War II. Not a boom at all since what most people remember about the home front was rationing and controls of every kind, and if you are thinking about the labour shortages, merely recall that around half the labour force under thirty was drafted into the army. But that’s not that point either, although it should put quite a dent into such Keynesian thought.

It is the coming of peace in 1945 that is the grand refutation of Keynesian economics. At the end of the war, within a year millions who had been overseas fighting, or had been part of the war effort at home, were suddenly in the labour market looking for work. Many women who had taken jobs while the men were overseas also remained in the workforce. The Keynesians were continually badgering Truman to maintain war-time deficits since, they said, if he did not the US would go straight back into the depression. Truman, however, having had a business background, hated deficits and the US virtually balanced its budget in a single year. No deficits, no stimulus, no nothing. The US slashed its expenditures and in so doing set off the greatest economic boom in world history, a boom that lasted straight through until ground into the dust by the war on poverty, and dare I say it, the unfunded, deficit-financed war in Vietnam.

Thinking about economic issues from the demand side is the single biggest mistake anyone can make in economics. In fact, if you do think that way, you aren’t even an economist since Say’s Law was once considered the best test of a sound economist. Not many of them around any more, I fear.

Here is the message. An economy is driven only by real value adding supply. Nothing else. This is the message of Say’s Law, supposedly discredited by Keynes but as accurate a statement of economic principle as there has ever been.

When the Money Runs Out – the government’s guide to policy

Simultaneously reading today’s papers on the Commission of Audit report and the Economist and The Financial Times 2013 book of the year, Stephen D. King’s When the Money Runs Out: the End of Western Affluence, I can see what the latest fashion in economic policy has become. Here I heave a sigh of despair. This from page 54 sums it up:

With poorly performing asset markets and much lower prospective economic growth, our entitlements are about to take a hammering. On current plans, only wishful thinking on economic growth stops government debt from spiralling out of control in the decades ahead. If the wishful thinking proves to be wrong, we will be in serious trouble.

And if you doubt that the wise heads of Treasury and the Government have not been reading this book, this is how it is described by the publisher:

It’s not just the end of an age of affluence, he shows. We have made promises to ourselves that are achievable only through ongoing economic expansion. The future benefits we expect—pensions, healthcare, and social security, for example—may be larger than tomorrow’s resources. And if we reach that point, which promises will be broken and who will lose out? The lessons of history offer compelling evidence that political and social upheaval are often born of economic stagnation. King addresses these lessons with a multifaceted plan that involves painful—but necessary—steps toward a stable and just economic future.

And so here we are.

I am the last person in the world to argue that wasteful and unproductive spending can go on forever. Cut waste. Live within your means. Do what is required to cut non-value-adding expenditure. But this book is half the story of what needs doing or possibly even less, just as the Commission of Audit doesn’t to my mind get there either. So far I have not come across a single sentence in the book that indicates the importance of the “private sector”, “the role of business” or “entrepreneurial activity”. The words don’t show up in the index and nothing in the contents goes anywhere near these issues. It is all about government policy, the financial system, the level of entitlements and containing outlays on entitlements. Nothing about what is needed for growth, and as the subtitle suggests, “The End of Affluence”, is entirely pessimistic about our economic possibilities.

And if you follow the guidelines found in the book, you would have to agree. We can no longer afford our way of life, our living standards must contract and therefore the only thing governments can do is cut various entitlement programs but strangely leave public sector infrastructure spending more or less as it is. No discussion of cuts to public waste, those useless money-losing operations that are everywhere absorbing our scarce savings for a negative return. If the real economy is discussed at any point along the way, I have not come across it. It’s all money, finance and interest rates. Encouraging business investment, cost containment, reducing government regulation – of these there’s not a word.

You want growth, cut back on government take up of resources. I love the headline on this story because of its cluelessness: UK AUSTERITY TO STAY DESPITE GROWTH PICK-UP. This is re-stated in the first para:

Austerity will remain the U.K. government’s mantra, Treasury chief George Osborne said Wednesday — even as he lauded the stronger than expected economic recovery.

The people who write such stories think “austerity”, the name its enemies give to cutting back on public sector waste, is bad for the economy, and because of their Keynesian mindset can only be harmful. They have no idea that it is the austerity itself that has led to the higher than expected growth. They cannot even understand what possible connection there could be. Moreover, a return to a stronger economy is not a warrant for higher public spending. The lesson that ought to learned and understood is that non-value-adding outlays slow an economy down. Reducing those outlays allow the economy to re-adjust towards faster growth. And already the Treasurer is talking about personal tax cuts in the lead-up to the next UK election. If only the same would happen here.

What’s the matter with our own economic managers in this country? If they really do want to take Australia down into some kind of American never-ending recession, then maintain or possibly even increase public sector outlays, raise taxes and do next nothing to encourage private sector growth. That way, the money most surely will run out but it didn’t have to be that way at all.

Government ‘investment’ does not equal growth

Judy Sloan’s column from The Australian today goes under the heading, Public spending won’t fuel the growth engine. I mention this on the same day as I have received word that my paper on Mill’s Fourth Proposition on Capital has been accepted for publication.

First Mill. In 1848, John Stuart Mill in his Principles of Political Economy included his four propositions on capital which not only never challenged in his lifetime, the fourth, that demand for commodities is not demand for labour, was described by Leslie Stephen in 1876 as the “best test of a sound economist”. It was the pons asinorum of classical economics, the divide that separated those who could understand economics from those who could not. But what is remarkable is that since that date in 1876, not only has there not been another economist to have embraced this statement in full, but it has been challenged by some of the greatest names in the history of economics – Marshall, Pigou, Hayek are just some amongst a quite extraordinary array of economists from every side of the economics divide who have tried to explain what Mill meant. To my astonishment, I am literally the first person since 1876 who has argued in print that what Mill wrote is literally true. It is the best test of a sound economist.

And what the proposition meant, as the words plainly state, is that buying non-value-adding goods and services – and here the issue is public spending in particular – will not lead to increased employment because it does not lead to economic growth. A Keynesian stimulus is therefore doomed to fail, evidence for which has been accumulating at an astronomical rate since 2009.

Judy in her column has brought forward evidence from a paper published in the UK whose subtitle is, “Government ‘investment’ does not equal growth” and written by an economist by name of Brian Sturgess. Here is Judy’s conclusion:

If the government is intent on spending even greater proportions of GDP on infrastructure — which was already ramped up under the Labor government — it must ensure that only projects for which the benefits far exceed the costs are approved. Spending money on infrastructure is no silver bullet to achieving economic growth and better living standards. Let’s just hope the audit commission has taken on board some of Sturgess’s conclusions.

Yes, let us hope our government has taken on these conclusions which once went under the collective name Say’s Law.

The first new economic aggregate since the introduction of GDP

One of the great mysteries of economics as it is now is to say that consumption comprises 60-70% of the economy and that therefore we must stimulate consumption to stimulate economic growth. But the reality is that so far as the value added of different activities go, consumption contributes either around 6-7%, which is the soak up of resources in the retail sector, or 100% which when all is said and done is the ultimate contibution consumer demand makes since final consumption is the point of all economic activity. As with so much in economics today, the problem starts from the Keynesian mindset that pervades macro.

The great Austrian economist, Mark Skousen, has been hassling the American government for many years to fix up the way they gather and report statistics and of all things, they have now begun to supplement their usual national accounting stats with a measure that actually burrows into the data in ways that show the underlying supply-side contribution of different sectors of the economy.

Forbes in its latest issue carries an article by Skousen, Beyond GDP: Get Ready For A New Way To Measure The Economy, which explains what is being done and how it will make a difference.

Starting in spring 2014, the Bureau of Economic Analysis will release a breakthrough new economic statistic on a quarterly basis. It’s called Gross Output, a measure of total sales volume at all stages of production. GO is almost twice the size of GDP, the standard yardstick for measuring final goods and services produced in a year.

This is the first new economic aggregate since Gross Domestic Product (GDP) was introduced over fifty years ago.

The disastrous Keynesian wreckage that has been devastating economies across the world has to a large extent been driven by the Y=C+I+G+X-M formula which everyone learns in first year and then, because it is so ridiculously simple, is never forgotten again. It helps establish in the minds of economists, governments and the public that economies are driven from the demand side when it is the one place that an economy receives no momentum at all. As Mark has put it:

By focusing only on final output, GDP underestimates the money spent and economic activity generated at earlier stages in the production process. It’s as though the manufacturers and shippers and designers aren’t fully acknowledged in their contribution to overall growth or decline.

There are no perfect measures at the aggregate level and the double counting that affects such an aggregate is noted by Skousen. But anything that can finally place the focus on the production side of the economy and end the preoccupation with demand is a massive step forward.

I hope the ABS is taking note.