Home > Economic policy, Oz Politics > Reading the economic theories of Rudd and Abbott

Reading the economic theories of Rudd and Abbott

August 20th, 2013

That’s the headline for my latest piece in Crikey, over the fold

Kevin Rudd’s suggestion that Opposition budget cuts could cause a recession seems, on the face of it, like just another round of the pointless series of claims and counterclaims that has characterized this election campaign so far.

However, underlying Rudd’s claim and the opposing rhetoric of Tony Abbott is a fundamental disagreement about the way the macro-economy works and how it should be managed. If Rudd’s claim leads to a real debate about these contradictory viewpoints, we could have a real choice in this election, rather than picking which party we dislike and distrust more.

So far, the claims and counterclaims have surrounded the government’s estimate that Abbott will need to make cuts of $70 billion over the period of the forward estimates. The Opposition has disputed this without, so far, offering an alternative estimate. Regardless of the precise numbers, however, it is clear that the Opposition is promising to return the budget to surplus more rapidly than Labor, and that this must involve cuts in public expenditure. The key question is, what effect will such cuts have in an economy that is already showing signs of weakness.

Tony Abbott’s views on macroeconomic management are clear. The aim of fiscal policy should be to deliver consistent surpluses of between 1 and 2 per cent of GDP. Implicit in this target is a recognition that shocks such as recessions will occasionally push the budget into deficit. In such circumstances, governments should exercise even tighter fiscal restraint to ensure a rapid return to surplus. Active macroeconomic policy should be left to the Reserve Bank and focused on maintaining low and stable inflation.

Although Abbott presents himself as favoring ‘practical solutions to practical problems’ rather than ‘market theory’, his position is derived from the ‘classical’ free-market economic theory that held sway before the Great Depression, and was revived as ‘New Classical economics’ in the 1980s. On the classical view, recessions and depressions in a market economy are self-correcting. Government attempts to stimulate the economy can do no good, and may do positive harm by ‘crowding out’ more productive private investment.

The alternative view, put forward by John Maynard Keynes during the Great Depression, is that the economy can remain depressed for long periods, and that, in such circumstances, fiscal stimulus through well-targeted tax cuts and public projects can increase employment and economic growth. The flip side of the Keynesian view is that governments should run substantial surpluses during boom periods, in order to stabilize the economy and balance the budget over the course of the economic cycle.

Keynesian policies achieved great success in the decades after World War II, when unemployment rates fell to 2 per cent or less, economic growth was consistently strong, and income inequality declined to levels never seen before or since. But Keynesianism fell out of favor during the inflationary crisis and remained so, with brief exceptions (such as the Accord period, and the Keating government’s Working Nation program) until the Global Financial Crisis.

Faced with the potential collapse of the global economy, and the absence of any coherent policy response from the classical school, most governments implemented Keynesian policies to some extent in the immediate aftermath of the financial meltdown of 2008. However, most such policies were halfhearted and rapidly scaled down. The eurozone and the UK went further, adopting ‘austerity’ policies focused on (largely unsuccessful) attempts to reduce deficits and debt.

The only major governments to undertake and sustain Keynesian fiscal stimulus were those of China and Australia. It has sometimes been argued, by supporters of the classical view that Australia’s stimulus had no effect, and that our economy was rescued by strong demand from China. This amounts to the nonsensical claim that fiscal stimulus in China was effective enough to provide a substantial flow-on benefit to Australia, but that fiscal stimulus in Australia had no effect.

The outcomes of the GFC speak for themselves. Australia was almost the only developed country to avoid a recession. Where fiscal stimulus was limited and temporary, as in the US, recovery from the recession has been slow and weak. Where classical austerity measures were implemented, as in much of Europe, there has been no recovery at all. In the UK, for example, often taken as a model by Australian conservatives, GDP is still 4 per cent below its peak of five years ago. On present indications, it will take a decade, and quite possibly more to repair the damage done by austerity policies.

The stimulus package introduced in 2009 included, quite appropriately, a strategy for a return to surplus as the economy recovered. Unfortunately, after committing to an optimistic timetable, former Treasurer Wayne Swan treated the return to surplus as an end in itself, not a tool of macroeconomic management. This effectively conceded the ground in the macroeconomic debate to Abbott and the opponents of Keynesian stimulus.

To win the election Rudd needs to move beyond attacks on the specifics of Abbott’s policies (or the lack thereof). He must explain why the Keynesian and social democratic policies he espoused and implemented in his first term as PM are the right way forward for Australia, and why the Howard government policies of consistent surpluses, regardless of economic conditions, represent a recipe for disaster next time there is an economic crisis.

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  1. Graham
    August 20th, 2013 at 08:07 | #1

    Here here
    On q@a labour went a step or two toward that goal last night however it looks impossible to convince the public of this in two weeks.
    This point was driven home by the fact that labour seems to still be figuring this stuff out.
    They were asked why they projected a surplus and failed to achieve it and why the unemployment was rising and debt was rising if the Aussie economy is doing so good.
    This was a great opportunity to say something like ‘in our initial projections we were expecting the rest of the world to follow a similar economic program as our stimulus and recover. We also weren’t expecting so much austerity to be done at the state level. The global economy is still week and the state economies have taken a hit which have hurt our economy. We had to make a choice between returning to surplus and hurting the Australian people.’
    They also still seemed to see a return to surplus as an end in itself rather than saying something like ‘we will run surpluses in good times and increase the deficit in hard times. Right now we have something in between so we aren’t going to be changing the deficit much’

    Finally he was silent on hockey’s repeated claim that we owe debt to other countries. Does hockey know how the bond market works?

    Ce la vie

  2. Ikonoclast
    August 20th, 2013 at 08:21 | #2

    JQ says – “The flip side of the Keynesian view is that governments should run substantial surpluses during boom periods, in order to stabilize the economy and balance the budget over the course of the economic cycle.”

    This is a simplified view of Keynesianism with improper emphases and distortions or omissions of certain facts and aspects. In other words, it is an absolute statement ignoring the real context provided the real economy. Firstly, the budget is never literally balanced over the cycle as the money supply must be expanded by net deficits over the cycles while the economy is growing on average. Otherwise, there would be a relative constriction in money supply. Thus while long term growth continues, long term growth in money supply must continue via net deficits over the long term.

    Secondly, it is inappropriate to return to surplus or even balance when the unemployment rate is above the rate of frictional unemployment and when there is capacity under-utilisation in the economy.

    But I forget myself, the man who wrote Full Employment in the 1990s now believes in 6% unemployment and 6% underemployment in the 2000s along with watered-down Keynesianism. Someone unkind would call this wet neoliberalism.

  3. TerjeP
    August 20th, 2013 at 08:48 | #3

    Australia did not increase government spending to get out of a recession. We didn’t have a recession to get out of.

  4. Jim Birch
    August 20th, 2013 at 09:29 | #4

    @TerjeP
    Is this a rhetorical point, or are you saying the stimulus was bad policy, either then, or always?

  5. iain
    August 20th, 2013 at 09:30 | #5

    Encouraging and supporting the use of complimentary currencies, particularly ones with demurrage charges / naturally high velocities, is an underused (ignored) option.

  6. JamesH
    August 20th, 2013 at 10:04 | #6

    @TerjeP
    There’s some kind of anti-teleological logical fallacy there. Your statement is like seeing someone apply the brakes to avoid hitting a tree and then saying “the car didn’t hit the tree, therefore it wasn’t necessary to apply the brakes”.

  7. Troy Prideaux
    August 20th, 2013 at 10:46 | #7

    @JamesH
    Damn, I wish I had of known that analogy when I was trying to explain the Y2K transition to some people.

  8. JamesH
    August 20th, 2013 at 12:28 | #8

    @Troy Prideaux
    “What’s more, by applying the brakes, you burned valuable brake rubber. Before applying the brakes, you should have done an exhaustive cost-benefit analysis and found a private sector provider who could come to your location near this alleged tree and replaced your brake pads with more efficient brakes.”

  9. Tim Macknay
    August 20th, 2013 at 12:43 | #9

    @TerjeP

    Australia did not increase government spending to get out of a recession. We didn’t have a recession to get out of.

    JQ didn’t say that Australia “got out of” a recession. He said we avoided one.

  10. TerjeP
    August 20th, 2013 at 13:01 | #10

    The alternative view, put forward by John Maynard Keynes during the Great Depression, is that the economy can remain depressed for long periods, and that, in such circumstances, fiscal stimulus through well-targeted tax cuts and public projects can increase employment and economic growth.

  11. August 20th, 2013 at 13:09 | #11

    TerjeP, so you think that Australia can dump a huge amount of stimulus into a healthy economy without it feeding inflation? That’s an interesting viewpoint to take. If this is your view do you think we should have a similar stimulus every year since it apparently doesn’t cause inflation?

  12. Tim Macknay
    August 20th, 2013 at 14:21 | #12

    @TerjeP
    So you admit JQ didn’t say that Australia “got out” of a recession, then.

  13. John Quiggin
    August 20th, 2013 at 15:55 | #13

    Terje, when you have to resort to such silly quibbles, do you really think your position is worth defending?

  14. TerjeP
    August 20th, 2013 at 18:20 | #14

    Ronald – if the RBA is doing it’s job then yes.

  15. TerjeP
    August 20th, 2013 at 18:26 | #15

    JQ – you’re the one defending a position. You are saying the Australian economy needed a spending based stimulus. You quote Keynes saying an economy in recession can benefit from public outlays (or tax cuts). But we weren’t in recession. Should the government just be over spending all the time as some sort of preventative medicine?

  16. TerjeP
    August 20th, 2013 at 18:30 | #16

    p.s. Chris Bowen says he will have the debts paid off by 2024. Bravo Labor, bravo. Idiots!!

  17. Ernestine Gross
    August 20th, 2013 at 18:46 | #17

    JQ,

    The UK seems to have followed the classical macro-economic idea (reincarnated in the Anglosphere as austerity measures).

    By contrast, the data for Germany is quite consistent with the version of Keynesian economics you succinctly described.

    http://www.tradingeconomics.com/germany/government-debt-to-gdp

    http://www.tradingeconomics.com/germany/government-budget

    A large part of the sharp increase in the government debt to gdp ratio in 2010 was to assist other countries. Those Germans who have been doing it tough aren’t happy about this. The idea that a recession could have been prevented in say Greece, had they spent earlier, is not credible because:

    For a rather long time, Greece did not show any sign she would voluntarily adopt the objectiv of getting close to a balanced budget.

    Policy objectives do matter..

  18. Ernestine Gross
    August 20th, 2013 at 18:50 | #18
  19. Catching Up
    August 20th, 2013 at 19:23 | #19

    @TerjeP
    Because the government on the evidence that came apparent, got in because unemployment was coming. Easier and beachwear to prevent unemployment in the first place, than waiting for the unemployment to occur and getting people back to work. History tells us we will pay either way.

    One does not wait for the river bank to break, before laying the sandbags. Useless after the water covers your house.

  20. August 20th, 2013 at 20:00 | #20

    Oh my goodness. TerjeP, interest rates were 7.25% on the 2nd of September 2008. They were cut in response to the Global Financial Crisis, reaching 3% on the 8th of April 9 and kept there until 7th of October 2009. From there they were gradually increased to the not at all lofty height of 4.75% and now they’re down to like 2.5%. That is not the behaviour of a reserve bank struggling to contain a huge inflationary stimulus pumped into an otherwise healthy economy. If you think it is, then your thoughts on the matter are nuttier than a lumpy chocolate bar.

  21. Jim Rose
    August 20th, 2013 at 21:52 | #21

    The only way for rudd to win is to focus in on how abbott will pay for his promises.

    That might work if the voter is a ricardian fiscal conservatiive. If so, keynesian fiscal policy will not work.

  22. TerjeP
    August 20th, 2013 at 21:59 | #22

    They were cut in response to the Global Financial Crisis, reaching 3% on the 8th of April 9 and kept there until 7th of October 2009.

    In January of 2009 the rate was 3.25%. The main stimulus package was enacted in February 2009 just before the rate fell to 3.00%.

    So post the main stimulus package rates went north not south.

  23. TerjeP
    August 20th, 2013 at 22:01 | #23

    For some reason I can’t post a link to the chart of rates. It’s easier with a picture.

  24. August 20th, 2013 at 22:08 | #24

    The classical economic thinking on recessions also fits with Catholic guilt. During a boom, people borrow and spend like crazy – then it all comes crashing down. This is clear proof that borrowing, spending and high living are bad. The correct thing to do to appease the god(s) is to live a sensible, spartan life, working hard, saving money, and not spending.

  25. Fran Barlow
    August 20th, 2013 at 22:20 | #25

    @TerjeP

    [you’re the one defending a position. You are saying the Australian economy needed a spending based stimulus. You quote Keynes saying an economy in recession can benefit from public outlays (or tax cuts). But we weren’t in recession. Should the government just be over spending all the time as some sort of preventative medicine?]

    Failure of the exclude middle …

    There are time lags here. If one is persuaded that the economy is about to contract, then the risks associated with foscal expansion are greatly to be preferred to the risks associated with contraction of economic activity.

    I used to have a 1957 VW in 1975. In order to maintain adequate road speed by the crest of the hill on Silverwater Rd over the Parramatta River, I had to exceed the 60kph speed limit (or was it 35 mph?) and build up to about 80kph. Failure to do so would force me to change down through the gears and hold up anyone behind me. Once I reached the crest (by which time I was back at 60kph) I could ease off the throttle and meander down the other side. It made sense to me, although a police officer at the time did fine me for it — within metres of a new higher speed zone of 80kph/50mph).

    Is that advocacy of speeding as a general rule? Not really. One picks one’s moments.

  26. August 20th, 2013 at 22:54 | #26

    TerjeP, so you are saying that the inflationary effect of a stimulus equal to something like 4.6% of GDP being dumped into a healthy economy was completely neutralized by raising interest rates from 3% to 4.75% and leaving them there for a year before dropping them again. That’s really quite a bargain when you think about it. Obviously in the future instead of ever cutting interest rates we should just have stimulus packages instead since they give so much bang for their buck. Instead of a .25% cut in interest rates we could have a nice unsterilized .66% of GDP stimlus. If you’re right, TerjeP, I think you’ve found the key to hugely increased economic prosperity.

  27. TerjeP
    August 20th, 2013 at 23:29 | #27

    Instead of a .25% cut in interest rates we could have a nice unsterilized .66% of GDP stimlus.

    What is nice about it?

  28. August 20th, 2013 at 23:54 | #28

    If you’re right, TerjeP, Australians can be wealthier without changing anything except making money out of nothing instead of cutting interest rates. You see, economists previously thought that the Australian economy was due for a sharp contraction and that’s why such a trivial increase in interest rates contained inflation from a huge 4.6% of GDP stimlus. But your insight that the economy was actually healthy obviously means we can dump a huge stimulus into a healthy economy without overheating the economy and losing all the benefit to inflation. I hope you like fame now that you’ve changed our understanding of the way the world works.

  29. Jordan
    August 21st, 2013 at 04:09 | #29

    It is uite easy to predict slowing economy and with it falling into recession within a 3-4 months timeframe. Just look at the growth of credit. Just as it easy to predict general stock price trend in few days is by looking at margin debt.
    Quantity of money supply is what indicates economic growth. By looking at slowdown in housing credit growth it was easy to predict a slowdown and a need for stimulus.

    Central banks are often working against governmental fiscal spending even tough CBs are part of the government. That is especially sickening in EU where every effort by governments is countered by CB actions because they have only one goal and aim and that is price stability even tough they work only to prevent upward price rise, they rarely see the need to prevent fall in prices even tough it is much more damaging then rise in prices.

  30. TerjeP
    August 21st, 2013 at 09:22 | #30

    Ronald – the major stimulus was approved in February 2009. Rates bottomed out in April. As the stimulus rolled out rates were lifted.

    So long as monetary policy is right we can have a truly massive increase in government spending without necessarily suffering any inflation. However government “stimulus” isn’t a good thing as you seem to assume. Just because you can have it, and can have it without the negative consequences of inflation, doesn’t mean it is desirable.

    You can cut off your right arm without bleeding to death if you take the right precautions. But that doesn’t amount to a recommendation.

  31. David Irving (no relation)
    August 21st, 2013 at 09:42 | #31

    It’s pointless arguing with glibertarians like Terje. They’re immune to facts and reason, rarely argue in good faith, and shift goal posts more often than I change my underwear.

  32. Ikonoclast
    August 21st, 2013 at 10:22 | #32

    David Irving (no relation) :
    It’s pointless arguing with glibertarians like Terje. They’re immune to facts and reason, rarely argue in good faith, and shift goal posts more often than I change my underwear.

    You got that right. They are kind of child-like in their faith in nonsense.

  33. Fran Barlow
    August 21st, 2013 at 11:45 | #33

    @TerjeP

    You can cut off your right arm without bleeding to death if you take the right precautions. But that doesn’t amount to a recommendation.

    Staying with argument by analogy …

    You can choose to jog or even sprint rather than walk if you take the right precautions, but that doesn’t amount to a recommendation.

    would be a better fit, or perhaps closer still:

    You can choose to take performance-enhancing drugs when competing than stay drug-free if you take the right precautions, but that doesn’t amount to a recommendation.

    When doing analogy, it’s best to map the elements as closely to the relationships one asserts exist as one can.

  34. Fran Barlow
    August 21st, 2013 at 11:46 | #34

    oops

    You can choose to take performance-enhancing drugs when competing rather than stay drug-free if you take the right precautions, but that doesn’t amount to a recommendation.

  35. Ikonoclast
    August 21st, 2013 at 12:25 | #35

    I do get a bit tired of “either/or” thinking. This is the thinking which says it’s one thing and one thing only that limits the economy like lack of real resources* or lack of deficits or lack of surpluses or lack of labour market reform or lack of regulation or too much regulation. People think as if it’s not possible for multiple limiters to exist. Multiple limiters can and do exist. We need to deal with each one.

    These are the main factors limiting the Australian economy IMO;

    1. Lack of focus on achieving full employment.
    2. Lack of focus on achieving full capacity utilisation.
    3. Inappropriate focus on budget outcomes (deficits or surpluses) as ends in themselves.
    4. Following from point 3, failure to tailor the budget outcomes to the real econmy’s needs.
    5. Excessive constriction of the public sector.
    6. Failure to acknowledge natural monopoly forces and failure to give these natural monopolies over to public enterprises. Failure to implement strategic dirigist policies.
    7. Excessive shift of national income to owners (capitalists and rentiers) thus causing the wages share of the economy to be too small.
    8. Excessive shift of the economy to the FIRE (Finance, Insurance, Real Estate) sector and away from real production and real services including human services.
    9. Taxes too low on income earned by capitalists and rentiers.
    10. Labour Law too heavily biased in favour of capitalists and rentiers.

    I could go on but that’s enough for a blog post.

    * Note: In the extreme case, lack of real resources will be a major limiting factor on the economy. Parts of the Middle East have now hit that wall. The fundamental cause of the unrest in Syria and Egypt (two examples) is now lack of real resources. Their situation is terminal, more or less. A collapse into barbarism and primitivism in those countries seems very probable as the long term outcome.

  36. may
    August 21st, 2013 at 12:41 | #36

    faith does not do reason and reason cannot do faith.

    turgid believes in a fairyland of an ideologically self defined concept of responsibility,no fact or reason will get in the way.
    iteration and reiteration are the modes of persuasion for faith based anything.
    it keeps on nagging until people just give up on it and let it have it’s own way.

    which wouldn’t be a problem except for the consequences.

  37. John
    August 21st, 2013 at 19:28 | #37

    “This amounts to the nonsensical claim that fiscal stimulus in China was effective enough to provide a substantial flow-on benefit to Australia, but that fiscal stimulus in Australia had no effect.”

    I don’t see why this is nonsensical. There is a hidden premise in your argument, Professor: that fiscal stimulus always works. Fiscal stimulus could work well in China and fail in Australia. I am not arguing that this is what happened – either way some further argument is needed to support the conclusion.

  38. TerjeP
    August 21st, 2013 at 21:39 | #38

    Fran – you seem to have taken a perfectly good analogy and turned it into mush. I’ll stick with my version thanks. It has the virtue of making sense.

  39. August 21st, 2013 at 21:46 | #39

    Have the courage of your convictions TerjeP. You say a 4.6% of GDP stimulus can be dumped into a healthy economy and its inflationary effects contained by a 1.75% increase in interest rates, despite centuries of evidence to the contrary. So if you believe this why shouldn’t we use an unsterilized stimulus to magically create wealth from nothing? Perhaps we should just have a 2.6% of GDP unsterilized stimulus at the moment. If the magic works again that should be enough to get interest rates up to 3.5%. The reserve bank likes to keep interest rates at over 3% so it can act quickly in emergencies, so that seems like a reasonable first step and once the stimulus money is distributed we’ll all be magically richer.

  40. Fran Barlow
    August 21st, 2013 at 22:53 | #40

    @TerjeP

    Fran – you seem to have taken a perfectly good analogy and turned it into mush. I’ll stick with my version thanks. It has the virtue of making sense.

    Yours misrepresents the relations between the components whereas mine map closely. You prefer yours because it serves you rhetorically, but fiscal stimulus is not at all lke cutting off one’s arm. That’s closer to a fiscal contraction. So your vrtue demands a camera obscura. Telling, IMO.

  41. SJ
    August 21st, 2013 at 23:12 | #41

    Fran, you’re just feeding the troll.

  42. Mel
    August 21st, 2013 at 23:43 | #42

    SJ,

    Terje has been singing the same song since at least 2006, when I first discovered this blog. The only thing that has changed in that time is he no longer suggests every other week that we return to the Gold Standard.

    To win the election Rudd needs to move beyond attacks on the specifics of Abbott’s policies (or the lack thereof). He must explain why the Keynesian and social democratic policies he espoused and implemented in his first term as PM are the right way forward for Australia, and why the Howard government policies of consistent surpluses, regardless of economic conditions, represent a recipe for disaster next time there is an economic crisis.

    The ALP should have hammered home that message from day one and pointed to the gloomy state of the Old Dart under the Tories to illustrate what Oz would look like under an Abbott. Why didn’t they do this? The only answer I can think of is that have little confidence in their own economic competence.

    Nothing Rudd does now will change anything and I note the latest Newspoll is 54/46 in favour of the Coalition. This exactly matches my prediction from when the election was called ;(

  43. crocodile
    August 21st, 2013 at 23:58 | #43

    and why the Howard government policies of consistent surpluses, regardless of economic conditions, represent a recipe for disaster next time there is an economic crisis.

    Howard was fortunate enough to not experience any major downturn. Around tech wreck time and 9/11 there was a small one. As a result, Costello’s budget dipped into the red. Had Howard won the 2007 election and experienced a downturn, I have absolutely no doubt that he would have run a stimulus program as well. After the 7th, if things don’t pick up and economic gloom looks likely you can bet your goolies that Abbott will also open the wallet and do likewise.

  44. TerjeP
    August 22nd, 2013 at 07:38 | #44

    So if you believe this why shouldn’t we use an unsterilized stimulus to magically create wealth from nothing?

    Because stimulus does not create wealth.

  45. Ernestine Gross
    August 22nd, 2013 at 10:06 | #45

    @TerjeP

    You apparently have no idea as to the fragility of the global financial system in 2008. By fragility I mean, without non-market (eg government interventions in just about all countries) wealth distruction on a monumental scale would have been the outcome. Do not ask for empirical evidence because I assume you are capable of reading what happened in the Great Depression.

    Of course there are conditions under which a ‘stimulus’ (a rather vague term) does not achieve anything much. But you fail to list these conditions and then compare them to the actual.

    Your theory may apply in that part of the universe which we have not discovered as yet.

  46. crocodile
    August 22nd, 2013 at 12:00 | #46

    Because stimulus does not create wealth.

    I don’t think it was ever intended to do so. Stimulus is used to ease the slide only. Sometimes they work, sometimes they don’t.

  47. August 22nd, 2013 at 12:25 | #47

    TerjeP, if Austalia’s economy was healthy when the 4.6% of GDP stimulus was applied and its inflationary effects contained by a 1.75% rate increases then this means a similar unsterilized stimulus could create wealth from nothing. So either you’re right and a stimulus can magically create wealth from nothing OR you are wrong and Australia’s economy would have contracted without the stimulus. Since I will assume that you’re right it means that an unsterilized stimulus can magically create wealth from nothing, despite all the evidence to the contrary. We can call it TereP’s magic wealth creation plan.

  48. Will
    August 22nd, 2013 at 15:51 | #48

    Because stimulus does not create wealth.

    Wholly untrue. During poor economic times interest rates get very low and government investment projects become very attractive. Projects that lead to productivity increases, such as re-engineered roads, railways, ports or the NBN indisputably create wealth, i.e., have a calculated ROI greater than cost of funds.

  49. Ken Fabian
    August 23rd, 2013 at 06:50 | #49

    Stimulus prevented wealth being lost from a domino-like wave of foreclosures and bankruptcies.

  50. Doug
    August 23rd, 2013 at 17:39 | #50

    I’d be interested in comment on the economic rationality and likely behavioural results of the latest Opposition policy proposal to buy up leaky fishing boats in Indonesia – the opportunities for the owners of such boats plus local Indonesian police to game responses to obtain maximum financial advantage with relatively limited impact on use of such vessels by refugees seem on first glance to be substantial. Any comments?

  51. Alphonse
    August 23rd, 2013 at 22:53 | #51

    Prof, do you think Rudd can explain how Treasury could chronically overestimate Costello’s surpluses and underestimate Swan’s deficits? (rather than C being prudent and S shifty). Without that, no point in embarking on Macro 101.

  52. James Wimberley
    August 24th, 2013 at 06:03 | #52

    JQ: ¨On present indications, it will take a decade, and quite possibly more to repair the damage done by austerity policies.¨
    Is there any non-fairyland scenario in which the Eurozone or UK economies can ever do better than convergence with the previous long-term growth trend? That´s what you would need to undo the damage of austerity. Otherwise the misery of the Great Depression and the Great Recession remain as uncompensated blots on the history of humanity. (That´s without counting the Nazis as collateral damage.) It´s more likely you never catch up, as per deLong/Summers hysteresis: there´s a new, lower growth path.

  53. Will
    August 24th, 2013 at 15:39 | #53

    I am definitely not up to date with the latest literature on economic convergence, but it is fairly obvious to me that one would expect an S-shaped economic growth curve. At low levels of development there is high marginal productivity of capital and is very easy to raise the standards of living. In developed countries, a unique economic shock leads to a reduction in the productivity of the labour force due to (if you’re a neolib, a large chunk of the population choose to take an extended holiday; if you are rational, there are structural issues among them a decreased safety net for all aspects of employment and training) and a concurrent brain drain as the most educated fraction of the population chases economic opportunities elsewhere. Convergence is not an immutable law and must not be assumed.

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