Home > Economics - General > Robson reverses reality

Robson reverses reality

December 13th, 2006

It turns out that Tim Blair’s post, linked below, is based on this piece by Alex Robson (a former colleague of mine and also briefly a blogger), who argues from claimed prediction errors by “leftist economists” (he’s kind enough not to mention me by name) that we shouldn’t trust climate science. His crucial point is that whereas we predicted that the 1996 budget cuts would cause increased unemployment

Howard did indeed reduce overall spending in real terms in the two years following the 1996 election, and he cut the size of the commonwealth public service in each year between 1996 and 2000. But following Howard’s “savage” budget cuts, the unemployment rate did not rise; it fell, from 8 per cent in 1996 to 6 per cent in 2000.

Unfortunately, Alex is being a little economical with the information he reports here. As can be seen below (courtesy of Economagic, unemployment did in fact rise following the 1996 budget cuts. It wasn’t as bad as it might have been (and was in New Zealand where monetary policy was messed up as well), but the facts are clear: contra Robson, unemployment did not fall, it rose.

The unemployment rate didn’t clearly resume its earlier decline until the shift to an expansionary fiscal and monetary policy during the Howard government’s second term.

Another piece of misdirection is the reference to cuts in the Commonwealth public service, largely driven by contracting out. This is a red herring, apparently designed to distract attention from the more relevant variable, public expenditure.

200612131654

Categories: Economics - General Tags:
  1. Sinclair Davidson
    December 13th, 2006 at 19:10 | #1

    Economagic is a great tool – I didn’t know about it, so thanks for the pointer.

    I had a look at the data from 1995 – 1998 (with grid lines) at the Economagic site. First, eyeballing the data, it looks like unemployment was trending up from late 1995 through to early 1997 anyway. If you ‘guesstimate’ the election point in 1996, unemployment was about 8.25% and in early 1997 (at the local peak) it was 8.5% – close to random variation. Now, the other thing to bear in mind is that the fiscal tightening (and good policy it was) can’t really be expected to have had an immediate impact as your argument suggests. There are lags after policy is announced, implemented, and effects felt. So I suspect by the time these lags filtered through etc. we’re close to being in the period where unemployment was falling. So, long story short, I reckon Alex is closer to the mark than your post suggests.

  2. jquiggin
    December 13th, 2006 at 20:27 | #2

    Sinclair, I agree there’s enough ambiguity about trends, leads and lags that you can make a case either way, regarding the effects of the 1996 cuts. But that’s not enough for Alex’s argument. He’s claiming that we were so obviously wrong as to prove that you can never rely on the predictions of leftist professors, and in fact that you can reliably assume that the opposite of what we say will happen. He bases this claim on a simple factual statement – we said unemployment would go up and (according to him) it went down. Visual inspection shows that this is false.

  3. dez
    December 13th, 2006 at 20:52 | #3

    Not being an economist (I come here to try and learn) this is probably naive, but surely the chart you show is not an ‘unemployment rate’ chart as such, but is an ‘official unemployment rate’ chart? Would it not be fair to say that the government chooses a way of measuring unemployment which makes them look as good as possible, rather than trying to measure what it actually is? What is the actual ‘unemployment rate’, as best we can know, and are there sites that provide charts of it?

  4. jquiggin
    December 13th, 2006 at 20:55 | #4

    The actual unemployment rate is higher than the official one, and the gap was widening over the period in question as lots of older men were leaving the workforce for various forms of disguised unemployment.

    But there’s no general agreement on who should be included in measures of unemployment, so we’re generally stuck with the (fairly restrictive) official measure graphed above – people who have not worked at all in the past week, are actively looking for work and are willing to start immediately.

  5. December 13th, 2006 at 23:47 | #5

    As I recall, the word on the street at the time was that the Howard government was itelf shocked that the expenditure cuts seemed to produce such a salutary effect. It will be interesting to look back, after the government has fallen, to see if this effectively marked the end of ‘small government’ rhetoric, along with the practice.

  6. Mark U
    December 14th, 2006 at 01:05 | #6

    dez:

    The Australian Bureau odf Statistics uses an internationally accepted standard for the measurement of unemployment. While this standard does have the flaws you mention, and the standard may be influenced by the views of governments, it is not a case of the Australian government choosing a measure to make it look as good as possible. My recollection is that the current measure has not chnaged for about 25 years.

  7. Mark U
    December 14th, 2006 at 01:20 | #7

    Official interest rates were increased from 4.75 per cent some time in 1994 to 7.5 per cent in late 1995 and did not start to come down until the middle of 1996. So the slight move up in unemployment was more likely due to monetary policy not fiscal policy. I agree with Sinclair Davidson that the lags on fiscal policy were simply too long for there to be any observed linkage between fiscal policy and unemployment. By the time fiscal policy was biting, unemployment was beginning to fall as monetary policy was eased.

    I don’t think there was anything at all salutory about the almost undiscernable rise in unemployment (it was more a halt in the sharp decline that had occured since the very high rates in the early 1990s). The shift away from small government rhetoric was more about pork barreling targetted at locking in key electoral groups. Howard is ultimately a pragmatist not an idealist.

  8. observa
    December 14th, 2006 at 06:31 | #8

    Which might all go to show that good old animal spirits are much better than all the prosletysing by economists left or right and animal spirits rose greatly with the demise of Keating and Co. A salutary lesson for us all.

  9. jquiggin
    December 14th, 2006 at 07:04 | #9

    Mark, since I had disagreed with the tightening of monetary policy in 1994 and 1995, it made sense to criticise a tightening of fiscal policy as well.

  10. Sinclair Davidson
    December 14th, 2006 at 07:06 | #10

    John, I know there were 110 signatures to your petition (excluding the authors). Was the full list ever published?

  11. jquiggin
    December 14th, 2006 at 07:28 | #11

    Sinclair, to quote quite a few politicians, I can’t recall.

  12. Ian Deans
    December 14th, 2006 at 07:42 | #12

    Hey Quiggly, have you ever been wrong?

  13. jquiggin
    December 14th, 2006 at 08:04 | #13

    Not according to Tim Blair!

  14. December 14th, 2006 at 10:15 | #14

    The obvious riposte to Robson/Blair is to point out that under the influence of Keating’s fiscal expansionist Working Nation total unemployment fell by 3%, from 11% in 1991 through to 8% in 1995. Hence the birth of “Beazley’s Black Hole”.

    Howard flirted with fiscal contractionism for the first year of non-core promise reneging, with underwhelming results. Since late 1996 his govt has moved to a structurally neutral fiscal policy, relying on the boom to produce cyclical surpluses.

    This is more or less standard Keynsianism since one is supposed to amortise debt during the fat years and inflate debt during the lean years. The canons of fiscal prudence dictate aiming for underlying cross-cyclical fiscal balance in the absence of nation building projects.

    Total unemployment has fallen by another 3% whilst the budget has returned to surplus. But this positive fiscal valency has been an effect, rather than cause, of underlying changes in industrial output.

    But really, Australia seems to have gotten past the stagflation period of structurally imbedded high rates of inflation and unemployment. So monetary, rather than fiscal, policy is where most of the policy action is. The more an advanced economy becomes “financialised” the stronger the power of monetary (ie interest rate) policy to determine the overall level of income-expenditure.

    Of course the secular tendency for fiscal policy is to produce a larger govt expenditure/tax take. This is because public goods (public utilities, community services) tend to be superior goods ie they tend to take up a larger share of expenditure as income rises.

  15. December 14th, 2006 at 10:26 | #15

    In general one should not trust Howard’s political rhetoric on any particular matter of policy. His instincts are invariably Machiavellian due to his taste for combining demagogical populism with hard-nosed statecraft. And his lack of faith in his base’s core ideology.

    He has idealised himself forward as a free market economic rationalist. But in reality he is a high-taxing, big-spending pork-barelling statist very much in the vein of Menzies/McKewan.

    This is certainly worse than the principled social-democracy of Dawkins, Hayden and Walsh. But it is better than the sado-monetarism of Rogernomics or Thatcher or in her most dogmatic days.

  16. observa
    December 14th, 2006 at 14:08 | #16

    It’s all gunna end in tears and a recession we have to have according to this bloke here http://www.brookesnews.com/061112ausecon.html
    Just about ready for Rudd and Gillard to tell it like it has to be for laid off workers and the unions. We’ll see if all their unions and their enterprise bargaining can protect workers pay and conditions in a recession eh?

  17. chrisl
    December 14th, 2006 at 14:20 | #17

    The point of the Robson article was that prediction is a very difficult business. Nobody in their wildest dreams would have predicted current employment rates. I remember would-be prime ministers wouldn’t even ASPIRE to a 5% unemployment TARGET for fear of looking foolish.The “experts” (how many were there again?) predicted catastrophic employment rates because of budget cuts.And yet here we are with unemployment rates of 4.6% and falling.
    And so to the “predictions ” of climate science……

  18. December 14th, 2006 at 14:34 | #18

    I think the notion that spending must be cut before taxes is why fiscal conservatives so often fail to deliver on the small government promise. Taxes should be cut before spending is cut. And spending cuts should follow over time only as necessary due to revenue constraints of to eliminate obvious waste. Of course with the government now in a healthy financial surplus it should be hacking away at taxes safe in the knowledge that they have a considerable buffer anyway.

  19. December 14th, 2006 at 14:44 | #19

    The answer to comment no. 12 lies at comment no. 11.

  20. rabee
    December 14th, 2006 at 17:39 | #20

    This article in the Australian is an intellectual and moral disaster. The main point is that policy makers should not listen to experts.

  21. wilful
    December 14th, 2006 at 17:54 | #21

    I think the rather obvious point has been missed. No one should trust leftist economists on climate science. And no one does! Instead, we should ask climatologists – who are very clear in their predictions.

  22. Mark U
    December 15th, 2006 at 00:02 | #22

    There is a good argument that fiscal policy is an ineffective macro-economic instrument for a small open economy with flexible exchange rates like Australia. This is why monetary policy has gained the ascendancy as the cyclical instrument for macro-economic management, while fiscal policy is set with a more medium term objective over the whole economic cycle.

    The fact that unemployment went up slightly was because the RBA mis-judged the situation. Inflation fell below the bottom of the 2-3 per cent target band at this time, suggesting the interest rate rises were overdone. These were the rises in interest rates that enabled Howard to make a very telling speech about “5 minutes of sunshine”.

  23. George
    December 17th, 2006 at 20:56 | #23

    #20 Rabee: A “moral disaster”? What does that mean?

    And since when were Phil O’Hara, Frank Stilwell et al considered “experts” on the finer points of macroeconomic policy and predicting the business cycle?

    That is the point of the Robson article – a prediction does not become more correct when the majority of people doing the predicting are people who know absolutely nothing about what is being predicted.

  24. Pseudonym (econowit)
    December 18th, 2006 at 22:26 | #24

    It is interesting to look at unemployment statistics from 2003 to the present;

    Unemployed persons went from 620,000 in 2003 to 500,000 in 2006 (6% to under 5% a reduction of 120,000)
    Total public sector employees on the other hand went from 1,525,000 in 2003 to 1,656,000 in 2006, increasing by a similar amount.

    The Transferring of 120,000 dole bludgers into the public non-service to bludge, should not be classified as a reduction in unemployment. It should be a reclassification indicating increased welfare payments to selected individuals.

    “What lessons can we learn from these sad, embarrassing episodes?�
    The most obvious one is that left-wing economics professors have trouble identifying one of their own- John Winston Howard.

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/second+level+view?ReadForm&prodno=6202.0&viewtitle=Labour%20Force,%20Australia~Nov%202006~Latest~7/12/2006&&tabname=Past%20Future%20Issues&prodno=6202.0&issue=Nov%202006&num=&view=&

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/second+level+view?ReadForm&prodno=6248.0.55.001&viewtitle=Wage%20and%20Salary%20Earners,%20Public%20Sector,%20Australia~Mar%202004~Previous~24/06/2004&&tabname=Past%20Future%20Issues&prodno=6248.0.55.001&issue=Mar%202004&num=&view=&

  25. sdfc
    December 20th, 2006 at 00:01 | #25

    120,000 dole bludgers?

    What about the other 600 odd thousand who found employment over the period?

    Was that econowit or econotwit.

  26. Pseudonym (econowit)
    December 20th, 2006 at 11:19 | #26

    “What about the other 600 odd thousand who found employment over the period?�
    SDFC,
    So what, the population of Australia increases by 250 K per year and hopefully not all of them go on the dole or become public sector bludgers. (Teachers, medical staff excluded).

    You can believe the disinformation spruiked by the elite political ruling class, deluding yourself that there has been a reduction in the amount of people sitting around on their backsides doing sweet f-all collecting their livelihood from the public purse.

    The fall in the amount of people receiving unemployment benefits has been completely offset by the rise in people collecting sickness benefits and disabled pensions over the last ten years. In other words they have just been relabelled from dole bludger to sickness benefit / disabled pension bludger if they stay on unemployment benefits for more than 6 months. The net effect is that there has been an increase in the amount of social security (dole) bludgers as a proportion of the over all economy during the last ten years.

    The public sector (bludgers) as a proportion of the over all economy has grown astronomically during the same period and as they are a tax on society, this is a concern.

  27. sdfc
    December 20th, 2006 at 14:27 | #27

    Who says I believe the official unemployment rate. It’s no secret that male labour force participation is extremely low. My objection is to tossers branding people as bludgers for no reason other than their own puerile prejudice.

  28. pseudonym (econowit)
    December 20th, 2006 at 17:40 | #28

    “My objection is to tossers branding people as bludgers for no reason other than their own puerile prejudice.�

    Excluding old age pensioners, we have millions of welfare recipients in this country (unbelievably, even I receive undeserved middle class welfare). So what mature and impartial word would you use to describe them?

    “Bludger is a derogatory slang term for a lazy individual, particularly one who is perceived to receive undeserved welfare or material benefits. “Dole bludger” is a related term in common usage, specifically used to refer to a long-term unemployed person who draws “the dole”, or state unemployment benefit.â€?
    The term seems to accurately articulate what is going to me.

    http://www.reference.com/browse/wiki/Bludge

    IMHO middle class and corporate welfare should be abolished and in the majority of other cases social welfare payments should be replaced with food and clothing vouchers coupled with direct rent subsidies.

    The verb form of the term “to bludge”, refers to any activity requiring little effort but delivering a disproportionately high level of remuneration or other desirable material outcome.

    Collectively the public sector “bludges� on the rest of the Australian economy. The public sector is virtually dysfunctional and one of the most unproductive sectors of our economy. Certain individual public servants might work hard, but due to the dysfunction of the sector this individual productivity is lost.

  29. sdfc
    December 20th, 2006 at 20:13 | #29

    There are a number of reasons why some people receive might benefits apart from bludging, they may be physically, mentally or emotionally impaired, seen as too old, unskilled etc. If you think those on the dole or disability are receiving a high level of remuneration you are obviously an inhabitant of Fantasy Island. Instead of whinging maybe you should try being thankful for the advantages you enjoy.

    As for middle-class welfare, family payments are an investment in the future. I would have thought someone calling themselves Econowit would be aware of that.

    If you dislike the public sector so much maybe you should move to a country where there is no law and order, no public health system, no education, no roads etc and see how well you get on.

  30. Bobalot
    December 23rd, 2006 at 07:26 | #30

    “If you dislike the public sector so much maybe you should move to a country where there is no law and order, no public health system, no education, no roads etc and see how well you get on.”

    econowit can’t find a reply. I always point this out to people who have a dogmatic belief (despite any real evidence other than “everybody says”) that ALL public sector services are a failure (I even point out the examples where state companies delivered better services/outcomes than their private counterparts). They generally don’t respond either.

  31. Pseudonym (econowit)
    December 26th, 2006 at 16:55 | #31

    “If you dislike the public sector so much maybe you should move to a country where there is no law and order, no public health system, no education, no roads etc and see how well you get on.�

    Where do you guys live?

    I live at lawless Cronulla where the only people who get justice under our legal system are lawyers and people with deep pockets; to get a reasonable standard of health care I’m in a private health fund, enabling entry into St Vincents Private hospital; to receive an acceptable standard of education it is mandatory for my children to attend a private school thereafter paying HECs; and I pay twice to use second rate roads- $6800 per year in tolls plus $5000 per year in fuel excise.

    “ALL public sector services are a failure�

    That part of your retort hits the nail right on the head.

    Statements implying I cant find a reply , any real evidence is “everybody says� or “that state companies delivered� any semblance of service are laughable. Your dogmatic assertions mirror the delusionary self-assessment the public sector makes of itself, an assessment that indicates a disconnection with reality.

    See more on my views re “everybody says� here:
    http://johnquiggin.com/index.php/archives/2006/08/18/make-telstra-public-again/
    http://johnquiggin.com/index.php/archives/2006/08/18/make-telstra-public-again/#comment-66616

    The public sector is a self-regulating monopoly. It serves its own self interest only and is accountable to no one, not elected representatives nor the public it is meant to serve. A self-regulating monopoly is the least desirable entity a consumer of goods and services could have mandated on them.

    The public sector legislates itself a pay rise each year and has done so most years since federation. Its economic size over the last 100 years has grown from 6% of GDP to 33% today. It has grown unabated to be a behemoth of inefficiency, with no regard to the standard of service provided.

    The efficiency of Australia’s public sector is akin to the English coalmines of the 1980s and it is in desperate need of a Thatcherite culling.

  32. chrisl
    December 26th, 2006 at 19:53 | #32

    Meanwhile infrastructure (especially schools, public transport) is decaying, but there are not enough skilled people to work on these projects even if the money was diverted.Under these circumstances, to build the urgently required infrastructure would be inflationary(unless public servants could be retrained as tradespeople)
    So status quo to remain.

  33. sdfc
    December 27th, 2006 at 14:21 | #33

    Yeah that’s right Econowit, the private education and health system’s are in no way subsidised by the public sector are they. I’m a little confused by your whinge about road tolls, are public roads in NSW subject to tolls?

    I don’t know where you live Chris but here in Perth we’re getting a fabulous new train line and the rest of the public transport seems to work just fine in my experience. I’m sure there is someone with a complaint though, there always is.

  34. chrisl
    December 27th, 2006 at 16:20 | #34

    sdfc you know that rubber band you get when you go to the bank to get a bundle of banknotes? That is what is holding the public transport system together in Melbourne.Recently there was a minor problem of the trains not being able to stop at the stations. I think traditionally trains have been able to stop at stations.The system is part private part public. Expect to see it entirely back in public hands very soon.The touble is that there is absolutely no expertise in running or maintaining a modern train system in the public system.When it returns to a public system the unions will resume their position at the shoulder of management. It is a mess

  35. Pseudonym (econowit)
    December 27th, 2006 at 22:41 | #35

    ” no way subsidised by the public sector are they”

    sdfc, yes you are “a little confused”.

    It is the public sector that taxes everything and it is the private sector that subsidise the public sector through this taxation- not the reverse.

    Any econotwit should know that.

  36. sdfc
    December 28th, 2006 at 13:42 | #36

    Chris

    You should speak to Econowit about your public transport system, he apparently knows of a way of providing public (non-profit) services without taxation.

Comments are closed.