Keynesian trap of spending: what of construction post-BER?
|
My learned Crikey colleague Bernard Keane is one of the more adept political writers in the press gallery. But when it comes to matters of economics, Keane occasionally falls into a half-cocked Keynesian trap. In Keane’s world, the solution to too much spending appears to be more spending. The answer to too much debt is to accumulate more debt. While Keane is entirely correct to point to Labor’s spending has generally remained less profligate than John Howard’s government (which took middle-class welfare to new highs, or lows), that is to excuse some of the more poorly constructed policies during the global financial crisis. Judging economic policy need not be a relative assessment. On Monday, Keane claimed the “much-reviewed BER program supported tens of thousands of desperately needed construction industry jobs providing important infrastructure for schools … in fact the BER was probably the most successful non-cash stimulus program developed anywhere in response to the GFC.” Determining the most successful “non-cash” stimulus is much like trying to work out the least painful way to kill oneself — pretty much all of the solutions are pretty awful. There is no doubt certain pockets of the community benefited substantially from the BER — construction companies, materials producers, architects. These chosen few were, of course, gained from the generosity of the anonymous rump. The masses of hard-working taxpayers who were considered so unimportant that their income be siphoned off (in the form of taxation) and handed to construction workers to build school halls. Of course, those shiny new halls were no doubt appreciated, even if many weren’t actually needed. There were other policies that could have been pursued — like pressuring the states to cut payroll tax to encourage direct employment. This would have led to more jobs in areas that were able to be sustained by the market, rather than those that are reliant on government assistance to prosper. Keane went even further yesterday, appointing Wayne Swan as some sort of economic savior, noting that:
In one sense, Keane makes an obvious and correct point: the stimulus packages did allow some Australians to retain their jobs. The problem is, those jobs came at a cost. By refusing to allow the market to correct past mistakes, the government perpetuated poor economic decisions. Swan does not appear to be a believer in Schumpeter’s “creative destruction” — the notion that after a boom, unprofitable industries need to end, with the economy adapting to changing circumstances. What the stimulus packages ultimately achieved was to transfer wealth from the deserving (taxpayers) and the innocent (future generations) to certain pockets of the community. This allowed people to keep their jobs, which prima facie is a good thing (lower unemployment benefit payments and improved morale are two obvious benefits). But if saving jobs is the only goal of economic policy, why not, at the first sign of economic weakness, create a policy of employing people to roam the streets randomly smashing house windows? Not only will the window smashing policy “create” jobs for the elite window smashers, there would be plenty of flow-on benefits — suddenly, there will be thousands of jobs for window makers and the window fitters. Plus, a greater demand for security guards to protect the wealthy from having their windows smashed. And of course fence builders to keep out those pesky government-employed window smashers. Not to mention lumberjacks who will be supplying the wood to build the fences or the truck drivers who will be hauling the windows and wood. Think of all the jobs … According to Keane, this kind of policy may even avoid the “sort of large-scale misery we saw in the aftermath of the 1990s recession — lives ruined, skills wasted, careers wasted”. The problem? Smashing and repairing windows creates no overall economic benefit. Instead, it creates an artificial demand, the cost of which will eventually be borne by future generations. What Keane ignores during his praise for the job-creating stimulus is that the victims from such spending have not yet been born, or are too young to vote. The fact that the beneficiaries of such policies very much do vote should not be lost. So while thousands of people were able to keep jobs that otherwise may have been lost, they did so in industries that may well be unsustainable in the medium or long term. Much like the corporate welfare paid to car manufacturers (which Keane accurately criticises), stimulus payments that allow people to remain in jobs leads to a misallocation of resources — away from the innocent unto the undeserving. While proponents of the stimulus point to Australia’s relatively low level of public debt to vindicate the moves, that argument ignores the nation’s substantial levels of private debt in the economy. Mortgage debt, for example, is higher in Australia than it was in the US before the GFC. Should a wobbling property market transfer to strife in the banking sector (as has occurred in the US and Ireland), the true folly of misguided stimulus spending will be fully revealed. |
|
|
|
16 Comments
Bilge, Bollocks, and Neo-Austrianism.
If Schumpeter had had his way during the Great Depression, it would have destroyed the economies of the free world to the point where they were unable to fight off the totalitarians. He was “Crying Fire! during Noah’s Flood” as one economist of the day memorably put it.
To move to the current day, the policy Schwab advocates here would create a class of window-breakers: all the long-term unemployed who turned to crime when his “creative destruction” somehow destroyed their jobs without creating new ones. Anyone who wants to see the results of this liquidationist sentiment need look no further than the current UK and Ireland economies.
Nor do I recall my taxes going up to support building school halls. In fact, I recall the government giving me a cheque. Oh sure, if you believe in Barro-Ricardian equivalence (empirically disproved), have an infinite time horizon (impossible), think that governments run on a hard-money standard (they don’t), and can perform the mental gymnastics of thinking that an economy in recession is also running at full capacity (a contradiction in terms) then it’s possible that my great, great, great, great, grandkids might have to pay higher taxes. In any other circumstances (ie in the real world), expansionary programs in recessions pay for themselves by generating higher revenues and lower welfare payments, both immediately and into the future as the infrastructure created gets used and the high social cost of the long-term unemployed is foregone. This is called the operation of automatic stabilisers. Every economist in the world is aware of this - except for Sinclair Davidson, Rand Paul, and Adam Schwab.
PS: Taxpayers are the “deserving”, are they? In that case they should be happy to pay more taxes, so they can show how deserving they are. Perhaps Schwab could put this argument to the Minerals Council of Australia.
JAMESH said it all. Adam - suggest that you stick to what you know, whatever that is.
I like the way the problem in the last paragraph is switched to private debt - from public debt.
The BER was not a school halls program, while many school halls were built - it was much more than that.
My local public school is about to move into a a modern 2 story classroom block - built over old post war (ww2 not the Gulf) weatherboard buildings.
Many, many of these buildings were desperately needed. It was reported at the start of the BER - (before it somehow went bad in the press narrative); that builders where shaking their heads at some schools when they saw the condition of the old buildings they were replacing.
I agree many businesses should have failed - rather than being propped up, however - the construction and associated trades where not a cause of the financial crisis - banks like Macquarie, Goldman Sachs were.
I don’t think there would have been any ‘creative’ benefit in letting the construction industry fail.
Last point - most of the Govt debt is from falling tax receipts not the stimulus spending.
Thanks for that piece Adam. Good to see the pontificating of Mr Keane challenged occasionally.
And the ranting of Jamesh can be summed up neatly when he agrees that his grandkids might have to pay higher taxes. Of course they will if the madness of Labor spending is allowed to continue
Granorlewis: I could receive no higher compliment than your complete misunderstanding of what I wrote, which is that expansionary programs in recessions pay for themselves. John 1:5 and all that.
I have only one question for Adam. Why is this sort of investment unproductive but gambling on the Mortgage market by Wall Street etc the root cause of the GFC is okay?
Thanks JamesH for saying more eloquently what I was thinking. Jeez, I have no economic training and even I could pick out errors in fact and logic in almost every line of this bilge. Absolutely risible for Schwab to imply that innocent people’s lives should be destroyed in the interest of maintaining theoretical economic purity. Obviously Schwab thinks he’s work is immune to recession and depression. If it is, it shouldn’t be. Have you read the nonsense he writes about the housing market?
Adam, virtually all the BER money in NSW was spent on getting rid of old demountables. If you would like to come and visit my son’s school and tell them to get out of their new classroom - complete with smartboards and fibre optics - and move back into the leaking tin sheds they use to have please do so. They would thoroughly enjoy listening to their NAPLAN-supporting teacher yell at an ignorant adult and not them for once.
Deficit funding of budgets should be undertaken as a consequence of constructive economic analysis including the benefits derived from borrowing, the financing of interest payments, and ultimately the redemption of the borrowings.
It is interesting to note that returning the budget to surplus is only the point at which deficit funding is no longer being relied upon, but then presumably from that point onwards it could be assumed that accumulated borrowings will eventually be repaid by future taxpayers. Deficit funded stimulus spending is not a free lunch stop
The issue that should be being analysed is not whether we have countercyclical expenditure to offset a recession, but, what is the nature of that expenditure, and will the future taxpayers who have to repay the debt and cover the interest costs in the meantime see value for money.
Maintenance of full employment can be undertaken by digging holes and filling them up again. Swan will be borrowing over $150 billion and adding at least $6 billion a year to the government’s budget costs as a consequence of deficit funding over a five-year period. Without detracting from the desirability of deficit funding as a counter cyclical budgetary strategy, there is an opportunity cost being both the interest incurred on the debt, and the eventual application of future government revenues to the repayment of that debt.
The other question is what value for money could the the taxpayers have received for their stimulus spending. The community would have got much better value for money with $150 billion being spent on infrastructure projects such as public transport systems roads etc whereby future taxpayers who are going to have to pay this bill could see some value for money in bringing forward otherwise economically justified expenditure. Stimulus spending should be seen as nothing more than a timing difference, being in effect the current government spending future government’s tax revenue. Maintenance of current full employment to the detriment of future taxpayers is not necessarily a positive thing unless the expenditure undertaken as a consequence of the borrowing is logically and economically justified other than on grounds of maintenance of employment. If Australia had a real Treasurer he or she could explain this, and manage the whole process much more effectively.
Greg Angelo, you may be right that better “value” could’ve been had by spending the stimulus on public transport, etc. The issue AT THE TIME was spending the money on shovel ready projects so that the stimulus would get into the economy QUICKLY. One could argue that they should’ve had shovel-ready public transport projects….
I agree with other posters critiquing Schwab’s rubbish that Crikey keeps publishing.
I add that Schwab’s only alternative to Labor’s stimulus to stave off recession is risible. He proposed to ‘cut payroll tax to encourage direct employment’, but the demand for labour was so flat that removing all of the payroll tax of 5.5% would have had a negligible effect on the demand for labour.
A significant amount of the stimulus spending WAS spent on roads, public transport, “etc”.
Yes, good point, Gavin. I think Adam’s been suckered into believing that conservative economic nonsense that tax breaks are the best stimulus. In the face of overwhelming evidence that tax breaks are the poorest stimulus.
I agree that putting all eggs in one basket (and rutting the Construction companies and unions which prop up the ALPs finances is a nice basket), was a mistake. But they were after quick, short term wins, and pragmatically executing tasks quickly is often going to be imperfect.
Are quick spends a good thing or a bad thing? Because like many “anti-everything which has tangible investments” people online, you seem to have fallen into the trap of contradicting yourself throughout.
And comparing Broken Windows to School Halls which will last for decades? You had me going there for a minute Adam, but your logic broke down in a sea of idealogical gobbledeegook.
This shoddy effort to discredit Mr Keane actually reminds me of a BER school hall. Good intentions undermined by ideology
Adam strikes me as a latter day Alan Ramsay. Alan pretty much wrote the one story over and over again - Labor’s fall from grace. With Adam it’s the bubble in the Australian housing market, and more recently, its possible knock-on effects. I think maybe Adam should stick to his regular schtick. Payroll tax cuts as a quick and effective stimulus?
Economic writers today know the price of everything and the value of nothing, it appears.
(Apologies to Mr Wilde)