Australia should really be the lucky country

Gerard Jackson's latest commentary on the Australian economy and the Rudd government's unbelievable mismanagement of the global financial crisis is a good place to start today's post.

The economic commentary swirling around Rudd's budget reveals how bad economic thinking is in Australia. What none of our so-called pundits have grasped is that government spending in the form of borrowing from the public is never stimulatory — and it certainly is not Keynesian. When the government borrows from A to put B to work it is not expanding aggregate demand but merely transferring purchasing power from one person to another. A economic fundamental fact that every classical economist fully understood.

The Keynesian approach consists of monetary expansion to fund deficits and government borrowing. In case you are wondering, this is called inflation. Unlike Rudd and Treasury head Ken Henry the devious Mr Keynes knew exactly what he was about. He also understood the inherent inflationary danger of such a policy. This is why in in 1937 he publicly called on the British government to end new public works projects, warning it against the inflationary effects of any "general stimulus" even though unemployment stood at 12.5 per cent. (T. W. Hutchison, Keynes v. the 'Keynesians'...?, The Institute for Economic Affairs, 1977, p. 11).

What we need to look at is the money supply. A vital factor in the economy's behaviour that our all-knowing economic commentariat keep overlooking. (This lot even manage to talk about the Reserve's monetary policy without ever referring to the money supply). Reserve figures show that since last September all measures of inflation have been falling. They also show that the prices of materials used in manufacturing started to drop in the same month and that the CPI flattened out at the same time. Therefore it should be no surprise to see that GDP also started to slow in September and has obviously continued to do so.

...Allow me to once again repeat a basic economic fact: entrepreneurship drives an economy and savings fuel it. Savings are what produces capital accumulation, otherwise called economic growth. The idea that GDP and growing productivity always indicate growth is a grave error. A situation can actually emerge where GDP and productivity continue to rise even as the capital stock is consumed and heavy unemployment continues to burden the economy. This is what happened in the US during the Great Depression. For example, from 1929 to 1936 labour productivity rose by 25 per cent.

Jackon's basic economic fact - entrepreneurship drives an economy and savings fuel it - should be taught in school so that the next generation can aspire to become entrepreneurs, as well as focus on saving for the future rather than spending now and paying (more) later.

In 50 years' time those societies that have enabled their people to look after themselves will have advanced past those who ensure their people are reliant on government doing things for them.

In 1964 Donald Horne released The Lucky Country, a book about how lucky Australia has been to have, as the Wikipedia page describes, "...natural resources, weather, history, distance from problems elsewhere in the world, and other sorts of prosperity."

As Horne put it, "Australia is a lucky country, run by second-rate people who share its luck."

It's hard to argue that we are lucky to have so many natural advantages over the rest of the world. It's unfortunate that from time to time we end up with second rate governments and, in the case of the current one, third rate.

The Rudd government's predicted public debt is $300 billion, which is about $380 billion lower than when they came to office in 2007 due to the surplus built up by the previous government.

If you want to get a sense of how lucky we are then check out the following:


(click to embiggen)

The itty bitty decrease on the right hand side is Australia.

There's no doubt that things are going to get much worse in the world before things get better.

However, there's also no doubt that the policies of the Rudd government are going to make Australia's recovery slower and more painful than they would otherwise be.

The same goes for the US where Obama's policy of bailing out failed states could lead to the country losing its AAA credit rating.

Ditto Great Britain.

It's unfortunate that at a time of global financial crisis that we have such incompetents as Obama, Brown and Rudd.

(Nothing Follows)