Think NBN, pink batts and school halls

It is an anti-Keynesian article so I won’t complain a lot, but still it does get me down that no one any longer has much of a clue why public spending depresses economic growth. And it’s not as if Keynes wasn’t crystal clear about his own intent. His aim was to remove Say’s Law from within the midst of economic analysis. That he has most comprehensively done. Since only if you understand Say’s Law will you understand what’s wrong with Keynesian economics, and indeed all of macro and the policies that come with it, you will never get policy right until you see the point the classical economists made.

The article is Budget 2017: This is not the time to turn to Keynes and let me say how much I agree with this:

That brings us to the most contentious budgetary option of cutting government expenditure. By crude Keynesian closed economy logic, enthusiastically embraced by Kevin Rudd, Wayne Swan and federal Treasury during the GFC, reduced spending can be recessionary. But this is debatable in theory for an economy like Australia that is open to international trade and capital flows. It is also at odds with real world evidence.

Economic history is replete with examples of “expansionary fiscal contraction”. For instance, there were no economic downturns following the significant spending cuts undertaken by treasurers Paul Keating and Peter Costello in the 1980s and 90s; quite the contrary. More recently, Ireland has emerged as one of the ­strongest performing economies in Europe after severe public spending cuts.

Keynesian economics is also at odds with sound theory, or at least the theory that existed from the time of Adam Smith until the publication of Keynes’s General Theory in 1936. It has nothing to do with closed economy or open, nor whether we are a trading nation or not. It is that unproductive non-value-adding public spending drags an economy down (think NBN, pink batts and school halls). That is Say’s Law. That is what you need to understand.

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22 Responses to Think NBN, pink batts and school halls

  1. Stephen Sasse says:

    So why are governments so enamoured of the Keynesian fallacy? Wilful adherence to a doctrine that has been disproven both in theory and empirically must be driven by some motivation. Is it some desire to exercise patronage – does someone like Stephen Conroy want to go down in history as the Medici of Broadband?

    Like the free speech discussion http://catallaxyfiles.com/2017/04/08/guest-post-arky-free-speech/ and David Leyonhjelm’s outstanding contributions on labour markets, there needs to be a more coordinated and effective campaign which rebuts the fallacies of the progressives, and puts the alternative policy position.

    Steve – given your background, my question is why the business and employer lobbies are not more astute as to the consequences of Keynesian thinking and why they don’t lobby more effectively for more enlightened economic decision making by government? This issue damages their shareholders’ wealth far more than the issues du jour such as SSM

  2. stackja says:

    If Keynes was the solution. Why is there still a problem?

  3. Tim Neilson says:

    why the business and employer lobbies are not more astute as to the consequences of Keynesian thinking
    Because the rewards of crony capitalism, and the risks of standing out from crony capitalism, are too great. Future societal collapse is someone else’s problem.

  4. EvilElvis says:

    Stephen, government’s are brain dead and beholden to public servants who are also brain dead. It’s easier in all circumstances to just bend over and push more of other people’s money towards so called ‘issues’.

    As a side note, before this thread degenerates into a ‘whos got the smallest complexity issue in economics through history’ shit fight that never comes up with any answers, when do we of the right come up with a tangible, simple narrative to put to the general public? After all, history is on our side and we are right!

  5. duncanm says:

    I love how the gist of the quote is “we should follow the theory, even if the evidence says otherwise

  6. steve says:

    I didnt find the school hall projects and their resultant legacy any less value adding than academic waffle about the behaviour of the economy, which only ever seems accurate in hindsight.

  7. Dr Fred Lenin says:

    Am I right in saying the GFC was caused by a combination of greedy unscrupulous crony capitalist bankers ,and stupid incompetent career politicians and public employees ? The bankers lending money to insolvent career political muppets to buy votes and people who had no hope of ever paying it back .sone of the major banking players actions would be classed as criminal ,but of course the law trade is riddled with lies and criminal actions ,so exposing the bankers could reflect on their own crimes . It was dangerous to the elites so it was swept under the carpet ,and Taxpayers money was poured in to save the bankers asses ,how many of the criminals involved were jailed? Where did the money lost go ? In soros account I guess it doesn’t vanish it ends up somewhere.

  8. Old School Conservative says:

    Correct Dr Fred.
    It is all down to the abuse of power.
    If taxation was at rock bottom minimum levels and government spending was also restricted to defence and care of the aged and infirm, it stands to reason that spending and saving decisions would be in the hands of millions of Australians.
    This decentralisation of power is NOT what government and bureaucracies want.

  9. BoyfromTottenham says:

    Steve, I noted the comment ‘Ireland has emerged as one of the ­strongest performing economies in Europe after severe public spending cuts.”. A better example might have been the (West) German ‘Economic Miracle’ of rebuilding and becoming Europe’s economic powerhouse after WW2 (at least until the late ’80s when the bureaucracy again intervened), which as I understand it was underpinned by massive economic deregulation. Compare this to the slow and cautious removal of wartime stringencies in the UK (e.g. some rationing persisted until the early 50’s, high unemployment, etc. – I know, I was there, at least until the early 60’s when my family emigrated to Australia as ‘Ten Pound Poms’!). But this was our government speaking, which (as ever?) does not seem to understand (like Trump does) that removing the dead hand of regulation is (IMO at least) far more important than simply cutting government spending.

  10. Rob MW says:

    When the welfare state together with taxpayer paid taxpayers, with their taxpayer paid super-superannuation and working to find services to service taxpayers are encouraged and supported by taxpayer funded politicians to increase taxpayer services for ballot box political purposes, and that 5% swing, then it naturally follows that ‘Say’s Law’ can play no part in a taxpayer funded economy until, of course, there are no more taxpayers left, at which time, wholesale expropriation of private property and assets occurs and redistributed among the masses until of course, the receivers of the redistribution are then themselves subject to an expropriation of their stolen property and assets all for the debauchery that funds services that no longer exist and unabashed personnel who have fled.

    Not too sure where a full-stop should have been placed !!!!!

  11. Mundi says:

    The reason why politicians like Keynes is that he gives the an excuse to not only spend money, but claim they are saving the economy by doing so. Remember these people literally believe that Swann was the greatest treasurer in the world (perhaps ever).

    Except for a small pocket of libertarians, who barely exist anymore, no one is going to complain when a politician spends money. Hence the reason why our current government is almost as worse as Rudd/Swann.

  12. Empire GTHO Phase III says:

    Not too sure where a full-stop should have been placed !!!!!

    I think your punctuation was fine, but you omitted inevitable civil war from your explanation.

  13. ned says:

    Why politicians like Keynes

    Keynes advocated what the politicians wanted to do anyway.

    The other major event of 1936 was the publication of John Maynard Keynes’s book, The General Theory of Employment, Interest, and Money. After six years of depression, standard economists, other than the Austrian school economists, could not explain the Great Depression. It should have disappeared by 1933. It did not. The academic economists had no explanation, and the younger economists wanted one. Keynes’s book seemed to offer both an analytical solution and a practical solution: massive government deficit spending. This was what governments had been doing ever since 1930, but Keynes’s book baptized the practice, and called for more of the same.

    https://www.lewrockwell.com/2014/10/gary-north/the-myths-of-fdr-and-keynes/

    Keynes was quite clear on one point: it does not matter what the government invests in. It does not matter if the government spends every dime on building pyramids. Or the government can bury paper money in jars, and hide these jars around the community. This way, individuals will have an incentive to go out and dig up jars of money, and therefore this will stimulate the economy.

    https://www.lewrockwell.com/2008/12/gary-north/keynesomania/

    politicians like to spend other people money, to buy votes to get reelected.

    I’m from the government and I’m here to help.” – Ronald Reagan

    https://www.youtube.com/watch?v=xhYJS80MgYA

  14. cui bono says:

    In Canberra they’re boasting about being the second strongest economy, behind NSW, in front of Victoria, Queensland etc..
    That’s Keynesian thinking right there.
    I could be the richest man in Australia…….if every Aussie borrowed a million and gave it to me.

  15. True Aussie says:

    So why are governments so enamoured of the Keynesian fallacy?

    Keynesian economics just provides a rationalisation for what politicians want to do, spend other people’s money to buy votes.

  16. Anto says:

    Playing devil’s advocate here – obviously, no government is not the answer – that’s anarchy.

    What is the “correct” level of government, in an ideal (Say’s) world?

  17. Andrew says:

    Kruglitz and Stigman were actually rubbishing the fucking Balts (h/t St Gough) as examples of what NOT to do.

    Their economies contracted over 10% in the GFC – either because
    a) their trading partners were fucked, and stopped buying from them OR
    b) because they didn’t attempt Keynesian theory and stimulate themselves to the approximate point of national bankruptcy.

    In fact, they cut spending in line with their reduced govt revenues.

    Their recessions of course ended, because there was nothing fundamentally wrong with their economies; they just lot of lot of trade through no fault of their own. With no pink batts etc, they quickly regained highwater marks for GDP per capita, and continue to grow at mid single figures. Greece is about 25% below highwater levels (and of course would have been far worse still but for their stimulus, and would be far better still if the EUSSR had allowed them to continue instead of imposing “austerity” on them) according to K and S.

  18. danger mouse says:

    Anto,

    15 – 20% of GDP. Steve always says that some government spending is required.

  19. Andrew says:

    If Keynes was the solution. Why is there still a problem?

    Not enough stimulus.

  20. . says:

    Anto
    #2364886, posted on April 26, 2017 at 9:46 pm
    Playing devil’s advocate here – obviously, no government is not the answer – that’s anarchy.

    What is the “correct” level of government, in an ideal (Say’s) world?

    5% of GDP – cops, courts and the military.

  21. John A says:

    Anto, I agree with Dot but probably from a very different starting point 🙂

  22. Nerblnob says:

    Fred Lenin: did bankers suddenly decide to lend to no-hopers or were they pushed and incentivised by politicians, because “fairness”?

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