It's true, the Rudd Labor government inherited the strongest economy in Australia's history when it won the 2007 election.
Yet now, a little over a year later, our $20+ billion surplus has not only been frittered away but flushed down the drain of Keynesian Do-Somethingism so that we'll end up with at least a $20 billion deficit this financial year.
Why, then, if our economy was so sound do we need to spend 6.4% of GDP on our bail out plan when the US is spending 5.8% and other countries with economies not as robust as Australia's are spending less?
We can't afford the mortgage so we're borrowing money to put in a swimming pool.
This is going to turn out extremely poorly, as Gerard Jackson describes in his weekly analysis:
Rudd's solution to the financial crisis and the recession is the discredited Keynesian one of swilling billions of dollars down a toilet bowl. In this he has the full support Treasury Secretary Dr Ken Henry who argued that Rudd's spending binge would prevent the economy from stalling. According to Henry's fallacious economic thinking investing in infrastructure and using cash handouts to promote consumption will create enough spending power to lift the economy out of recession. If it doesn't, then spend and borrow some more until it does. This line of 'economic thought' is complete hogwash.(Nothing Follows)
The brilliant Dr Henry has stated that cash handouts are more effective than tax cuts. Turnbull's response to this nonsense was to dredge up Friedman's permanent income hypothesis, which immediately swung public opinion behind him (some hope). The problem is that Turnbull and his advisors are a bunch of economic illiterates while Henry is nothing but a vulgar little Keynesian whose lousy economics — that are also shared by officials at the Reserve Bank of Australia — are in grave danger of making matters much worse than they would otherwise be.
Australia's economic state — and that of the rest of the world — is the result of the appalling economic fallacies that have shackled the central banks. Without exception every central banker believes that he can stabilise the economy by manipulating interest rates. Let us once again turn to our own central banking experience. March 1996 to October 2008 currency grew by 129 per cent, bank deposits by 201 per cent and M1 by 185 per cent. It was this utterly incompetent (some would call it criminal) monetary policy that created a boom that once again gave us a "recession we had to have".
A loose monetary policy always distorts the production structure. By this it is meant that activities are encouraged that rely for their continued expansion — if not existence — on more and more monetary injections. The longer this policy is pursued the greater will be the distortions. Sooner or later the central bank will gradually begin to raise interest rates. A turning point will finally be reached where rising rates will cause manufacturing to start contracting*.
The latest Australian Industry Group's PricewaterhouseCoopers performance of manufacturing index reports that "seasonally adjusted manufacturing employment fell for an 11th consecutive month", which suggest that the turning point was reached in early 2008 when the cash rate target was raised to 7 per cent. That it was also reported that while manufacturing contracted for the eighth consecutive month in January might suggest to readers that there is a contradiction here. Not at all.
Austrian theory explains that the production structure consists of complex stages of production, which each stage being further from the point of consumption than the preceding stage. (Austrian capital theory is a lot more complicated than this might suggest). Therefore, because of the structure's time dimension — we expect the higher stages to contract first then in turn by the lower stages. Therefore a manufacturing index could for a time conceal the fact that some manufacturing activities are contracting and shedding labour. It would not be until the contraction became more widespread that the index would drop below 50.
Without a reasonable grasp of capital theory it is impossible to fully comprehend what is going on with the economy. This is why so much economic commentary is very bad, including the stuff Treasury officials come out with, which brings us right back to Dr Henry's nonsense. His only argument for increased government spending as opposed to tax cuts has to rest on Keynes' magical multiplier, according to which, the less you save and the more you consume the richer you will become. Hence wealth springs from consumption (demand) and not production.
Rudd is going to give — with Dr Henry's approval — small businesses a temporary $2.7 billion tax break. It ought to be obvious, even to a Keynesian, that no business is going to expand production on the basis of a temporary tax break. This is why tax cuts need to be permanent. Unfortunately, even the sound idea of tax cuts is burdened with fallacies. For example, Andrew Norton, a research fellow at the Centre for Independent Studies, argues that "tax cuts would be less inflationary than the spending we are seeing, because they would be partly saved". But tax cuts are never inflationary. Moreover, government spending is only inflationary when it is monetised by the central bank. In addition, to save, as Ricardo pointed out to Malthus, is to spend.
The question is not one of tax cuts v. government spending but the fact that not a single member of the economic commentariat gets it. First and foremost, nearly all of the spending is directed to personal and government consumption. For instance, nearly $4 billion is going to be spent on home insulation and just over $21 billion is to be spent on schools and public housing. That's a total of some $25 billion alone.
All of the spending is taking place at the lower end of the production structure. This is guaranteed to worsen the plight of the higher stages of production. The orthodox argument is that because consumption spending is about 66 per cent of GDP Rudd's spending binge will jump start the economy by spurring consumer spending. This approach is totally blind to the fact that total spending is about three time the size of GDP with business spending being about 66 per cent. It is not consumption that needs to be promoted but savings and production, out of which consumption springs — irrespective of what Dr Henry thinks.
The RBA recently said it expected GDP to bottom out at an annual pace of 0.25 per cent by the June quarter of 2009. But if the Reserve had used total spending (or total outlays) as its measure it would have found that the economy had actually contracted. Our so-called meagre growth figure is in fact negative. The country is in recession and Rudd's so-called stimulus will make it worse.
The following are a couple of examples of the type of economic commentary that I am forever condemning
Terry McCrann stated:
Now we've got massive co-ordinated stimulus for the first time in 17 years — and indeed arguably much more than back then. It's a big, bold experiment. (The phone call that never came , Herald Sun, 4 February 2009).
It's neither bold nor experimental. This kind of economic hooey has always failed whenever it has been tried. What is needed is sound economic advice, which is not what McCrann is offering. However, McCrann is a fount of economic wisdom when compared with Anatole Kaletsky. According to this expert:
As a result of moralistic witch-hunts against debt and consumption, pragmatic Keynesian solutions to the credit crunch have been thwarted by an unholy alliance of ideological monetarists who believe that the market is always right...(How we all got it wrong this year , The Australian, 30 December 2008).
It is completely beyond the ken of this vulgar little Keynesian that it was his "debt and consumption" policies that caused the bloody crisis in the first place. But what can we expect from a moralising twit who thinks that a country can grow rich by bombing its own cities.
The economy sinks deeper into recession while the economic commentariat flounders.