Though I am not wholly convinced that the government will be able to maintain the spending discipline required to return the budget to surplus by 2015-16, or to ‘pay off’ its net debt by some time in the early 2020s, as foreshadowed in the recent Budget. Achieving those goals will, I think, require ‘harder’ decisions, and more of them, than were contained in this year’s Budget. But if that timetable were to slip by two or three years, I for one would not be losing much, if any, sleep over it.
Let me conclude by noting that the spirit of Keynes the economist has been very much alive during the past year, and that we are all much the better for it.
Saul Eslake, Brisbane Polo Club, addressing a luncheon hosted by The Australia-Israel Chamber of Commerce and The Australian Business Arts Foundation 11/6/2009
Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not the case of choosing those which, to the best of one’s judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipate what the average opinion expects the average opinion to be. And there are some I, believe, who practice the fourth, fifth, and higher degrees.
John Maynard Keynes, around the 1930s
ECINYA COMMENT
We are nowhere near as relaxed or comfortable as Saul with the concept that the re-leveraging of the public sector is an entirely appropriate way to de-leverage the private sector. However, we are less uncomfortable in knowing that an economist as capable and thoughtful as Saul will ‘not be losing much sleep’ as our Federal budget surplus is replaced in hasty fashion by a deficit 10-12 times larger. We do not have a great deal of confidence in our government’s ability to allocate scarce resources effectively and efficiently.
Keynes was born in 1883 and died in 1946 and was particularly effective in persuading governments that the economic damage wrought by the combination of the great depression and World War ll could be remedied by governments spending and borrowing to boost economic activity. It can fairly be said that Keynes may not quite see the post 2000 world as he saw it between 1928 and 1946. The speed of economics and politics and the interaction between the two might have been somewhat different in his day. But we will never know.
But we can say that Keynes was an economist who based his concepts and theories not on precise macro, mathematically driven models, but on the economic behaviour of societal elements. These included producers, developers, consumers, governments, entrepreneurs etc. Data had to be assembled and evaluated in context of attitudes and motivations. He regarded the world as generally dynamic and capable of wild swings due mainly to wild swings in peoples’ perceptions.
Prime Minister Rudd, as part of his stimulus rhetoric, has cleverly said "We are all Keynesians now". However, we are of the opinion that careless spending would not have been sanctioned by Keynes and we suspect that much of the borrowing and the spending will be carelessly driven by politics as much as economics.
It seems hard to reconcile Keynes with the concept of the cash handout, which consumers spend on imported goods or a day at the races. But this is where about $10 billion of taxpayer funded debt has gone; or to a school’s programme that builds facilities not necessarily needed at this time.
So as governments in America and Australia are congratulating themselves on the good works wrought by fiscal stimulus, it seems reasonable to say that much of the stability that has been restored has had more to do with monetary policy (lower interest rates and printing money) than dubious concepts of borrow and spend.
America had little choice but to reflate as it has. ‘Globalisation’ has been a charade perpetuated by America’s bankers looking to support American manufacturers chasing cheap labour outside of the USA. Immediately after WW2 it was Japan followed by South Korea, Taiwan and now China. America lost the will to manufacture and has now lost many of the skills and structures, including a dynamic, manufacturing, education base. But America needs time to recover from its manifest malaises and profligate consumerism, and though the fiscal and monetary stimulus is probably excessive, it should do more good than harm.
Taking Keynesianism to extreme positions could create future problems and make the world vulnerable to the next ‘Black Swan’ event. Much of America’s problems are structural, brought about by absurd interpretations of Reaganomics.
If we had one economic input to suggest, for Australia, it would be the abolition or suspension of that worst of all the taxes: the dreaded payroll tax.
KEYNES THE INVESTOR
In going with the current flow of the market with little conviction of the underlying macro and micro fundamentals supporting current price and price momentum, we sometimes feel like a competitor in Keynes’ ‘six prettiest girls’ competition.