Rudd’s essay is on the money

Flattr this!

Aus­tralian Prime Min­is­ter Kevin Rudd has fol­lowed up his cri­tique of neolib­er­al­ism with a new essay in the Syd­ney Morn­ing Her­ald on the causes of the cri­sis, and the poli­cies needed after recov­ery.

With one excep­tion, his key expla­na­tions for the cri­sis are the same as those iden­ti­fied by myself and the hand­ful of other econ­o­mists who pre­dicted this cri­sis before it hap­pened:

The roots of the cri­sis lie in the pre­ced­ing decade of excess. In it the world enjoyed an extra­or­di­nary boom… How­ever, as we later learnt, the global boom was built in large part on a three-lay­ered house of cards.
First, in many West­ern coun­tries the boom was cre­ated on a pile of debt held by con­sumers, cor­po­ra­tions and some gov­ern­ments. As the global financier George Soros put it: “For 25 years [the West] has been con­sum­ing more than we have been pro­duc­ing — liv­ing beyond our means.”
In the United States, in par­tic­u­lar, con­sumers went on a long, debt-fuelled shop­ping spree. House­hold debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The com­men­ta­tor Bill Gross sum­marised the US con­sump­tion boom as: “For too long it’s been McHouses, McHum­mers and McFlatscreens, all financed with exces­sive amounts of McCredit — What a colos­sal McStake.”
Aus­tralian con­sumers also spent up big. Between 1996 and 2007 there was a 460 per cent increase in credit card debt, a 340 per cent increase in house­hold debt, a 450 per cent increase in cor­po­rate debt and a 200 per cent increase in net for­eign debt.
Sec­ond, these debts were racked up on the back of sky­rock­et­ing asset prices. In sev­eral coun­tries, stock prices and house val­ues soared far above their true long-term worth, cre­at­ing paper wealth that mil­lions of house­holds used as col­lat­eral for their grow­ing debts. The value of global finan­cial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007. Of course, this bub­ble was fed by a reg­u­la­tory sys­tem that encour­aged exces­sive greed. Weak finan­cial reg­u­la­tion allowed cor­po­rate cow­boys to take on dan­ger­ous finan­cial risks that began to threaten the finan­cial sys­tem itself…
The finance sec­tor, rather than ser­vic­ing the needs of the real econ­omy, began to pri­mar­ily ser­vice itself.
The final layer of the house of cards was the huge vol­ume of money fun­nelled from China, Japan and the Mid­dle East to West­ern banks and gov­ern­ments. Cheap sav­ings from the East flooded into the West to finance bal­loon­ing deficits. From 1999 to 2006 the US cur­rent account deficit more than tripled, from $US63.3 bil­lion to $US214.8 bil­lion, bal­anced by huge sur­pluses in other coun­tries, espe­cially China.

The roots of the cri­sis lie in the pre­ced­ing decade of excess. In it the world enjoyed an extra­or­di­nary boom… How­ever, as we later learnt, the global boom was built in large part on a three-lay­ered house of cards.

First, in many West­ern coun­tries the boom was cre­ated on a pile of debt held by con­sumers, cor­po­ra­tions and some gov­ern­ments. As the global financier George Soros put it: “For 25 years [the West] has been con­sum­ing more than we have been pro­duc­ing … liv­ing beyond our means.”

In the United States, in par­tic­u­lar, con­sumers went on a long, debt-fuelled shop­ping spree. House­hold debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The com­men­ta­tor Bill Gross sum­marised the US con­sump­tion boom as: “For too long it’s been McHouses, McHum­mers and McFlatscreens, all financed with exces­sive amounts of McCredit .. What a colos­sal McStake.”

Aus­tralian con­sumers also spent up big. Between 1996 and 2007 there was a 460 per cent increase in credit card debt, a 340 per cent increase in house­hold debt, a 450 per cent increase in cor­po­rate debt and a 200 per cent increase in net for­eign debt.

Sec­ond, these debts were racked up on the back of sky­rock­et­ing asset prices. In sev­eral coun­tries, stock prices and house val­ues soared far above their true long-term worth, cre­at­ing paper wealth that mil­lions of house­holds used as col­lat­eral for their grow­ing debts. The value of global finan­cial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007…

The finance sec­tor, rather than ser­vic­ing the needs of the real econ­omy, began to pri­mar­ily ser­vice itself.

The final layer of the house of cards was the huge vol­ume of money fun­nelled from China, Japan and the Mid­dle East to West­ern banks and gov­ern­ments. Cheap sav­ings from the East flooded into the West to finance bal­loon­ing deficits. From 1999 to 2006 the US cur­rent account deficit more than tripled, from $US63.3 bil­lion to $US214.8 bil­lion, bal­anced by huge sur­pluses in other coun­tries, espe­cially China.  (the emphases in these and sub­se­quent quotes is my own)

The only ele­ment of that with which I dis­agree is the third point–which I’ll get back to later on.

Rudd also pro­vides some inter­est­ing “insider’s” sta­tis­tics on the size of the col­lec­tive efforts taken by OECD gov­ern­ments to try to limit the scale of the cri­sis:

On the fis­cal front, gov­ern­ments from the world’s largest 20 economies are expected to col­lec­tively pump about $US5 tril­lion into their economies by the end of next year (or nearly 8 per cent of global GDP since the cri­sis began). Alto­gether, the mea­sures are the equiv­a­lent of an extra­or­di­nary and unprece­dented 18 per cent of global GDP.

That’s an extra­or­di­nary injection–against which the scale of this cri­sis should be appar­ent. Inject an addi­tional 18 per cent of activ­ity into a global eco­nomic sys­tem over about 3 years, and yet the sys­tem still falls by about 6 per cent over that period? With­out that inter­ven­tion, out­put could have fallen by 25 per cent over 3 years, which is a Depres­sion in anyone’s lan­guage.

Where I dif­fer again with the Prime Min­is­ter is over whether this gov­ern­ment stim­u­lus alone is suf­fi­cient to avoid a Depres­sion. Though his case is far more nuanced than most, the “green shoots” phrase nonethe­less gets an air­ing:

We have already begun to see the results. Early signs of “green shoots” have emerged in recent eco­nomic data. And this month the Inter­na­tional Mon­e­tary Fund revised up its fore­cast for the global recov­ery, from 1.9 per cent to 2.5 per cent growth next year. An IMF report this month noted “the world econ­omy is sta­bil­is­ing, helped by unprece­dented macro-eco­nomic and finan­cial pol­icy sup­port”. The truth, how­ever, is the world is still a long way from recov­ery.

The extent to which Rudd is “lev­el­ling” with his audi­ence is also quite wel­come:

The aver­age bud­get deficit for OECD economies increased more than six­fold, from 1.4 per cent of GDP before the cri­sis in 2007 to 8.8 per cent of GDP in 2010. Pub­lic bor­row­ing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.

Australia’s deficit and debt posi­tion have inevitably been affected, albeit much less than in other advanced economies. The com­bined effects of col­lapses in rev­enue ($210 bil­lion) and pol­icy inter­ven­tions to sup­port our econ­omy ($77 bil­lion) are expected to result in a deficit that peaks at 4.9 per cent of GDP in 2009-10. Net pub­lic debt is expected to rise to 4.6 per cent of GDP this finan­cial year and peak at 13.8 per cent of GDP in 2013–14. Both are the low­est by an order of mag­ni­tude of all major advanced economies.

Clearly, gov­ern­ment global action has come at a cost. But as the IMF argued ear­lier this year: “While the fis­cal cost for some coun­tries will be large in the short run, the alter­na­tive of pro­vid­ing no fis­cal stim­u­lus or finan­cial sec­tor sup­port would be extremely costly in terms of the lost out­put.”

With­out gov­ern­ment inter­ven­tion, global growth, global unem­ploy­ment and prospects of global finan­cial recov­ery would be much, much worse.

We never got to see whether Howard or Costello would have pro­vided a rea­soned expla­na­tion of poli­cies in the light of an eco­nomic cat­a­stro­phe, because they never expe­ri­enced one–instead, they were amongst the lucky incum­bents who held office while the global finan­cial excess that caused this cri­sis held aloft the illu­sion of pros­per­ity, and lost office before The Piper called to col­lect on The Tune.

Had they held on to power, I have no doubt that they would have–by force of necessity–been under­tak­ing very sim­i­lar fis­cal poli­cies to those Rudd now is (though the addi­tional expen­di­ture may have gone on the mil­i­tary and bor­der patrols rather than ports and schools). Whether they would have pre­sented as rea­soned an expla­na­tion for their actions I think would have been less likely.

Rudd also revis­its the anti-neolib­er­al­ism theme of his pre­vi­ous essay:

As I have argued else­where, the boom-and-bust eco­nomic cycle of the past decade has been an unavoid­able con­se­quence of a decade of neo-lib­eral free mar­ket fun­da­men­tal­ism that rein­forced a cul­ture of cor­po­rate greed and excess in the finan­cial sec­tor. The cen­tral prin­ci­ples of this extreme form of cap­i­tal­ism are that mar­kets are self-reg­u­lat­ing; that gov­ern­ment should get out of the road of the mar­ket alto­gether and that the state itself should retreat to its core his­tor­i­cal func­tion of secu­rity at home and abroad.

As some­one who has long argued that the eco­nomic the­ory that under­lies neolib­er­al­ism (Neo­clas­si­cal Eco­nom­ics) is intel­lec­tual dri­vel, I of course sup­port this cri­tique.

Where I beg to dif­fer is Rudd’s dat­ing of this–merely the last decade? We’ve been fol­low­ing Neo­clas­si­cal-Eco­nom­ics-inspired poli­cies ever since 1975, includ­ing under the pre­ced­ing Aus­tralian Labor Party gov­ern­ment of Bob Hawke and Paul Keat­ing  (or since 1973 if we include Whitlam’s 25% overnight cut in tar­iffs). And of course, the last decade wasn’t one of boom and bust around the globe, which was partly the prob­lem: the mild US down­turn after the 2000 Stock Mar­ket Crash occurred because the huge runup of pri­vate debt-financed spend­ing that was the Sub­prime Cri­sis over­whelmed the neg­a­tives of the Dot­Com swin­dle, and of course set us up for the far big­ger crash we are now expe­ri­enc­ing.

The absence of eco­nomic down­turns since 1993–and the mild­ness of the mainly US reces­sion after the Dot­Com Bub­ble burst–played a large role into delud­ing neo­class­si­cal econ­o­mists like Bernanke into believ­ing that they had tamed the trade cycle in what they termed “The Great Mod­er­a­tion”:

… the low-infla­tion era of the past two decades has seen not only sig­nif­i­cant improve­ments in eco­nomic growth and pro­duc­tiv­ity but also a marked reduc­tion in eco­nomic volatil­ity…, a phe­nom­e­non that has been dubbed “the Great Mod­er­a­tion.” Reces­sions have become less fre­quent and milder, and … volatil­ity in out­put and employ­ment has declined sig­nif­i­cantly… The sources of the Great Mod­er­a­tion remain some­what con­tro­ver­sial, but … there is evi­dence for the view that improved con­trol of infla­tion has con­tributed in impor­tant mea­sure to this wel­come change in the econ­omy … (Bernanke, 2004)

Bol­locks to all that. The pre­dic­tion I made in 1995 in my paper “Finance and Eco­nomic Break­down: Mod­el­ling Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis” has stood the test of time rather bet­ter:

From the per­spec­tive of eco­nomic the­ory and pol­icy, this vision of a cap­i­tal­ist econ­omy with finance requires us to go beyond that habit of mind which Keynes described so well, the  exces­sive reliance on the (sta­ble) recent past as a guide to the future. The chaotic dynam­ics explored in this paper should warn us against accept­ing a period of rel­a­tive tran­quil­ity in a cap­i­tal­ist econ­omy as any­thing other than a lull before the storm. (Keen, 1995)

A Nascent Recovery?

Like most global lead­ers, Rudd is now speak­ing as if recov­ery has already begun. But to give him his due, even here there is a word of cau­tion:

The first phase of Australia’s response to the global cri­sis has legit­i­mately focused on cri­sis man­age­ment, emer­gency inter­ven­tions and imple­ment­ing a strat­egy for recov­ery. But we must now deal with two chal­lenges that arise in the con­text of a pos­si­ble recov­ery.

There is also wel­come real­ism that a debt-financed recov­ery is barely pos­si­ble and cer­tainly unde­sir­able, and an aware­ness that delever­ag­ing and defla­tion are the major risks fac­ing the global econ­omy.

This cri­sis has shown we have reached the lim­its of a purely debt-fuelled global growth strat­egy. Not only will the neo-lib­eral model of the past not pro­vide growth for the future, its after-effects will make recov­ery more dif­fi­cult. Moun­tains of global pub­lic and pri­vate debt, global imbal­ances, and a weak­ened global finan­cial sys­tem will drag on global growth for a long time. As the renowned finan­cial colum­nist Mar­tin Wolf has writ­ten: “Those who expect a swift return to the busi­ness-as-usual of 2006 are fan­ta­sists. A slow and dif­fi­cult recov­ery, dom­i­nated by de-lever­ag­ing and defla­tion­ary risks, is the most likely prospect.”

Since Rudd has prop­erly enter­tained the prospect that the next decade will be dom­i­nated by delever­ag­ing rather than ris­ing debt lev­els, let’s get a han­dle on what that might mean for aggre­gate demand over that decade.

Aus­tralia has expe­ri­enced two pre­vi­ous bouts of delever­ag­ing, in the Depres­sions of the 1890s and 1930s. In both those pre­vi­ous Depres­sions, defla­tion and falling real out­put drove the debt to GDP ratio higher after the onset of the crisis–something we have yet to experience–after which the painful process of delever­ag­ing began.

In the 1890s, we began with a debt to GDP ratio of just over 100 per cent, which then fell to a low of roughly 40 per cent over a 15 year period. In the 1930s, we started with a lower level of 75 per cent, which fell over a sim­i­lar period to a low of 25 per cent–but the Sec­ond World War clearly accel­er­ated the delever­ag­ing process, which prior to then was run­ning more slowly than after the 1890s Depres­sion.

In the Fig­ure above, these his­tor­i­cal episodes are fit­ted by an expo­nen­tial decay process. The rate of decay in the 1890s was roughly 4% per year; it began at roughly 3% in the 1930s prior to the War, but over the entire period includ­ing the War it fell at an aver­age rate of 8% a year.

There was no pol­icy inter­ven­tion to accel­er­ate eco­nomic recov­ery in the 1890s, so 4% might be taken to be the endoge­nous capac­ity of a Depressed econ­omy to de-lever, whereas 8% can be regarded as a pol­icy-accel­er­ated rate (where how­ever that “pol­icy” was an arms race dur­ing a global mil­i­tary con­flict). Both these rates are con­sid­ered as hypo­thet­i­cals for reduc­tion of our debt lev­els today.

Tak­ing 50% of GDP as a level at which nor­mal eco­nomic activ­ity might resume (higher than the 40% level that applied in the 1920s and 25% level of the 40s-60s), this implies that delever­ag­ing could take any­where between 15 years (at the accel­er­ated 8% rate) and 30 years (at the “nat­ural max­i­mum” 4% rate).

We can get a pre­lim­i­nary han­dle on what this might mean for eco­nomic growth by cal­cu­lat­ing the per­cent­age of GDP rep­re­sented by each year’s deleveraging–effectively by con­vert­ing the per­cent­age reduc­tion in debt each year into a frac­tion of GDP for that same year (this ignores feed­backs between the rate of change of debt and GDP itself, but it will do as a first pass). In the first year (2009) when debt started at 165% of GDP, a 4% reduc­tion in debt lev­els is equiv­a­lent to a 6% reduc­tion in GDP; the size of this hit then falls as the debt to GDP ratio itself falls.

The fol­low­ing chart shows each year’s delever­ag­ing as a per­cent­age of GDP, at the rates of 4% and 8% per year:

We are cur­rently delever­ag­ing at the 4% rate, and debt has fallen from 165% of GDP in March 2008 to 159% today–a 6% fall as a per­cent­age of GDP, as noted above. At this rate, debt will not fall below 50% of GDP until 2038, and the annual reduc­tion in debt will be equiv­a­lent to 3% of GDP until 2028.

To com­pare this to what hap­pened dur­ing the 30s and 40s, the next Fig­ure shows the impact of delever­ag­ing in the 1930s: the actual 3% rate that applied from 1932 till 1939, what a “nat­ural max­i­mum” rate of a 4% fall per year would have meant as a per­cent­age of GDP, and how bad things might have been with­out a World War if the achieved rate for 1932–45 of an 8% reduc­tion had come via reduc­ing debt rather than increas­ing GDP via a huge mil­i­tari­sa­tion effort.

Even the worst rate of 1930s delever­ag­ing (includ­ing WWII) only just com­pares to the impact of delever­ag­ing today at the 4% rate–because the debt ratio in 2008 peaked at 2.2 times the peak level in the 1930s. And through­out the 1930s, delever­ag­ing never sub­tracted more than 3% from GDP–again because debt was so much lower then than it is now.

While Rudd is there­fore aware that delever­ag­ing will prob­a­bly be the defin­ing eco­nomic expe­ri­ence of the next decade, I doubt that he is aware of the scale of its poten­tial impact. Though Treasury–if it has had any input into Rudd’s paper–seems more aware of the dan­gers of delever­ag­ing than the RBA, delever­ag­ing is surely not fac­tored into Treasury’s eco­nomic mod­el­ling of the post-cri­sis recov­ery sce­nar­ios on which some of Rudd’s bud­get pre­dic­tions are based. These pre­sume a return to real eco­nomic growth of 3%+ by 2010, which imply a capac­ity for the econ­omy to grow at upwards of 7% per annum in real terms, to coun­ter­act delever­ag­ing sub­tract­ing more than 5% from GDP every year till 2015.

If we rely upon the “nat­ural max­i­mum” process of delever­ag­ing, we face a 30 year period in which changes in debt will cut at least 3% from the growth poten­tial of the econ­omy

This is why I pro­pose a far more rad­i­cal pol­icy to deal with the cri­sis than the gov­ern­ment stim­u­lus pack­age that Aus­tralia and other OECD nations have fol­lowed to date. These poli­cies are attempt­ing to address a cri­sis caused by irre­spon­si­ble pri­vate lend­ing, yet they involve con­tin­u­ing to respect this debt. They attempt to coun­ter­act pri­vate delever­ag­ing by run­ning up pub­lic debt instead. And they dras­ti­cally under­es­ti­mate the impact of delever­ag­ing: rather than achiev­ing a return to growth by 2010, these poli­cies alone are likely to result in zero or sub-zero growth for most of the next decade.

That pri­vate debt does not deserve respect. It was irre­spon­si­bly lent in the first place, and the finan­cial insti­tu­tions that lent it should pay the price–not the pub­lic nor the pub­lic purse–via delib­er­ate debt reduc­tion. This of course would bank­rupt those finan­cial insti­tu­tions, but as should be obvi­ous from the US expe­ri­ence, these insti­tu­tions are effec­tively bank­rupt already.

A Copernican Switch on Savings

I noted above that the one aspect of Rudd’s analy­sis of the cri­sis that I dis­agreed with was the propo­si­tion that:

The final layer of the house of cards was the huge vol­ume of money fun­nelled from China, Japan and the Mid­dle East to West­ern banks and gov­ern­ments. Cheap sav­ings from the East flooded into the West to finance bal­loon­ing deficits.

This is the “Sav­ings cause Loans” per­spec­tive of the con­ven­tional model of money. As I explained in The Rov­ing Cav­a­liers of Credit, this model is rather like the pre-Coper­ni­can view that the Sun orbits the Earth: it’s easy to under­stand (we still speak of “sun­rise” and “sun­set” after all) and also com­pletely wrong. Just as the Earth orbits the Sun, “Loans cause Sav­ings”.

The “excess sav­ings” of the East were thus caused by the excess bor­row­ing of the West. Chi­nese, Japan­ese and Mid­dle East­ern accounts accu­mu­lated money because West­ern con­sumers and firms bor­rowed up big, and spent that bor­rowed money buy­ing goods pro­duced in China, Japan and the Mid­dle East. Now that the bor­row­ing binge in the West has come to an end, those “excess sav­ings” in the East should start to dimin­ish.

Conclusion

Rudd’s essay shows a stronger appre­ci­a­tion of the causes of this cri­sis, and the fragility of the econ­omy in its wake, than I’ve yet seen from any other offi­cial source (with the sole excep­tion of the Bank of Inter­na­tional Set­tle­ments, where Bill White’s influ­ence appears to remain, even though he is no longer its Eco­nomic Adviser–check this story on Bill and his for­lorn attempts to raise the alarm dur­ing the Bub­ble).

Its one weak­ness is con­tin­ued reliance upon neo­clas­si­cal eco­nomic mod­els to pre­dict the future course of the econ­omy after this crisis–when those same mod­els ignore the role of pri­vate debt (which caused the bub­ble in the first place) and delever­ag­ing (which will in fact drive the future course of the econ­omy).

We can expect Rudd and Swann to con­tinue with a large scale fis­cal stim­u­lus, in the hope that this will end the cri­sis. The next stage will come when this stim­u­lus fails to achieve the level of growth pre­dicted by neo­clas­si­cal eco­nomic mod­els, and as a result unem­ploy­ment exceeds fore­casts, pub­lic debt con­tin­ues to run up, and deficit reduc­tion strate­gies get pushed back in time.

So though Rudd is aware of the prob­lem of delever­ag­ing, he hasn’t yet taken devel­oped poli­cies that directly tackle it. But aware­ness of the prob­lem is a nec­es­sary first step in address­ing it, and Rudd has taken that first step.

PS Gittins on the Boil

Ros Git­tins wrote a far less flat­ter­ing review of Rudd’s essay in this morning’s SMH (Rudd’s new bogy: fear­ing the pain of recov­ery, SMH July 27 2009).

There were a few ele­ments of his argu­ment I agreed with, but most of it I reject. The points he made that I agree with include:

  • That Rudd’s def­i­n­i­tion of neolib­er­al­ism is bogus–or at least incom­plete. As Git­tins puts it:

The notion that the Libs could be fairly described as “neo-lib­eral free-mar­ket fun­da­men­tal­ists” is laugh­able.

And yet Rudd boasts about the suc­cess of the Hawke-Keat­ing government’s micro-eco­nomic reforms and promises more reforms of his own.

Micro-eco­nomic reform and neo-lib­eral mean the same thing. As an ide­o­log­i­cal war­rior, this guy’s a phoney.”

True–as I noted above:

We’ve been fol­low­ing Neo­clas­si­cal-Eco­nom­ics-inspired poli­cies ever since 1975, includ­ing under the pre­ced­ing Aus­tralian Labor Party gov­ern­ment of Bob Hawke and Paul Keat­ing (or since 1973 if we include Whitlam’s 25% overnight cut in tar­iffs).

  • The false claim that our national bal­ance sheet is healthy:

He boasts his inten­tion is to main­tain Australia’s posi­tion as hav­ing “the best national bal­ance sheet of the major advanced economies” (I didn’t know we were a major econ­omy). Really? With a net for­eign debt equiv­a­lent to 56 per cent of gross domes­tic prod­uct?”

True again. But Git­tins him­self has rarely (once from memory–see below) acknowl­edged the par­lous state of pri­vate debt in gen­eral in this econ­omy. Rudd’s essay did dis­cuss that, and he drew the impli­ca­tion of the dan­ger of delever­ag­ing as well, which applies to all debt, whether owed domes­ti­cally or over­seas.

  • And finally, the fact that most of Rudd’s reform agenda is no dif­fer­ent to any­thing else pro­posed at any time in the last two decades–in other words that it’s still read­ing from the neolib­eral script, which of course is writ­ten by neo­clas­si­cal econ­o­mists:

First is reg­u­la­tion and com­pe­ti­tion reform… Next is infra­struc­ture (noth­ing new here), inno­va­tion (the national broad­band net­work “will arguably be the sin­gle great­est mul­ti­plier of pro­duc­tiv­ity growth”; I cer­tainly hope it isn’t the best we can do), skills (noth­ing new) and tax reform (wait­ing for the Henry report). Then comes the “broader reform agenda”: retire­ment income pol­icy (wait­ing for Henry), health and age­ing (may do some­thing in response to the immi­nent report) and cli­mate change and water (noth­ing new).”

But that’s about it. Oth­er­wise

  • Rudd had an accu­rate analy­sis of what caused the cri­sis, on which Git­tins had no com­ment; and
  • Based on this analy­sis, Rudd warned of the dan­gers ahead in delever­ag­ing and defla­tion, while Git­tins seems to have bought the “it’ll all be over by Christ­mas” sen­ti­ment. For instance:

Rudd fails to explain just why it will be so tough to get the bud­get back to sur­plus. It shouldn’t be, when you remem­ber that all the offi­cial stim­u­lus spend­ing is once-off and the budget’s “auto­matic sta­bilis­ers” will even­tu­ally bring back the rev­enue they took away.”

and…

I’m start­ing to see the motive for all this talk about tough times ahead: you make it sound ter­ri­ble so that when it turns out it isn’t so bad, vot­ers are more relieved than angry. It’s spin, in other words.”

Yes there was cer­tainly some spin there. But there was also a bet­ter appre­ci­a­tion of what caused this cri­sis than I’d pre­vi­ously seen from an inter­na­tional leader. In prac­tice, Rudd may well have set the grounds for what is needed polit­i­cally if, as I expect, things turn out to be a lot worse than most neo­clas­si­cal econ­o­mists and com­men­ta­tors like Git­tins expect.

Any­one who read Gittins’s dia­tribe before read­ing Rudd’s essay would prob­a­bly con­clude that it wasn’t worth the effort to do so any­way. That would be a mis­take. It’s rare that a major essay in a news­pa­per actu­ally (a) iden­ti­fies the cause of this cri­sis and (b) notes the dan­gers that lie ahead. The for­mer has hap­pened only once, so far as I can rec­ol­lect in any of Gittins’s own columns (“It’s not infla­tion that did us in, it’s the bor­row­ing”, SMH 08/12/2008–see my blog entry on this “Ross Git­tins finally comes aboard”), the lat­ter, never.

On that point alone, read­ing Rudd’s essay is a far more reward­ing activ­ity than read­ing Gittins’s cri­tique.

Bookmark the permalink.
  • mahaish

    hi aus­trian bob,

    funny you should men­tion the fall of the roman empire,

    this isnt eco­nom­ics i know,

    but how the jar­vanese han­dle their own pow­der keg of an empire to the north of us, is going to have a sig­nif­i­cant bear­ing on our for­tunes over the next 30 years.

    the fall of rome or the con­stan­tin­ian split is going to look like a storm in a tea cup, com­pared to the trou­bles await­ing the jar­vanese and as a con­se­quence us.

  • Hi ak!

    First let me com­ment on the data from China. Yes they have enor­mous bub­bles. Yes these bub­bles will burst. No they don’t care. No this will not do much harm to their econ­omy. Because they do not have to obey the same rules. 

    We believe that too.

    But then, after talk­ing to our Chi­nese friends in Shang­hai ear­lier in the year, they told me that if the Chi­nese gov­ern­ment let prop­erty bub­ble pop, it will screw up the econ­omy.

    In the larger scheme of things, maybe China will not be hit by a depres­sion if their spec­tac­u­lar bub­ble burst because they don’t fol­low the same rules. But cer­tainly, in the short term, it will screw up and piss off a lot of the richer mid­dle class in the coastal cities.

  • DrBob127

    In chang­ing the com­ment struc­ture of the blog (I only men­tioned the size of this page, I was not com­plain­ing about the com­ments)

    It may be eas­ier to fol­low a thread of com­ments between two mem­bers in a hier­ar­chi­cal com­ment struc­ture (like the com­ment struc­ture at slashdot.org) how­ever this may mean that newer post­ing are missed because you are focused on a dif­fer­ent part of the ‘tree’.

    I actu­ally quite like the sim­plic­ity of this blog. Yes, it does mean that I have to read every com­ment that is posted, but I think that is one of the good things about this com­mu­nity; everyone’s point of view is rec­og­nized as being valid (mostly) and thus everyone’s com­ments are read by the com­mu­nity.

    Yes this does place a higher ‘read­ing bur­den’ on all mem­bers, but I think that is what dif­fer­en­ti­ates this blog from oth­ers is that most of us are will­ing to put in the time lis­ten­ing to what other peo­ple have to say.

    I think that we should be wary about try­ing to change aspects of this blog (it is after all entirely up to Prof. Keen). I am not sure how the Prof sees the evo­lu­tion of this com­mu­nity, but I do think that things are work­ing so far.

  • Pingback: P2P Foundation » Blog Archive » How long will this meltdown last? Until 2038?()

  • Pingback: Notes on the delveraging economy… « Re: The People()

  • Pingback: Anarchistas » Defliacin?s kredito kriz?s mechanika()

  • Pingback: Debtwatch No. 38: The GFC—Pothole or Mountain? | Steve Keen's Debtwatch()

  • Pingback: The GFC—Pothole or Mountain? | Centre For Economic Stability()

  • The idea that we’ve have been fol­low­ing neolib­eral poli­cies since the 1970’s is laugh­able. Sure there have been moves to free up the mar­ket but it’s hardly been lais­sez-faire.

    If com­pa­nies and indi­vid­u­als (yes Howards “Aussie Bat­tlers” and Rudd’s “Work­ing Fam­i­lies” (a term which reeks of anti-bour­geois sen­ti­ment and alludes to red army hats and col­lec­tive farms) were allowed to fail. Rather than fall in a plush net of gov­ern­ment bailouts and social wel­fare.

    Maybe then you could have argued that the fail­ures of the past are due to neolib­er­al­ism. You may well say it’s Gov­ern­ment inter­fer­ence with the econ­omy that has led to the cur­rent sit­u­a­tion (Fan­nie Mae, Fred­die Mac, deficit blow outs in gov­ern­ment expen­di­ture etc, etc, etc)

  • Re #409: Hello Bank­ruptcy Ben,

    The essay you’re com­ment­ing on was writ­ten so long ago that I had to check it to see what I had actu­ally said.

    What I wrote was:

    Where I beg to dif­fer is Rudd’s dat­ing of this–merely the last decade? We’ve been fol­low­ing Neo­clas­si­cal-Eco­nom­ics-inspired poli­cies ever since 1975”.

    I stick by that com­ment. I didn’t use the term neolib­eral but “Neo­clas­si­cal-Eco­nom­ics-inspired” poli­cies, and that the­ory of eco­nom­ics has been the foun­tain­head of vir­tu­ally every change to gov­ern­ment pol­icy since that date.

    Of course this doesn’t mean lais­sez faire has ruled since then: the first change in the direc­tion of pol­icy doesn’t imme­di­ately thrust us to its polar oppo­site. But I think it would be rather dif­fi­cult to find a pol­icy move that increased, rather than reduced, the effec­tive­ness of gov­ern­ment reg­u­la­tion of finance (in par­tic­u­lar) since 1975.