Learning from the past
In times of crisis, be it the global economic crisis or the recent Australian floods, the role of government spending needs to be better understood in its historical context.
In a previous post I suggested that countries that cut back public expenditure in these perilous times would do so at the danger of causing their economies irreparable risk. Well, the evidence from the UK suggests that my warning was apposite.
In the December quarter, the UK economy, expected to grow by 0.5%, went backwards by 0.5% instead. The coalition government is blaming the severe weather in December for this unexpected result, claiming that it is because people could not get to work or to the shops.
While it is likely that the weather did make such a contribution, though it did not so in 2009, in similar circumstances, a 1% reversal of fortune cannot be explained away so easily.
In fact, when one considers the segments of the economy that went especially bad, it is clear that through the last three months of 2010 UK consumers went on strike, as did the building industry. This is not surprising, as people cut back on discretionary expenditure in expectation of bad times to come and household savings rates continue to rise.
Does this sound familiar? It should, because this is the scenario that played out in the 1930s.
After the 1929 crash, the UK economy, as did most others, picked briefly, thanks to stimulus supplied by governments. Seeing these glimmers of light, however, governments around the world immediately turned off the tap, balancing their budgets, which caused national economies and the global economy to crash again, this time for good, until World War 2 turned things around.
By the way, it is obvious that Abbott and Costello…sorry Hockey…do not read or understand history, because this is the policy course they continue to advocate for us. In fact, one wonders whether their short term memory is also defective, because in their arguments against a flood relief levy they seem to have forgotten the six special purpose levies they imposed when last in government.
I urge you, dear readers, not to make the same mistake, in respect of the levy or the economy more broadly. Why do I say that?
Let us draw a simple comparison. In Australia, we have falling inflation and a growing economy, thanks to the government, Ken Henry and the Reserve Bank…and China. The UK has rising inflation and a falling economy, thanks to the government, the Bank of England…and the weather. Which would you choose?
It will be interesting to see what happens to the UK economy now that the weather has improved.
Meanwhile, I suggest you read John Kenneth Galbraith’s The Great Crash, 1929. It was written over half a century ago – though there is a new edition dating back to 1997 – but I think it remains the best account and provides the most lucid explanation of the crisis that has become the benchmark for all financial crises. It should be compulsory reading for politicians, commentators and academics, in Australia and elsewhere.
Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Senior Executive Advisor, Domestic and International Markets, with the Sustain Group www.sustaingroup.net. His books Compliance and Regulation in the Financial Services Industry & Waves of Change: Managing Global Trends in the Financial Services Industry are available at Amazon
Philip Argy
January 28, 2011 at 4:21 pm
Hard to generalise
It’s the composition of Govt spending that matters in my view. For example, sending people a cheque for $900 to spend on imports is going to be less effective than if that money had been invested in a long term capital project with durable public value. It’s the old argument about deficit and surplus budgeting – it’s too simplistic and generalised unless the composition of the spend is examined. Even the paradox of thrift remains applicable.