The impossibility of growth without investment and auguries for Australia

The IMF is to publish its views on the US economy today.  It has telegraphed these already as being: delay interest rate increases until the economy is showing more signs of recovery and seek to repair fiscal policy in the medium term – largely by tax increases to supply better education, infrastructure and childcare facilities.

Infrastructure spending is arguably a productivity-promoting expenditure but so much of this amorphous term seems to apply nowadays to consumption-like spending on parks, environmental measures, and of course the ubiquitous school halls and municipal buildings. As such it would add to the, at best, productivity-neutral spending that the IMF advocates.

The IMF, alongside so many other global forecasting institutions is transfixed on mechanistic identities which add up projections of spending to projections of saving and compare the outcome to previous years.   It is oblivious to the fact that the biggest share, consumption, relies on investment (hence saving) combined with enterprise and improvements in technology.

While enterprise and improvements in technology are hard to measure, they will see diminished returns with more government and greater regulatory controls.  In the developed world, it is difficult to point to measures where these have been made easier and all too simple to see areas where they have been intensified.

In the case of investment the picture is clearer. As a share of GDP, investment in the EU, US and Japan has failed to recover to its pre-2008 levels.  China by contrast has seen this share continue to grow (India, the other emerging titan, was in the same position but appears to have seen a dip in 2013-14).

Global investment shares

Because the economic fraternity represented by IMF is dominated by the Keynesian fiscal stimulus and Friedmanite monetary stimulus schools, it fails to see the link between the capacity of an economy to produce and its level of growth.  It is therefore constantly baffled by the continued failure of economies to recover.

No amount of fiscal of monetary pump priming will provide anything but a temporary fillip to the real level of income.  Growth depends on investment that creates additional value (not, of course, the negative value that occurs with subsidised investments – tariff protected manufacturing in the old days, renewable energy in these hip times).

The mainstream macro-economics fraternity as characterised by the IMF and OECD therefore represents not just a waste of money but, in so far as they influence government policy, a positive menace to prosperity.

In Australia, Joe Hockey has been preening himself on his economic management and damning those who see a downside as “clowns”.  Although Australian GDP did see better growth than in most developed economies in the first quarter of 2015, it was only at 2-3 per cent.  Much of this is due to the position our miners have earned as raw material suppliers to Chindia.  And unlike other developed countries, the momentum of investment in mining meant that as a share of GDP this increased up until 2012.

However Australia’s previously strong investment picture is now under is a major cloud.  Data released in the past few weeks showed expected new private sector capital investment falling – perhaps by as much as 25 per cent.  This is an ominous warning of the economy’s fragility that reinforces calls for lower spending and deregulation – possibly the opposite of what the IMF would counsel. Australia can hitch a ride with the high growth Asian nations but we cannot sleepwalk our way towards prosperity.

 

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27 Responses to The impossibility of growth without investment and auguries for Australia

  1. blogstrop

    In the absence of manufacturing or a brilliant lot of “clever country” inventions, or R&D that translates into intellectual property which is protected and saleable, we remain principally a quarry and a farm.

    China seems to be taking an interest in the farm part, and there may be a good honest living to be earned by Australia exporting food to asia generally, particularly if it can be grown and shipped economically. Northern development could have a role to play there.

    The infrastructure that should get attention is (i) that which eases congestion on city roads, since governments are determined to stack the cities full of more and more people rather than do anything seriously effective regarding decentralisation. (ii)Transport and port/airport facilities which help the efficiency or productivity of our remaining quarry and farm industries.

    (iii) Communications, a mix of technologies which make both the cities and the regions operate more efficiently while also improving living standards – oh, and helping with that elusive decentralisation – which just won’t happen without infrastructure. A sensible mix of technologies, not the madly over-egged FTTH. I note that the ABC was running a story the other day about remote kiddies not getting educated because of satellite download limitations imposed on remote households (and businesses) by this new upstart threadbare NBN run by (gasp!) the conservative government! It was going to take whole year until mid 2016 to fix that. Shock, horror.

  2. Lem

    To continue your theme, Blogstrop, there are plenty of people looking for investment opportunities (I am not talking the zillionaires, they buy the railroads and ager infrastructure) who would willingly look at, for instance, agricultural investment opportunities, but how to find them? Where are the entrepreneurs looking for these investors?

    What is the government actually doing to facilitate these ventures?

  3. Maybe we ask why coal and mineral rich Australia can’t afford smelters, while those with fewer coal and mineral resources can smelt, can do it with our raw materials, and can send us the products of smelting. That should give us a few answers.

    Note that it’s not the products we refuse…just the smelting.

  4. Maybe we ask why coal and mineral rich Australia can’t afford smelters,

    We can afford them, Mosomoso. We just can’t afford the union staffing and the red and green tape that entails us using them.

  5. Infidel Tiger

    All we need for growth is higher paying jobs. Joe told me.

  6. JC

    I disagree Alan, sorry. Australian monetary is not not loose at all.

  7. JC

    Pretty much, by saying this:

    No amount of fiscal of monetary pump priming will provide anything but a temporary fillip to the real level of income. Growth depends on investment that creates additional value (not, of course, the negative value that occurs with subsidised investments – tariff protected manufacturing in the old days, renewable energy in these hip times).

    Because the economic fraternity represented by IMF is dominated by the Keynesian fiscal stimulus and Friedmanite monetary stimulus schools, it fails to see the link between the capacity of an economy to produce and its level of growth. It is therefore constantly baffled by the continued failure of economies to recover.

    There are absolutely no followers of Friedman at the IMF. None at all.

  8. Ubique

    There are absolutely no followers of Friedman at the IMF. None at all.

    At the IMF, and our Treasury for that matter, they think Friedman is an alternate moniker for Colonel Sanders.

  9. Zippy The Younger

    leftist logic: if we tax them harder they will be forced to work/produce more to have the same lifestyle.

  10. Tel

    if we tax them harder they will be forced to work/produce more to have the same lifestyle.

    https://en.wikipedia.org/wiki/Backward_bending_supply_curve_of_labour

  11. Pedro

    “Infrastructure spending is arguably a productivity-promoting expenditure but so much of this amorphous term seems to apply nowadays to consumption-like spending on parks, environmental measures, and of course the ubiquitous school halls and municipal buildings.”

    Why are parks not capital goods? It seems to me that they stand there producing consumer goods, namely enjoyment of the great outdoors with friends and family. You can have a value without a price. If you argue that investment in parks, say, is just wasteful consumption then sensible people will likely think you a swivel-eyed loony.

    You can believe in an important role for monetary policy while still pushing the vital importance of the supply side for real growth. You can also have a laser like focus on the supply side and have stupid gold-bug ideas or an over exuberance to tighten.

  12. Empire

    Blogstrop – are you advocating the state invest in the infrastructure you mention?

  13. wreckage

    Pedro, the spending on parks is consumption-like. It is a one off expenditure that has no, or negative, ongoing returns, and produces nothing but a consumer good (green warm fuzzies) that is valued by the general public at precisely zero (what they personally will pay for it), or even less (they won’t even consume it at zero dollars unless it has added facilities or delivers some other enjoyment).

    That’s not an investment, especially since maintenance comes at additional expense, the more so as purity of ideal overrides practicality and positive outcomes (ZERO logging ZERO hunting, ZERO firebreaks, even when the optimal amount is non-zero.)

    So, if you’re arguing that parks and greenness are not, essentially, consumption, then you’re insane. A swivel eyed loony even.

  14. wreckage

    Winston: energy costs are even more important.

    http://nextbigfuture.com/2014/12/correctly-factoring-in-more-important.html

    Even France manages to maintain a staggering, sclerotic economy, despite absurd labour laws, due to abundant energy; Germany’s move from nukes to coal is undoubtedly an opportunistic use of political momentum to lower energy costs; and the USA remains in a slow recovery despite rampant stupidity, led, indeed perhaps only in, the new energy-rich states created by fracking and unconventional oil.

  15. Ray

    I agree that monetary policy is too lax at present. However, this is not “Friedmanite” monetary policy. In fact Friedman was against central bank use of discretionary monetary policy to stimulate the economy, instead he urged a rules based monetary policy to increase money supply at a fixed rate over the cycle.

  16. Hydra

    Quote from a contact at major car manufacturer shutting down:

    “We are competitive or better than the competition within our own company on every aspect of vehicle manufacturing except one – wages – and wage leves have forced our closure.”

    End of story.

  17. rich

    leftist logic: if we tax them harder they will be forced to work/produce more to have the same lifestyle.

    I know this logic is specious but, how/why?

    If I have a family of four and my tax bill goes up 15%, do I have to find a job that pays 30% more to maintain a standard of living for my family? Or do I have to get 30% more commission from each paycheck (and have to give up leisure time to do this?)

  18. Pyrmonter

    As ever there is much truth in what Alan says; yet I really need to cavil with one point: much real “environmental” expenditure is in the way of a capital outlay – the preservation of the natural environment that will yield future environmental services. That these services enter into some physical measure of GDP is really by the by: Australia is not eastern Europe before the fall of communism; we do not deny that there is real value derived from the existence of the natural environment.

  19. wreckage

    Pyromonter, I suggest that the majority of environmental spending does not conform to an investment in future environmental services. It is consumption. Investment would entail some degree of return; environmental expenditure is not targeted or monitored for effect. There is no allowance for upkeep, nor is there a rational approach to self-funding upkeep, and finally, much upkeep is banned or eliminated, resulting in a run-down, not preservation, of the environmental assets, particularly forests.

  20. alan moran

    We can all admire Friedman as a small government low regulation advocate.

    But his monetary expansion solution to a downturn following his faulty analysis of the 1929 crash was the policy adopted by Bernanke. It has led to negative interest rates and shifted income from savings while misdirecting savings away from productive investment

  21. Blogstrop

    … are you advocating the state invest in the infrastructure you mention?

    If it’s a mining company seeking to move a mountain of ore to the coast, they usually have to build their own railway. If it’s public transport to service a growth corridor, then I expect that to be a government investment, at least to begin with. Sydney’s North West Rail Link being one example.

    Where we get a bit more complexity is with proposed freight lines, such as a Vic.NSW.Qld line, north-south but inland. It’s mooted that this would be helpful in moving bulk goods, but it would possibly have an impact for decentrlisation as well. The fast train proposed (periodically) for the coastal run Melbourne-Canberra(maybe)-Sydney-Brisbane, is usually decried on purely passenger numbers considerations, but again leaving out the land value component. How that’s harvested is part of the equation when assessing desirability. Decentralisation is also a benefit. All the hoo-ha about affordability of city housing ultimately has to be informed by discussion of access to jobs. Very large projects will remain a government problem, although later sell-off is possible in order to fund further projects.

  22. Blogstrop

    … we do not deny that there is real value derived from the existence of the natural environment.

    There has been more than enough National Park madness by successive Labor governments locking up land and sea to win deluded green votes and help create the unjolly Green monster. No more, please.

  23. Pyrmonter

    Blogstrop: think broken windows.

    Or, perhaps more obviously: the value of transport services facilitated by the availability of lighthouses.

    Physical output measures, even GDP, are proxies for the capacity to bring about well-being, not a direct measure of it. By and large I think they’re good measures; however they are apt to fail us if we ignore “benefits” with large external effects, large free-rider effects and where the benefit accrues outside the marketplace. That doesn’t mean those benefits don’t exist: to say so is to fall into the same fallacy as those who contend that “manufacturing”, or, in older thinking, “primary production” has some inherently superior nature. That is, in essence, non-economic thinking.

  24. Harry Newman

    damn, the cat new posts by email has crashed. no cats since Friday, withdrawal symptoms! Keep up the good work

  25. Pedro

    As far as I can tell:
    1 nobody is an old style monetarist;
    2 monetarists basically see the role of monetary policy as the avoidance of nominal shocks through trying to keep inflation or NGDP on a stable path;
    3 Freidman, along with every other sensible person, was a supply-sider;
    4 You can do a lot of harm on the supply side with nominal shocks.

    Hayek famously recanted his liquidationist views.

    “That doesn’t mean those benefits don’t exist: to say so is to fall into the same fallacy as those who contend that “manufacturing”, or, in older thinking, “primary production” has some inherently superior nature. That is, in essence, non-economic thinking.”

    Indeed. Money is not the only reward or reason for doing things. Goods and services with prices as not the only things people trade. The great benefit of the market is efficiency. That does not mean goods and services provided through socialist or socialistic systems are not desired or valuable, it just means that the provision of those goods and services may not be as efficient as it might be.

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