Giving the Bird to the Stimulus?

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Peter Martin reports in The Age today that Professor Ron Bird of UTS has weighed into the debate over the Rudd stimulus package. Professor Bird claimed that the stimulus was far less important than our strong economy prior to the crisis, and the secondary effect on our exports of stimulus packages undertaken elsewhere.

”The position we find ourselves in today is more due to our strong economic position going into the crisis and the massive stimulus packages undertaken by our trading partners,” Professor Bird says. ”The government can take little or no credit for either of these, a point it (and our learned academics) conveniently forget.” (Peter Martin, “Reserve Bank backing for stimulus“, The Age August 18 2010)

Ron is in effect making an appeal to the facts over simple assertion, but a careful look at the data shows that the facts support the letter signatories, and not Bird’s rejoinder.

His first point, that Australia had a “strong economy going into the crisis”, is just waffle: everyone appeared to have a strong economy going into the crisis—that’s why most economists were completely blindsided when the crisis actually occurred.

Remember that the OECD concluded that things were rosy across the globe in June 2007, just before the crisis hit?:

“the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign…” (OECD Economic Outlook June 2007).

His second point is simply wrong on the data. If it were true that the rest of the world had saved us rather than ourselves, then Western Australia and Queensland would have dragged us out of the slump, and our tradeable product industries would have risen most while non-tradeables would have lagged.

That is the exact opposite of what you find when you look at the data—something Ron clearly didn’t do before he wrote his rejoinder. The State that dragged Australia out of the slump was Victoria, and the industries that did it were the non-tradeables that were the most direct beneficiaries of the Rudd Stimulus.

Australia began to lose jobs in January 2009, and the crisis was at its most severe in March, when employment was falling at a rate of 80,000 jobs a year. We got back to zero job losses in August—a stunningly fast turnaround—and at that point the only State with rising employment was Victoria. WA and Queensland were still shedding jobs at a rate of 9,000 jobs a year at that point.


Drilling down into Victoria’s number shows that most of the industries that led the charge out of recession had very little to do with trade, and a lot to do with the stimulus: the biggest boomer was Professional employment (24 thousand jobs), where either trade or the stimulus could be the cause, but the next four biggest movers are all clearly non-tradeables: Retail (23000), Finance (21000), Education (15000), and Health (14000).

Victorian Employment Growth by Industry March-December 2009
Industry

Growth

Growth Percent

Agriculture

8,026

9.8%

Mining

978

9.4%

Electricity

-5,953

-16.9%

Construction

-8,366

-3.7%

Wholesale

5,029

4.4%

Retail

22,724

7.8%

Accommodation & Food

996

0.6%

Transport

-6,782

-4.7%

Information Technology

-1,236

-1.9%

Finance

21,275

22.4%

Real Estate

-1,631

-4.6%

Professional

24,157

12.2%

Administration

7,456

8.5%

Education

14,673

7.4%

Health

13,718

4.8%

Arts

-2,276

-3.6%

Other Services

-704

-0.7%

Total Victoria

70,005

2.6%

Total Australia

62,953

0.8%

Only once employment was rising again did the resource states and export industries really kick in—but even then, the main drivers of employment growth across the country were the non-tradeable industries that benefited most from the stimulus. The largest single numerical increase was still in Professional employment (79000), but the next five (Accommodation and Food Services 49,000; Health 47,000; Construction 30,000; Education 29,000; Real Estate 23,000) are clearly driven by the government stimulus package–including part of the package that I am critical of, which I prefer to call the First Home Vendors Boost. The export-oriented Mining and Agriculture sectors share effective seventh place in the expansion at 20,500 each.

Industry

Growth

Growth Percent

Agriculture

20,503

5.7%

Mining

20,659

13.0%

Electricity

-7,923

-5.5%

Construction

29,935

3.0%

Wholesale

11,759

3.0%

Retail

-32,859

-2.7%

Accommodation & Food

49,279

6.9%

Transport

-2,513

-0.4%

Information Technology

-7,753

-3.5%

Finance

-1,982

-0.5%

Real Estate

23,287

13.4%

Professional

78,640

10.4%

Administration

15,609

4.4%

Education

28,853

3.6%

Health

47,060

4.0%

Arts

-13,156

-6.2%

Other Services

17,641

4.0%

Total Victoria

109,894

4.1%

Total Australia

158,710

2.1%

So the facts support the letter signatories and not Professor Bird. It isn’t the case that we conveniently forgot some important facts—since they were clearly on our side—but that those making the case against the stimulus have simply failed to check the facts.

Finally, let’s get real here: this whole debate is being driven by the pseudo-conflict between Labor and Liberal over the economy. Frankly, if the Liberals had been in power, they would have reacted in much the same way that the Labor Party did, and followed the same advice from Ken Henry: “Go early, go hard, and go households”.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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170 Responses to Giving the Bird to the Stimulus?

  1. TruthIsThereIsNoTruth says:

    just read the link posted by AK,

    BIB – you waste a lot of effort in forming arguments based on a sensationalist bias and selective and uninformed interpretation of the facts available to you. I gave you an opportunity to understand this issue in more detail but it is understable that you would ignore it as it is a niche audience not the objective truth which you are seeking.

  2. BarnabyIsRight.com says:

    Hi ak,

    Ok. You do not wish to offer any suggested economic solutions to the concerns discussed here, specifically, private debt levels and the housing bubble. That much is clear.

    > What if the answer about the spin is very simple – YOU stop writing irresponsible pieces and we will see what happens…

    If I’m understanding you correctly, then:

    (a) Stopping the spin on economics is the circuit-breaker – it would automatically fix everything.

    (b) Your only suggested solution so far to stopping the spin, is for one blogger (me) to stop blogging.

    Do you have a realistic solution to stopping all the other economic (mis)information that you don’t agree with, from a “whole industry manufacturing conservative, liberal and “new labour” lies, often based on the “science” of neoclassical economics”?

    I am genuinely interested in hearing pragmatic, realistic suggested solutions to these various problems, from those with far greater knowledge than I on the topics.

    To date, I’m not hearing any from regular bloggers here… only from Steve.

    Instead, all I’m hearing is bleating and moaning, and theoretically / ideologically-driven criticism of others.. with no practical solutions proferred for discussion and consideration.

    hi TITINT,

    re #149

    >I am interested to read what a person living in one the wealthiest countries in the world considers to be grave economic concerns.

    Financial systemic collapse. Sky rocketing unemployment. Civil unrest. Starvation and homelessness.

    Simply, all those spectres that ak and others have raised, and that we see going on abroad right now, as realistic potential consequences of the situation in which we find ourselves.

    re #151,

    >…it is a niche audience not the objective truth which you are seeking.

    “Objective truth”?

    You’ll forgive me for considering that a bit rich, coming from someone boasting the screen name, “TruthIsThereIsNoTruth”.

  3. Steve Keen says:

    Hey guys,

    I think tempers are getting a bit overheated here. I know you all (personally, as it happens with this exchange), and you’re all very decent people. You all are seeking objective truth–it’s just your starting points, definitions and logic that differ.

    I think it’s time you three took a bit of a break from the keyboard, took some deep breaths, and relaxed a bit.

  4. TruthIsThereIsNoTruth says:

    Sorry Steve my comments are not ill tempered, and I think Barnaby is a good sport.

    in reply:

    “Financial systemic collapse. Sky rocketing unemployment. Civil unrest. Starvation and homelessness.” – sensationalist or not if it happens in Australia you’ll be made a prophet.

    “Objective truth”?

    You’ll forgive me for considering that a bit rich, coming from someone boasting the screen name, “TruthIsThereIsNoTruth”.

    Love a good paradox, one must seek the truth that doesn’t exist, it is the approach not the destination which is important.

  5. johnyh says:

    gday steve
    i can understand the benifits of government taking on private debt by way of stimulas or nation building or more beaurocracy.
    and i agree with comments that it will reduce the symptoms of over extended society
    but what effect will that have on the private sectors philosophy toward debt?
    surely it would encourage the same mentality that has driven up the bubble and threaten a free and soveriegn society?
    what in your mind would bring about a long a sustainable period of prosperity for all, not simply wealth transfer or boom for some?

  6. johnyh says:

    i should say that i like the idea of nation building just not stimulas or more beaurocracy…

  7. BarnabyIsRight.com says:

    Hi Steve,

    I fully concur with TITINT’s comment – no feelings of ill-temper on my part either. I apologise to any who may have received that impression from my posts. I have no reason to doubt that all participants here have genuine concerns, and good and well-meaning intentions.

    Hi TITINT,

    Thanks for the “good sport” comment.. likewise.

    Just fwiw, I’m honestly a bit bemused that you consider my comments quoted above to be “sensationalist”. The first is widely considered to have very nearly occurred in late 2008. The second and third are happening in other developed nations. And the forth is happening everywhere. Even here, in Australia. I see nothing “sensationalist” or prophetic about pointing out these realities abroad, and asking if others have solutions to avoid the same occurring again / here.

    And in good-natured riposte to your last paragraph, I can’t help but be reminded of that Talking Heads lyric, “We’re on a road to nowhere”.

    Cheers mate 😉

  8. BrightSpark1 says:

    On the issue of skyrocketing unemployment if it where happening here how would you know? the ABS definition is a joke. It probably is worse that the average for the great depression but social security is much better now so it would not seem as bad.

    My father told me of his experience of the GD but admitted he knew no one who had absolutely no work, while most of the people he knew only had two or three days per week of employment. In other words he knew no one who would have been unemployed by the ABS definition. I know several people who are unemployed right now, even by the ABS definition.

  9. ak says:

    BarnabyIsRight,

    The abysmal level of the public debate in the most of the Western democracies is in my opinion a result of the so-called “postmodernism” that is the rejection of the idea of the objective truth.

    Convincing anybody is a waste of time, people should only be manipulated.

    Seems to me that some of our ultra-conservatives have been very flexible in regards to assimilating this idea.

    Maybe because of that:
    http://en.wikipedia.org/wiki/Doctrine_of_mental_reservation

    Only when the reality bites hard people may realise that marketing does not replace the reality.

    I have been inocculated to the modern “marketing” by being exposed to communist propaganda but a lot of people born and raised in Australia don’t even understand what I am talking about.

    Marketing is an essential part of modern life, the truth has been commoditised as everything else. This is the foundation of the modern capitalism which is based on overconsumption. Without the debt-fuelled overconsumption the system may collapse. (Unfortunately the environment is an objective constraint to overconsumption so the system WILL collapse regardless of what Mr. Abbott and the others think about the greenies UNLESS we change our colective behaviour).

    I know that people often claim that we actually don’t know anything so they can say everything they want and it really doesn’t matter.

    I disagree.

    Certain statements made by our politicians especially in regards to the state of public finances were plain lies not relative interpretations.

    Neoclassical economics is a very useful tool in manipulating people.

    I have given several examples already – for example what’s the difference between “wasting” $1bln by the Government on the Keynesian stimulus and wasting the same amount of money by the private sector on buying useless stuff?

    Crowding out? Costs of borrowing? Higher taxes?

    What if that stimulus saved jobs? Again we may argue whether this could have been implemented in a better way, maybe money should have been spent on reducing our environmental footprint. But we should not dispute the obvious things mentioned in the letter signed by Steve.

    Will we be “free” if we purge our brains from all this postmodern rubbish? Probably not. People in the 1950-ties were not free. We will always be tainted because we are humans. I am tainted as well.

    But I would keep trying. We may see our real problems a bit earlier when we are a bit less brainwashed. We will be able to communicate and argue again about real issues not about who is a better game.

  10. BarnabyIsRight.com says:

    Hi ak,

    re #159, I agree with pretty much everything you’ve said here.

    And fwiw, my sincere apologies to you if my earlier questions and challenges came across as confronting or unfriendly – certainly not intended.

    Cheers mate.

  11. ak says:

    BarnabyIsRight,

    I need to apologise to you as well because I misread your intentions and I responded to your questions as if they were personal attacks.

  12. BarnabyIsRight.com says:

    BrightSpark1,

    Re #158 and dodgy unemployment figures, this might interest you:

    http://www.dailyfinance.com/story/careers/what-is-the-real-unemployment-rate/19556146/

  13. ak says:

    johnyh@155

    “what in your mind would bring about a long a sustainable period of prosperity for all, not simply wealth transfer or boom for some?”

    This is the key question which has not been answered yet.

    Steve has put forward some ideas which are worth considering – limiting the size of mortgage loans and redefining company shares so they are more like bonds redeemed after certain period of time at a nominal price.

    I agree that just compensating for (S-I) gyrations by increasing (G-T) may be a short-term strategy. It may be better than allowing for an unchecked deflation but eventually some negative consequences would be inevitable.

    Let me be clear. Monetarists and neoclassicals claim that we can’t increase (G-T) or that it will not be beneficial to the level of the real GDP. MMT theorists have shown that we can do that. In this regards I fully agree with the MMT.

    But the root cause of the instability seems to be replacing the M-C-M+ cycle by generating income just by the stock of M (M-M+ cycle) either on interests or by speculation. MMT has not offered a direct solution to this problem.

    This must be analysed at a disaggregated level because some groups of people save while other groups either invest or consume more by borrowing (and the overall stock of debt is growing).

    The Austrians have sort-of correctly identified the problem (as related to the boom not bust phase) but their solution is unworkable as they want only the markets to determine the price of money – without any distortions from the state. This means that other elements of the social policy implemented by the state would have to as well. I don’t want even to imagine living in an Austrian society.
    It has not been proven that this system is stable or that would not very efficiently destroy the environment.

    Market socialism is based on manipulating (S-I) using direct and indirect methods by the state while private property rights exist but are more limited than in Western capitalism. They also use (G-T) lever. So far this system has shown certain benefits in China but it may be difficult to implement it in the Western societies.

    I ordered a book which may help me understand this process. For now this is pretty much all I know.

  14. BrightSpark1 says:

    bir@162

    Thanks for that.

    ak

    You all seem to be ignoring what I consider to be the elephant in the room and under the carpet the trade and current account debt and imbalance. It seems that on this forum this is only of concern to myself and outback oracle.

    This imbalance is forcing foreign credit onto the banks and it doesn’t matter if it is written in AUD or a foreign currency it can only really be repaid in the foreign currency. Remember we have needed not only to continually roll over this debt but we have needed to borrow more for 50 years. With all but mining of our real wealth creating capabilities destroyed our ability to pay our way is continually diminishing (now almost gone).

    Maybe somebody on this forum can explain how the proportion of the Australian currency which is accepted by the banks for currency conversion but, is unwanted by foreign banks (because we have nothing more that the foreign country wants to buy) is handled by the Australian banks (a sum equal to the CAD). As I see it the banks can (and need to) treat this as deposits and use it for local lending, for leveraged Ponzi style investments by local “investors”, that is if they can borrow the required amount of foreign currency from the foreign banks.

    But are the banks now forced to buy Australian treasury bonds to pass on to the foreign banks. The stimulus legislation authorised the issuing of 300 billion AUD of treasury bonds, a fact which was ignored by all. It seems that government treasuries may be more acceptable to the foreign banks than the local banks’ Bills? Surely this would be shifting the banks risk onto the Australian government making them Government sponsored private enterprise. If this is happening it is wrong the banks should be permitted to fail, but if we as tax payers are underwriting the banks in some way should these “free enterprise” banks not be paying in a big way for our support? Should they be nationalised? Who is now carrying the risk?

    Meanwhile the banks have mostly passed the interest burden for this foreign borrowing on to home buyers and others for Ponzi financing and their costs of servicing this debt must be rising above the cash rate to the extent that they will need to raise interest rates even if the RBA does not raise the cash rate.

    We should be discussing our fifty years of operating a successful cargo cult and start considering the consequences.

  15. ak says:

    BrightSpark1,

    I agree with some of your observations especially in regards to de-industrialisation however some aspects of the Current Account Deficit are less dangerous if the country has a political system minimising foreign influence (and the influence of the interest groups) on the decision-making process.

    I am not sure whether this is the case looking at the way both Malcolm Turnbull and Kevin Rudd were politically assassinated probably by the same lobby.

    Can you read between the lines?
    http://www.smh.com.au/opinion/politics/axed-and-humiliated-someone-should-give-this-poor-bastard-a-hug-20100629-zium.html

    Disclaimer: I am not a supporter of the ETS.

    I may comment more later as you have highlighted a few very interesting points.

  16. sj says:

    Gloves are off Tony Abbott is the greatest opposition leader even seen in Australian history Abbotts taking on the Treasury Department the greedy clowns who push for the first home buyer grant to keep the economy going.
    Steve Keen himself warn the Housing Minister against putting young naive Australians into big debt.
    Treasury Department must be held accountable.
    Julia Gulliard only believes in one thing POWER and Mr Abbott really has some steel believes in a christian civilisation
    Blood,sweat,toil and tears.
    Bring on deflation.

  17. justme says:

    hi all,
    have been reading here for a couple of years now – every time I think I have my head around it i find I don’t!
    question:
    based on the idea that we are a few months behind the US (and possibly the UK/europe?) wouldn’t we expect interest rates to start going down over the next year or so?
    If not, can someone tell me why our debt problems are similar to US/UK and our property market appears to be following their lead (demise, albeit very slowly, and our official interest rate is going … up? (or is it down?)
    cheers,
    JM

  18. ak says:

    sj,

    “Gloves are off Tony Abbott is the greatest opposition leader even seen in Australian history Abbotts taking on the Treasury Department the greedy clowns who push for the first home buyer grant to keep the economy going.”

    are you referring to this?

    “HOME owners and renters struggling to pay bills would be handed vouchers under the Coalition’s housing policy, potentially marking a radical shift away from state-provided accommodation to direct subsidies of private home ownership.”

    http://www.smh.com.au/federal-election/coalition-plan-for-rental-vouchers-20100826-13uau.html

  19. sirius says:

    I am posting this simply because it mentions “the bird” (whatever that means)…

    “I’m 54 years old and am foreclosing. I’ll de dead and gone before my home returns to it’s original sales price. I see Fannie Mae/Mack as criminal in that they knew exactly how their fraudulent loans would effect the nation. I have no guilt or embarrassment. I am simply happy that my attorney protected me from future harassment by those very men in Fannie Mae/Mac who took $90 million in bonus money. I also laugh out loud when I think of the look on their faces when American home owners shot them the bird!!!

    Comment from…
    http://blogs.reuters.com/deep-pocket/2010/08/13/strategic-defaults-why-older-americans-walk-away-from-mortgages/

  20. sj says:

    Hi Ak
    Thanks for the link.
    Interesting that the Treasury Department cannot do a budget costing of this voucher idea?
    Treasury Department likes a big bang for their buck giving large first home buyer grants increases the debt and thus keeps the ponzi scheme economy going.
    The voucher idea maybe better stops suckers getting into big debt.
    Tony Abbott does not want to be in power under a weak greenie agenda bring on a new election as soon as possible.
    If Tony Abbott does get in power he may go after the Treasury Department with a baseball bat for putting many naive Australians into unsustainable debt.

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