Thursday, November 13, 2008

Call Me Keynesian If You Must

For years now I have been chided for the use of economic expletives, like deficit and Keynesianism. Now those sort of words are coming back into semi-respectable usage I’m left confused rather than overjoyed. My two preferred economics tutors, economics editor Ross Gittins and fellow blogger Lindsay have no real concept of how thick I really am, but they keep trying.

Gittins is now revealing himself as a born again Keynesian, more or less using the argument that it was just as well to save his breath to cool his porridge. I can accept that from a professional commentator, but a recent article he penned (Listen carefully…) Take this statement for example:

“It's appropriate (and desirable) for budgets to fall into deficit when the economy is entering or leaving recession (or a serious downturn), whereas it's appropriate and desirable for the budget to move into surplus when the economy recovers from recession in the expansion phase of the business cycle.”

It has been common across western economies over the past couple of decades to shrink spending on key areas like health and education. That has never made any sense to me, just taking those two areas. Surely it is economically healthier to provide easily accessible frontline health services to reduce later pressure on more expensive specialist and hospital treatments.

Though conservatives tend to fear education it really has the effect of maintaining stock on the shelves for the future. The stop start in valuing education and training has severe consequences on the economy, particularly when we hit times of skills shortage, as is currently the case.

I’m inclined to believe that regardless of the economic cycle, if deficits are needed to ensure these things are maintained at appropriate levels it is worth the cost. I will stand corrected, but it seems that as the corporate sector must compete with government for available borrowings, the recent regime all too happily shed community responsibility for corporate gain.

For some insane reason the New South Wales state Labor government is sticking with the nasty ways of the past, increasing taxes and reducing spending to avoid deficit. In fact they are putting the national economy at risk to maintain a dubious AAA credit rating.

This at a time when the health, education and broader infrastructure across the state is in serious need of attention. The benefits of creating much needed jobs from construction and other projects feed back to the state in a number of ways, including maintaining currently dwindling GST revenues and other taxes.

I seriously fail to comprehend why government should not be entitled to a portion of loan funds, regardless of stages in the economic cycle. If investment is the base is not consistent they need to be caught up sooner or later, and it is generally later – after the horse has bolted. Call me Keynesian if you must, at least it is no longer a swear word among most economists.


D.K. Raed said...

I think we are in agreement here, Cart, although it is hard to tell much of anything when economics is discussed because the language gets in the way of real comprehension.

Keynes' ideas about deficit cycles & surplus cycles sound spot on to me, much more compassionate than strict adherence to some dogmatic formula. Let's face it, anyone who ended up on the opposite side of the Milton Friedman school can't be bad (in my book).

I have a problem with certain political groups pushing the "deficits don't matter" philosophy. Well apparently most people feel they do matter & so we just handed those deficit-lovers their asses in our election. With a new Great Depression looming, we may find FDR-Style Keynesian economics back in vogue.

Cart said...

DK, as I understand it JK Galbraith's son, a UTex economist is already part of the new advisory regime. That is encouraging, given the family's US take on Keynesianism.
We have just suffered the anti deficit extreme when what we really need is a well judged, pragmatic approach to the whole range of economic tools.

lindsaylobe said...

Ross Gitton’s article in my opinion is spot on the money, if you can indulge me for a moment I am bound to say what a pleasure it is to read an article like that and feel assured he knows what he is talking about.

I gather the crux of your argument is that regardless of economic cycles governments need to allow for real expenditure( after allowing for the effects of inflation) to be maintained for such staples as Education and Heath as otherwise we will be far worse off in the longer term.

Keynesian principles are based on aggregations and not the individual components, except he favoured spending initiatives during economic downturns to be directed towards investment type spending (e.g. on roads, bridges, engineering etc) which were known to have a multiplier effect. That was based upon his mathematical theory that demonstrated such initial spending in key investment type industries (e. g the big ticket type industries I have described that need a lot of partners) has a multiplier flow on effect, maybe typically 3 to one but varying from industry to industry. In other words as each dollar is spent others quickly join and start to co invest in their business and so on. Hence the investment multiplier as it is known will be far more effective during any downturn than the same amount forgone by way of a tax reduction, as the tax reduction will be either saved or simply spent indiscriminately on consumer type items.

This has been the fallacy of Economics in the USA for a very long time; tax cuts have been largely ineffective, except to the extent it one of the lowest taxing nations in the world.

Turning to the aggregated receipts side of the equation it’s evident during boom times (such as was the case in Australia where we benefited from the minerals boom) the government’s share of income increases with tax receipts income and hence ensured a huge net surpluses.

It had nothing to do with controlling government expenditure as Costello would have you believe since aggregated outlays increased substantially over the rate of inflation during his term, but not nearly as fast as the aggregated receipts.

I tried to explain this the other day, as I was asked how I felt about the prospect of the government budget surplus reverting to deficit ; I replied that’s exactly what should be happening !....which was not the answer expected.

Hence staples such as health and education need not be subject to the economic cycles and furthermore I don’t think that was ever intended by John Maynard Keys that they do.

What the NSW government is doing seems to me to be pure nonsense but I am yet to read the fine print.

Best wishes

Cart said...

Lindsay, thank you. Gittins illuminates the issues, certainly enough to focus the questions; which you answer with admirable clarity.
I'm not sure abot NSW fine print, it all seems like a blunt instrument to me. Again, I'm indebted to Gittins today for some valuable insights.