The Federal Government dodged a bullet when the Bureau of Statistics announced first-quarter growth of 0.4 per cent. The economy is not in recession -- popularly, if unscientifically, defined as two consecutive quarters of negative growth.
The news will be small comfort to those Australians who have lost their jobs or taken a cut in income. Nonetheless, no government wants to be branded with having presided over an "official" recession.
The growth is now being attributed to the Government's two stimulus packages. Treasurer Wayne Swan told Sky News the Opposition's economic arguments had been "shredded". Unfortunately, despite the economy not being in recession, the data does not support that view.
The Government has argued that its "go early, go hard, go household" strategy has stimulated the economy and shielded Australia from the worst economic crisis since the Great Depression. But there is no evidence that the economic downturn is anywhere near Great Depression levels. Unemployment, for example, has fallen to levels last seen in 2004. Even if we believe unemployment could rise to 10 per cent, that was last seen in the early 1990s. A disastrous outcome, to be sure, but hardly the Great Depression.
Government revenue next year is forecast to fall to 2006 levels -- again hardly disastrous, especially for a Government that in 2007 promised to cut spending. The point being that the Government itself is being overly pessimistic about the economy.
This is hardly surprising. In his 2007 The Myth of the Rational Voter: Why Democracies Choose Bad Policies Bryan Caplan of George Mason University sets out four biases that affect economic decision-making. One is the "pessimistic bias". This is described as the tendency to overestimate the severity of economic problems and underestimate the future performance of the economy. It is hard to accuse the Government of the latter part of the bias -- its future growth estimates are high.
The Government also suffers from Caplan's "make-work bias". There are to be 35,000 construction sites around the country and pink batts for all. Sure, this is spending, but it is not clear that much of it adds value. The Government has an "anti-foreign bias" -- the skilled migrant intake has been decreased and the Government has been slow to approve foreign investment proposals. Most importantly, it has an "anti-market bias" -- the tendency to underestimate the economic benefits of markets -- it does overestimate the economic benefit of government.
Prime Minister Kevin Rudd's Government is interventionist, placing little faith in the market mechanism. Rudd has written that markets are powerful, but social democrats need to save capitalism from itself. The global financial crisis seems to support that view. Yet this week's ABS statistics paint a different picture. The single-largest contributor to the positive growth figure was an increase in net exports. In all likelihood this was due to a decline in the value of the Australian dollar -- exports rose, imports fell. That is exactly how the market mechanism is supposed to work.
The Government would rather Australians concentrated on the other big events of recent times; the big increase in government spending and the resultant budget deficits and debt. We are now invited to believe that this has been money well spent. Yet the March-quarter figures wouldn't include the effects of the second cash splash. That money only began to flow after mid-April. If government spending did prevent a recession, then it was the $10.4 billion package from December 2008 that did it. All subsequent spending has yet to appear in the national accounts and, if the economy is not in recession and is unlikely to reach Great Depression levels, then that spending and debt is unnecessary.
The $10.4 billion question is whether the December stimulus package worked -- especially the $8.7 billion consumer cash splash to households. The ABS data is clear. Household gross disposable income spikes upwards in December 2008 whereas household final consumption expenditure does not. There has been no unusual increase in household consumption expenditure -- indicating that most of the cash splash has been saved.
ADVERTISEMENT
No comments:
Post a Comment