Swan on Keynesian policy

Wayne Swan has a Fabian Essay defending the Keynesian credentials of the Rudd and Gillard government. The central argument is sound enough

if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.

But there are a couple of big problems. The first is one of timing. The 2009-10 Budget, which included a large deficit as a Keynesian stimulus, proposed a return to surplus by 2015-16. This was seen at the time as quite ambitious – most developed countries have no obvious path back to surplus.

Nevertheless, by May 2010, with economic conditions much stronger than expected, it seemed as if the government had not been ambitious enough and the target date was brought forward to 2012-13.

Over the past year, however, the economic news, both locally and globally, has mostly been bad, with natural disasters producing short-term shocks, and the US and Europe mired in heavy debt and sluggish recovery. The economy has slowed a bit and tax revenue has fallen short of expectations. Unsurprisingly, on the government’s current policy settings, the return to surplus would be delayed, though probably still ahead of the original 2015-16 target.

From a Keynesian point of view, that’s exactly what should happen. Although the slowdown isn’t enough to justify an active fiscal stimulus, the standard Keynesian prescription would be to allow the automatic stabilizers to work, smoothing the path back to full economic recovery. Unfortunately, that’s not what the government is doing.

Rather than adjust the target to reflect the fact that the strong conditions of last year have not been sustained, the government is planning sharp spending cuts, not justified by any evaluation of costs and benefits, to ensure that the target is met on the new timetable. This is a fairly typical example, as is this.

An even bigger problem, reflected in Swan’s rhetoric about “making way for the private sector” in the recovery is the government’s insistence on holding down the size of the public sector relative to national income. This is a repetition of the ‘Trilogy’ commitment made by the Hawke–Keating government in 1984.

But (although Swan understandably skates over the fact) the Hawke-Keating government was explicitly anti-Keynesian at least until the later stages of the recession that began in 1989. The Trilogy reflected the policy thinking of the time, which was dominated by the then-ascendent ideology of new classical macroeconomics, market liberalism and financial deregulation. Anti-Keynesian ideas such as ‘crowding out’ were part of this ideology.

As Kevin Rudd observed in his much-cited Monthly Essay, such thinking was discredited by the Global Financial Crisis. The crisis demonstrated the dependence of modern economies on the ability of the state to act as a financier of last resort and as a source of fiscal stimulus.

In these circumstances, there is no justification for holding down the size of the public sector if it means rejecting policies for which the benefits outweigh the costs. Given the growing importance of health, education and other services largely funded by the public, we should expect to see the share of the public sector growing over time.

Unfortunately, Rudd and Swan did not act on this logic in the 2009 budget, promising to balance the budget primarily by holding down saving. And in this respect, unlike the timing of the return to surplus, the government’s position has been consistent.

A genuine revival of Keynesianism requires a hard look at all the ideas that came to be taken for granted during the era when market liberalism carried all before it. These ideas produced the global financial crisis, and were discredited by it. Nevertheless, they continue to wander in zombie form through the arguments even of professed Keynesians like Swan.

27 thoughts on “Swan on Keynesian policy

  1. So having never really tried proper communism and having never really tried free market liberalism it seems you are saying that we are also not really trying Keynesianism. I’d be disowning this government also if not for the fact I was never a supporter.

  2. @TerjeP

    Spoken like a true ideologue, Terje. Ideologues always think in pure categories and propose pure solutions. Pure categories never exist in real political economies, neither do pure solutions. This is not the same as saying extremes never exist. Pure free market liberalism was never tried anywhere (because it cannot be) but some extremes of deregulated free market liberalism were tried circa 1980 to 2010 in the USA. We saw the results in the Global Financial Crisis Part 1 in 2008. (The full GFC event is not over yet.)

    A pluralistic, policy flexible, mixed, open economy works best. The empirical evidence shows this time and again. Extreme systems always flounder in the end.

    Libertarianism is an extreme view of the rights of the individual to enact any self serving behaviour (at least in the economic sphere) without regard to the general rights of others nor the common good of humanity and nature.

    JQ’s criticism is spot on. It is not the time yet for decided fiscal tightening. It is too early in the recovery cycle and the global recovery is doubtful at the moment. I suspect that the survival of zombie ideas result from some people being “zombied out” on ideology and pure solutions and the rest of the zombie herd following (as zombies do).


    “All those zombies in high places” is a great line. Pity the rest of that song is religious ideology.

  3. Oops, that song (All You Zombies), does not have a line that literally says,
    “All those zombies in high places”.

    I guess it was a Freudian slip and reveals what I think of people in high places. 😐

    “All You Zombies” is a Hooters song. It is also the title of a science fiction short story by Robert A. Heinlein in 1958.

  4. John, you are right: what Swan and Gillard are doing is not well timed Keynesianism. Even conservatives like the independents accept this. But the Government is locked into stupid promise to achieve a surplus by 2012-3.

    The Coalition and other idologues can’t lose: they will deplore the savage cuts and blame in on past “wastage” (which is only a smallish proportion of the total). Any if the Government abandons the idea of balancing the budget, it’s just another promise broken.

  5. Dear John,
    Bill Mitchell and others of the MMT school state, in terms of sectoral net financial assets (NFA): GovtBal = NonGovtBal $ for $.

    The govt. is by accounting definition in deficit, if it wants the nongovt sector to have NFA. GovtBal + PrivateBal + ExternalBal = 0.

    If the external sector is negative then govt. must run a deficit if the private sector is to be in surplus for the period.

    If the govt. in these conditions runs a surplus (strips NFA’s from the private sector) then the economy contracts and the private sector is nobbled.

    I think the main points of the MMT camp about sovereign governments:

    1) issuing their own currency with a flexible exchange rate (with debts denominated in their currency) can never become insolvent, or ‘run out of their own money’;
    2) can therefore, always buy anything that is for sale up to the point of full capacity before inflation becomes an issue (e.g. the 11.4% labour under utilisation in this country – 24.6% for 15~24 year olds);
    3) are irrational ‘funding’ themselves with bonds, when they can simply spend by crediting bank accounts (honoring the capacity constraint) –

    is what the discussion should be about. I am yet to read an argument that negates these propostions.

    After WWII the govt. bout was all about which party could provide full employment (~2% unemployment). Now its all about debt. If you could buy anything that was for sale would you be practicing austerity? And how would you sum up your ‘surplus and deficit’?

    My understanding is that a sovereign government need not rob, borrow, work, save, tax, or prostitute itself in order to spend. The monetary system is simply a plug-in. All there really is, is the skin of the earth, its resources, and human values.


  6. Spoken like a true ideologue, Terje. Ideologues always think in pure categories and propose pure solutions.

    So you have me in the pure category called “ideologue”? And nuanced arguments about actual policy is now okay whilst if done to defend liberal markets it’s all too much. Interesting.

  7. @TerjeP

    And nuanced arguments about actual policy is now okay


    whilst if done to defend liberal markets it’s all too much.

    Fallacy of Non-sequitur. Where is the link between the first observation and your unsupported conclusion.

  8. @TerjeP

    If I must play the nuanced semantic argument game as finely as you, I can reply that “spoken like a true ideologue” is not the necessarily the same as saying you are a pure ideologue. That is precisely why I worded it so carefully. I am sure you are not a pure ideologue but you seem, on my judgement, to take libertarianism to an extreme.

    However, you need to explain what you mean by “liberal market” and/or “free market liberalism”and why you imply “we” (Austalia?, the US?) have never tried “free market liberalism” or aspects therof. Further, you need to explain why you apparantly don’t regard US market and economic deregulation (circa 1980-2008) as a test case of movement in the direction of more liberalised markets. Further, you need to explain why you think that that liberalisation played no role in the GFC (Global Finacial Collapse) or Great Recession as some Americans call it.

    I assume you would need to explain this, if you are arguing that market liberalisation did not go far enough in the US over the last two and half decades.

    I’d also like to know if you regard the recent history of the Marianas Islands (CNMI) circa the time of the events involving “Casino” Jack Abramoff et al, as in any way indicative of what happens when markets are extremely liberalised? Given that a significant body of US Law (economic and labour laws especially) did not apply in the Marianas at this time, even though the US administered the Marianas, this equates to a further liberalisation of standard US market laws at that time. Is this what you would like to see everywhere under your version of free market liberalism? I assume not but I wonder how you think it would not end like that? The Marianas looks a like a real experiment in extreme free market liberalism to me. The empirical results are clear.

  9. defending pure free markets is going on all the time.

    the freedom to profit from importating cocaine into Oz was defended by what is described as the “execution”of a witness to the activity.

    if you want a purely unregulated market you can’t go past an illegal one.

    of course it regulates itself but without that bugbear of sovereign states sticking their noses in where they are not wanted.

  10. @jrbarch

    MMT (Modern Monetary Theory) or Chartalism makes a lot of sense to me. It de-mystifies a number of issues surrounding money, taxes, surpluses and deficits. Chartalism points out that these phenomena (money, taxes, surpluses and deficits) are not natural or absolute realities but simply convenient and inter-relative accounting categories in a particular abstract financial system, that of capitalism.

    Of course, our populist, rabble-rouser politicians love to talk about money, taxes, surpluses and deficits as if they were deep, natural and absolute realities handed down from on high at the creation of the world.


    Wikipedia notes its relation to Keynesian theory;

    “The theory was developed by economist G.F. Knapp in the 1920s, with important contributions also by Alfred Mitchell-Innes. It was influential on the 1930 Treatise on Money of John Maynard Keynes[4], which approvingly cited Knapp and “Chartalism” in its opening pages.[5] Chartalism experienced a revival under Abba P. Lerner,[6] and has a number of modern proponents, who are broadly denoted as post-Keynesian economists.”

  11. “if you want a purely unregulated market you can’t go past an illegal one.”

    Isn’t making a market illegal the ultimate regulation?

  12. Keynesianism is really a plagiarism on Torrens. Wasn’t he the first to note the need for ‘effectual demand’ where consumers exchanged for a commodity, more than it cost to produce.

    R.Torrens (1821) – An Essay on the Production of Wealth [Cited by Marx]

    I don’t think Marx ever considered the possibility that capitalists would have the effrontery to actually try an run an economy on this basis – but there we are. No wonder Steve Keen is jumping all over the place.

  13. However, you need to explain what you mean by “liberal market” and/or “free market liberalism”and why you imply “we” (Austalia?, the US?) have never tried “free market liberalism” or aspects therof.

    Ikonoclast – Actually to do that in detail would probably take us off at a tangent.

    First up I would not want my opening comment in this discussion to be interpreted too seriously. It was intended more as a friendly poke rather than a full blown criticism. Having said that I will attempt to explain where I was coming from.

    John Quiggin has dismissed “free market liberalism” because in his view it has failed. The GFC and the subsequent “need” to nationalise banks in the USA and elsewhere are his more recent evidence of that failure. Any counter argument that points to regulations as the source of the problem almost by definition says that we didn’t have enough of a “free market”. To dismiss such arguments on the basis that a “free market” has been tried is somewhat disingenuous. To dismiss such arguments fairly would require that they be examined on their merit. In some instances John has in fact done this but on other occasions he has simply dismissed arguments for free market liberalism on the basis of “been there done that it didn’t work”. I offer this as an observation more than as any sort of serious criticism. From time to time we all use short hand remarks in our arguments. I felt it worthy of a poke not a full blown critique.

    In terms of where things in the financial sector have gone wrong a major problematic regulation in my view is the control of interest rates by central banks via the fiat monetary system. It is certainly the case that some people might examine a proposal to abolish central banking and dismiss it. However it wouldn’t be correct to say that we recently tried such a proposal and it was found wanting.

    You seem to regard the US as the land of financial freedom. I’m not sure why. The Heritage Index of Economic Freedom has a metric called “financial freedom”. In it’s 2011 ranking the country with the highest score on this measure (90/100) is Australia. The following link shows the historical trend for the USA and Australia. It suggests that Australia more easily lays claim to being the land of financial freedom.


    Finally on the issue of Keynesianism I should declare that I don’t think governments should ever spend wastefully. Not in good times nor in a recession. A government program of spending that makes no sense in good times does not suddenly make sense because of a recession. Except perhaps where it is the metaphorical equivalent of a soup kitchen.

  14. John, you may deplore the distributional consequences of a faster return to surplus, but I can’t see the problem on macroeconomic grounds. Do you fear it will depress employment? If so couldn’t looser monetary policy counterbalance that? Would you object to returning the budget to surplus by 2012-13 by raising taxes on the well to do? Would it be poor macro-economic policy?

  15. @TerjeP (say tay-a)

    Free markets can’t exist. What people call “free markets” is always controlled and manipulated. The choice is by who and how? How do you propose your version of control would improve the situation for which people?

  16. Swan skates over the change in the definition of “full employment” from 2% to 5%+, I note.

    Chris Warren: I think Malthus beat Torrens to it; he justified the existence of an aristocratic rent-absorbing class on the grounds that they would buy lots of luxuries, employ lots of servants, etc with their rent (ie consume rather than invest it) and thereby boost demand.

    Nicholas Gruen, I think the problem with trying to achieve “a faster return to surplus” is that as the British are now finding, savage cuts to public spending depress the economy, leading to lower tax takes and higher unemployment payouts (automatic stabilisers) so that the deficit grows more the more you try to “cut” it.

  17. @Greego
    oh boy oh boy.

    profitable business here i come .

    slavery—pure profit,especially with the population levels the way they are,work ’em til they drop.
    then market as fertiliser.

    prostitution—-shackles! age of consent? don’t give me that. pure profit.supply and demand rulz.

    timber—–strip those forests out,the future don’t need them.more profit.

    armaments—- whew,the mind boggles.profit


    the list is extensive—we don’t need no steenkin’ regulations.

    the repeal of natural laws/boundaries is the newest post modern seriously superior noble cause.

    apologies for the self indulgence.

    the next time i see this kind of blither i’ll just give it a parse.

  18. @JamesH

    I think Malthus beat Torrens to it;

    I guess so. In principle it is a merchantile concept viz. buy ‘here’ but sell ‘there’ (where more can be obtained).

    However once the issue surfaces as a general “effective demand” it appears to take on a new guise. This appears different to a merchant opportunistically ‘buying cheap and selling dear’.

  19. I don’t think that governments ever ‘spend wastefully’ on purpose. Keynes’ story about employing some people to dig ditches and others to fill them in was an illustration of the importance of aggregate demand, not a policy prescription. And the idea that government spending is hugely wasteful is untrue. I heard recently Ken Rogoff (hardly a friend of big government) saying that government investment can easily return 6%, which is considerably greater than their cost of capital. Given that private sector investment averages (I think) around 7-8% there is hardly a huge difference here. Also government spending has all sorts of advantages such as being counter-cyclical rather than pro-cyclical and generally has nice effects in terms of alleviating poverty.

  20. @jakerman
    Jakerman – Id actually like to know where Terje’s nuanced commentary was regarding policy was in the first place. I cant find it here.

  21. John given your exposure of Swan’s lip-service-Keynesianism here (is there a nominally left wing govt anywhere that is Keynesian now?), especially in relation to debt, I would be interested in your take on the latest Obama big economic picture speech. I had a little go at one aspect (the Australian media treatment) here http://davidhortonsblog.com/2011/04/15/miles-to-go/, but I wonder if you share my horror of a Democratic president as apparently neo-conservative economically as any of his mad-brained Republican opponents? And he is STILL hoping for agreement, common ground etc with these crazy tea party/ Glen Beck-inspired people.

  22. @Nicholas Gruen
    How is the US doing with its quantitative easings? Any light on the job front from all that money sloshing about or is it only the banks who have been guaranteed to make a killing on it?. So the large banks are still floating beautifully in a bountiful sea of taxpayers and federal banks generosity with none of their ills even checked or rationally reduced by the market?

    Seems to me market powers can easily be forgotten by free markets advocates any time they like.

    Alas US unemployment has risen again and the budget is well….you know. Was Milton really as good as some people thought? Im having trouble seeing it. How about traxing the rich more? Maybe this is a good place to start undoing some of the wrongs.


  23. As a fledgling post-Keynesian (MMT School), I disagree with

    Although the slowdown isn’t enough to justify an active fiscal stimulus

    but I agree with everything else you’ve said, Prof Quiggin.

  24. Nicholas Gruen :
    John, you may deplore the distributional consequences of a faster return to surplus, but I can’t see the problem on macroeconomic grounds. Do you fear it will depress employment? If so couldn’t looser monetary policy counterbalance that? Would you object to returning the budget to surplus by 2012-13 by raising taxes on the well to do? Would it be poor macro-economic policy?

    Hi Nick, I know you didn’t ask me and I’m by no means a professional (in any economic capacity) but the answer to your questions in order are Yes. No. Yes. Yes.

    Looser monetary policy will work in some areas but not others, its a blunt instrument. On hiking taxes on the well-to-do, in your own work you note they’re not a broad base and this wouldn’t be efficient. It would only encourage tax evasion and probably prevent investment.

    Greater employment (less underemployment) leads to Greater tax revenues which leads to lower deficits,which can possibly lead to accelerating inflation and thus a surplus is required to withdraw some of that spending power from the formerly underemployed.

    Otherwise a surplus just draws taxes from those that can least afford it and creates more underemployment as those that need to spend can no longer spend as much driving up unemployment.

    I believe Gillard/Swan are relying on another commodity bubble (and with worldwide disasters, it is likely) to export their way out of the situation which goes straight to @jrbarch‘s point.

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