Ever wonder why real wages are falling?

A messy fight is looming over who will pay the huge extra costs of the Metro Tunnel, with the Andrew Government reportedly warned the total blowout of..

The Metro Tunnel is Victoria’s very own NBN, although there are quite a few others like it but not quite as draining although very bad as well. There was the desal plant, and the billion spent on the Miki Card, getting rid of level crossings in the city, others too, but this one is big big time. Infrastructure spending at its absolute stupidest. The above story is a snippet from the H-S this morning.

There are economic idiots everywhere, but the biggest ones are the ones who think government infrastructure projects like this are good for the economy. Even the Premier is beginning to see what a black hole this is. Construction everywhere you turn in the City, whole city blocks turned into construction sites, billions of dollars being spent, and not a dollar’s worth of actual value-adding output anywhere to be seen. We are looking here at immense costs, for which there will NEVER be a single cent of profit ever earned.

Keynesian economics was once only about getting an economy out of a recession. Now it’s about massive and permanent deficits coupled with massive and permanent forms of public waste. Now they have overrun their original costs to $3 billion, but there is more than just the tunnel that comes with all of this. Victoria is bankrupt in the same way that economic theory is bankrupt. I was just up in Sydney and they are about to finally start running their idiotic streetcars down George Street. That, too, will never turn a dollar of profit, which means it will never ever repay its costs in the benefits it provides. Pure waste but presented as a public benefit. My biggest query is always why isn’t this obvious?

Modern economic theory is a disaster for anyone whose government believes any and all of it. Public spending has its role, but is a drain on an economy’s productivity. Oddly because of the Keynesian nature of the National Accounts, all of this will show up as growth in GDP even though it is nothing of the kind. And there will be many people employed, except not employed on projects that will add to the economy’s net level of real production. They are not value adding. They may create a dollar’s worth of value, but for each dollar of value created it will cost much much more than a dollar. Why does this make sense to anyone?

Soak the poor

The astonishing part about modern macroeconomics is how those whose wealth is most comprehensively plundered through public spending and crony capitalism are the ones who are told that everything is being done on their behalf. Governments spend trillions hiring their friends and colleagues through moneys syphoned off from a proportion of the taxpaying public, but the reality is that everyone who is not on the receiving end is on the paying end, whether one pays taxes or not.

An economy during any relatively short period of time – say over the course of a decade – has only so many goods and services along with only so much physical capital. Those who receive payments from the government, whether public servants or government contractors, get to spend well beyond any productive contributions they make to the economy. Everyone else ends up with less.

It’s how Keynesian economics works. A massive Ponzi scheme, where the poor and middle class are made to subsidise the relatively well off as well as the rich.

You think you are getting free this and free that. But the ones who are creaming off the system are the ones the government is paying on your behalf. Even if you don’t pay a cent in tax, you are paying an enormous cost in allowing others to get rich while you struggle to get by.

And if you think it’s bad now, wait till Modern Monetary Theory becomes the go-to means to finance governments. And we are just one election away from a full roll out in Australia.

If it’s not in itself value adding don’t do it

I share Judy’s exasperation at the push for more infrastructure spending which is a code word for more government waste. If it is government spending, it will never repay its costs. Occasionally a government will grab hold of some natural monopoly – Telecom in the old days – from which even with all of the usual incompetence they were able to take in more money than they paid out. But past those few and far between projects, I cannot think of a single instance where governments take on projects which leave us economically better off. So this from The Australian this morning fills me with tremendous foreboding:

Joe Hockey says state treasurers will find it “very hard to resist” a federal proposal to recycle government-owned assets and boost spending on infrastructure.

State treasurers are in Canberra this morning to discuss spending on infrastructure and the carve-up of the good and services tax.

The federal Treasurer expressed optimism about the discussions ahead of today’s meeting.

The Abbott government is pushing for a deal that will unlock billions of dollars from the privatisation of state government assets to be reinvested in significant new infrastructure projects.

It’s understood proposals put to state treasurers will include new incentive payments from the commonwealth which will be linked to qualification deadlines.

“I have no doubt that the states will find it very hard to resist what the commonwealth is prepared to offer them,” Mr Hockey said.

Mr Hockey said the proposal would be “for the recycling of state government assets and investment in new productive infrastructure that is going to create jobs and improve the capacity of the economy”.

Governments do not create jobs. If you believe that government spending leads to an outcome where there are more jobs in an economy than there would have been had the government not indulged in this kind of spending, or that the economy will end up stronger and more productive, you will never understand a thing about how an economy works. And as an added extra, with increased government spending there will be lower real earnings as well. So let me repeat what Judy said below:

The bigger issue is with all this talk of INFRASTRUCTURE, what we are about to witness is just a monumental waste of taxpayer money on politically popular and excessively expensive projects for which there have been inadequate assessments. Just a continuation of Albo, really, who ramped up infrastructure spending from 1 to 2 per cent of GDP.

The disaster that overcame the Victorian economy in the dismal Cain-Kirner years were built on just those same “hollow logs” they thought they could tap into. If it’s not value adding – that is, if it does not pay for itself after every cost is taken into account – it makes us worse off, not better. Call it charity or welfare or whatever else signifies that it draws down on our productivity if you must do it. But for heaven’s sake, don’t pretend it is a contribution to economic growth.

UPDATE: Here is the Treasurer’s press release, Treasurers agree to boost infrastructure.

The Commonwealth’s incentive will be 15 per cent of the assessed value of the proposed asset being sold for capital recycling. If proceeds are used by the States and Territories for the retirement of debt or other purposes, rather than for agreed, new productive infrastructure, they will not be eligible to receive payments under the initiative.

This is an important initiative to remove debilitating infrastructure bottlenecks, stimulate construction and drive real activity in the economy when it is most needed, as investment in the resources sector declines.

Infrastructure Australia estimates that at least $100 billion in commercial infrastructure assets are currently tied up on government balance sheets and could be sold.

The partnerships could overcome the fiscal constraints Governments face to increase the pipeline of projects and improve Australians’ quality of life, tackle congestion, reduce business costs and help firms better link with their employees and customers.

Those who think this will be of the roads-rail-and-sewers variety of expenditure will just have to wait to see what gets floated instead. At least on the up-side, the States will have to sell up various capital assets to private owners to secure the funds so it’s not all bad.