opinion politics

Caveat Lector

A response to this rather infuriating article:

Paul Sheehan has a rather glaring contradiction in his article on Monday, accusing “Comrade Rudd” of being a great illusionist. To claim on the one hand that the Prime Minister falsely represented himself as an economic conservative, but argue on the other hand that following Keynes’ General Theory is not economic conservatism appears somewhat contradictory.

Keynes’ ideas of macroeconomics had been largely displaced by Milton Friedman and the Chicago School of Business’ laissez-faire monetary approach since the 70s, so it seems that a return to older ideas would indeed conform to the ideas of conservatism in the field of economics. Applying the approach used to solve the Great Depression of the 1930s seems like the very model of conservatism.

It is also telling to read the full text of Niall Ferguson’s quasi-blog-post. Sheehan very selectively quotes from the source, which is primarily focused on proposing a solution for America and its banks.

Niall Ferguson’s article focuses on the fact that the US and UK governments are deeply indebted, along with their banks. He proposes that the US Government effectively seize American banks known to be holding large volumes of potentially bad debt, rewriting mortgages in more favourable terms for borrowers, and reprivatizing seized banks in 10 years. It’s an idea that is widely circulated, and has the backing of Paul Krugman, the Nobel Prize for Economics winner for 2008.

Does Sheehan expect that Kevin Rudd follow this example for the Australian banks? The solutions Sheehan hints at in Ferguson’s “solution” have nothing to do with Australia and the Government’s attempts to stimulate local demand, and would have Sheehan screaming about socialism by any other name. To imagine that these solutions could be brought about without increased government spending and debt is also fatuous.

Australian banks not affected to the extent of their international peers, for which regulation is but one factor, so Ferguson’s proposed solution is largely irrelevant to Australia, despite the allusions Mr Sheehan draws to solutions which “space precludes listing.” Ferguson’s contention that more debt is a problem, which Sheehan has latched onto, is only to set up the argument that the further debt should be targeted more directly at fixing bad loans in America. Paul Sheehan seems to have missed that part.

Caveat lector – let the reader beware – ought to proceed Sheehan’s article.

11 replies on “Caveat Lector”

First of all, any article that is raises the spectre of communism with glee is probably one you can happily ignore. “Comrade Rudd”? Give me a break. This kind of article serves to preach to the choir and hopes to direct the blind frustration that people feel about the world economy. I have no idea what other purpose this article serves except as character assassination.

That being said…

Economic conservativism doesn’t mean relying on the old methods. It means to maintain and defend what already exists and exercise caution and skepticism. What’s sold as “Keynesian economics” today is far from conservative; it’s the idea that government should spend boatloads of money on infrastructure so that the poor have jobs and spend their income on food, shelter, etc. and money starts flowing again.

There’s correlation between the FDR administration’s spending and the subsequent economic recovery but Obama’s stimulus package is still a huge gamble. Especially if you couple that with the risk that politicians receiving the spending money can invest poorly (or corruptly).

I’m not talking about conservatism in the sense of conservative behaviour, I’m using it in the sense of economic orthodoxy, which I would argue is Keynesian macroeconomics. If Rudd used the term in the sense of the conservative behaviour, I’d be more than relieved right now that he has abondoned it in favour of action.

The two models of macroeconomics you can contrast here are Monetarism and Keynes’ General Theory. Monetarism ran out of options once interest rates got below 1% – Keynes’ theory argues that government action can reduce the impact of recession by spending to make up for private sector shrinking, and realistically that’s the only way to keep an economy chugging when a sudden bout of caution follows a period of exuberance.

Obama’s package is a gamble only in the sense that it may not completely restore confidence to the credit markets which have been the cause of this meltdown. Without it, or with a smaller package, there’s zero chance of that happening, and the problem of a shrinking economy with all its implications for jobs is excrebated. I don’t know what place caution and skepticism would have in that context.

I was under the impression that one of the hallmarks of economic conservatism was a hands-off approach to the economy, letting market forces do their thing. Obviously massive stimulus packages don’t fall under that umbrella, but I’ve always disliked economic ideology anyway. Sometimes the right tool for the job comes from a different toolbox (and thankfully there are a wide variety of tools to choose from in Australian politics).

a hands-off, laissez-faire approach is probably closer to neo-liberalism (alternatively, market fundamentalism) – that the markets will sort themselves out eventually. I’ve always taken conservatism to be more along Keynesian lines, which says (in wikipedia’s nice summary):

Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes, and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government, to stabilize output over the business cycle.

Monetarism succeeded it during the 70s, which wiki summarises as:

it argues that excessive expansion of the money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability… restraint of government spending is the most important single target to restrain excessive monetary growth

A hands-off approach would suggest that you allow the market to bottom out naturally, no matter how many people are out of jobs, because that gets rid of the cruft from the economy and makes it “fitter”. I can see that approach working (eventually) in the current situation, but it’s not one that wins votes.

Nathan, when you say there are a wide range of tools to choose from, does that include Peter Costello?

By the way, I think the parts of the packages Krudd007 is putting directly into people’s pockets will most likely be saved. He would have been better off investing in research, development and building housing (since there is a housing shortage here) for people. Mind you, these should be GOOD residences that are well built, and rented out to people at market rates.

Z, Costello is like a set of 20 metre wide Vernier calipers – a truly massive tool, not useful for very much. ;)

lol, I think both of you score top marks for analogy of the month :D

Z, people saving the bonuses isn’t necessarily a bad thing – it means it’s less time before they feel financially secure again and ready to spend. A short sharp recession is better than a long drawn out period of negligible growth – just look at Japan, which had been bumping along at growth rates of less than 1% for over 15 years (they’re now in official recession following a drop in exports).

Well, I know that people saving money is a good thing. What I mean is that instead of pushing the budget into deficit for little gain, the deficit should be invested in something of value and worth for the country which can pay itself back.

Getting people to go and spend money is just like drinking a V. The high is good, but you’ll feel terrible afterwards. It just fuels the addiction and tells the insipid blonde that it’s OK to keep spending even if they’re already in trouble.

I think there’s a bit of an illusion that the $42bn is all being spent on the bonuses – about $20bn is actually marked for infrastructure spending and the sort. The difference is that payments in the pocket take effect now, while payments for infrastructure feed down over time, as the spending on materials and wages filter through. That’s also why they’re trying to emphasize “Shovel-ready” projects.

I know that it’s not the entire $42b that’s being shovelled into people’s bank accounts. I did mention it was parts of it. I just don’t think that in the short term, people will spend the $950 or whatever they get on what the government wants them to. They’ll more likely spend it on bills and credit repayments.

… which is not a problem from a pure economics point of view, because it frees up $950 or so of their other dollars to be spent elsewhere. It also frees up credit on bank balance sheets, and allows companies to meet their own bills. If it’s just put into savings, it increases bank capital, freeing up their ability to lend on the back of it.

It’s still a net addition to the economy. The money doesn’t disappear up the wazoo – only major issue is if it’s used to spend outside Australia, but you can’t effectively restrict people from doing that, short of making it a special non-convertible currency.

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