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:
“Labor’s decisions to ramp up spending in 2008-09 and 2009-10 … were fundamental to Australia withstanding the global shocks. And they are the reasons tens of thousands of Australians, maybe hundreds of thousands of Australians, kept their jobs. This may seem obvious to a lot of people, but there is a persistent campaign to mislead people into thinking they had nothing to do with it.”
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.