Policy in the pub

krugman and me july 2015

I will be debating the Chief Economist of the National Bank on Stimulus versus Austerity on August 19 at the Imperial Hotel in Melbourne on the corner of Spring and Bourke @ 5:30. These are the notes I am putting together, which will be added to as I go along. The picture is, of course, myself with Paul Krugman on 12 July at Freedomfest in Las Vegas. We were obviously separated at birth.

Using the term “Austerity” as the noun meaning sound finance and fiscal prudence already tips the debate, both here and internationally, in a negative direction

Back in the 1990s, before their ill-fated stimulus, I sat next to the Japanese Finance Minister at a lunch where I told him not to do it. His reply – “Don’t you care about the unemployed?”

I teach non-Keynesian economics and those who have never done economics before get it and those who have studied Keynes already find it difficult

Keynesian economics is a cult – believed in spite of the fact that it makes no economic sense and has never actually worked in practice

What’s the matter with you people?

The GFC was not, obviously, caused by a failure of demand. It was not caused by too much saving. In America, it was the product of a crash in the housing industry that fed into its financial system. In the rest of the world, the problem was entirely financial, with credit frozen across the globe.

The answer was the TARP which unfroze credit. The subsequent stimulus was not only unnecessary, but positively harmful.

See my Quadrant article from February 2009: The Dangerous Return to Keynesian Economics.

I also wrote my Free Market Economics, now in its second edition, to explain why the hysteria surrounding the GFC was misplaced and the stimulus would be a disaster

The notion of a “stimulus” is, of course, Keynesian. Economic theory always accepted a role for public spending as a palliative. No one thought of spending as a cure.

The idea of a stimulus is based on the belief that economies enter recession because there is too much saving. The government must therefore enter the picture and put those savings to use if the economy is not to enter a long drawn out recession and unemployment is to come down in a reasonable period of time.

The belief is that government must put those savings to work asap, even if the form in which the spending takes place is not in itself value adding. Even if the initial spending is not value adding, the multiplier will do the work of ensuring that the rest of the expenditure is properly based on profit-making activities.

The basis: Y=C+I+G. If C and I fall, G is raised to replace the missing expenditure.

C, I and G are final demand. The rest of the economy, the hinterland behind final demand, is ignored. It will simply structure itself to conform to whatever is being bought at the end of the production trail. Eventually everyone will be employed if there is enough spending on final goods and services.

Let’s take Bronwyn Bishop’s helicopter ride. It would be ludicrous to defend it as a way to stimulate demand. She could not claim that with a multiplier of three, let us say, she has added around $15,000 to GDP.

No one would think it would make sense if the Government said that every ministerial journey between 50 and 200 kms had to be by helicopter as a means to create jobs. We can all see straightaway how government waste of this kind has no positive economic effects.

Suppose we heard that entrepreneurially-driven construction activity with no government subsidy was to double over the next ten years, would we not all agree that the economy would be bigger and stronger at the end of that time, more jobs would be created and real incomes would rise.

But suppose, instead, we heard that over the next ten years there would be twice as many meetings of the Economic Society and the number of journal articles would double. What then would be the effect on output and employment, do you think?

Record 93,770,000 Americans Not in Labor Force…
Participation Rate 38-Year Low…
Record 56,209,000 Women Not Working…