We’ve heard this before

Here is Andrew Leigh promising doom and gloom after the election:

ANDREW LEIGH: Certainly the two parties will be presenting very different visions to Australia on seventh September. The Coalition are clearly planning savage austerity. We know from estimates that John Quiggin* has done that for every $10 billion they take out of the economy, the unemployment rate is going to rise half a per cent and we know the impact that that sort of a slump would have on the jobs and the life prospects of Australians leaving school.

First things first – the ALP itself is predicting an increase in unemployment.

Second – it isn’t clear what the current government have done for “the jobs and the life prospects of Australians leaving school” – to demonstrate this point I have plotted the unemployment rate for 15 – 24 year olds (seasonally adjusted).

Youth unemployment

Bottom line the obscene spending that we’ve observed over the past six years has not improved prospects for school leavers. That is even before we take into account how the government has been rorting the unemployment figures.

Finally there is the allegation that spending cuts will cause an increase in unemployment. We have heard this argument before. When Mrs Thatcher came to office there was the famous letter from 364 economists predicting doom and gloom.

In 1996 there was a similar letter organised in Australia. Unfortunately no public copy of the letter exists, but I’m reproducing Alan Wood’s column from The Australian (25 June 1996) where he discusses the letter below the fold.

The case for reform of our public finances is a compelling one despite what some academics might think
A DRAFT letter is circulating around Australian economics faculties seeking signatures for an attack on the Howard Government’s fiscal policy.
Its originators are four academic economists John Nevile of the University of NSW, John Quiggin of James Cook University, Frank Stilwell of Sydney University and Phil O’Hara of Curtin University. All share a belief in big government as a solution to our economic problems, contrary to the current view of mainstream economics.
The letter invites recipients to sign it “and/or circulate it to potentially sympathetic colleagues” – presumably other economists who have failed to draw any useful lessons from the collapse of eastern Europe, Euro-sclerosis in the West or the rise of Asia.
The letter consists of three paragraphs, which are worth considering in turn.
The first paragraph reads: The Federal Government’s commitment to reduce expenditure by $8 billion is economically irresponsible. Expenditure cuts of that magnitude will inevitably cause job losses – directly in the public sector and indirectly in the private sector as a result of the downward multiplier effects. There is a strong possibility of precipitating a substantial economic recession.
The last sentence immediately brings to mind a famous letter from a group of academic economists of similar views, which was written to The Times of London in 1981.
The economy in the United Kingdom was in recession, but prime minister Margaret Thatcher was determined to bring down a tough Budget to get government spending under control.
The 364 academic economists who signed the letter warned against such a course of action, predicting disaster for the British economy. In the event, 1981 was the last year of negative growth and the economy picked up strongly from then on.
Both the International Monetary Fund, in its recent World Economic Outlook, and the Organisation for Economic Co-operation and Development, in its OECD Economic Outlook, look in detail at the issue of fiscal consolidation (deficit cutting) and economic growth.
Both conclude that, to quote from the IMF, “a policy of tight fiscal consolidation does not necessarily lead to recession”. There are a significant number of cases, including Australia in the latter part of the 1980s, where tough Budget policy has been followed by faster economic growth.
The relationship is not a simple one and depends on a wide range of variables, including what is happening in the rest of the world at the time fiscal consolidation takes place and the stance of domestic monetary policy.
Since 1997 is expected to be a year of accelerating world growth, it looks a good time for Australia to be cutting its budget deficit. Whether interest rates should also be cut is less clear.
While the OECD favours rate cuts for the European economies with a lot of economic slack, it does not favour them for the United States, and Australia is closer to the US than Europe in its growth profile.
While many economists would agree that if the deficit cuts are delivered they will slow economic growth, few see the prospect of “substantial recession”. The second paragraph of the letter reads: The goal of a balanced budget indicates pre-Keynesian economic thinking. It ignores the creative role which fiscal policy can play in economic management, especially in tackling unemployment. Moreover, the expenditure cuts would likely fail to produce a balanced budget anyway because the consequent reduction in jobs and incomes would result in lower tax revenues being generated in the next fiscal year.
This is just plain wrong. Even a committed Keynesian would accept the proposition that it makes sense to build up budget surpluses during the growth phase of the economic cycle, so that there is a buffer for the downturn. The balanced budget goal is simply a (inadequate) step in this direction.
A major macro-economic policy problem in recent years in many countries is that because of high budget deficits, fiscal policy has not been available to stimulate economic growth and an excessive burden has fallen on monetary policy, with various adverse consequences.
As for the effect of budget cuts on the economy, current thinking has moved beyond the simple Keynesian multiplier model to recognise other influences such as wealth and expectations effects which, to quote the IMF, may “outweigh the negative Keynesian effect relatively quickly”. Paragraph three of the letter reads: More attention needs to be given to the role of government expenditure on repairing the nation’s rundown infrastructure, creating jobs and fostering industry and regional development. If necessary, increased taxation and other revenue options should be under consideration. Savage expenditure cuts are economically irresponsible and socially damaging.
This is the usual attempt by the big government lobby to have it all ways. If there is a shortage of public infrastructure spending, it is because more and more of available revenue is being spent on social entitlement programs and handouts to business.
A choice has to be made between spending on infrastructure, including social infrastructure such as education, on the one hand and industry subsidies, middle-class welfare and regional rorts on the other.
YET attempts to cut in such obvious areas as export development grants, the Development Import Finance Facility, health or childcare bring forth howls of protest from the same groups complaining about the lack of infrastructure spending.
As for the argument about whether the deficit should be cut by spending cuts or tax increases, the IMF and OECD have a bit to say about that as well.
Their conclusion is that spending cuts are preferable to tax rises and that the available evidence favours “in particular, cuts in the government wage bill, in other government consumption and in social security payments”, to quote the IMF.
The usual response when confronted with these mainstream international views in favour of what Australia is doing with fiscal policy is to say they don’t apply here.
Australia has a relatively low budget deficit by international standards and a modest public sector debt, so why worry?
Because Australia also manages to run one of the lowest household savings ratios and highest current account deficits in the OECD and has one of the highest levels of net external liabilities.
In other words, our economic behaviour tells us that the incentives to work, earn income and save in Australia are disturbingly weak – we behave as if we had one of the worst deficit and public debt position in the OECD.
That means the case for reform of our public finances is a powerful one, if we want to enjoy higher growth and be able to provide on a sustainable basis for the genuinely needy.
If we compare ourselves with Asia – a far more valid comparison than Europe, whose finances and economies have been ravaged by decades of welfare statism – the case becomes irresistible.

* as always this is not an invitation for gratuitous insults directed at John Quiggin.
(HT: Noodle)

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29 Responses to We’ve heard this before

  1. * as always this is not an invitation for gratuitous insults directed at John Quiggin.

    Whyever not?

    You never let us have any fun.

  2. .

    You are too kind hearted Sinclair.

    Always remember the Liberal Party was meant to split after 2007.

  3. Fred Lenin

    Just watching “wee willie shortarse”on meet the stenographers! Another accomplished LIAR like this leigh Bastard you speak of . The liebor pardee is full of LIARSwe all know the law trade is full of LIARS ,and the pardee is full of lawyers who could never get a real job I believe shortarse has an “mba” ? Does that mean “major bullshit artist” ?

  4. Snoopy

    Sinc, there’s a typo on the Y axis label.

    [Fixed. Thanks. Sinc]

  5. BM

    The supposed link between higher government spending and higher economic growth baffles me. In simplistic terms, the link is there – and I guess I must remind myself that Labor and the Left, by definition, only ever think in simplistic terms.

    I can identify three possible outcomes from higher spending – higher taxes to balance the budget, future spending cuts to balance the budget, or ever increasing debt.

    Higher taxes would reduce economic growth, which would (more than) offset any gain from the spending. Future spending cuts would reduce future growth. As for ever increasing debt…PIGS will fly before that makes any sense.

    It’s the second point that intrigues me, and a concept of which the Left clearly couldn’t conceive, let alone understand. Bowen says the debt will be paid off 2023-24. That means, by my calculation, 7 years of surpluses averaging $30 billion. By their reckoning, that’s a hell of a lot of economic growth cut!

    So what is it, are going to tax the productive sector, somehow without impacting economic growth, do we have a never-ending packet of Tim Tams, or are we just going to borrow future growth. That’s just pea-and-thimble tricks, which will leave us no better off (likely worse off) down the track. Sure, it might look better this year, but what about in ten years time?

    Borrowing to spend only makes sense if it creates a return that exceeds the investment. Very little of what Labor has done, or intends to do, would come close to that. And short of such investment, spending more money in an attempt to increase economic growth is – to paraphrase the Happy Little Vegemite 2.0 – a fraud committed upon the Australian people.

    Whacking sticks at the ready good Cats, just six days to go! (not a death threat)

  6. H B Bear

    God this is getting tedious. Be gone.

  7. Andrew

    Ok since we can’t heap abuse on John Wiggum, or JCU (where have I heard that name before promoting leftist causes harming the country??), lets turn to the premise that austerity hurts jobs even in trivial doses.

    Can someone representing the loony left tell me why there is such a negative multiplier on tax that the dozens of tax increases by the Rudd-Gillard-Brown-Rudd govt has NOT caused the 111,000 increase in unemployment since Gillard took over? (And why 90% of the world’s population DIDN’T experience this coincidental exogenous shock?) Apparently they believe you can Taxtaxtaxtaxtaxtaxtax without consequences, but not Cutcutcutcutcutcutcut. I’d like to hear it from them.

  8. Jim Rose

    see http://www.telegraph.co.uk/comment/personal-view/3623669/How-364-economists-got-it-totally-wrong.html the letter against that predicting woe and doom from thatcher’s 1981 fiscal consolidation.

    The recovery the 364 said would not happen began soon as the letter appeared.

  9. Token

    God this is getting tedious. Be gone.

    Wait until they are in opposition.

    Have you heard the crap the man who stopped NSW privatisation and ran the state from Sussex St (John Robertson) tries to get away with?

  10. Jim Rose

    Now that every policy must be costed and every major party promises a return to surplus in a few years, the Ricardian theory of budget deficits is an optimistic view of the power of fiscal policy.

    When Barro wrote in the 1980s, he pointed out that there is no reason to assume that forecasting errors about future tax liabilities are always biased in the direction of under-estimating future taxes. People might over-estimate future taxes.

    It is certainly the case that most think they have to provide for their own retirement and that government will not tax enough to support them.

    People have relatively sophisticated views of both long-run spending and taxing in an ageing society and that deficits must be paid for. The voter is a fiscal conservative.

  11. JC

    If lightweight Leigh thinks cutting spending will cause hardship he may want to explain how the US has seen moderate growth over the past few years when the GOP put a brake on spending.

    If you control your currency it is never a problem.

    Lightweight Leigh doesn’t understand macro at all. He’s such a dickhead.

  12. Ken N

    As someone said a while back, Leigh is a disappointment. He is or should be the most economically literate member of the government. Does he really believe this stuff or has party loyalty overcome what he was taught and studied?

  13. Megan

    Lightweight Leigh doesn’t understand macro at all.

    (a) I am not an economist, (b) not am I a perfessor type person and (c) I did one year of economics and don’t understand much about macro but (d) I completely understand what is being said in the post and the comments.

    And if a wizened old crone in the ‘burbs gets what Leigh and the Perfesser don’t, then what in the name of any deity you care to worship, is going on?

  14. Pedro

    It almost looks like there was a step change with the introduction of the FWA,

  15. TJW

    I haven’t seen an ad this slick from a major party before:

  16. Infidel Tiger

    That ad is brilliant. It should be screened 24/7 and made compulsory to view before voting.

  17. Fisky

    Great ad. Libs are really lifting their game in the final quarter. There is hope for us yet.

  18. Lucie

    Wow, yeah, that ad’s like a (scary) movie trailer. Spine-tingling.

  19. Makka

    Not enough people will see that ad. 1.5 minutes.
    An abbreviated version needs to get on to Prime Time tv.

  20. WhaleHunt Fun

    Old dead Packer said it simply. The politicians do not do a good job of spending money.
    Every effing cent ripped out of govt spending is one cent not pissed up against the wall.
    It is the money the labour spends which, being wasted, is ripped out of the economy.
    The more Abbott cuts, the better off we will be.
    Rudd should not fear Abbott’s cuts. They’re lightweight.
    Cutting out both kidneys from every greenfilth, every labour minister, every ABC journo; and flogging them on ebay …. those are valuable cuts, cuts Rudd should fear. But Abbott is not the man to pursue such cuts.
    So Rudd has nothing to fear.

  21. Mick Gold Coast QLD

    “Not enough people will see that ad. 1.5 minutes.
    An abbreviated version needs to get on to Prime Time tv.”

    It’s 1:25 minutes. They’ll watch one for an Audi or Givenchy for that long, or for Hugh Whatisname’s latest moving pitcha.

    Has it become that tedious, that demanding, to have them raise their eyes from the important task of fussing over their mobile phone keyboards, letting all their friends know of their satisfying No 2 just before leaving home for the bus?

    How would we have them understand the detail of public borrowing as a proportion of GDP, the interest load on that and the debt per capita? Wow, they’d mistake it as an ad for an exciting, refreshing new group appearing on tonight’s X factor!

  22. JC

    Megan

    There’s little to understand about the argument. Cutting spending would be more than compensated through the RBA’s easier monetary stance in a fiscal tightness.

    Deplorable scumbags like Leigh use Europe as an example of fiscal retrenchment in an attempt the frighten the punters. However the EU has the Euro which means individual members aren’t able to fully compensate for the fiscal restraint they had to endure.. nations like the US, Australia and Japan for example are perfectly able to set off the tightness on the fiscal side through the monetary levers.

    Lightweight Leigh is a fucking disgrace to the economics profession for bringing up EU members as a comparison.

    So he lied about the ABC is right wing, the libs costings and now he’s lying about macro. He’s truly a despicable individual…. a fraud.

  23. JC

    Ken N
    #979815, posted on September 1, 2013 at 2:50 pm

    As someone said a while back, Leigh is a disappointment. He is or should be the most economically literate member of the government. Does he really believe this stuff or has party loyalty overcome what he was taught and studied?

    Ken, most of the stuff leigh did was lightweight stuff… pop economics. He’s shown about as much substance as a warm marshmallow…. and he’s dishonest.

  24. JC

    One of the best monetary economists around, Scott Sumner devastates the argument Leigh used when he referred to a certain professor’s arguments.

    Here he is. It’s a little wonky but right on the money.

    http://www.themoneyillusion.com/?p=23296

  25. ” All share a belief in big government as a solution to our economic problems, contrary to the current view of mainstream economics”

    Mainstream economics now appears to embrace the idea of big government, when did things change?

  26. Samuel J

    Why then doesn’t Leigh advocate increasing government spending by $114 billion and therefore drive the unemployment rate to zero?

  27. Aaron

    The hallmark of a good theory is the ability to make accurate predictions. How many failed predictions have the (australian) Keynesians made?

  28. wreckage

    If government spend gets added onto GDP then the lift in GDP from government spend is irrelevant, right? Because you’re basically cooling the thermometer and then declaring the fever cured.

  29. jimmy

    Leigh and a certain academic are dead wrong. Countries usually begin to grow strongly after a primary surplus is achieved. Look at the 2014 forecasts for Greece FFS !

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