On stimulus

To do myself justice, I am going to discuss the commentary that caused me to write the post that so infuriated the Institute of Public Affairs or Julie Novak to instigate my sacking.

(I'd suggest that you follow the link so that you can refer to Ms Novak's commentary as you read, because I will not reproduce it in full here because I fear that a woman as vindictive as she is may attempt to pursue legal action for breach of her copyright if I do. I mean, who knows? If your reaction to someone's telling his five readers you wrote screeching nonsense is to get him sacked, there really isn't anything too low for you to consider for revenge. She has already taken the food from my children's table -- I imagine it would be no big thing to her to try to bankrupt me into the bargain. I apologise for its mutilated form: I believe it would probably be okay to have published it in full with commentary, but I won't risk it.)

The first thing you'll notice is that it's reasonably tightly subbed (the head is mine, btw). That's because I'm a professional. Whatever my personal views, I do not allow them to intrude on my work, and I give the same care to Ms Novak's nonsense as I would to something closer to my own views.

With ... has engineered a great escape for the Australian economy.

At least in the short term, one would have to allow that the Australian economy seems to have escaped the worst of the global recession. Now, of course, Ms Novak does not want to credit the Australian government for this, but I feel she would have been first in the queue to claim it was responsible were we to have suffered a severe recession.

My view is that applying stimulus was the correct move, and the good economic results bear this out. That's not to say that there are no downsides to the stimulus, nor that the government's economic policy is entirely satisfactory. But I think it was a lot better than some of the alternatives. I note that the Institute of Public Affairs, which Ms Novak works for, suggested a large tax cut rather than stimulus, and promotes austerity. These measures are favoured by most rightwing parties the world round, and I think we can be thankful that few of them were in power in the major economies. Rightwingers think tax cuts are the solution to everything, but you have to consider that in a world economy whose major problem was a deficit in demand -- spending -- giving more money to the agents who were refusing to spend does not seem a particularly smart idea. Of course, Australia, like most Western nations, has tried a tax cut as well as stimulus: the money it handed me and my family was in effect a tax cut. But I rather think Ms Novak believes that that money should instead have been handed to the rich. (I won't put words into her mouth though.)

As for austerity, well, that was tried in the Great Depression, and was largely responsible for the "Great" part of that name, and as though to prove that history does repeat itself, in Japan after its banking crisis, which resulted in economic times so bad Japan calls them the "Lost Decade".

I do not expect Ms Novak to know much economics though. She has elsewhere repeated the canard that the American financial crisis was caused by President Clinton's forcing reluctant banks to lend to poor blacks. While I would agree with her that the Clinton administration was irresponsible in its regulation of the finance industry, the crisis was caused by a collapsing asset bubble, whose inflation was barely affected, let alone caused, by community schemes such as that blamed by the American right, desperate not to allow the finger to be pointed where it ought to be: irresponsible, greedy lenders and successive governments that encouraged that greed, undermining the soundness of US financial regulation. My understanding -- limited, I confess -- of the Australian banking sector is that it is more tightly regulated, and I take it to be a consequence that Australian banks did not suffer as badly as others.

I will touch on a couple of fundamental errors in economics that Ms Novak makes below.

Retail sales remain buoyant, as they have been for 15 years

I cannot speak for the past 15 years, but retail sales are not buoyant. The July figures showed another decline.

and surveys ... expenditure measure of gross domestic product has increased for the past two quarters.

It's slightly confusing to describe GDP as an "expenditure measure" (although it is), but I would not have been permitted to recast this. We were recently sent an email telling us not to rewrite columnists, and I didn't have either the time or the access to Ms Novak to discuss a reformulation.

For the layperson, GDP is best understood as a measure of the productivity of an economy, and stating it that way would make it clearer why it is considered it important that it not fall.

... a body that includes an Australian government appointee.

The insinuation here is quite incredible: that the OECD only congratulated the government because of a Rudd fifth columnist. The subordinate clause in this sentence should have been stricken, and in anything approaching a neutral newspaper, it would have been.

Of course, anything approaching a neutral newspaper would not be publishing yet another comment piece by a neoliberal extremist. This is not the first I've subbed, and not even the craziest.

However ... a beneficial impact on economic growth?

Well, let's be honest, they give you a pretty broad hint. If economic growth is measured by increase in GDP, and GDP has as a component government spending, then if the government increases spending and GDP increases, perhaps it is reasonable to suggest causation?

Indeed, no serious economist, no matter their ideology, would care to debate that. (Actually, on reflection, I should note that some "serious" economists actually do debate that, but they can only do so by indulging in economics errors that you wouldn't make if you paid attention in a Year 10 class.) It's clearly the case. What you might argue is the degree of benefit and whether other measures may have brought more benefit. To suggest that the stimulus did not bring growth is, well, let's just say it can only be intended to fool the rubes, because Ms Novak cannot expect to be taken seriously by anyone with even a bit of a clue.

There are some grounds...

Okay. So we've outlined the benefits of the stimulus and now we're going to give grounds for discounting them. Fair enough.

I enjoyed Ms Novak's reference to "irrational exuberance". Given that this, on the part of the market, is the root cause of the crisis, it's deliciously cheeky to accuse Rudd of it.

Let's ... take from your wallet $3636. ...

Two things struck me when I read this and the following par. First, and most importantly, the government gave many of us much more than $900. I know I got more. Perhaps Ms Novak is too rich to have benefited as much as some, or does not have children. There are reasons the government targeted families with children, of course, and we could argue the merit of those reasons. But "boo hoo" is not in itself a sound argument, we should note. Second, the government has not taken $3636 from anyone, at least not yet.

Ms Novak frames this as though the government has committed highway robbery. Again, this can only be for the benefit of the rubes. It may be that we end up paying the money back in full, with interest (and this aspect of Ms Novak's thesis has at least some tiny bit of merit, although I'm sorry to say, not much, because it is simply the case that were we to allow our economy to slide into depression, the cost to us would be much, much more than 3K a head; but let's discuss that when we get to it).

I immediately give you back $900 ...

I then spend $2227 of your money on things that take my fancy.

Here is the thing. What caused the global recession? I don't mean the ultimate causes: the asset bubble or the poor blacks' buying houses, whichever you take it to be. I mean, why was there a recession?

No one was spending money.

That's what a recession is. If GDP is a measure of expenditure, and it falls, this is equivalent to saying there isn't enough money being spent. Let's not get into a lesson in economics on why this is thought to be a bad thing. We'll agree that it is. I am pretty sure that Ms Novak would not argue that a fall in GDP is a good thing for Australia.

In effect, recessions are caused by falls in demand. Less demand, less need for production; less need for production, less need for people to do the producing.

So we need someone to spend money. The idea behind a stimulus is that the government steps into the breach and keeps the economy from faltering. We can argue, if we must, over whether there are other ways to increase spending (and if we must, we will be led to conclude that those other ways are less effective than government spending, which has been shown so often you'd think even the looniest rightards would just give up and concede it), but you just cannot expect that you could do nothing at all and everything would work out fine.

This is a fallacy in economics as it is in other areas of life. Doing nothing is doing something: it is refusing to take all the other options you could take.

Some lobbyist ... (let's call it what it is, a tax)

Well, let's not! You could, if you chose, say that the government had made you give it a loan, but it hasn't taxed you and it's quite ridiculous to suggest it has.

It should imply taxation. I mean, let's get this clear: the government is going to have to pay for its spending, and it's very unlikely that increased revenues in a recovery will cover it, although that is not impossible (I will also allow that it may not be desirable that it should). There is no reason that the government should not tax those who benefit most from a strengthening economy, particularly if they are not using their money as productively as, say, I would. The assumption that the very wealthy use their riches productively ought to be challenged, and given that they benefited most from the asset bubble and its associated wealth production, it is not unreasonable that they should pay for its outcome.

I do not expect Ms Novak to agree. She is not paid to think that the wealthy should pay for anything. Far from it.

towards housing insulation batts would somehow save the Earth.

Ms Novak has some sort of issue with insulation batts.

And school gyms. (I am for both, on the whole. I think reducing the amount of energy we consume is a good idea, although my understanding is that the IPA is a global warming denying institution -- my apologies if this has been misreported -- so possibly Ms Novak thinks that we should not concern ourselves with that. I also think school gyms are a good idea because a healthy body promotes a healthy mind. Perhaps if Australians did more exercise, they would not write turgid shit like this?)

I think we should point two things out though. First, we can argue that the government should attempt to spend its money in the most productive manner. I would agree with Ms Novak on this score in general terms. By all means, let's scrutinise the stimulus spending and insist that it does the job it's supposed to. I'm all for that. But it should spend it, and ultimately it does not matter what it spends it on. One could employ men to dig ditches and that would have the desired effect. The productive use of our money is an added extra in the stimulus, not a sine qua non. Second, Ms Novak seems extraordinarily not to understand that money is not destroyed when it is spent! The housing batt people are not going to burn it, Julie! They are going to pay their people with it, and those people will go and buy other things. That's how economies work.

The purpose of the stimulus is to create demand for things. It doesn't really matter what you demand, so long as you ask for something. Then the economy will produce that something: be it batts, gyms, tanks, ponies. And the people who are engaged in producing it will have jobs (and Julie, note, jobs are on the whole fungible -- in general terms it doesn't matter to GDP what people do so long as they do something). They will spend money in shops, and the people working in the shops will spend money on this that and the other, and the economy will continue to spin. That's the point.

Yes, it's nice if we get some roads and the like out of it. If Ms Novak had spent these words arguing that we should more tightly focus the stimulus on infrastructure and more tightly control costs so that we got more for our money, I would not have said she wrote screeching rubbish. I might not have agreed but at least she would be arguing about what we should do with the stimulus money, not, horrors!, arguing incoherently that we should not have it.

I forgot to mention at the outset that 14 out of every dollar I spend is on my own administration costs.

You would imagine, reading this, that the government pays its "administration costs" by building a bonfire and burning 50-buck notes. Luckily for us, and for Ms Novak herself, who it turns out was responsible for some of the government's "administration costs", it doesn't. It pays public servants.

Now you may not believe public servants do anything much productive, and for sure, when I worked at the Department of Education, half the people there didn't seem to be doing anything at all but their money is as good as anyone else's. When Mr Public Officer buys a schooner of VB, he pays the same money as Mr Factory Worker. And at least the element of cost that he represents is turned into value for the brewery, which is able to pay its own factory workers with it.

While this scenario ... to bolster a market economy.

Erm no. It doesn't even discuss how a stimulus does or doesn't bolster an economy! It completely avoids that question.

Again, let's point this out, just in case anyone has actually read all this and not got it: the stimulus bolsters the economy by providing demand that the economy then meets. In meeting the demand, the economy must produce goods and services: whether they be batts, schooners of VB or people working in little offices inventing costs for school gyms out of thin air.

Whether other methods could produce this demand, whether the right areas of the economy are stimulated, whether the amount was too much, too little or just right, these are all questions that could be asked. None of them was though.

Because money trees do not exist

It's funny that Ms Novak said this, because at this point I was of the belief that she did think that there were money trees.

Here's a thing. Apples grow on trees, as we all know. And when you consume an apple, it is gone. It is a scarce resource.

Money does not grow on trees, as we all know. But when you consume money, it is not gone. It is merely passed on. It is not a scarce resource in the same way an apple is.

Yes, I am saying you must compare apples with apples!

and most governments recognise that printing new money simply stokes inflation ... someplace else.

The first part of this sentence is incorrect as a matter of fact. The problem word is "simply". I will not digress further into the weeds of economics, and will simply allow that the government cannot pay back its stimulus by printing money, which is true.

It will have to get the money from some place else. But where?

We have discussed one option earlier, but we don't need to soak the rich for all of it. Why not?

Consider a simple model of what a government does in the economy. Money circulates in the economy -- let's imagine that each dollar does a circuit of an actual circle -- and at points in that circle, the government dips in and takes out some dollars. At other points, it puts dollars back in. Let's say the government takes a fixed percentage of the dollars (it doesn't, of course, because it adjusts its take year on year, but the adjustments can be quite fine).

If you have a recession, the amount of money going round that circle becomes less, and the government cannot take enough out to cover what it wants to put in. Its revenues fall but it's hard to cut its spending -- particularly bearing in mind that recessions are caused by agents in the economy not spending enough!

But if you have a boom, the amount of money going round that circle becomes more, and the government's take increases to more than its spending. Now it is also an agent in an economy that has enough agents that are spending.

Do you see? What a miracle! Increased economic activity allows the government to cover its borrowing. By not allowing the economy to stagnate, the government brings forward the recovery, which will increase its revenues. So it borrows today and pays back tomorrow.

That's the plan, anyway. I am willing to entertain Ms Novak's riposte to this, which will be that the government will then extract money that could be used for private investment. This is true, but private investment will only happen if there is demand for it. Ms Novak would have it that the government should decrease its tax take in times of plenty, so that the money can be invested productively (ignoring again that the government is not actually going to burn the money it takes in taxes!), but is not willing to accept that the times of plenty are, in part, a result of the borrowing that the government must now cover. This is the nub of it: the economy must climb from some point or another to reach this time of plenty. If we allow it to collapse into recession, that climb is both longer and slower. Sure, when we get there, we will have more spending money, but we are not getting there any time soon. Ms Novak, I believe, will have it that the peak of those good times will be lower for the drag of taxation. But she will have us live in an economy that does not demand the investment she thinks the government is preventing.

Someone always ... would otherwise be the case.

Again, this would only be true if the government did not spend, did not invest, did not do any economic activities. It would be true that the economic pie would be smaller if the government did less with its money than you or me, but I see nothing in this commentary or in Ms Novak's collected works that suggests she can argue that it does. This is a fierce battleground in economics, to be sure, and I am not willing to take it on here given that Ms Novak simply assumed her side of it, rather than stating its merits.

I will leave the rest, because I have spent too long on this already, bar saying that this:

On the spending side, the scenario above illustrates clearly that government is merely in the business of shuffling funds from the private sector into activities it perceives to be beneficial.

is true, and the government would argue that it is in the business of doing things that are beneficial, and I would agree with it. I don't believe the rich are all that interested in benefiting me at all, and certainly investing their money in rent seeking doesn't help me.

and this:

However, what is overlooked is the economy-wide perspective suggesting that economic activity and jobs will be lost in other industries that endured a tax burden instead. More pink batts or school gyms, and less of everything else.

is not true if the people who make batts are willing to buy other goods, which they are.

Here is something the right pretends not to understand. If I tax you at 20% and you earn 100 units, I take 20, you keep 80. If you earn 200 units, your "tax burden" is 40, double, but you keep 160, also double. If my actions increase your ability to make money, you gain. Not the whole of the amount of the increase, but a lot of it.

We should focus on arguing whether the government increases the amount that you gain, not on what you must pay it for doing so. And we allowed at the beginning of this piece that the government's actions have helped us avoid a recession that would cause your 100 units to become 90 units!

It's not rocket science. My mum could understand that.

and this:

By refusing to withdraw its stimulus, the Rudd Government is looking to portray itself as the economic Pied Piper right up to the next election, but continuation of the stimulus will merely direct scarce resources to less productive uses.

simply repeats what she has been suggesting, that money is scarce in the way apples are, and that creating demand is not "productive". She has not shown either to be the case. Indeed, the meat of her commentary was simply the suggestion that the government is taking 3K from everyone to spend on pink batts, and that's bad. Well, to be honest, if no one wants anything else, if no one will spend money on anything else, well, it's a good thing the government wants pink batts. It will keep us afloat until we do want other things.

And you'll note, if you read the entire commentary, as I urge you to do, that Ms Novak at no point suggests what would be more "productive" than making pink batts. You would think that they are just things the government will be burning on the same bonfire as its "administrative costs".

posted by Dr Zen @ 6:56 pm