World's best treasurer takes a swipe at USA libertarians

Textbook example of how to flush money down the drain whilst the real economy (you and me) did 99.999% of the heavy lifting on the back of a Chinese credit bubble.

If defecit spending was ever going to counter private sector down turns, America would be going great guns right now. Same for UK and the rest.

Proof that correlation does not necessarily mean causation.

 

Proof that they waited too long and spent the money in the wrong ways.

Look at what we did: $900 "tax refund" cheques (to the citizenry), $1400 pensioner bonus cheques (to the citizenry), subsidised roof insulation (for the citizenry), guarantee of bank deposits (owned by the citizenry), doubling of home buyer grants (to the citizenry), brought forward infrastructure spending to support jobs (of the citizenry).

And what did the U.S. do?

Gave free money to big banks.


The point still stands: counter-cyclical deficit spending can work if you do it right.

We did. They didn't.

 

Okay I'm not going to bother having a back and forth argument about the merits of counter cyclical deficit spending. I'll just say that deficit spending by the Government is bad particularly the consumption based spending instigated by our government.

Say's law (and basic rational thinking) is the proof. You simply cannot spend the economy better. In order to boost the demand for goods and services, one must boost the production of goods and services. Citizens lives are improved by improvements in the supply side not the consumption side as professed by the stupid Keynesians.

Given our Government's ridiculous stranglehold on much of the supply of productivity enhancing infrastructure then this sort of spending can be a good thing but it is their job to be supplying this stuff all the time not just during recessions. During recessions the builder can get more bang for their buck and the Government should take advantage of this just as any producer of goods that are early in the production chain. However, as you well know Big A.D., this stuff cannot be turned on and off like a tap at will except by recklessly spending on any random building project which do not result in productivity improvements (i.e. the schools halls, cola's, tuckshops type bollocks that our Govt morons actually did).

Any other form of deficit spending simply gives an illusion of real benefit and instead it continues the misallocation of resources for longer, raises the cost of supplying the next round of investment in early production chain activities that boost the supply side of the economy and therefore weakens the recovery and the longer term welfare of all citizens.

It's like eating some of you stored wheat grain now so that belly is slightly fuller in the near term at the expense of less wheat in the future (since less planted seed). Given the greater and greater payoff from just a few planted seeds - like old Fibonnaci's bunny rabbits - the short term benefit results in a bigger and bigger long term loss.

 

Oh but isn't it all about velocity of money into the economy? Pffft!

All you do with defecit spending as Boardsilver has pointed out well in a different way, is stealing future demand and bringing it forward to today. It would be slightly more palatable if they were spending savings not future savings or the benefits of future economic growth. The down turn is the solution, not the problem. The problem was the expanding credit bubble that caused the mess in the first place.

Instead of restructuring, liquidatiting debt and generally becoming more productive, we simply insulate ourselves from the future benefits of this (the supply side) because we have already spent our capital resources on inefficient and misallocated resources and now have to pay back the debt which is now significantly higher than what it would have been had the government simply shrank and allowed the debt to be liquidated and the public sector cut its fat.

 

You make some excellent points (and I agree with a lot of them) but spending is only "wasteful" if it doesn't achieve the intended result which should always be a better outcome for the citizens and taxpayers.

We're used to thinking about large sums of money being spent on infrastructure or programs to improve productivity as "good value' and anything else as "wasteful" and usually that's a fair and reasonable position.

What happened during the GFC on the other hand was very unusual and dealing with it effectively required very unusual kinds of spending. Sending out $900 cheques to everyone while things are ticking along nicely certainly is wasteful, but doing it when the economy is on the verge of stalling and plunging into a deep recession is pretty sensible.

Thankfully those kinds of situations don't come along very often and ultimately our counter-cyclical deficit spending wasn't wasteful because we're better off living with a relatively small deficit than being in a deep recession (or depression) like most other countries currently are. We didn't get much shiny new infrastructure out of it but we don't have an 8%+ unemployment rate that won't go down either.

At the time (and even now in the aftermath) we had this bizarre situation where some people thought an immediate problem (a liquidity crisis) could be solved using a long term strategy (infrastructure spending). America has been struggling with the opposite: thinking they can solve a long term problem (a budget deficit) with an immediate solution (immediate cessation of spending).

The type of solution has to match the type of problem, otherwise it won't work.

 

<<<< puts finger to side of head and pulls trigger. FFS I give up.

 

Oh, so as a result of all the great things done so far you think the risk of a repeated liquidity crisis of a similar or greater size has gone away?

Bank liquidity issues highlight the house of cards, but Central banks have been main method for solving these issues not Swannies etc deficit spending. Bond issues from the deficit spending have actually been discouraging the deleveraging and evaporation of the phoney-FRB money that has to happen (as much as it sucks in terms of wealth redistribution and near term adjustment costs).

Anyway so we are clear on one of your pet loves, I reckon NBN-style infrastructure spending is good at the current time because it improves long term productivity (but this is not part of the (true) deficit spending). Yes, I actually said the NBN-style spend will be good for our economy Whether we get the best value for money is what I have an issue with as you well know Doing such a major project during a time when the construction costs are cheaper would be ideal in improving the value for money (whether these costs were actually cheaper when the project started is of course highly debatable but we should see some cost reductions flowing through over the next couple of years).

In contrast, the school halls-style spending was undertaken when the construction industry was already overheated, done at ridiculous expense in order to pump the money into the economy as fast as possible and won't increase the future productivity of Australia one-dot. So we end up with a high credit card bill for no benefit. Whoopee that was a good idea

 

^ great post.

I have to say, I was with Big A.D on the US fiscal debacle, but 100% with you bordsilver when the topic turned homewards. Swan/Rudd achieved nothing. Their stimulus is an unprovable joke that reeks of wannabe us-styled copy-cat keynesian policy.

Chinese stimulus did far more for us than our wasted handouts. Who were we stimulating anyway, Harvey Norman? Chinese manufacturers? Look at there current state of our retail and tourism - what did we achieve locally?

I spouse Big A.D. will have some internal conflict going over the first home owners boost/stimulus by Rudd 'the saviour', when it just created a larger systemic problem.

 

We didn't have a crap Christmas spending season in 2009.

When retailers and hospitality have a crap Christmas, they trim the low-hanging fruit and lay off casual staff (actually they don't fire them, they just take them off the shift roster). Those people who get by on a $500-$700/week pay cheque go on the dole instead and increase the tax burden on everyone who's left.

Not really.

Australian house prices need to come down because they're ridiculously expensive, but they need to come down slowly through a process of stagflation.

If prices simply crashed like they did elsewhere, we'd have either bank failures or bank bailouts. Our lenders also peg basically all small business finance to somebody's house, so if the business owner's house drops in value then their business loan will get partially (or completely) called in and there would be another, more domestic liquidity problem.

They did the right thing at the time, but that time is passed and the housing stimulus needs to be wound back (which the states are already doing).

 

Or we could let the crash happen and try something like the Steve Keen Debt jubilee? Or just let it crash, yep I vote let it crash. Capitalism is about profiit AND loss. Domestic liquidity problem? Yeh sure 6-12-18 months of massive bankruptcies and debt write offs...... Then we'd be back to REAL growth and in a position to set policies so it doesn't happen again. Stagflation! Ha! I'll take 18 months of pain over a 20year Japan stagflation every time.

Stop bailing out the losers!

 

So basically the plan is to smash the hell out of small business, push the beginning of "REAL growth" back to 36 months because un-discharged bankrupts can't be directors of companies for 3 years and have to announce to the world that they're bankrupt if they're still allowed to run a business or applying for credit, have hundreds of thousands of homes repossess and sold to whoever hasn't just lost their business or their job (or both) and still represents a decent credit risk and wait out the resulting credit crunch since all the money got wiped out through debt write-downs?

You're not an economics advisor to the Tea Party are you?

 

I'm afraid I agree with Lovey80 for moral as well as "Austrian" economic reasons. Real progress and real growth is only achieved by taking the failures with the successes. You can't avoid failures nor should you try to force a bunch of people who are currently successful to pay for the mistakes of another bunch who are currently losers.

 

I'm not talking about people who are "successful" as in "Oops, lost $100 million, I'll just have to start again using my $10 million rainy day stash", I'm talking about small business owners who are simply getting by.

There are rather a lot of them out there and they'd get wiped out under that "blow it all up and see who's still standing when the dust settles" kind of non-plan.

If you want to do that, find a decent computer game sim. There's no need to destroy people's livelihoods when you can re-shape an economy through a reasonably orderly transition process.

 

I am hoping to see someone much smarter than me come up with an orderly transition process, and something to transition into. I agree, a chaotic crash/default is the last thing that we need, the suffering would be immense. We have a system that is terminal and unrecoverable and no other system to transition to that is sane and balanced see I don't see any other future except a slow decline into depression. It seems to me that those with the power to move the world's economies to a functional format are the ones who least want that to happen.

 

Big A.D - so if Rudd/Swan succeeded in keeping Australia's retail on life support for the xmas period - then what? Does the Govt need to spend that same stimulus money every xmas? Even if there is a budget benefit of stimulus vs welfare (ie, paying $900 cash vs. having to pay people on the dole), if you have to do it every year then what kind of system is that?

Unless you actually believe that we're in a better situation now. That is, after retail is getting hammered and we're less competitive than ever. Prolonging the inevitable much? Election cycle spending much? It's not good, no matter how you spin it.

Short-term benefit is no good at all if it is at the expense of long-term system stability and viability.

The two most valuable things that come from a depression is the lessons that people learn about financial risk management, and the destruction of mal-investment. People like Jonesy here would certainly argue that the good businesses will also get damaged or destroyed in the process - and he is right. This is a major negative side-effect*. But the longer the 'negative' is put off, the worse it will be when it finally arrives. This keynesian stimulus crap only works in the short-term, and only for economies that were previously healthy. Its best use is to soften the effect of an external negative force.

*(It wouldn't be such a major negative side-effect if the system were allowed to suffer the much more minor negative side of the business cycle in the first place... but putting off the inevitable by propping up failing industries and over-stimulating just makes it all that more worse in the longterm... IMO)

 

Well said. You have to have all the little failures (and sometimes quite large ones) along the way. It's perfectly natural. If you don't, the risk builds and builds and eventually becomes systemic. At this point healthy viable businesses become at threat as well, maybe more so because they don't have the govt their to bail them out. Investment occurs in areas where it shouldn't because there is the thought by many that the govt will step in and bailout if necessary. Combine with all the subsidies etc and you don't have a system responding to market forces as much as endemic corruption. This is particularly pernicious when it is applied to the banking system which of course lends to all other business areas.

Now we are at the point both in Oz and America and Europe where we have systems which have built up on the back of the bailout mentality that are now too big to fail but unable to succeed. And basically, billions of dollars are being thrown into black holes (the same will happen in Oz too). It's a massive waste of scarce resources.

At some point people will be forced to realise that the old paradigms no longer apply and change will be forced upon the world. It's just a shame so much capital will have to be thrown away in the process. At least, I hope, it won't take another world war this time. And hopefully the world won't be stupid enough to start the process all over again, but we'll have to wait and see on that one.

But if you ask me, there's essentially no stopping the process at this point. It will reach it's end point. The only rational decision to take is to protect yourself and help as many individuals as you can understand what's happening.

 

Looks like those who were the most productive and financially prudent will be the worst hit in a crash situation. And they will have to be the ones to re-build things afterward, and just like before the crash they will be predated and held back by the lazy and unmotivated.

 

The answer Jonesy, is liberty and free markets. Freedom for all and an end to institutionalised coercion.

 

Lets play this out in a hypothetical. The liquidity crisis in Aus will start at the top. The big banks. The unraveling of the debt bubble will hit them first and fast. Do you really think the banks that will be SMASHED under such a situation, are going to have the time to recall all of those small business loans and put productive small businesses into bankruptcy before they are in receivership themselves? Trust me those banks will be nationalised before the banks have a chance at getting the first business that is still paying it's liabilities into a courtroom to force the liquidation.

 

Hypothetical ? The debt bubble will hit the citizens long before any effect is felt/noticed at the top. Debts will be recalled at the drop of a hat (one or two missed payments) for those seen as the biggest risk. Interest rates and fees will rise irrespective of reserve bank rates and market rate drops will not be passed on in full if at all. Banks will stop lending or tighten conditions for all , even small business people who have excellent records will be charged extra for average type loans if they can get them...... Hang on? thats already happening right ?