Keynesian economics is guaranteed to make an economy’s problems worse

This is Judy Sloan stating as clear as you like: Time to get the budget in surplus and pay off debt. What it is really about is how disastrous Keynesian economics is and always has been. I am a month away from finishing my book on how the idiocies of Keynesian economics replaced classical theory that had created the world of wealth we have now all become not just used to, but have come to believe it is all just automatic. It was for a while, but with Keynesian economics at the heart of policy making, we are potentially heading for a very large fall in living standards. The following are Judy’s comments about Keynesian theory and policy from her column today.

I’ve been reading Paul Tilley’s Changing Fortunes: A History of the Australian Treasury and a theme that emerges is the advent after World War II of unquestioned Keynesian thinking among senior officials.

Having seen the economic damage and human suffering the Depression caused — although Australia was less affected than many other economies and recovered more rapidly — consensus emerged that the federal government must seek to manage demand actively to maintain full employment.

There was little questioning whether this approach would work or what any adverse consequences might be. Rather, the politicians of the day meekly accepted Treasury’s advice that monetary and fiscal policy should be used to boost employment when needed and to quell inflationary pressures when required….

The Keynesian salad days came to an abrupt end during the Whitlam years when the stable relationships on which the theory was based — in particular, the inverse relationship between unemployment and inflation — fell apart. In its place, a prolonged period of stagflation ensued in which unemployment rose in the context of high inflation….

Today we observe Treasury as a much diminished institution with plenty of Keynesian devotees still occupying positions at various levels….

In the context of today’s debate about appropriate action to deal with a soft economy, many of the debates of yesteryear are there in the background. The simplistic Keynesian response is that the government must spend more immediately, even though experience says this is costly and largely ineffective….

And let us not forget that the government has been running a budget deficit for more than a decade — a long-running Keynesian experiment — yet we still find ourselves in a relative economic slump.

It’s time to get the budget back into surplus and start repaying the accumulated debt.

Keynesian economic policy has NEVER worked, not a single time, not anywhere, not ever. Let me take you to my own: The Dangerous Persistence of Keynesian Economics where all of this is spelled out in more detail. And I cannot refrain from adding this quote at the front of the article.

Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?

—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

Classical economic theory presents perennial truths that economists once knew but have completely forgotten

The perfect statement of classical economic theory, from David Uren in The Australian today: Get used to the new normal – booming rates of growth are gone.

Over the year to December, growth was only 2.3 per cent and, short of massive revisions by the Australian Bureau of Statistics, Treasury’s forecast of 2.7 per cent growth this financial year looks unattainable

It is time Treasury let go of its vision of an extended burst of rapid growth around the corner.

After a decade in the slow lane, this may be as good as it gets.

It is not such a bad place to be — employment growth has been strong.

It was a staple within classical economic theory that economic growth is unrelated to employment. And there we see it before our eyes, low rates of economic growth and high levels of employment growth. All that is discussed in my Quadrant article this month: The Dangerous Persistence of Keynesian Economics. There at the very end of the article we find the then-Treasurer of the UK, Winston Churchill, discussing the futility of public spending to add to employment in the wake of their attempt in the 1920s to stimulate employment through high levels of public works:

“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.”

Ninety years later we demonstrate once again what once upon a time every economist knew which now no one knows. Read the Quadrant article if for no other reason than to get another perspective.

More economic incompetence coming our way

Modern economics is so incompetent to deal with the problems of our economy that it is simply breathtaking. This is the headline at The Oz: “Reserve Bank paves way for further cuts in official interest rates”.

His comments come against a backdrop of deteriorating economic data: house prices and building approvals are falling, while the national economic growth rate dropped from 3.4 per cent to 2.8 per cent, it emerged this week, surprising economists.

Speaking at the Australian Business Economists annual dinner, Dr Debelle said the federal government had room borrow and spend to stimulate the economy, if needed.

These people do not, of course, have any idea why the economy is floundering. They have kept rates low since the GFC and public spending has never been higher. Of course, a major part of the problem is that rates have been too low and public spending has been too high, but they would be the last people to know. Look at what he even said:

“Fiscal space is really important; we still have that in Australia,” he said, backing former Treasurer Wayne Swan’s controversial $52bn fiscal stimulus of late 2008 and early 2009, which saw $900 payments to households, help for first home buyers, discount roof insulation and a school hall building boom.

“Fiscal stimulus in Australia in my view was absolutely necessary and was a critical factor behind Australia’s good economic outcomes,” he said.

Unbelievable. No idea how an economy works but they will bludgeon it again until it finally responds to treatment. And there is not much doubt we are heading into an economic sinkhole that Treasury and the RBA have between them created.

The GFC is now a decade past and we, along with pretty much everyone else, have never had even an inkling of a robust recovery. Amazing.

A brutal reminder of macroeconomic incompetence

The GFC was over with in 2009 and now we are at the end of 2017. So what are we to make of this, other than they have no clue what’s gone wrong:Brutal reminder of GFC still here, Treasury says, as retail stung by poor sales.

Treasury secretary John Fraser has slammed politicians for being out of touch with the struggles of everyday Australians and blamed “extraordinary political instability” for a lack of consistent policy settings that could push the economy forward.

Mr Fraser made his comments as retail figures released on Friday showed yet another month of downbeat results, with a fall in food, clothing and department store sales.

Rising energy prices and the weakest wage growth in Australian history are slugging consumers, driving anxiety among businesses in the lead-up to the crucial Christmas trading period.

In a speech at the Australian National University before the dismal data was [were] released, Mr Fraser said the country was still struggling with “the brutal reminder of the global financial crisis,” which took longer than expected to recover from and had led to a “perplexing weakness” in the economy.

The actual perplexing weakness is in the economic theories that have been used to analyse what’s gone wrong and then work out what to do to fix things.

The GFC was a worse-than-usual downturn that would have blown over in about a year, were it not for all of the Keynesian so-called “stimuli”. It is the fantastic amount of our national savings that have been blown by governments on building the education revolution, pink batts, the NBN, green energy and pretty well every other government spending program over the past decade. Obvious as the day is long, yet there is no one in Treasury who seems to understand why their road to recovery has been a road to ruin.