Writing the history of the GFC

Over the coming years, we will no doubt be subjected to a new history wars – one battling over the final word on the GFC and the fiscal policy response to it.

Time will allow it all to be played out, but there are some troubling trends that I hope are eventually discussed honestly and openly.

The first is the idea that the fiscal stimulus ‘saved’ Australia from recession. For starters, if Australia wasn’t ‘in recession’ in late 2008/early 2009, then we simply have a definitional problem. The blunt definition used in Australia is unnecessarily artificial. Some are starting the question the method and its meaning. I suspect time will show that the non-mining economy was, in fact in recession. I will certainly remember it that way.

Further on that point, the mathematical fiction that we avoided a recession is, even if true, a relative measure. What is the difference between, say, a +0.1% growth rate, vs. a -0.1% growth rate. One is a recession, the other not.  Surely, though, it is the difference of the two trajectories (say, one with stimulus, one without) that is the real measure of value.

Having a true understanding of that dynamic will be critical in evaluating whether or not the stimulus was a good investment. Simply claiming that the stimulus was a good thing because it ‘saved Australia from recession’ is extraordinary in its irrelevance. It is incredible how often the line is repeated.

The second is the commonly quoted idea that this has been the worst economic downturn since the Depression. That’s just not true. The financial market challenges in late 2008/early 2009 were perhaps the greatest since the Wall Street crash in 1929, but were resolved over the months that followed. The financial market crisis essentially was a North Atlantic issue, and was steadied after the TARP bailout in the US. Bankers have long been back to paying out billion dollar bonuses.

The lingering economic downturn that followed has been felt most in the US, the UK and a range of European countries, all driven to a large degree by the unwinding of terrible financial misalignments that had developed over a long period of time.

The third and most important goes to the status of the professional economist and the reputation of Keynesian economics. The Keynesians have managed to capture most of the oxygen in the debate, and have created, quite fraudulently in my view, a non-falsifiable position to the effect of: Spend lots of money. If it doesn’t work, just spend more. If it does work, claim credit. Any waste is justified as being the lesser of evils, and in any event is stimulatory in itself. One only has to scan Paul Krugman in the NY Times to get a sense of the argument. His opinions can never be wrong; any failure of reality to match his predictions are attributed to not spending enough.

It is hard to have any sense of how to judge an economist. Given that it is impossible to ever conduct a controlled experiment, it must be difficult to call it a science in the true sense. Who knows what would have happened with less stimulus. With more. Who knows what the effect of stimulus was and remains: encourage people to spend, or allow them to pay down debt? Does it stimulate confidence, or reduce it given that most know it is temporary? Are we no better than monkeys, or do we understand that every dollar spent today will be a dollar not spent tomorrow, or that it will have to be re-paid in higher taxes or inflation?

The internet is full of critiques of the current Keynesian experiment, and arguments supporting it. I am no economist, and don’t claim to be an expert. Either way, I have a hard time accepting the ‘spend money you don’t have to ‘save’ us’ argument without reservation. It smacks too much of the narcissistic idea that we are living in unique times, and that no future price is too high to pay for my current happiness.

With that in mind, I found this article interesting. My favourite line:

To every one of the supporters of these government projects who claim to have created some number of jobs, I encourage the reader to ask a simple question–who was using the money before the government diverted it, and how many jobs were they creating?

It resonates with me, especially because it goes to my belief that the stimulus has been too skewed towards big business. That of course was ‘necessary’ given that there was not, apparently, enough time to do anything other than give money away to the usual suspects in a rush.

Where will it all end? Perhaps we’ll have to wait to see what happens when we start paying down all the debt. Thankfully Australia looks to be spared the worst of it. I think it would be a misreading of history to thank the stimulus. More likely the credit goes to starting with no public debt, having already had a tough year in the real estate industry in the preceding year, and having a huge trade exposure to China.

UPDATE 2/8: Interesting article apropos the scientific method in economics and other social sciences, courtesy of Real Clear Politics.

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