Can economic advisers learn how economies work?

David Uren in an article The Australian today reports the IMF saying, “Investment to GDP ratios in many advanced economies are unlikely to recover to pre-crisis levels in the next five years.”

All those fiscal and money supply injections were supposed to inject new demand into economies and, the narrative goes this will reignite investor confidence, spur new investment and restore economic growth trajectories. And yet the investment share of OECD economies’ GDP remains at under 20 per cent compared to its pre-GFC level of 25 per cent.

Uren notes, “Christine Lagarde has foreshadowed that it will show modest improvement from the 3 per cent global growth rate achieved in 2013, but will emphasise that the recovery is too slow and that this will not change without concerted policy action by governments around the world.”

What on earth could she have in mind? Perhaps she figures that after five years of sprucking the need to reduce “austerity” and increase government spending so that budgets are widened is over.  Perhaps she has finally recognised that government spending is almost always geared to consumption not investment that might improve supply.  And that, even when it is geared to supply, it is hopelessly extravagant.  The epitome of this is the NBN, a $41 billion white elephant which four years after being given the go-ahead and after spending $7 billion has more customer service people than customer connections.  (Company doctor Switkowski says it can only be profitable if cost saving options by customers are foreclosed!). 

But I digress. 

Australia has dodged much of the OECD economic malaise because its primary industries are so highly integrated within the “Emerging Market” economies – read China and India – which have not followed the profligacy of government spending to foster consumer led growth.  As a result, whereas the OECD economies have seen a plunge in their investment shares, the Emerging Economies have increased their own from a turn of the century 22 per cent to 31 per cent at present.  This has been achieved by governments following the age-old path to prosperity: put in place policies that don’t discourage increased savings and allow these savings to be translated into commercial investments.

Instead Australia, like other OECD countries, has seen a rapid increase in social spending, exacerbated in our own case by wealth-neutralising penalties on investment with carbon taxes and mining taxes.

There has never been an alternative to prosperity other than having governments allow markets to operate with light regulation, curb their own spending, balance the budget and ensure that taxes are geared to spending rather than production.  Rudd and Gillard took the opposite approach and in practice found support among the economic bureaucrats in the IMF, and OECD as well as the Australian Treasury.  Abbott says he will do things differently and has some major tests ahead. Not the least of these is getting good economic advice.

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12 Responses to Can economic advisers learn how economies work?

  1. Uber

    Hopefully the Coalition will use Palmer as an excuse to dump paid parental leave. What a disaster that thing is.

  2. Bob

    There has never been an alternative to prosperity other than having governments ……. curb their own spending, balance the budget and ensure that taxes are geared to spending rather than production.

    Much like running your household successfully.

    Why then, the need for a trainload of economists in Treasury?

  3. Blogstrop

    Stand by for a deluge of criticism from the media when any attempt to improve the budget bottom line appears.

  4. Rabz

    Why then, the need for a trainload of economists in Treasury?

    The more economists the more likely that at least one of them may actually get something right* at some point in the foreseeable future.

    *Highly unlikely.

  5. rickw

    I was in the US last week, an in-flight magazine had an advertorial on “Mississippi, Open for Business”. Amongst the striking figures on employment: 22% Government, 12% Manufacturing etc.

    Well, there’s your problem !!

    How on earth did the second great “workshop of the world” get to the point where Government employment outstrips employment in manufacturing by 2:1 ????

  6. The Pugilist

    The more economists the more likely that at least one of them may actually get something right* at some point in the foreseeable future.

    *Highly unlikely.

    Not before our capital stock is so debauched and our prosperity trashed…
    Never ever forget folks…Stephen Conroy, the vociferous monorail NBN spruiker has a bachelor of economics from ANU.

  7. Anne

    Bob

    Why then, the need for a trainload of economists in Treasury?

    All you’d need is a housewife with kids and a mortgage.

    I can’t find it but there’s a lovely scene in the movie Dave, where Charles Grodin and Kevin Kline are balancing the US budget.

  8. Driftforge

    Well.. the result of Labor’s choices was a net capital outflow of nearly $50B a year on average.

  9. ChrisPer

    Educate me please.

    Governments control interest rates to a large extent. US and Australian governmetns have held rates close to zero for some years. This is supposed to encourage business to borrow to invest, and consumers to borrow to build houses or whatever, and get the business cycle going.

    Not conicidentally, this makes Government interest on existing borrowings artificially cheap, the low risk rating means Government borrowing soaks up a lot of available money to be lent. Government agencies see borrowing as a cheap option to achieve things/increase their influence.

    Does this not also drive down incentives to save such that the pool of money made available for lending is very small? And the part of it available to borrow for business investment is even more reduced, through competition with Government borrowing?

    (I have economics 101, no more)

  10. Squirrel

    “….the recovery is too slow and that this will not change without concerted policy action by governments around the world.”

    So the solution is an even worse asset price bubble and household debt – brilliant!

    “Uber

    #1255371, posted on April 7, 2014 at 8:07 am

    Hopefully the Coalition will use Palmer as an excuse to dump paid parental leave. What a disaster that thing is.”

    Yes, that would be a huge political gift from Palmer to Abbott – only yesterday, we had Andrew Leigh sliding around Andrew Bolt’s questions on the cost of the Age Pension by pointing to the cost of the parental leave scheme. Labor and the Greens will continue to use it as a weapon to highlight the claimed injustice of every Budget cut.

    “Rabz

    #1255451, posted on April 7, 2014 at 9:31 am

    Why then, the need for a trainload of economists in Treasury?

    The more economists the more likely that at least one of them may actually get something right* at some point in the foreseeable future.

    *Highly unlikely.”

    Monkeys – typewriters – Shakespeare……

  11. motherhubbard'sdog

    Can economic advisers learn how economies work?

    Could have left it at that. I’m sure most of them think they are above learning from others.

  12. alan moran

    ChrisPer,
    If only economics advisers had Eco101 or less and simply performed the functions of Anne’s houswife we could enjoy genuine prosperity.

    The fact is that economics students instead of studying the economy and how governments can raise the funds they need with minimal distortion to the activities of consumers and suppliers, they seek to “nudge” and regulate. Unfortunately people don’t have the wisdom of the economics clerisy and are incapable of seeing the “bigger picture” but if they did they would surely approve of the measures taken in their name.

    Oh wait a minute! Is this not the famed Dictatorship of the Proletariat?

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