Just don’t do it

Two articles at opposite ends of today’s AFR both discuss public spending on infrastructure but with a different message from each. There is firstly on the front page, Project spree risks AAA rating ,which begins:

The government’s AAA credit rating may be at risk if it embarks on major infrastructure initiatives before sweeping changes to how projects are funding are made, according to the ­Productivity Commission.

The rest is behind the paywall but the article discusses the views of Peter Harris, the Chairman of the Productivity Commission, who is trying to get the government to think long and hard before it spends our money. Infrastructure is seldom the best use of our resources and before we commit to such spending there needs to be a very thorough cost-benefit analysis undertaken with a real intent to ensure we are getting value for money.

Pet projects have been an ongoing disaster. There is only one reason for a government to enter into such expenditure and that is because there is a net dividend to the economy. If you think, for example, that Building the Education Revolution contributed anything at all to the Australian economy, you should not be making infrastructure judgments. Only if you are able to articulate why the BER was an almost total waste of money and resources could you be trusted to assess our future infrastructure needs.

Then at the back of the paper we have Peter Sheehan with an opinion piece, The new Keynesians: accident or design?. And his point: however it may have come about the Abbott government is about to launch into a Keynesian stimulus which he thinks is a great idea. As he writes:

Strong underlying growth cannot be assumed. The Keynesian response is clear: there needs to be a major program of infrastructure investment. This should be large-scale additional spending of 1.5 per cent to 2 per cent of GDP a year for five years.

If the government listens to this kind of thing they will end up as bad as Labor. They should dwell instead on this before they start spending money as if we are in some deep depression, also from today’s AFR:

Employment jumped in February by the most in almost two years, led by an oversized 80,500 surge in full-time work, Australian Bureau of Statistics data shows.

Some small part of government spending is productive, some is necessary because it provides assistance to those who are in need, but for the most part government spending is a drag on the economy not a stimulus. Cut the deficit. Get unions out of the road. Reduce unnecessary regulation. And leave recovery to the private sector which is already starting the process we need to continue along.

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12 Responses to Just don’t do it

  1. Robert Barro’s ‘New Classical and Keynesians, or the Good Guys and the Bad Guys’ in the Swiss Journal of Economics and Statistics 1989 is an excellent paper on New Keynesian economics failure as a progressive research programme.

    Barro said that instead of providing new theoretical results and hypotheses for empirical testing, the objective often seems to be to provide respectability for the basic viewpoint and policy prescriptions that characterised the old Keynesian models. It may well be more rewarding to look instead for new theoretical insights, empirical hypotheses, and policy implications.

  2. Joe

    However, If infrastructure is not a responsibility of government, then what am I paying taxes for?

  3. Combine Dave

    However, If infrastructure is not a responsibility of government, then what am I paying taxes for?

    Mardi gras

  4. Craig Mc

    Who decided Peter Harris knows what he’s talking about? Isn’t he the clown behind Victoria’s DeSal plant? That should be enough for him to be disqualified from public life for 30 years (about how long the public will be stuck with that white elephant).

  5. johanna

    I read a report earlier today (sorry, can’t find it just now) that the PC has just delivered a draft report which recommends that favourite Lefty policy, taxing people per kilometre that they drive on roads. For some reason, they haven’t got around to taxing us for walking on publicly funded footpaths yet, but since pedometers are cheap, it can’t be far off. Oh, and cyclists are exempt, of course.

    The PC does some good work, but they have a bee in their bonnet about the evils of private mobility using publicly funded roads. We don’t hear much about the economic and social benefits of having a decent road network, or about the numerous other taxes and charges that motorists already pay (including huge fuel taxes which roughly correspond to the amount of driving that they do).

    It’s just a Trojan Horse for the “cars are evil” greenie lobby.

    That’s not to say that there isn’t a role for private, or private/public toll roads. But the history of other infrastructure policy areas that the Greens are obsessed with is instructive. They are the only areas where they want governments to do less and consumers to pay more – water and electricity (becos glowbull warming) are obvious examples.

    The quotes from Harris above are just platitudes that we have heard many times before. Note that he is a mediocrity appointed by Labor to succeed the distinguished Gary Banks.

  6. John Comnenus

    I see that Gov Scott Walker has turned Wisconsin’s deficit into a surplus by cutting taxes. Who would’ve thunk it apart from empirically minded Laffer Curve devotees. Keynesianism is the real voodoo economics.

  7. Cars cause next to no road damage. Trucks do most of that because the road damage is to the 4th power of their weight.
    Cars should face access and congestion fees as with any other club good.

  8. The Pugilist

    The PC does used to do some good work…

    FTFY Johanna

    Note that [Peter Harris] is a mediocrity appointed by Labor to succeed the distinguished Gary Banks…

    There’s the issue right there…

  9. Andrew

    Keynesian stimulus?? With the economy growing at 2%? That’s our SUSTAINABLE level of growth, at best – after 6 years of productivity-destroying wasteathon like NBN, BER, NRAS, and anti-growth policies like FWA. In fact, with the govt effectively bankrupt (which even Ken Henry, the architect of that bankruptcy, now alludes to) we may never grow at 2% p.a. again. How the flying Buddha does that suggest we should have another stimulus??

  10. The Ricardian theory of budget deficits the most optimistic theory of deficit spending. Throw in some animal spirits, and it is safe to assume that deficits will lead voters to expect more than 1 to 1 tax rises in the future. Why does ignorance about future taxes is always assumed to lead to an under-estimation of the future taxes?

    It is well know that the fiscal burden of an ageing society will lead to tighter budgets and higher taxes too. Another reason why the Ricardian theory of fiscal deficits is the most optimistic theory of deficit spending!

    Eugene Fama noted that government bailouts and stimulus plans seem attractive when there are idle resources (unemployment) – but
    1. Bailouts and stimulus plans must be financed.
    2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
    3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
    In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another without employing any of the unemployed.

  11. Pusnip

    The PC is much more than just its chairman, with any report having a number of Commissioners and the arguments and views bring exposed to the wider organisation and then publicly in the form of a draft report. The PC’s legislative basis and thirty plus years of history and precedent also constrain what it can and can’t do or say. These principles and processes do not allow any idiosyncratic views of any one commissioner to predominate.

  12. johanna

    Pusnip – are you saying that the boss is just ornamental?

    Gary Banks drove the culture and vetted every report they issued. That was mostly (nobody’s perfect) a very good thing. Having the current person in charge is not, irrespective of whether he works as hard as Banks did.

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