I will be debating Alan Oster, the Chief Economist of the National Bank, on “Stimulus versus Austerity” on August 19 at the Imperial Hotel in Melbourne on the corner of Spring and Bourke @ 5:30 pm. If you are interested in coming along, please email Joe Dimasi to let him know: [email protected]
Although normally I like to go first in such things, on this occasion I have asked to go second since I can no longer even imagine what a yes case for the stimulus could be. It is for that reason primarily I will be coming along on the night. In the meantime, these are the notes I am putting together as I prepare. I should also mention that neither of the two in the picture above is Alan Oster.
Using the term “Austerity” as the noun meaning sound finance and fiscal prudence already tips the debate, both here and internationally, in a negative direction
Back in the 1990s, before their ill-fated stimulus, I sat next to the Japanese Finance Minister at a lunch where I told him not to do it. His reply – “Don’t you care about the unemployed?”
Keynesian economics is a cult – believed in spite of the fact that it makes no economic sense and has never actually worked in practice
The GFC was not, obviously not, caused by a failure of demand. It was not caused by too much saving. In America, it was the product of a crash in the housing industry that fed into its financial system. In the rest of the world, the problem was entirely financial, with credit frozen across the globe.
The answer was the TARP which unfroze credit which I think was the right thing to do [but is not part of this debate]. The subsequent stimulus was not only unnecessary, but positively harmful [which is part of this debate].
See my Quadrant article from February 2009: The Dangerous Return to Keynesian Economics.
I also wrote my Free Market Economics, now in its second edition, to explain why the hysteria surrounding the GFC was misplaced and the stimulus would be a disaster
The notion of a “stimulus” is, of course, Keynesian. Economic theory always accepted a role for public spending as a palliative. No one thought of spending as a cure.
The idea of a stimulus is based on the belief that economies enter recession because there is too much saving. The government must therefore enter the picture and put those savings to use if the economy is not to enter a long drawn out recession and unemployment is to come down in a reasonable period of time.
The belief is that government must put those savings to work asap, even if the form in which the spending takes place is not in itself value adding. Even if the initial spending is not value adding, the multiplier will do the work of ensuring that the rest of the expenditure is properly based on profit-making activities.
The basis: Y=C+I+G. If C and I fall, G is raised to replace the missing expenditure.
C, I and G are final demand. The rest of the economy, the hinterland behind final demand, is ignored. It will simply structure itself to conform to whatever is being bought at the end of the production trail. Eventually everyone will be employed if there is enough spending on final goods and services. It hasn’t worked out that way, but then again, I never thought it would.
Suppose we heard that entrepreneurially-driven construction activity with no government subsidy was to double over the next ten years, would we not all agree that the economy would be bigger and stronger at the end of that time, more jobs would be created and real incomes would rise. Suppose, instead, we heard that over the next ten years there would be twice as many meetings of the Economic Society and the number of journal articles would double. What then would be the effect on output and employment, do you think?
For a more detailed understanding of why the stimulus was madness, now demonstrated in the deeply recessed economies across the world, see the Liberty Fund discussion on John Stuart Mill for which I wrote the lead article.