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The Economy is Like a Giant Blancmange, Except that it’s Not.

Many people see the economy as like a household budget. You need to keep it all neat and orderly and manage it. Others see it as like the weather. There’s nothing you can to do change it, so you just have to adjust as it happens. I could find plenty of analogies for what the economy is like, but I think it’s worth quoting George E. P. Box here: “All models are wrong; some are useful.”

As far as the economy goes, here in Australia, we’ve often been encouraged to see it similar to the “weather” model: Lots of things beyond our control dictate how well it performs and beyond having an umbrella handy, there’s nothing much we can really do about it. We’re a small country and we don’t have the scale or clout to affect things very much.

Of course, this is partially true, which is what makes it compelling, but let’s not forget that all models, all analogies, all comparisons are arbitrary and man-made.

An economy is – well, an economy. And while there are various ways we can look at it, break it down into sub-sections and individual parts such as the local economy or the world economy, in the end these are just to give it meaning and structure. When Margaret Thatcher said that there was no such thing as society, she may as well have added that there is no such thing as “the economy”.

I make this point, not as a sort of first year philosophy discussion, but because a lot of convention wisdom about the economy is just that. It’s an agreed set of beliefs that economists generally agree about (and disagree, within certain parameters). A few years ago, for example, I heard an economist explain that China was doing the wrong thing by not floating their currency. Apparently, the reason China wasn’t doing this is because it was to their advantage. But it was the wrong thing to do.

Australia has been doing the “right thing” for years – opening borders, privatising, floating the dollar, reducing Government spending in certain areas. And it could be argued that this has served Australia well, but that’s a rather large debate and not completely relevant the point I’m making.

The Labor Government copped both praise and criticism for the way it responded to the Global Financial Crisis. The strongest comeback for Labor is that Australia was one of the few countries in the world that didn’t go into recession. To counter this, the argument that the Liberals have been running for years is that the money they spent was too much, and mismanaged. Of course, it’s always easy to argue hypothetically about something past. (I can argue that if Melbourne Football Club had appointed me coach two years ago they’d have been in the finals now, rather than near the bottom of the ladder. Nobody can prove me wrong!)

Labor did what it did, borrowed what it borrowed and spent the money on identifiable things. But let’s not take up the politics of this, or the conventual economic view that Labor were wise to get into as little debt as possible, let’s take a totally “irresponsible” view. What if Labor had borrowed twice* as much, and awash with funds set up a state of the art, world class research facility which would have attracted the best scientific minds in the world. Or something long-term to help our competitiveness in the future. Like improving the availability and speed of the internet. Oh, yes, I forgot. When’s that stopping again?

The thing is Labor were in Government. They had control. They could have spent more, or less. They could have lowered taxes, or raised them. They had lots of ways in which they could affect the economy. The debt itself wasn’t the issue. …

The debt was political. The Liberals would have squawked about things getting out of control under Labor. Whereas now, a 66% increase in the debt ceiling is ok. Except that we’re not meant to be hitting it for ANOTHER THREE YEARS. That’s three years of “responsible” economic management.

Responsible economic management that may include the sale of Medibank Private, which was mentioned before the election, and the sale of the HECS debt, Australia Post and a range of things that weren’t. Imagine if Labor had tried even selling one of these to pay off debt or to bring in the NDIS.

Of course, the real reason that Hockey is increasing the debt ceiling by so much, I suspect, is so much that he expects to hit it, but that he doesn’t want to have raise it again before the next election, and that not hitting it will be used as “sign of good, responsible management” as in Labor raised the debt ceiling more that once, but we just did it the once and look we haven’t hit it, aren’t we good?

I think that’s about the size of it, economically speaking. As the economy is like the weather, I’ll end with this analogy:

Labor was blamed for the rain. They then bought too many sand-bags to use in the levy bank to protect us from the flood. We didn’t need that many sand-bags because no water got over the levy bank, so we put the Liberals in charge. It’s stopped raining. We put in an order for nearly twice as many sand-bags. When the next lot of rain comes, the Liberals will claim credit for the fact that they didn’t use all the sand-bags.

So Labor went $285 billion into debt to save us from the GFC, what’ll be the Coalition’s excuse?

*Someone I’m sure will point out that funds were not easy to obtain in the GFC, even for Governments. I’m conveniently overlooking that because it’s not relevant to the points I’m going to make later on, and as this is hypothetical, I can – like Tony Abbott – completely ignore reality when it doesn’t suit me.

 

 

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