Catallaxy Files

There is an insanity that will not go away in the American President’s addiction to stimulus. Its failures up until now seem to have made no impression. This latest effort is a reminder of how little vision there is in such central government direction for an economy. This is the new $50 billion plan:

President Obama, looking for ways to jump-start the sagging economy and create new jobs, called on Congress on Monday to approve a far-reaching plan to rebuild and modernize the nation’s transportation networks — roads, rail and airport runways — over the next six years.

This is the roads to nowhere approach used in Japan in the 1990s. It will be a drain on productivity, or at least it would be if there were the slightest chance that it will do anything other than sink into the sunset.

Krugman keeps coming back to the great success of the American economy during World War II. Let’s do the same again, he says. The analogy is so flawed I can hardly believe anyone brings it up.

World War II had everyone working, it is true. But first they took most males and many females in their late teens and early twenties and put them into the armed forces. They then had a government program to build every form of armaments they could.

But as far as the economy was concerned, that mechanism for delivering goods and services to buyers, there was rationing and shortages everywhere. You might as well say how well the Soviet economy worked since there, too, there was no unemployment.

It is, indeed, the same mentality. Build roads if you need them, but don’t build roads to make work. There are plenty of goods and services we would all like, but the last people to know what these are are the people who run our governments.

This bidding war over the allegiance of the various independents is our first exposure to how governments might eventually be run under a republic.

An elected President would no longer be an independent arbiter overseeing the Parliament that the Governor-General currently is. Instead, Australia would have someone at the top with an election mandate of their own who would build a constituency of their own through their own power base so far as the governing of the country was concerned. The Prime Minister might lead the largest party in the House but depending on how presidential politics evolved, would over time no longer remain the person actually at the head of the government.

Members of Parliament would become like American Members of Congress which is what the current lobbying of the independents reminds me of. They would represent individual constituencies but it is hard to see why there would be any need for the kinds of party discipline we now have since it is hard to see how it would any longer matter what the vote in the House might be as to whether an election would need to be called. Parliamentary ratification of legislation proposed by an executive would be necessary but the locus of executive power would be concentrated in the President.

Cabinet government is a convention that would be hard to maintain with the centre of power moved elsewhere. Meanwhile, each and all members of the House would have their own little agendas, and irrespective of the party labels worn, would, like in the American system, be able to do what they liked.

It is actually quite an incredible display to have watched any of this, although I must admit not having had the fortitude to pay close attention. It has been a bidding war amongst this lot of independents for who can give them the best deal, not who can best govern the country in the national interest. The bidding war has the potential to add to the electability of the local member by being able to seek benefits for their own constituents. It may also end up being how we as a population rate our own Members of Parliament.

The logrolling – the voting for each other’s claims on our national wealth – which is a staple of the American political process, and the earmarks – the spending programs attached to just about every congressional bill – that cover legislation from head to foot are the kind of future an elected president could bring.

There is a tiny but quite revealing snippet from a small story in today’s Australian by Christian Kerr. It begins first by discussing how the hung Parliament is complicating the lives of the upper reaches of the Canberra public service but then goes on to say:

Their underlings dare not take advantage of the uncertainty and slip out for a long lunch. They fear a Coalition government will trim their numbers and are watching their pennies.

The ACT Chamber of Commerce says Canberra’s restaurants and shops are suffering as public servants slow their spending while they see who will be prime minister.

There is a reason that Canberra is a Labor town, and this is part of the reason why.

There is a movie we went to see last week that is a perfect miniature of the entrepreneurial life. Father of My Children in English (in French, Le père de mes enfants) won a special Jury Prize at Cannes but don’t let that put you off.

I also don’t want to say anything about the film itself since it is a movie best watched with no expectations about what will happen next. In fact, that is part of its theme. The very last moment of the movie, and I don’t think there are any spoilers in saying this, the background music is Doris Day singing Che Sera Sera with heavy emphasis on the “future’s not ours to see” motif.

It is a film to think about on a number of levels. And as there are very few movies with a strong underlying theme embedded in economics – aside from The Fountainhead are there any others? – if that is the kind of thing that interests you, you might put it on your list.

The National Accounts for June 2010 have come out today and will provide those who look no deeper than the headline figure with the belief that the Australian economy is on a shortcut to prosperity. The numbers tell a different story, and while I have no better idea about the future than anyone else, there is nothing in the recent past that should make anyone think things are heading in the right direction.

Three sets of figures stand out as part of a cautionary tale told by the numbers.

The first is the set of figures on Private Gross Fixed Capital Formation, the data on private sector investment. Across the year the growth rate was a quite sedate 1.3% and for the quarter itself (I always use the trend numbers), the growth rate was actually negative, coming in at -0.1%.

Meanwhile, for Public Gross Fixed Capital Formation the growth rate was 38.5%, a monstrous increase. The quarterly figure was only 4.7% which means the numbers are coming back down to sane proportions but even so.

Then thirdly there is the figure for imports which rose by 15.9% across the year, raising spectres of its own. For the quarter it was 1.9%, and for the first time this financial year was lower than the level of exports.

There is a story of debt printed all over the accounts, both domestic and foreign. We have as a nation splurged to get a result, but the costs are still to be paid.

The notion of a double dip, especially after efforts made to maintain the appearance of growth in an economy heading into recession, is in part due to the need not only to unpick the production errors that led to recession in the first place, but now to undo all of the structural changes introduced as part of the stimulus. People producing and installing pink batts now have to find a real job although the major horrors may take place in the United States. We shall see what happens then.

I didn’t want the month of August to go by without mentioning this. The year 410 has always been electric to me, as has the name Alaric the Gaul although I can’t say I ever knew the specific date.

As has been reported, but not very widely, August 24 was the 1,600th anniversary of one of the turning points of European history – the first sack of Imperial Rome by an army of Visigoths, northern European barbarian tribesmen, led by a general called Alaric.

I continuously find that significant dates go by without much attention. The 65th anniversary of the dropping of the bomb on Hiroshima went by at the start of the month without much notice as well.

On Alaric and the sack of Rome, the BBC has a full report.

The Private New Fixed Capital Expenditure data were released today. As the diagram above shows, the results are pretty dismal. The seasonally adjusted figures are especially poor. Total New Fixed Capital Expenditure fell by 4.0% in the quarter and by 4.8% across the year.

Maybe next year will be better. Looking forward, the ABS reports that “Estimate 3 for 2010-11 is $123,334m. This is 24.3% higher than Estimate 3 for 2009-10. Estimate 3 is 17.5% higher than Estimate 2 for 2010-11.”

The strength in the data looking forward are found in the mining industry which is pulling the statistic upwards. Whether boardroom decisions continue to reflect the optimism shown by the statistical clerk responsible for forwarding these figures to the ABS is still an unknown.

Meantime, however, the data for what we know are seriously bad.

There’s a story in today’s Financial Times with the title “Worries about US Recovery Deepen”. It ought to be a reminder to that dwindling number of Keynesian economists out there just how bad things are in the showcase stimulus economy of the United States. The argument that it would have been worse had no stimulus been provided is wearing very thin. That even more spending is now needed is a policy restricted almost entirely to tenured academics.

The central point of the story, which is mostly about financial markets, is this:

The Richmond branch of the Federal Reserve’s gauge of manufacturing activity for the US’s mid-Atlantic region fell by nearly a third, and sales of existing homes fell 27.2 per cent in July – to the lowest level for 15 years – well past consensus expectations of a 12 per cent decline.

The problem, apparently, at least according to Goldman Sachs, is that there is still too much optimism! As reported in that same story:

Though fears for the global economy are not new, economists at Goldman Sachs said earlier today that economic expectations were not yet low enough….

Factor to watch: With a GDP revision due on Friday, it should bring official expectations – at 1.5 per cent – in line with Goldman’s early forecast of a drop to that level for the rest of 2010 and early 2011.

As noted by one American commentator, “the US economy is in a 1930s-style Depression”. This may even be true, but not for the reason he thinks. It is true because the same Keynesian approach was taken to fix the problem both then and now. And interestingly, the result may end up being exactly the same this time as it was then.

I’ve been struck by the recurrence of the $43 billion figure in three separate matters.

The first was the $43 billion absorbed by the Government’s stimulus package. There was then the $43 billion official price tag on the National Broadband Network as first announced. And finally, this week, there is the $43 billion that BHP–Billiton has proposed as a first offer for a potash fertiliser business located in Canada.

The first two have become part of the national conversation on public spending. The third is a private decision that is really up to the parties themselves. No one, at least no one in public life, is saying that BHP should spend the money or that it shouldn’t. It’s nobody else’s business.

Given the commercial nature of the deal, and given the commercial judgement of the principals, it is a deal that would very likely make money for the company. It will pay its way and earn a profitable return. The world will be a tiny bit more prosperous and BHP will be able to add to its profitability and increase its shareholder returns.

Meanwhile, the $43 billion spent on the stimulus is money gone up in smoke. There will never be a net positive return. The pink batts, the school halls and most of the rest that the money was spent on has created an increase in public debt that had not been there before. The projects themselves are not self financing in any conceivable way.

Repaying the money blown away will be a matter of budgetary discipline for years on end. All the other things this money might have been spent on will never be built.

And now we are looking forward to the $43 billion to be spent on the NBN, a potential white elephant that will become another sink hole for public funds. Is there some identifiable market failure reparable by public sector spending in the broadband network of Australia going forward towards the year 2020? Doesn’t look like it to me, but in any case, no one has done any calculations to show that there is.

It is just money thrown away on some glitzy idea, the usual picking losers strategy of governments everywhere. There will be some benefits – it is unlikely to be a total loss but you never know. What you do know, however, is that the value of the benefits that will accrue will be well short of $43 billion and whatever returns there are will only start coming in years from now.

But no matter how you look at it, there will be more communal debt and less real growth than we might otherwise have had.

In the end it is not the amount of money as such that matters – in each case we are talking about $43 billion – but who does the spending and the likelihood that the spending will end up creating net value added. With BHP, even accepting that there are always risks involved in any project, the high probability is that both the company and the country will come out ahead.

With the stimulus and then the NBN you can forget about positive net returns; what you get is good money thrown after bad. It is bad for the country, bad for the economy. I just wish there were some means to stop governments from throwing our national savings away on projects such as these.

One of the great political and economic commentators of our time is Thomas Sowell who seems to put out a book a year if not more. His latest just reached me this week. Dismantling America: and Other Controversial Essays is a collection of recent columns dealing with political, economic, cultural and legal issues.

There is, in his view, a derangement in the world that is value driven and cultural. The erosion of our long-standing culture of personal responsibility is at the centre of this change. The shifting personal values within our communities are in his view moving Western civilisation in some very dangerous directions. While he finds the American President utterly out of his depth in virtually every area he has had to deal with, the ultimate blame is placed on the voting public that allowed him to become President in the first place. Sowell writes:

While the Obama administration in Washington is not the root cause of the ominous dangers that face this country, at home and abroad, it is the embodiment, the personification and the culmination of dangerous trends that began decades ago…. That such an administration could be elected in the first place, headed by a man whose only qualifications to be President of the United States at a dangerous time in the history of the world were rhetoric, style and symbolism – and whose animus against the values and institutions of America had been demonstrated repeatedly over a period of decades beforehand – speaks volumes about the inadequacies of our educational system and the degeneration of our culture….

The really painful surprise is that so many people based their hopes on his words, rather than on the record of his deeds. What that means is that, even if we somehow manage to survive this man’s reckless economic policies and his fatal foreign policy actions and inactions, the gullibility and fecklessness of those voters who put him in the White House will still be there to be exploited by the next master of glib demagoguery and emotional images, who can lead us into another vortex of dangers from which there is no guarantee that we will emerge as a free people or even as a viable society….

When we look back at the decades-long erosions and distortions of our educational system, our legal system and our political system, we must acknowledge the chilling fact that the kinds of dangers we face now were always inherent in these degenerating trends.

In reading this, I was reminded of a quote originally written in Czech that was sent to me by a friend:

The danger to America is not Barack Obama but a citizenry capable of entrusting a man like him with the Presidency. It will be far easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president.

The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails America. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince.

The Republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president.

We depend on the sound judgement and good sense of our fellow citizens to maintain the peaceful, free and prosperous societies in which we live. Mixed in with providence and a bit of good fortune, that is all there is.