Economic policy for idiots

Here’s a misleading headline: Interest rate cuts causing pain for no substantial gain. The reality is that interest rate cuts have done substantial harm to the economy, but at least people are beginning to see just how harmful these cuts have been.

The letter challenges the central bank’s strategy as it struggles to meet its inflation target and follows a groundswell of disquiet with the direction of monetary policy — including from former treasurer Peter Costelloformer RBA governor Ian Macfarlane and a trio of Liberal backbenchers.

The cuts have also sparked alarm for reigniting house prices in Sydney and Melbourne without boosting economic growth, or household or business confidence.

Mr Costello — Nine chairman — said record low interest rates and tax cuts had failed to stimulate consumer spending, which had hit advertising spending.

It’s this modern macroeconomic junk science that never ever gets anything right. I will again mention my Free Market Economics, Third Edition An Introduction for the General Reader where in its final two chapters sets out the flaws in Keynesian monetary policy as clear as you might like. Keynesian economics has evolved into the modern form of socialism, giving blanket approval to public spending, massive deficits and incompetent monetary policy. Think how incredible it is that the approaches taken to fix the Global Financial Crisis have never worked in a single instance in any country in the world. For an abbreviated version of all of this see The Dangerous Persistence of Keynesian Economics which begins with these two quotes:

Just as the causes of this downturn cannot be charted through a Keynesian demand deficiency model, neither can the solution. The world’s economies are not suffering from a lack of demand and the right policy response is not a demand stimulus. Increased public sector spending will only add to the market confusions that already exist.
What is potentially catastrophic would be to try to spend our way to recovery. The recession that will follow will be deep, prolonged and potentially take years to overcome.
—Steven Kates, Quadrant, March 2009
Why have the IMF, the OECD, the ILO, the treasuries of every advanced economy, the Treasury in Australia, the business economists around the world, why have they got it so wrong and yet you in your ivory tower at RMIT have got it so right?
—Question to Steven Kates from Senator Doug Cameron, Senate Economic References Committee, September 21, 2009

Great question. For the answer see my text. I might also mention that I have just sent off to the publisher my “Classical Economics for the Modern Economy” but that won’t be around till next year. But these central bankers and Treasury economists do only harm every time they touch the economy. And just for the record, infrastructure spending, beyond a minimum – and we are well beyond that minimum – will only make things worse.

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17 Responses to Economic policy for idiots

  1. Bruce of Newcastle

    If businesses can’t invest at 1% RB interest rate then a reduction to 0.75% RB interest rate is going to do nothing except take money out of the hands of people with investments in bank accounts. Which includes many pensioners for whom capital preservation is very important.

    If they want business to invest maybe they could remove the vast thicket of barriers in the way? Like red tape, green tape, indigenous stuff and lawless green protesters who glue themselves to your HQ to the great delight of the pustulant MSM. Oh and then there’re the company taxes which are some of the highest in the developed world.

    But removing those barriers might take effort from politicians…

  2. Alex Davidson

    Any landowner who is deemed to cause ‘harm’ to the environment is quickly punished with severe fines and compelled to undertake actions to restore things to the way they were, even on their own land. This applies even when there is no demonstrable economic harm, or harm to anyone else’s property, and is enforced with great zeal.

    So how is it that bureaucrats are able to get off scot free, even when they clearly harm a great many people? Not only that, renumerated very handsomely while they are at it?

    It is a total outrage that the RBA governor is paid $1 million p.a. to print money and force down interest rates to almost zero. Even more insulting to those who had to pay close to 20% at the stage in life when they required capital; now having accumulated it, receive virtually nothing.

  3. Tim Neilson

    Oh and then there’re the company taxes which are some of the highest in the developed world.

    Don’t worry Bruce, help is on the way from the OECD!

    …This Pillar seeks to comprehensively address remaining BEPS challenges by ensuring that the profits of internationally operating businesses are subject to a minimum rate of tax.5 A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting6 and establishes a floor for tax competition among jurisdictions.7 In doing so, the GloBE proposal is intended to address the remaining BEPS challenges linked to the digitalisation of the economy, but it goes even further and addresses these challenges more broadly.8 The GloBE proposal is expected to affect the behaviour of taxpayers and jurisdictions.9 It posits that global action is needed to stop a harmful race to the bottom on corporate taxes, which risks shifting the burden of taxes onto less mobile bases and may pose a particular risk for developing countries with small economies

  4. Tim Neilson

    PS there’s no mention of a harmful race to the bottom on tax-exemptions for salaries of transnational bureaucrats such as OECD officials.

  5. Sinclair Davidson

    Who are you criticising here? As far as I can work out the people in the story are all agreeing with your position.

  6. RobertS

    As far as I can work out Kates is criticising the people responsible for the interest rate cuts.

  7. John A

    Keynesian economics has evolved into the modern form of socialism

    His mother was a social reformer, he was an atheist and “Keynes was always confident he could find a solution to whatever problem he turned his attention to and retained a lasting faith in the ability of government officials to do good” (Wikipedia entry).

    So he was disposed to advocating government intervention to solve problems. That would give him a collectivist outlook, n’est pas?

  8. Lutz

    Two points: The low interest rates are the curse producing the insane housing prices. And the amount of discretionary spending of the ordinary person has been so far eroded as to be pretty well non-existant. Between all the increases in fees and charges on federal and state level and the high costs of all energy products most of your income goes to the authorities.

  9. Tator

    It’s not only the Keynesians you need to watch out for these days, the MMT morons are out in force most days as well pushing the no need for a balanced budget because Australia can print its own currency. It is amazing how so many can fall for the work of a small cabal of economists yet when it comes to Anthropogenic Climate Change, its the fucking consensus that rules. Hypocrites, the lot of them.

  10. Squirrel

    Even at 0.75% there is still mad talk of further rate “cuts” – the RBA is ever more like the armless, legless Monty Python knight who is, in spite of his obvious limitations, still up for a mighty battle.

  11. Bruce

    Not much seems to be made of the actual spending by the mug punters. Nor the effects of that great source of economic pestilence, government.

    Take as a “trivial” example, this caper of a mandated “recycling” excise on drink bottles. A basic bottle of “house-brand “tonic water” went from 75c to 90c overnight. That is effectievly a 20% price increase; not quite in line with the alleged inflation rate. Sure, you can go to the nominated “recycling centre” and recoup the cash.

    Now, as always, buried in that bit of legerdemain, is the usual “spillage” and “leakage”. Carting the empties quite some kilometres costs the punters dollars in fuel and vehicle depreciation. Then there is the financial and energy costs in the actual process of “recycling”. Mike Rowe could do a cracker of an episode of “Dirty Jobs” in a bottle recycling / sorting facility.

    How many “discretionary spending” choices are NOT covered by the official stats? Flea Markets, Garage Sales, etc., etc.. What proportion of REAL PEOPLE prefer it that way?

    Will the ATO get “special bonuses” and wear natty uniforms whilst attending such events?

    I recall Ayn Rand had a few things to say about such power games.

  12. mundi

    Its not going to change. Keynesian has proliferated everywhere because it tells the government exactly what it wants to here: Spend spend spend, debt debt debt. Never is there enough spending.

    Government outlays have increased 8% PA since the GFC, and yet everyone is saying they way out is more government spending, including the RBA.

    Its absurd.

    Its delusional.

    But there will be no end to it. The new economics is 0% interest rates, and complete economic stagnation. Given our lives and living standards are so high, I predict the current situation could drag on for many many decades without change.

    Japan is an example: 25 years and counting of net zero economic growth.

  13. The fact that near zero and even negative interest rates do not stimulate the economy nor cause inflation indicates that we are in a deflationary phase. Normal interest rates would collapse the economy and cause a great depression.

    The cause of the deflation is the Globalist agenda of free trade and open borders. These policies drive all wages and prices toward the global mean. In the case of household income, the American wage of about $30,000 per year is being driven to the global wage of about $5,000 per year.

    So far, only our working class has suffered actual income loss; the middle class has merely stagnated. However, the use of H-1B visas by high tech companies to replace high wage American programmers is a harbinger of things to come for all high wage earners.

  14. The cause of the deflation is the Globalist agenda of free trade and open borders. These policies drive all wages and prices toward the global mean. In the case of household income, the American wage of about $30,000 per year is being driven to the global wage of about $5,000 per year.

    You are completely wrong Bob. You are also conflating household incomes and wages.

    Everyone else’s wages catches up to the wealthiest nation, which has the ability to keep on getting wealthier.

    Billions of people were lifted out of poverty last century and the US was clearly better off in each decade along the way.

    The idea that US workers are going to be paid 3.81 AUD per hour is totally nuts. An electrician in the US is on at least ten times that once they are fully qualified and with a couple of years experience.

  15. The fact that near zero and even negative interest rates do not stimulate the economy nor cause inflation indicates that we are in a deflationary phase.

    Again, totally wrong.

    You are conflating inflation with growth and deflation with decline, but also falling prices with falling wages.

    Keynesianism and MMT really are full blown crackpottery.

    They are a mental illness.

  16. Buccaneer

    Take as a “trivial” example, this caper of a mandated “recycling” excise on drink bottles.

    you forgot to mention they mostly end up in landfill anyway or off the side of a boat on the way to landfill in a south east asian country.

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