TJ Ryan Foundation Research Associate, John Quiggin, writes in Inside Story (17.7.20) that governments should resist the ‘easy’ economic option of austerity measures in attempting to steer a path out of pandemic-induced recession.
‘The title of my book-in-progress, The Economic Consequences of the Pandemic, is meant as an allusion to John Maynard Keynes’s The Economic Consequences of the Peace, and one of its central messages is the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment, Interest and Money.
‘As the title of that book suggests, Keynes wanted to replace a “special” theory with a theory that covered all likely eventualities. The special theory that worried him was the central tenet of classical economics: that the economy always tends to full employment unless governments or unions get in the way. Keynes compared classical economists to those practitioners of Euclidean geometry who clung to their theory in the non-Euclidean world discovered by Albert Einstein. (Keynes’s title also echoes Einstein’s distinction between special and general relativity.)
‘The central implication of classical economics – which was articulated during the Great Depression by the American banker Andrew Mellon (“liquidate the rottenness”) and following the global financial crisis by the advocates of “expansionary austerity” – is that governments must respond to a recession by cutting taxes, cutting spending even more to balance the budget, and letting the private sector expand as it naturally will.
‘The disastrous failure of that approach, particularly in Europe, has put its advocates on the defensive.’
The right and proper thing
Saul Eslake writes in Inside Story (30.4.21) about signs that Treasurer Josh Frydenberg has moved further from Coalition orthodoxy on budget deficits.
‘On 24 September last year, twelve days before he delivered the (delayed) 2020-21 federal budget, Treasurer Josh Frydenberg foreshadowed what he called a “recalibration” of the government’s fiscal strategy to “match the circumstances we now find ourselves in.” It was “no longer appropriate” for the government to seek to “deliver budget surpluses of sufficient size to… eliminate net debt over the medium term,” he went on. On the contrary, continuing to pursue that objective would “be damaging to the economy” and “unrealistic.”
‘The government’s new strategy would focus on providing “temporary, proportionate and targeted” (but nonetheless substantial) fiscal support to “private sector jobs and investment,” as well as allowing the “automatic stabilisers” (tax receipts and cyclically sensitive spending) to “work freely to support the economy.” This strategy would remain in place – and that the government would not embark upon the task of “budget repair” – until the unemployment rate was “comfortably below 6 per cent,” which was unlikely to be the case until 2024.
‘The budget projected the largest budget deficit, as a proportion of GDP, since the second world war – a decisive turnaround for a treasurer in a government that had gone to the previous election with having put the budget “back in the black” as one of its proudest boasts. But it was (as Stanley Holloway’s Alf Doolittle so memorably put it in My Fair Lady) “The Right and Proper Thing To Do”.’