By all accounts, John Maynard Keynes -- the Rudd Government's economic inspiration -- was known for practising what he preached with make-work schemes.
During a dinner in a hotel suite in 1934, he chided a fellow economist for carefully selecting a towel so as to not crumple the other towels in the stack. Then, in one dramatic sweep of his arm, Keynes dislodged all of the towels, knocking some on the floor.
Keynes said to his surprised dinner companion: "I am convinced that I am more useful to the economy of the USA by stimulating employment through messing up these towels than you are by your carefulness in avoiding waste."
Reading through his 1936 text, The General Theory of Employment, Interest and Money, one gets the sense that Keynes passionately felt that governments should do whatever it takes to boost employment.
He wrote favourably of a hypothetical job-creation scheme in which a government treasury filled up old bottles with banknotes, buried them in disused coalmines and left it up to the private sector to dig them out.
Late last year, with panic spreading through Canberra's halls of power about the consequences of the global recession for the Australian economy, the Rudd Government dusted off The General Theory and went about spending about $80 billion to boost employment and make new lines of work.
Some anecdotal evidence suggests the Government's spending has encouraged, say, certain insulation batt installers or construction companies engaged in rebuilding school halls to hire some new staff, including apprentices and trainees.
Indeed, these accounts are often spruiked by the Government as evidence that its strategy is working. People can see and touch a government-funded library in a dusty Outback school or a mansion fitted with insulation.
However, there are broader issues to be considered. The Keynesian make-work theory assumes that workers are like a piece of plasticine that can be shaped in any direction. In other words, the Government funds a duplicated school hall and somehow unemployed university lecturers, finance brokers and restaurant waiters will flock from everywhere to don a hard hat and pick up a shovel.
The theory belies not only an understanding of the skills diversity of Australia's workforce but a reading of the statistical evidence. For example, Australian Bureau of Statistics industry employment data shows that jobs have been lost during the past year in retail, a target of the $900 a head cash splash that the Government hoped would create masses of real jobs in store aisles.
The domestic employment impact of the Rudd stimulus has also been diluted by the need for imported insulation batts and construction materials. The Government's stimulus has to be paid for, either by the Government imposing taxes on individuals and businesses or borrowing its money from holders of government bonds, with taxpayers to later repay the principal and interest on the debt.
This enforced transaction is far from a simple handing over of a dollar from citizen to government. This is because taxes distort the allocation of resources throughout the economy, known in the economic literature as deadweight losses.
Most studies have estimated that each dollar of tax raised costs the economy an extra 20 because of deadweight losses.
If an extra dollar of the Government's stimulus spending does not deliver at least $1.20 of economic benefit, we risk wasting scarce resources on activities that might generate some temporary jobs but do not deliver sufficient value in the long run.
The Government has not released any cost/benefit studies of its stimulus programs. Nonetheless, one could safely assume that good projects implemented at any stage of the business cycle, such as roadworks, are likely to deliver net gains to the economy.
On the other hand, it is far less clear that other aspects of the stimulus program, such as social housing, insulation batt installation or ornamental projects such as skate parks or public iPod docking stations, will deliver flows of economic value in excess of their cost of finance.
The Government's make-work schemes are predicated on the assumption that they are implemented perfectly, without any glitches, which would therefore cost taxpayers extra.
This aspiration has unfortunately been well and truly dashed already, with governments paying inflated prices for school reconstruction work and problems surrounding the intermittent supply of insulation batts. Cream-skimming of available stimulus funds by government agencies has also been reported.
When the full effects are considered, it becomes clear that the economic waste of the Rudd stimulus will erode the wealth-creation potential of the economy.
Like a dishevelled bundle of towels left behind by an academic scribbler, we are all left poorer by the big spend.
No comments:
Post a Comment