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Confused economics

August 3, 2010

In the rough & tumble of an election campaign, it can be very difficult to differentiate between sensible sentiments and silly spin. This is doubly true for economic commentary, which is mediocre at the best of times. Here is my “idiots guide” to the economic issues of the campaign:

Saved from recession

This is partly true, but misleading. As my previous analysis has shown, the stimulus spending didn’t increase economic growth, it just brought it forward. When the stimulus came out, economic growth went up by about 1.4%, but then six months later it went down by about the same amount… leaving us no better off. The problem is that this small re-arrangement of growth has cost us over $60 billion.

Saved 200,000 jobs

This is an absurd claim, based on a half-page piece of pseudo-analysis from Treasury. There was no economic modeling involved in coming to this number, just the use of a “rule of thumb” which links economic growth to employment. Noticeably, Treasury refused to use the same “rule of thumb” when looking at the impact of the ETS. Even worse, this “rule of thumb” was based on the assumption that economic growth would be permanently boosted… and as shown above, this is not true.

Debt & deficits

Australia fell into deficit because (1) the government spent too much on an ultimately pointless stimulus package; and (2) there was a slowdown in growth which means tax revenue isn’t as high as expected. According to the budget papers, Australia’s net debt is expected to reach about 6% of GDP, which is low by world standards. Labor is correct in saying that it’s not currently a problem, but there are two important caveats. First, even if the debt is relatively low, that doesn’t justify wasted spending. Second, all western countries are facing a growing debt challenge in the future as we face up to an unsustainable welfare state (see: Intergenerational Report). This is the problem facing many European countries at the moment. In the face of a coming debt challenge, we should be concerned about anything that drives up debt.

Investment & productivity

The truth is that neither side of politics have proposed a real productivity agenda. Instead, both sides have dressed up their favourite spending proposals as “productivity measures” or “investments” to give them a responsible sounding name. Labor’s new trick is to call everything “investment”, when there are clearly won’t be a proper return, nor a likely productivity benefit. They have refused to even do the sums on their proposed new broadband business, and simply assert that every new spending measure is a productivity measure, despite the near total absence of evidence. On my side of the fence, I’m afraid the “paid parental leave” is not really a productivity measure, but simply another piece of welfare.

A real productivity agenda would involve cutting regulations, lower taxes, fewer subsidies and handouts, fixing vertical fiscal imbalance, addressing low-skilled unemployment, allowing proper price signals at university, introducing more choice in healthcare, and decentralising government responsibilities. But that stuff is hard. It’s easier just to spend money and call it “investment”.

Mining tax

As I’ve written elsewhere, there are several reasons for opposing the mining tax. My main concern is that it further undermines our federal system of government… but others are legitimately worried about the impact on business viability, jobs, future investments and our political risk premium. The truth is that we got into deficit from too much government spending, and now the Labor government is trying to get out of deficit with a new tax… but what we really need is an “economic conservative” who will control spending and cut taxes.

Emissions Trading System (ETS)

The emissions trading system has fallen off this election campaign, but Labor is still intent on bringing it in if they win. This is another example of a project that has not been given a proper benefit-cost analysis. The Garnaut Review had an implicit benefit-cost analysis… but these results were publicised because the truth is that the proposed ETS massively fails any reasonable assessment. The reason is that the ETS would drive up the costs of living, but it would have no noticeable environmental benefit. This is still one of the best reasons to vote for the Liberal Nationals.

Tax reform

Unfortunately, it seems that real tax reform is dead in Australia. The choice has come down to a company tax rate of 29% (Labor) or 28.5% (Liberal National). Both have caveats. The Labor tax cut will only be introduced if they get to introduce a much bigger tax increase elsewhere (mining tax) and the Liberal National tax cut won’t apply to large businesses for a while as they pay a temporary 1.5% company levy. Both proposals are underwhelming, but only the Liberal National proposal represents a real reduction in the overall tax rates.

Labour markets

Nothing. Both sides seem happy with the current arrangements. Given the significant reforms under the last Howard government and the Rudd government, it is perhaps fair to have a “time out” for a few years and then re-assess. The scare campaign about Abbott “bringing back Workchoices” is absolutely absurd, both because (1) he never really supported it in the first place; and (2) the Greens will likely have balance of power and they would never support it anyway.

Categories: Economics
  1. Ben
    August 4, 2010 at 1:46 am

    RE: No. 1. So taking from “Howard’s treasure chest” saved us, according to the elite media. Can I file that under Aliens and Green Supernatural Theories?

  2. August 5, 2010 at 12:21 am

    I would say Keynesian economics (the basis for the stimulus) is more like a Zombie than an Alien… the theory is long dead, but for some reason it continues to slowly creep through the media, seemingly impervious to rational arguments or contrary evidence.

    The sad truth is that very few people properly understand modern open-economy macro-economics. Most of the leftie ALP cheer-squad are micro-economists who don’t understand the international macro accounting identity KAS = CAD. That single equation automatically means that at least half of the stimulus is wasted (and actually counter-productive), but even Treasury got it wrong.

  3. Ben
    August 7, 2010 at 2:11 am

    “I would say Keynesian economics (the basis for the stimulus) is more like a Zombie than an Alien”? You got me there. Good call. (LOL X 10).

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