When Keynes’s masterpiece ‘The General Theory of Employment, Interest and Money’ came out in 1936, Schumpeter, by then the senior member of the Harvard economics faculty, told his students to read the book and told them also that Keynes’ work had totally superseded his own earlier writings on money. Keynes, in turn considered Schumpeter one of the few contemporary economists worthy of his respect. Yet Schumpeter considered Keynes’ answers to most economics questions as wrong. Schumpeter and Keynes are often contrasted politically with Schumpeter being portrayed as the ‘conservative’ and Keynes the ‘radical. The opposite is more nearly right. Politically Keynes’ views were quite similar to what we now call ‘neo-conservative’. His theory had its origins in his passionate attachment to the free market and in his desire to keep politicians and governments out of it. Schumpeter, by contrast, had serious doubts about free markets.
Peter Drucker’s ‘The Frontiers of Management’ , 1983.
In just about every rich country, the global financial crisis has morphed NOT into the triumph of Keynesian economics but into the fiscal crisis of the modern welfare state. The Tea Party rebels and the bond kings are advancing on Capitol Hill, the British are enduring their most bracing budget austerity in generations and there are street riots in European cities. This hasn’t happened here for one reason: Australia escaped the rich world recession not because our budget stimulus was much bigger or better than the rest, as Wayne Swan suggests in his weekend ‘Keynesian in the Recovery’ essay for the Fabians. We’ve stood out because of the unique China boom…. The Treasury calculates that Swan’s 2012-13 budget surplus still would be propped up by the unsustainable high iron ore and coal export prices. The budget will remain in an underlying "structural" deficit until 2019-20 on its reckoning. This amounts to a serious national vulnerability.
Michael Stutchbury, Economics Editor, The Australian 12/4/ 2011.
My G20 colleagues, many of whom have experienced deep recessions in their own countries, also know better than most how effective Australia’s fiscal policy has been and how strict our fiscal rules are.
Treasurer Wayne Swan, The Australian 14/4/ 2011.
I finally saw the light. Slowly, I discovered that the left was inherently totalitarian…… The Reagan revolution could never be won unless the establishment politicians and opinion makers gave our ideas a fair hearing. They had to be convinced that sound money, lower tax rates, and a vast curtailment of federal spending, welfare, and subsidies was the only recipe for sustained economic growth and social progress…… The abortive Reagan revolution proved that the American electorate wants a moderate social democracy to shield itself from capitalism’s rougher edges. Recognition of this in the Oval Office is all that stands between a tolerable economic future and one fraught with unprecedented perils.
From the cover sheet: Despite the powerful mandate given to President Reagan by the American people, his program faces increasing difficulties as it encounters political realities. Even those members of Congress who favor spending cuts in principle hastily vacate the battle field when this conflicts with powerful demands of their own constituencies. Eventually Stockman, the revolutionary, is forced to accept the reality of his theories, which looked so convincing on paper, have been based on a profound misjudgement of the American political system.
"The Triumph of Politics: Why the Reagan Revolution Failed’ by David Stockman published 1986, Director of the Office of Budget and Administration 1981-1985.
HEAD-NOTE EXPLANATIONS
1. Peter Drucker is acknowledged as one of the leading economic and business strategists of his age and his bio is obviously available on Google. From our readings over the years we believe that Drucker favoured Schumpeter over Keynes. Schumpeter held that a modern economy was always in dynamic disequilibrium, it is forever growing and changing, and is biological rather than mechanistic in nature. Keynes was more inclined to believe in the certainty of macro economics, a more prescriptive approach.
2. Michael Stutchbury, in our view, is an extremely balanced economics writer and takes issue with the self-serving and convoluted approach to Keynes adopted by Treasurer Swan. Keynes did not promote unfettered or loose government spending as the path to prosperity.
3. Wayne Swan just learns his lines and ignores the failed policies that have come from the Rudd and Gillard governments which have pushed interest rates up, national debt up, actual and prospective budget surpluses down, and taxes up. In an economy as exposed as ours to world trade and growth, squandering earned income is economic folly.
4. Ronald Reagan is portrayed as the saviour of the American capitalist system with such famous quotes as " A recession is when your neighbour loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his" and "Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves." This latter policy quote was lifted from the writings of Ayn Rand, who met Reagan in 1949 as a Hollywood scriptwriter before going on to publish her famous works "The Fountainhead" and Atlas Shrugged" .
Rand is acknowledged By Alan Greenspan as the person who ‘broadened my horizons far beyond the models of economics I’d learned. I began to study how societies form and how cultures behave, and to realize that economics and forecasting depend on such knowledge. Different cultures grow and create material wealth in profoundly different ways. All of this started with Ayn Rand. She introduced me to a vast realm from which I’d shut myself off.’
Ronald Reagan was president of the USA from 1981 to 1989 and might have been in early stage dementia for a good part of his second term. Ecinya is of the opinion that Reagan was the first architect of the end of capitalism in America. As evidence of this, page 332 of Stockman’s book throws up – ‘Newt Gingrich, the self-proclaimed conservative gadfly from Georgia, had made the outstanding assertion that Ronald Reagan was not significantly different from Jimmy Carter’. Ayn Rand initially endorsed Reagan’s candidature but withdrew her endorsement when he mixed religion and politics. Reagan preached small government, but sowed the seeds of fiscal recklessness into the fabric of the American dream.
PURPOSE OF THIS WEEK’S INSIGHT
The mistakes of the past are oft repeated and economists are said by Drucker to be the slowest learners of all as they are ‘prisoners of totally invalid but dogmatic theories’. The last term of the Howard government spent too much and expanded the role of government beyond reasonable limits. Mr Rudd then got elected by portraying himself as a conservative and when the GFC came saw it as his opportunity to be a revolutionary. He was resisted in this by Lindsay Tanner, but encouraged by Messrs Gillard and Swan and then influenced Treasury, or was encouraged by them, to attack the American and European financial crisis with massive Keynesian expenditures lest we became ensnared in the sub-prime crash web. The waste that resulted now means that we are under-funded to meet the challenges of the Queensland, Northern NSW and Victorian floods, not to mention higher oil prices, skills shortages, and the Japanese quake, and basic infrastructure needs.
To compound the problem Keynesian theories are being twisted to cover-up inept policy and inept execution. For example, we are embarking on a National Broadband roll-out of dubious merit, proposing to tax the mining industry, and proposing a carbon tax which is currently a confusion. All of this at a time when the consumer is going on strike and committing the unpardonable sin of saving rather than borrowing to consume at elevated interest rates. Also we have a number of high cost desalination plants around the country and other infrastructure errors soaking up scarce resources. Policy has become a patchwork that seems to reflect massive disequilibrium without Schumpeter’s dynamism.
CAPITALISM IS DEAD AND WE SHOULD ACKNOWLEDGE THAT FACT
It is relatively easy to say that there are four systems of government – capitalism, socialism, communism, and totalitarianism. Ecinya is of the belief that what we need is BALANCED FREE ENTERPRISE and we have been banging this drum for so long that one of our regular readers is sick of hearing it. Today, in developed economies we have governments in all of its various forms (federal, state, municipal) running at somewhere between 20 and 30% of the economy, squeezing the private sector. The capitalism vs socialism debate is not worth having for neither exists in abundance in the developed world, nor even in most parts of the emerging world.
Balanced free enterprise means that there is a valid and useful role for government including the provision of social and commercial infrastructure that provide appropriate community solutions. The genuinely disadvantaged have to be helped. Government is essentially an agency function where taxpayer’s money comes back to them via constructive government initiatives in education, health, infrastructure, security, law and order etc. Our editor’s recollection of the best years of government in Australia have been the Menzies era, the Hawke-Keating-Walsh years and the Howard-Costello years. The worst years have been Whitlam, Fraser, and now Rudd-Gillard.
AMERICA
We believe that the best of America is the best that is available and though we decry the concept of American exceptionalism much of what the world enjoys today has come from American enthusiasm, creativity, and engineering skills. But America now finds itself in a horrendous situation with huge federal debts running at 100% of GDP, a seemingly intractable domestic deficit, a current account deficit, insolvent states and municipalities, falling house prices, high unemployment , a falling currency, huge energy dependence, and ongoing wars.
Over the past two decades, except for a brief period under the Clinton- Newt Gingrich axis, things have accelerated to the downside.. America has –
- Exported jobs to Japan, South Korea, Taiwan, China.
- Fought a number of wars that have gone over-time and over-budget and are still continuing to varying degrees.
- Experienced two major bubbles……dot-com and sub prime.
- Failed to address structural problems in taxation, banking, politics and manufacturing.
DAVID ROSENBERG
David Rosenberg was the Chief Strategist at Merrill Lynch prior to the takeover by Bank of America. He now works for Gluskin Sheff of Canada and his views are always worth a visit. His 10 policy ideas for the USA were published on 21 January 2011 and they do indicate the depth of the American malaise plus they strike a harmonic chord with our Australian experience today and yesterday.
- An energy policy that truly removes U.S. dependence on foreign oil (shale case, coal, nuclear).
- A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment. That is crucial. But it will take political courage (ask Brian Mulroney).
- A credible plan that reverses the runup in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any … they became wards of the government nearly three years ago and there is still no clarification on this file (slightly more important than these periodic consumer spending gimmicks that have surfaced over the past few years). We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable. Plus, people are not going to learn to live within their means if our politicians continue to set a bad example. The act of dipping into Social Security, incentivizing companies who are already cash-rich to spend more on new equipment and extending a Bush tax cut that always had a 10-year expiry date at the expense of the already severely strained public purse was political expediency at its worst.
- A massive mortgage write-down by the banks — a Jubilee of biblical proportions — that provide much-needed equity to upside-down homeowners.
- A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.
- Tort reform. The only way to rationally bring down health care costs to more manageable levels.
- And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.
- Financial sector regulatory reforms that actually have some teeth.
- Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!
- Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential. This is where Japan’s decade of lost growth became two decades but its decision to resist immigration rule changes is more cultural in nature. The U.S.A., like Canada, is already extremely diverse. But as economists, what goes into economic growth is both simple and complicated. The simple part is merely identifying the two ingredients: growth in the population (more specifically, the part of the population that is working) and productivity (what most of the other nine ideas listed above would attempt to generate). But the dependency ratio is working against the U.S.A. and a smart immigration policy would help at least stem the runup.
You don’t have to agree with all of Rosenberg’s policy ideas them to realise that much work needs to be done. Ecinya lives in the hope and indeed the expectation that the next president of the United States can avoid the cult of celebrity, the idiocy of presidential infallibility, and have a sense of humour beyond slapstick that delivers fundamental messages of peace and prosperity to the world. The turmoil of the George W Bush years are behind us, though America seems to be still addicted to cheap oil. A vibrant America is of the utmost importance to the world. It is a pity that Obama wasted so much time and energy on healthcare when the healthiest thing that anyone can have is a good education and a worthwhile job.
America has become a cash flow statement with an unsound profit and loss account and a stressed balance sheet.
WHY TALK OF AMERICA AND AUSTRALIA AT THE SAME TIME
Our editor has been around the world enough times to have an appreciation of how it hangs together. At Ecinya we have had the mistaken belief that Australia was clever enough and pragmatic enough to adopt the best of British (integrity, respect, good manners, a sense of fair play) and the best of America (effort, innovation, established wealth, positive thinking). However, that has not been the case and we have adopted the worst of British (excessive welfare and low productivity) and the worst of America (celebrity and profligate politicians, excessive consumption, excessive debt, low productivity, no attention to small business).
But America is 20% of the world economy and China is about 9%. So the world’s largest economy is a major historical ally and the fastest growing economy is our major trading partner. A lot of what is happening in America is happening here and we have to be aware of historical precedent lest we squander our chances for sustainable prosperity.