The long-forgotten supply side needs to be recalled

When I was the Chief Economist of the Australian Chamber of Commerce and Industry, this is what you never saw: Business Calls for Stimulus Spark. In normal English, this says, “Business Calls for More Money from Taxpayers”. There may be no better way to subvert an economy than through public spending. Modern macro is an economic death cult. It’s now more than a decade since the stimulus programs that followed the GFC were introduced, and still our economies remain stalled and stagnant. So let me take you to the words of Australia’s greatest Treasurer:

Mr Costello said fiscal and monetary policy had run out of puff and supply-side reforms such as deregulation were now the key to improving efficiency and ­restoring growth, as retailers pushed for a fresh look at lowering the company tax rate.

Despite the IMF again slashing its growth forecast for Australia from 2.1 per cent to 1.7 per cent — well below the government’s 2.25 per cent forecast — Mr Costello said he did not agree with the school of thought that it was “all doom and gloom out there”.

“We need to turn to another arm of policy which has been long forgotten and that’s the supply side,” he told a Citi investor conference in Sydney.

“After 10 years of deficits and 28 years of continuous growth, we could really get a boost by dealing with some of the imbalances that have built up in the economy.”

While the Morrison government has been under pressure to ditch its commitment to a budget surplus and pump-prime the economy by going into deficit, Mr Costello said he did not believe this held much appeal.

Remember the Costello approach? Cuts to public spending, continuous years of surplus and zero public debt. Worked like a charm. Just let me take you back to my days in ACCI. One of the questions I would ask the entrepreneurs who used to wander through our office is whether they had expansion plans sitting in their drawers that they would put into place if they had the extra revenue. And the universal answer was yes. The American economy has possibly never been as robust as it is today, and all of the efforts have been made on the supply side. That’s where the action is. Public spending as an economic stimulus is a dead end.

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21 Responses to The long-forgotten supply side needs to be recalled

  1. C.L.

    Sounds radical and exotic nowadays, doesn’t it?

  2. struth

    It’s not rocket science and the Libs talk about such things from time to time.
    So they know what they should be doing.
    But then do the opposite.
    However they know Climate Change is bullshit as well.

    The flow of money via corruption and the considerations of their own careers and wealth, means all they have to do is work out which overseas country they want to live in once they’ve pillaged this one.

  3. Gavin R Putland

    You mean stop taxing supply, and start taxing failure to supply?

    Remember the Costello approach?

    Sure do: spend your entire tenure pumping up a housing bubble, and then throw an election just before it pops. Greatest treasurer ever.

  4. struth

    Sure do: spend your entire tenure pumping up a housing bubble

    How did he do that?

  5. Mother Lode

    I hope, perhaps naively, perhaps forlornly, that Morro using the political nous of a mole nudging about blindly underground (which is still quantum leaps ahead of prevailing political acumen) has the sense to take this morsel in his jaws and realise that the judgement of Costello will resonate as valid with voters, and that this opens up a whole new menu of policy initiatives he can champion.

    He won’t do it because he understands economics. None of them do.

    But just maybe, for stupid reasons, they might do something clever.

  6. RobK

    It is so very easy to extinguish entrepreneurial vitality and replace it with a prescription to protect the principals in power.

  7. Roger

    Cuts to public spending, continuous years of surplus and zero public debt. Worked like a charm.

    And then came Rudd with Ken Henry in his ear.

  8. Mother Lode

    The thing is that politicians are in such a thrall to public spending because it does two things:

    1) Looks like (and is never challenged in the MSM or parliament) they are doing something to help the economy.

    2) They can, at the same time, use the money to bribe client demographics, departments, or mates in the crony capitalist sector.

    The politician who stands up and says ‘We are aiming to fix the economy but we must cut spending’, when standing beside someone saying ‘We are going to fix the economy and, while we are at it, here is some money – I don’t know where it comes from, but it is yours now!” will have a harder time.

    And none of the talking heads know better.

  9. Trax

    The longer they keep trying to prop up consumption and debt the tougher it will be when we need to rebuild our productivity which we have largely shipped overseas.

    https://oec.world/en/profile/country/aus/

    We have a low complexity country which is highly dependent on cyclical resources.

  10. yarpos

    IMF have a good track record with its forecasts? Or are they just guessing like everyone else?

  11. Mother Lode

    Or are they just guessing like everyone else?

    They have an almost perfect record of guessing accurately.

    Right up until the word ‘guessing’.

  12. Entropy

    They would just get a take from federal treasury. Snore.

  13. Squirrel

    “Mr Costello said fiscal and monetary policy had run out of puff and supply-side reforms such as deregulation were now the key to improving efficiency and ­restoring growth”

    A Government which is (or should be) looking for an agenda, and which is faced by an Opposition in disarray and with no policies, should give very serious thought to this.

    The bed-wetters and assorted other hysterics will not shut-up with their demands for “real action” (where have we heard that before….) on the economy so their bluff should be called. Part of this is explaining, as the Government has done, that there is wisdom in keeping our remaining skerricks of powder dry for use if/when things really do get bad, but the inevitable demands for “action” now should be met with serious proposals for reform.

    Grappling with serious economic reform would be a salutary experience for a generation of public and private officials who seem to think that they are worth every dollar, and then some, of their fat salaries – but who, in truth have been floating along for years on a tsunami of very easy unearned money.

  14. Gavin R Putland

    @struth #3186410:

    Sure do: spend your entire tenure pumping up a housing bubble

    How did he do that?

    1996: Start cutting public debt in order to make more room for private debt and create capacity for public bailouts of irresponsible private lenders.*

    1998: Remove mortgage interest and the land component of “house prices” from the CPI, so that “house price” inflation no longer counts.

    1999: Discount “capital gains” for “mum and dad” investors, so that fully deductible negative-gearing losses are now incurred in pursuit of “capital gains” that are only half taxable.**

    2002: Phase out the Commonwealth Additional Grant (CAG), which was available only for new homes and therefore encouraged construction, but keep the original First Home Owners’ Grant (FHOG), which had no such proviso and therefore pumped up prices of existing homes.

    2003 onward: Resist calls to attach conditions to the FHOG or negative gearing or capital-gains discounting along the lines of the CAG.

    Late 2004 onward: With your side controlling both houses of Parliament, blow your political capital on housing affordability WorkChoices!

    Late 2007: Lose the election, leaving Wayne Swan*** to take that famous phone call from Hank Paulson.

    __________

    * Avoiding debt is eminently sensible — for private entities as well as public ones.

    ** If you want to encourage capital formation, you cut taxes on income from capital, not on misnamed “capital gains”; true capital depreciates.

    *** World’s greatest Kicker of the Can down the Road.

  15. Cardimona

    Thank you, Steve.
    This should be shouted from the rooftops.
    But it’s only us discussing it here on a remote corner of the interwebs…
    How do we get these ideas into the hands of polliemuppets and their trusted advisers?
    Well, for my part, I know they read letters to the editors in newspapers – so I’ll be spreading the word there.
    What’s everyone else doing?
    Seriously – I’m open to ideas.

  16. Tator

    Gavin,
    the change from indexation to 50% discount was to simplify tax returns. The number was chosen on the long run statistics on capital gains data and the capital gains discount had zero to do with house prices soaring.
    The main drivers of housing prices between 2002 and now are state and local government regulations, taxes and charges. Charges like infrastructure charges imposed by ALP State Governments between 2002 and 2003, land banking by state governments and zoning restrictions like hard development boundaries.
    Plus local government zoning restrictions and building regulations increasing the costs of new builds to a similar level of existing homes meant people who would normally look at a new build now were in the market for an existing home creating extra demand.
    As the Capital gains discount was implemented in 1999 and only was for investments held for more than 12 months and housing didn’t start spiking upwards until after 2003 means it wasn’t really a driver.
    BTW, the federal governments do not benefit financially from increased real estate prices but the state and local governments which were dominated by the ALP in the early 2000s received massive revenue windfalls from stamp duty, land tax and rates revenues.

  17. Gavin R Putland

    Dear Tator #3186830,

    Graph: https://twitter.com/grputland/status/1182143452487663616

    (the house-price index is scaled to per-capita GDP, not to the CPI).

  18. classical_hero

    Gavin, what about a comparison to house prices and immigration?

  19. Gavin R Putland

    classical_hero #3186861: The balance between immigration and construction (demand and supply) certainly affects rents. Prices, however, depend on borrowing capacity and the supply of greater fools. Only in the longer term does one see a proportionality between prices and rents (both of which tend to absorb capacity to pay).

    Yes, I’ve heard it said that the price is the discounted present value of the future rent stream. But in a growing economy with a rapidly growing population, that theory gives ridiculously high price/rent ratios, and you are forced to conclude that prices are limited by something else.

  20. Gavin R Putland

    Oops, I was too brief.

    Only in the longer term does one see a proportionality between prices and rents (both of which tend to absorb capacity to pay).

    Suppose you get a stimulus for construction, like the CAG. In the short term, it increases capacity to pay and therefore raises prices. In the longer term (if it continues), it adds to supply and therefore reduces the intensity of competition for housing. Prices and rents still “tend to absorb capacity to pay”, but not so completely. Hence, if the tax concessions and grants had been directed to new construction over the life of the Howard-Costello government, the situation might not have been so threatening in 2008.

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