Did you see all the fawning praise that followed on from the news that Australia’s GDP grew by 3.1 per cent in the last quarter of last year? The Treasurer Josh Frydenberg did the Sky after dark circuit, with metaphorical bouquets tossed at his feet from all directions including most of the Australian’s columnists who thought things economic were looking far better than expected just a few months ago. Well, forgive me for playing Cassandra here but I’m not remotely convinced. Here’s why.
Even if you buy into GDP as a good measure of a country’s economic health, and I don’t, last year GDP shrank by 7 per cent in the June quarter before coming off that precipitous base with increases of 3.4 per cent in the September quarter and then this most recent 3.1 per cent increase. The more fundamental problem is that so many commentators – and our Treasurer – are obsessed with GDP as a measure of economic activity. Its two main components are household spending and government spending. (So any time government spends, that in and of itself helps GDP go up. You can’t adopt a more Keynesian presupposition than that.) In that sense, and that sense only, when GDP goes up then the economy has grown – households and government are spending more.
What’s wrong with that as a measure? First off, and least fundamentally, GDP says nothing about how individuals are faring. We’ve all heard about how Australia’s GDP grew, uninterrupted, for near on three decades. Alas, the simple fact is that if a country’s population grows quickly enough – and pre-Wuhan flu Australia had pretty much the highest per capita immigration intake in the world – then GDP has to go up. Bigly. If a country has 100 people in year 1 and you increase that to 200 people the next year the level of household and government spending will go up, and up a lot. But, per capita, things could have plummeted. Did I mention that if you looked at GDP per person Australia has done no better these last decades than Japan, which has basically zero immigration. Pre-Covid that was the sort of Ponzi scheme economic growth Australia was producing for quite some time.
But here are more fundamental problems with our economy, at least to my way of thinking. Government spending does not create real wealth. The GDP measure masks this. When Team Howard/Costello produced their last budget (back before Rudd), Commonwealth government debt was basically zero. Yes, alone in the democratic world we were zero. And Commonwealth government spending was about $220 billion or so. That was 15 years ago. Since then we have had more Coalition governments than Labor ones. Right now, while Josh celebrates 3.1 per cent GDP growth last quarter, Commonwealth government debt has exploded and by 2024 will be one trillion dollars (from basically zero remember, giving us the worst trajectory of any country worldwide) and government spending will settle around $600 billion in about three years. Let’s be honest. Josh Frydenberg is a massive spender. Massive. He outspent Justin Trudeau in responding to Covid. He and Team Morrison spend like drunken sailors. Remember back to how GDP is measured? Government spending (because of how GDP is measured) in and of itself increases GDP. Those are the presumptions built into the game. Celebrating your own profligacy on Sky TV seems a bit odd to me.
Let me put it another way. Countries in Europe like Greece and Italy and (at a sub-sovereign level) Scotland have government spending of over 50 per cent of GDP. You know what that does? It kills productivity and makes you something of a basket case – massive debt, low wage growth and young people who want to leave. Fifteen years ago we had zero Commonwealth debt and comparatively low government spending. Now our Commonwealth and State government spending is trending towards a new peacetime record of at least 40 per cent of GDP. I would have thought any Treasurer from a political party that purports to be for small government and freedom of the individual (okay, you’re right, Team Morrison shows zero concern for freedom issues of any sort so ignore that second criterion) would worry like crazy about how his government is spending on the level of soft socialist states.
Look, we as a country have comparatively lousy productivity growth. Unless you believe government spending drives innovation and productivity, we’re trending in a really bad direction. Government is borrowing like mad. People are spending money the government sends their way (which also boosts GDP remember), including via having some of the highest-paid public servants and university administrators in the world. Governments and central bankers are doing all they can to keep interest rates low (to help service these debts). Doing that means forcing inflation to show itself in terms of asset inflation – higher and higher house prices and stock market indices. Do you really think that’s good? People with assets keep getting richer while those without don’t, which means you’re breaking any link between merit, hard work, willingness to save and how you fare in life. The old Protestant virtues no longer tend toward good outcomes, as they did for most all successful countries in the last two centuries. Now those virtues make you a mug. But hey, our GDP went up 3.1 per cent last quarter.
Last point. All of this spending on steroids was not the fault of a virus that kills about a quarter of one per cent of those who catch it, and when it does kill its median age of death is higher than the country’s life expectancy – put bluntly, it only kills the very old and sick if we’re talking general terms. So Josh’s talk of the economy suffering a ‘Covid-induced fall’ is rubbish. The economy suffered from the response made by politicians who deferred completely to a handful of public health types. These people, with their preference for heavy-handed lockdowns where they (the doctors, the epidemiologists, the politicians, the public servants, the police) pay none of the costs of their authoritarian heavy-handedness, got it badly wrong. Compare Florida to New York. The one that didn’t lockdown has about half the deaths per million from Covid. Compare us to Taiwan. They did not intrude on civil liberties anywhere like the way we did and they had far fewer deaths. Or put it this way. GDP went up some $20 billion in the last quarter. But Commonwealth debt probably went up almost $40 billion while the Reserve Bank printed near on another $20 billion. Can’t keep that up for long.
I’m no economist. But my daughter, sister, dad, uncle and two cousins are. I’m the family’s lawyer black sheep (can I still say that?) who’s listened to enough arguments about economics to sink a ship. I know balderdash when I hear it. Josh the Dosh is not a particularly good Treasurer. He’s a profligate spendthrift in a government that won’t make any hard calls on the economy, reforming IR, universities, cutting spending or anything else.
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