Ed Note: The following is an excerpt of testimony submitted by Dr. Kates before the Senate on the stimulus package
On 21 September I provided testimony to the Senate Economics References Committee on the damage done by the government’s “stimulus” package. The submission was broken into five separate sections.
- The state of the national economy where it was demonstrated that the Australian economy has been and is in recession. Even using the “technical definition”, the actions of the Government have not prevented the economy from entering recession.
- The impossibility of quantifying the effect of the stimulus showing that conclusions based on projections from a Keynesian model cannot be used to demonstrate that the economy would have been worse off had no Keynesian stimulus been applied. To think that a Keynesian model can substantiate any Keynesian claim when the economy continues to flounder is merely circular reasoning and based on no serious evidence.
- The harm done by the stimulus which includes:
- noting that there is no justification for the introduction of a stimulus other than its effects on employment whose effects have been minimal at best
- the distortions in the structure of production which occur as a result of the stimulus which directs the economy into unproductive activities
- the loss in real economic growth because the stimulus measures have competed resources way from productive enterprises
- a loss in long-term economic growth which will depress the rise in real incomes and lower living standards
- the effect on interest rates which have remained higher than they otherwise would have been and will rise sooner than they otherwise needed to have done
- the effect on future taxation which will need to rise by prodigious amounts if the debts that have been taken on are to be repaid
- the potential effect on inflation which may become an important medium-term economic issue as the recovery gathers some momentum.
- The fundamental structural flaws in Keynesian economic theory which wrongly argues that increases in public spending and budget deficits are capable of generating economic growth even when the money spent is spent on producing goods whose value is far below their costs of production.
- A discussion of the theory of the cycle where it was noted that economies are subject to alternating periods of growth and periods of recession. The panic that greeted the downturn both here and elsewhere were massively disproportionate to the actual dimensions of the problems, even assuming that a stimulus package was the right approach, which it isn’t.
The full submission runs to 27 pages, but I will just note a couple of the specifics raised. The first of these is to point out that the economy has not only been in recession, but using the ABS-preferred trend data, the downturn even matches the definition of a “technical” recession by having contracted in two consecutive quarters.
The movement in the September quarter 2008 was negligible but unquestionably negative. In the December quarter 2008 the fall was somewhat larger but again negative. Thus using even the “technical” definition, on the best measure we have of the movements in GDP, the economy contracted for two consecutive quarters.
But it should not matter whether there were actually two consecutive quarters of falling GDP for us to declare that the Australian economy is in recession. If across a four quarter period, the growth rate has been 0.3%, then the economy is in recession. To pretend otherwise is simply to deny a reality that really cannot be denied.
The phenomenal fall in the level of national saving is also quite disturbing. Savings have diminished to half the level they were at a year before. In the June quarter 2009, there was a fall of one-third in just that period alone.
Moreover, in June 2009, the saving ratio has descended into negative territory, being recorded at -0.4. The notion that the stimulus has been tucked away into additional savings is belied by these figures.
The notion that was always at the core of the Keynesian model, that recessions are due to over-saving, is clearly nonsense. But without that bit of cover for the actions taken, where is the theoretical justification for spending money and deficit finance.
The Keynesian model, for those who have not studied economics, argued that recessions were caused by too much saving relative to the willingness of investors to invest. The Government was then required to make up the difference by increasing its own expenditures to soak those savings up.
The data, however, do not indicate any such problem. If there is a problem, it lies with not enough saving which makes the Government’s pursuit of our accumulated saving through its expenditure package even more difficult to justify. It is not hard to see when one looks at these figures why the RBA is itching to raise rates as soon as possible. It is why rates are rising already with or without the cover provided by the RBA. The potential for an inflationary spiral is not low.
I also pointed out to the Committee that the cost per job saved has been in the vicinity of one and a half million dollars each, based on the assumption that had there been no stimulus, the unemployment rate would have risen to around 6.1% (and here I am giving the stimulus the benefit of the doubt).
But to give you an easy access to the orders of magnitude involved in such immense levels of spending, I will just point out that we have spent $43 billion on the stimulus, for which there is real reason to believe we will not get a single dollar of economic return for the money spent. In times past the words we used to refer to a figures such as 43 billion was to say 43,000 millions. If we have created a net addition of 43,000 jobs for $43,000 million, then each of those additional jobs would have come with a price tag of around $1,000,000 each.
It’s all very well to say that something had to be done. It is something else again to say that we have to spend one million dollars for each additional job saved. It would not have made good economic sense at one tenth the cost, but this is totally beyond reason.
We have poured four percent of our national output into projects that cannot generate in any possible way an increased productivity that allows the debt created to be repaid from the projects themselves. It is all just a dead weight cost.
I will finish with something that was picked up from my testimony by the AAP which I did not even know I had said it until I read it. “The use of Keynesian economics has been on of the great catastrophes for economic theory in the West”. Just how true this is I fear we are all about to find out.
Dr. Steven Kates
for Markets and Money