Between the often Keynesian ramblings of senior RBA staff and the apparent unwillingness of Treasury to object (at least publicly) to further growth in government expenditure, it is good to read something that might have been regarded as unremarkable, even orthodox, a decade ago from Michael Brennan – the successor to Alf Rattigan and Gary Banks.
The speech is currently gated, but here are some extracts.
In the pandemic, the fiscal response was not really a conventional Keynesian stimulus, because it wasn’t trying to boost activity in a period of weak demand.
Rather it provided income to those most affected by supply-side restrictions, akin to a form of ex post collective insurance. It provided some protection against what amounted to uninsurable risks, the costs of which were concentrated on particular firms, households and sectors.
The fiscal response helped to smooth that cost across the community and through time – a more efficient form of insurance than would have been possible in private markets.
The risk in the public debate is that this insight – that GDP growth tends to exceed interest rates – is taken to imply something altogether different and much bigger: that debt and deficit no longer matter at all.
That we can afford the next and the next “one off” rise in debt on the grounds that growth rates will continue to outpace bond yields – noting that in other developed economies, the very same observation is being used to justify debt-to-GDP ratios more than twice as high as ours.
Then there is a microeconomic case for caution.
This is based on the observation that fiscal choices come back to the use of real resources in the economy. And there are some limits on the extent to which real resources can actually be borrowed from the future. One way this happens in practice is through a decrease in capital accumulation.
The real cost of government spending is measured in the labour, capital and materials used that would otherwise be employed elsewhere, such as in pursuit of some private entrepreneurial aim – innovation or investment.
Wise words that bear repeating.