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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

austerity is prosperity « Previous | |Next »
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:

PinnIpublic finances.jpg

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.

| Posted by Gary Sauer-Thompson at 12:32 PM | | Comments (10)
Comments

Comments

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/).

The state of the national economy is meaningless here. With a local economy dependent on building and tourism, we're in an economic hole. The state is also going great guns, but economics postcode by postcode, where people actually live, is a different animal.

Labor's claim to superior economic management in which Labor argues that the stimulus prevented the Australian economy from a deep recession and prevented a massive increase in unemployment. In order to deny this Australian conservatives have begun to play down the global economic crisis. Thus John Howard in Perth said:

There's some merit in the argument that this has really been a North Atlantic global financial downturn, than a world financial downturn, and we have benefited enormously from that. There's the China factor, don't forget the Japanese and Korean factors either. It's enormously to our benefit. I don't rate the fiscal stimulus of the Rudd government at all highly in relation to saving us from the global financial crisis, I don't rate it at all. It was over-indulgent, it was way beyond what's necessary.

Treasury estimates Labor's stimulus added 2 per cent to GDP in 2009, and saved 200,000 jobs. Some others estimate a smaller bang for buck. What is clear is that without the stimulus - and the bank guarantees that headed off a financial collapse - Australia would have suffered a far worse downturn.

Australian conservatives are beginning to look like little Australians.

Conservatives like Howard have a problem in downplaying the global financial crisis since Tony Abbott said on Q+A that the Coalition supported the first stimulus package---the $21 billion of handouts to households allowed many to pay down debt and others to keep retail demand rising.

Abbott also said that the Coalition supported part of the second stimulus package--the $16 billion for school buildings - delivered only after Australia had begun to emerge from the crisis.

As Colebatch points out:

The budget papers imply that in the four years of expected deficits, from 2008-09 to 2011-12, half the budget blowout was due to the financial crisis and half to the stimulus measures. Whenever pressed, the Liberals concede that deficits and debt in some measure were unavoidable.
Brad Orgill's taskforce concluded that $1 billion was wasted from middlemen and contractors overcharging for school buildings. Probably more than that was wasted from the Rudd government's refusal to halt its foil insulation program.

Labor has to answer for a lot of money that was wasted through poor public administration.

Annon- the counterfactual is the loss of production and the experience of substantially increased unemployment with the cost of the social and health outcomes that unemployment brings for a period of at least five years - jobs lost in an economic downturn are not quickly recovered. How do we measure the human waste and destruction of human, family and community life that would have resulted without the stimulus?

If financial waste there was i would prefer that to waste of human life that we avoided.

Annon what possible basis is there for your claim that the BER task force found $1billion of waste? It didn't make a finding about waste at all. It found that the program had probably incurred a premium of around 5% to meet accelerated completion schedules. These were required to achieve the economic objectives of the program. In other words if they had taken longer they would have spent a little less but the stimulus effect would also have been less. There is no way this can be characterised as 'waste'.

Ken,
I was lazy and was working off the article by Tim Colebatch in the National Times. I've retuned to the Building the Education Revolution Implementation Taskforce Interim Report which states:

To date, the Taskforce has received complaints in respect of 254 schools; approximately 2.7% of all schools involved in the BER program, and of these over half relate to value for money. NSW Government schools accounted for 56% of complaints and Victorian Government schools for 20%. A full listing of complaints received is at Appendix 1.From our investigations to date, the majority of complaints raise very valid concerns, particularly about value for money and the approach to school level involvement in decision making.

The Report continues:
Issues raised with the Taskforce include: inflexibility both in terms of project specification and the capacity to reallocate funding to address priority needs, ’de-scoping’ of projects if budgets came under pressure, lack of access to information on costs, insufficient consultation and empowerment of the school community in decision making and a perception that managing organisation fees were unnecessarily high. In part, these issues reflect the focus on speed of implementation of projects and a necessary tradeoff of consultation time and design customisation versus the stimulus objectives.

No figures are mentioned. I'm not sure where Colebatch got the figure of $1 billion for waste from as the Taskforce says that the majority of the complaints received by the Taskforce have been primarily about value for money, with sub-topics around the quality of the product and the management processes used by education authorities to deliver BER projects.

It adds that the experience of many schools has been very positive with new facilities, consistent with their needs and designed to deliver improved educational outcomes, delivered on a timely basis and with minimal disruption to the school’s operations.

Annon I'm guessing that Colebatch converted cost premiums into 'waste' and rounded $700 million to $1billion. Journos don't like nuance - takes too many words.

gee, even Peter van Onselen reckons that the Coalition's action plan on economics doesn't add up. he says:

To borrow Paul Keating's line, it is a case of voodoo economics. It contains complaints about overstated levels of debt as well as promises the Coalition would rapidly repay debt, but with simultaneous large-scale spending commitments.

He adds that when the Coalition complains about debt built up by the Labor government, it forgets to make note of the fact that it supported all of the first round of stimulus spending and some of the second. It also suggested other ways of supporting economic stimulus during the crisis, such as bringing forward tax cuts, which would have further eroded the budget bottom line.

In truth, the debt at only 6 per cent of GDP is not unmanageable and the Coalition's plan doesn't reduce debt faster than Labor plans to anyway

I gather that Niall Ferguson came to Australia to tell us that government spending was bad, debt worse and the stimulus useless.

A central argument made by deficit hawks like Ferguson is that that the government's debt and borrowing is bad and it will lead to higher interest rates and crowding out other borrower.

Has this happened? Since last June more than $42 billion has been borrowed by the Federal Government, and yet rates (yields on 10-year bonds, the key indicator for the local market) are back where they were 14 months ago.