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August 16, 2010
In an op-ed in The Australian entitled ALP's knight is a thief in rusty armour the economic historian Niall Ferguson challenges Labor's economic narrative that the Keynesian style fiscal stimulus injected by the Rudd Labor government saved Australia from a much more serious recession.
In doing so he is challenging Labors claims about its good economic management:
Australia has dodged a global economic crisis and it has emerged with low unemployment, inflation under control and interest rates still well below their historical levels. Ferguson's argument is that there are more plausible explanations for Australia's relative out performance of the other western governments during the global downturn or recession arising from the global economic crisis. This is the core of his case.
How plausible is it?
Ferguson's explanation for this is:
Step forward five candidates with a better claim to the credit: 1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry...Stimulus? Yes, sure, Labor has stimulated the Australian economy, in the same way that Ned Kelly used to stimulate the economy of Victoria.
Sure, these are factors but they need to be weighted along with the fiscal stimulus. Monetary policy, for instance, would not have delivered even the limited recovery we have had on its own.
What is denied by this account as Tim Colebatch points out in the National Times is that:
Because private sector activity collapsed. In the non-residential sector - excluding education - approvals halved from $28 billion in 2007-08 to $14 billion in 2009-10. Bank lending to business has shrunk by $87 billion, or 11 per cent - and for many companies there are no other lending sources.Think about that. Even now, there are 150,000 more Australians out of work and 180,000 more working shorter time than before the crisis. Growth is sluggish, and GDP per head remains less than two years ago. Ask yourself: what would Australia be like now had the government not pumped all that money into new construction?
The stimulus kept the industry going. In the March quarter, 38 per cent of work on non-residential buildings was on schools and the like, up from 5 per cent before the crisis. Work also began on 4259 public housing units, more than they normally build in a year.
Ferguson is advocating “counterfactuals”---the study of alternative historical outcomes based on “what if” scenarios. What is implied is a counterfactual argument that a conservative fiscal policy on the part of the Australian government to fight the recession would have had beneficial results.
Ferguson sees the Labor Government as clinging to their dog-eared copies of John Maynard Keynes's General Theory to justify their profligacy. Ferguson, in other words, is a deficit hawk who would argue that the biggest problem with Australian fiscal policy is that, under Labor there is simply no plan to return to fiscal stability.
Deficits cannot continue indefinitely and this is acknowledged by Labor. Secondly, there is an international debate over fiscal tightening. Thirdly, in this austerity versus stimulus debate the deficit hawks, such as Jean-Claude Trichet the president of the European Central Bank acknowledge that western economies:
are emerging from the worst economic crisis since the second world war, and without the swift and appropriate action of central banks and a very significant contribution from fiscal policies, we would have experienced a major depression. But now is the time to restore fiscal sustainability. The fiscal deterioration we are experiencing is unprecedented in magnitude and geographical scope.
The growth of public debt has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector.
Ferguson acknowledges that governments were facing the collapse of the financial sector but questions the Keynesian prescription of government deficit spending. A question we need to ask the deficit hawks is: "how would the Rudd Government's balancing their budget, as many conservatives demanded, have had little effect on activity, and even produced beneficial results? What is Ferguson's argument?
The general answer is that austerity is not bad news for business for much of what is being planned by the Coalition attacks waste in the public sector; it is the bloated public sector that the Labor Party allowed to expand is going to feel most of the pain. That is going to reduce the burden that the private sector has to bear in terms of taxation. This is good austerity---if you want business confidence to bounce back do some radical things that send the kind of signal that the Thatcher government and the Reagan government sent to business in the early 1980s.
Ferguson's argument is that the private sector (think mining) would have borrowed and spent as if no crisis at all had happened. In other words, a massive fiscal tightening would actually expand the economy. Private enterprise does the trick. Oh yeah. This is akin to magic thinking. The construction industry in the eastern states (SA, Victoria, NSW) would have deflated and there would have been a big rise in unemployment.
I suspect the more important issue is the longer term economic sustainability of keeping growth going. The international situation is sobering. We a have entered a world of interminable fiscal deficits, increased government debt reduced effective demand, and downward pressure on prices. This suggests long-term deflation, which is what debt-heavy Japan has experienced. Indeed, the future that many countries face may well be unfolding before our eyes in Japan today.
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Ferguson discloses his true position when he writes about 'the home insulation fiasco and the now-proven waste on new school halls'. Recycled Liberal Party talking points in other words and contrary to the evidence to boot. And that's before the juvenile dig at Krugman (this is Australia doofus, do you think anyone cares about your petty professional squabbles back home?), the outrageous paean of praise for the mining companies and the gratuitous attack on the resources tax. No doubt he acquired his deep understanding of Australian domestic politics at the mining companies annual piss-up in Kalgoorlie where he was this year's imported celebrity (http://www.diggersndealers.com.au/).