John B Taylor provides evidence that keeping interest rates too low exacerbates a housing boom. It will be interesting to see if this also holds true in Australia because our interest rates are at an historic low.
Originally posted on Economics One:
In her article “Alan Greenspan: What Went Wrong” in the Wall Street Journal Alexandra Wolfe considers whether monetary policy played a role in exacerbating the housing boom going into the financial crisis by holding interest rates “too low for too long.” I’ve argued that it did (along with regulatory lapses) and wrote about it in a 2007 Jackson Hole paper.
Alan Greenspan disagrees with that paper, as Alexandra Wolfe reports, but she also reports that “Prof. Taylor stands by the paper in which he presented the idea. ‘The paper provided empirical evidence…that unusually low interest rates set by the Fed in 2003-2005 compared with policy decisions in the prior two decades exacerbated the housing boom,’ he wrote in an email. Other economists have corroborated the findings, he added, and ‘the results are quite robust.’”
Understandably, there’s not enough space in such an article to list the corroborations that…
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Keynesians are defined as people who follow the teachings of John Maynard Keynes. By definition, and because of the nature of my degree, and in particular because I did my studies more than 30 years ago, I am a Keynesian. I was taught basic Keynesian economic theory, including theories about Supply and Demand. However, that is about as far as I go where the definition is concerned, because I do in fact believe that Keynesian economics failed by the mid-1970s and the reason for this failure was in fact Stagflation.
Economic theory should not be something that is considered to be static. If Keynes had not died so soon, perhaps he would have revised further his own ideas. I do know that he revised some of his ideas after his interaction with Hayek, and this is a point that I never see acknowledged by those who take an anti-Keynesian stance.
What I am going to argue here is that the anti-Keynsians are guilty of building up a straw man and then knocking it down with their own ideas. What I am going to point out is that many anti-Keynesians are guilty of having the narrow view of the world at large, seeing as they do everything through an American prism.
The first thing to point out, therefore, is that Keynes was an Englishman. His observations of the world economy were based upon his own English and European experience. As such, I argue that Keynesian theory needs to be studied not via the American prism of an economy but through the British experience instead. By necessity, this includes examining the rise of unionism and its impact upon the British economy during the era in which Keynes lived. This is also relevant to the Australian experience, but there are some differences.
The second thing I am going to point out here is that Australia had recognized the role of unions from the beginning of Federation, and had in place a system whereby the Arbitration Commission (now extinct) had set a minimum wage for all wage earners. I can write more about the Australian experience rather than either the British of the US experience when it comes to wage earners or I should say Labour.
The Australian Arbitration Commission was very influential when it came to the setting of rates of pay. Up until about the 1980s Australia had a system where the national unions and employers would take a case before the Commission that always ended up setting the minimum wages. In the end, this system served to fuel wage inflation… but I will try to get back to this point. The point I want to make is that in Australia we did have in place a system where the wages for an apprentice and the lowest paid workers were set by the Arbitration Commission. The system itself was inflexible and inefficient because there were many factors not taken into account with regard to raising the minimum wage. In other words, what appeared on the surface to be a win for the workers, when the minimum wage was increased, usually had a cost in terms of jobs lost as some employers struggled to pay the new wage rates, or if jobs were not lost, then prices rose in response to any increase in pay.
It is this last point that I believe is the key as to why some aspects of Keynesian economic theory began to crumble by the late 1960s. Australia had followed Keynesian theory from the 1930s, and the government was reasonably successful in dealing with various problems. When government debt began to get out of control there would be a tightening of the belt or a contraction, in other words a credit squeeze, and at other times there was a little bit of an expansion. It all worked whilst Menzie was Prime Minister, but by the time Gough Whitlam grabbed power, Australia’s economy had begun to go into decline.
Under Menzies, as well as under such Premiers as Bolte, Australia was relatively prosperous. There was some moderate expansion programs that included building of the Westgate Bridge in Melbourne, as well as Warragamba Dam, the Snowy Mountains Hydro-Electric Scheme and other projects. All of this was investment in infrastructure and government paid for such schemes by the issuing of Treasury bonds.
However, when Whitlam took over the reins of government, his whole Ministry spiralled out of control when it came to spending taxpayer money. There were a lot of unfunded schemes, especially in relation to education, as well as the introduction of the Universal Health Scheme known as Medibank. Funding for Medibank was to come from the imposition of a levy that all taxpayers were supposed to pay. It is worth pointing out that largely unfunded schemes like Medibank (now Medicare) sound like a good idea until implemented and that is when the rorts begin to happen. A lot of doctors were prosecuted for rorting the bulk billing side of the scheme. A lot can be said about other forms of rorts but that is beside the point here.
As well as the out of control spending of the Whitlam Government, something which was controllable, there were other events that were not controllable in this era. The first of the uncontrollable events was the first oil shock. The 1960s was the first time that Islamic terror was splashed across our headlines. It was the era of aircraft being blown up. This had one type of impact upon oil supplies etc. but the oil shock was caused not by Islamic terrorism, but by the oil cartel known as OPEC. The OPEC countries are mostly Middle Eastern nations, but it also includes the USA. The cartel used to get together to determine the price per barrel of oil that we had to pay to get hold of unrefined oil. Thus, we have a group that was not exactly a monopoly controlling how the market behaved. The second oil shock occurred after the fall fo the Shah of Iran.
Whilst Whitlam was not entirely to blame for Stagflation, especially in Australia, his out of control spending was in fact a major factor in the prolongation of the Stagflation. As well as the impact of OPEC, Australia and he world was facing a period of inflation. In Australia I believe that the inflation is best explained a cost-push inflation because of the factors most responsible for the inflation including: sudden high wage increases due to never ending union demands for higher wages, the OPEC oil shock, and government taking up more than their fair share of the pie available for borrowings.
Keynes never had the opportunity to observe these economic patterns because these were events that occurred a lot time after his death. Had he been alive, then I feel certain that he would have modified his theories according to what he could observe after his theories were put into practice. The Keynesian solution worked for a time, but over time the solution stopped working. The failure of the Keynesian solutions is something that needs to be examined in some depth.
I am arguing that both anti-Keynsians and Keynesians are wrong in their outlook. The anti-Keynesians are blaming the wrong guy, and there are alleged Keynsians who wrap up their Marxism, using Keynesian theory to hide their real objectives (yes I am referring to Krugman who has pretensions to being a Keynesian when in fact his theories are Marxist in origin). The straw man built by the anti-Keynesian never in fact applies fully to Keynesian theory. The Marxist also never applies Keynesian theory but does in fact cherry pick what is convenient to their way of thinking.
My argument is that we need to examine government policy and government expenditure to see why Keynsian theory when applied in our modern society has been such a spectacular failure, and that any further implementation would continue to bring about the wrong results. Doing this unfortunately requires looking at the lunacy that is Green policy.
Don Argus is correct in what he is stating, that Australia’s position in 2013 has deteriorated back to the high debt levels of the 1990s.
The situation in Australia today economics wise is not a good situation for a variety of reasons. I have always argued that the measures taken back in 2008 were not necessary because Australia was not affected by the GFC because of the flow on effect of the good management under former Treasurer, Peter Costello.
The points that come out of what Andrew Bolt is reporting re the comments of Don Argus are ones that I think are critical as to the future economic position of Australia, especially if the electorate was foolish enough to allow the ALP to have another 3 years in power. That point is that our debt position has worsened and we have not had a recession!!
Despite what some claim, Australia was not as badly affected by the GFC, as say the USA or the UK for a simple reason – we have better controls over bank lending for mortgage. The mortgage companies that failed did so because they were following practices adopted in the USA and they were lending to people who could not possibly meet the mortgage repayment requirements. However, we did have a minor liquidity problem at the time and it did mean that some lending sources dried up, leaving some big projects either unfinished or simply delayed until the situation got better. Specifically, I am thinking of the Canberra Airport expansion that was held up due to temporary liquidity problems.
The measures adopted by Wayne Swan as Treasurer were the wrong measures to be taken. There was no need to send out $900 cheques to a portion of the population. I should add here that most of what was adopted was a colossal waste of money.
On a different note: There is a lot of information being revealed about government waste on certain projects. The waste involved more than 1 state in Australia and includes: Victoria, Queensland, South Australia and NSW. The projects are the white elephant de-salination plants. What is being revealed at this time indicates that the beneficiaries of the projects were people who had their snouts in the trough. Certain names, companies and unions have surfaced in what I have been reading. One name Robyn McLeod is quite significant because her history is not what has been claimed. The winners in regard to these projects have been the AWU and Thiess.
I am not sure that what has happened can be undone, but the point to make here is that this kind of project has meant that taxpayers will continue to be hurt for a very long time because a group of people had their snouts in the trough and were getting rich as a result of these schemes. BTW think Climate Change when considering this matter.
Yes it is true that I have an economics degree, and I received my degree in 1976. I have always maintained some interest in the economy but I am not an Economist because I have not done any work related to economics. I hope this makes sense because I want to expound upon something that I have been saying for quite some time regarding what I call the available pie.
My argument has been that when government starts spending up big on infrastructure etc. it is in fact taking investment monies away from private enterprise. My argument is best explained by using a pie which can be sliced up into several pieces or shares. My argument is that the pie is defined in some way (I am not an expert and do not know how it is to be defined), and that when Government is borrowing because Government is spending more than it is raking in via revenues, then Government is taking away from private enterprise, (Big, Medium and Small business). When Government borrows more than 50% of savings available for Investment, then that only hurts private enterprise. If private enterprise cannot borrow because the Investment Savings are being soaked up by Government, then in turn profits go down, and when profits go down, then tax revenue also decreases.
This is a very bad situation and is not one that should be lauded by any economist…. yet it seems the Marxist economists such as Krugman continue to peddle the idea that Government should be spending more. This is not just an argument in the USA because Australia also has some economists who claim the same thing, and it seems that European Marxist Economists such as Stieglitz also preach this kind of thinking.
Today I feel somewhat vindicated by a blog piece from the economist John B Taylor stating the obvious, that Krugman is wrong. Thank you John B. Taylor for affirming what I have been trying to state but am too inarticulate when it comes to economics to state the obvious.
The latest information out of France refers to Francois Hollande and his own officials, and the scandal is far worse than some wealthy old woman who is claimed to have dementia giving a large donation. The latest French scandal involves offshore accounts.
This seems to be a repeat of the rubbish prior to the 2008 U.S. Presidential election when a certain person proclaimed that he would run an Administration that was transparent… and yet he has the most corrupt Administration ever in the USA.
The Socialists cannot help themselves it seems. They like to think that they are “clean” and “ethical” but scratch below the surface and there are lots of corruption hidden in plain sight.
These revelations though, are nothing compared to what has been revealed by the NSW ICAC inquiry relating to the former ALP NSW government… now that is truly entertainment.
Australia is stuck with a government that is incompetent and I should add that it is full of cronyism and incompetents… did I just say incompetent? Maybe I should repeat that word one more time…. incompetent. There is raging in Australia at the present time the story that is at least 17 years old relating to the activities of the present Prime Minister. On my other blog I had a little bit to say about the fact that the woman has a bad habit of opening her legs for married men (it says a lot about her lack of integrity and character) and the fact that she has been a willing participant in what was fraudulent activity. It is no wonder that she expreseed her faith in yet another union con-man, Craig Thomson who is at the moment the MP for my new electorate. She did that because she has no problem with the creation of a union slush fund for political purposes.
The events that took place up to 20 years ago are indeed a reflection upon the lack of integrity of the present Prime Minister. I have seen documents that prove that she had a hand in the deception. Since this woman stole the leadership role, Australia has been going backwards at a very rapid pace – probably even more rapid than in the USA with that usurper in the White House. The incompetence on display is the level at which taxpayer funds are being wasted. However, there is even bigger evidence of why this is such a big stink.
First there is Fair Work Australia, which has replaced the Industrial Relations Commission. The Dullard is responsible for the legislation that has set up this paper tiger which is really on there to hand everything to unions on a silver platter. We are now starting to reap the whirlwind with regards to how this has been set up. FWA is staffed by union cronies. If the government wants to stifle an investigation, such as the one into the HSU East which is protecting the political career of Craig Thomson then it will do everything in its incompetent power to protect a crook. Hence, the KPMG report criticized the fact that FWA was ill-equipped to handle the investigation, but that report did not exhonerate Thomson as that sap claims!! It is actions within the last few days that are really showing that the FWA has absolutely no authority where these unions are concerned, and Australia is rapidly descending back to the days when unions employed all of their bully boy tactics with gay abandon – especially in the 1960s and 1970s.
Second, there is the implementation of the tax on the air that we breathe, and the continual spending of monies that have not even been collected. Australia is very rapidly descending further and further into the red because there is no accountability for the decision-making of this present government.
Third, there is the illegal alien debacle. I refuse to call these people refugees. There are refugees in camps in Africa but the people coming by boat are from Afghanistan, Pakistan, Iran, Iraq and a few from Syria. I am most suspicious about the ones allegedly from Syria because most of the refugees are in camps on the Syrian borders with Turkey and Jordan. If they want to leave and come to Australia they do not need to get on boats to come!! I am also suspicious about those from Iran and Iraq. It is true that there is religious conflict in Iraq – it is Sunni vs. Shia, but Iraq at least has a government that was voted in by the people. I am suspcious of those Iranians. How do we know that they are genuine refugees and not just agents of the government? The African refugees come to Australia by plane, and it is these illegal boat aliens who are displacing them in the queue. At the moment the boat arrivals are something like 5 in a matter of days, and the numbers are steadily rising on a daily basis. If they have no documents they should be refused entry into Australia. This sounds harsh but harsh measures are needed to stop the flow of these illegal aliens and the risks being taken in leaky boats.
Fourth there is the white elephant, the NBN network. The question remains: is this a necessary undertaking? However, more to the point, Conroy who was put in charge did not respect the need for a duty of care and he did not even do a feasibility study prior to embarking upon this lunacy. The cost is already blowing out, and it is a cost that is being hidden off-budget. Then again these union hacks have a history of keeping things out of balance sheets.
The fact remains that when you have union hacks running the government there seems to be a total lack of responsibility for good governance. The same kind of irresponsible spending that we saw in the Whitlam years has been occurring at an even more rapid pace. These people do not have any type of business nous. They love to enrich themselves at the expense of others. When they were the union bosses they enriched themselves by using members’ funds for their own purposes. In government they waste money left, right and centre.
The Daily Caller has given me the idea for this particular title. This is a follow on from my thoughts of yesterday when I began exploring what I consider to be ill-conceived notions about the role of government in the building of a national economy. The Solyndra debacle is only one of many, not just in the USA but also in Australia where government backing has not proved that an enterprise becomes a success.
Solyndra is a good case study because it highlights the problems with crony capitalism. The owner of Solyndra was a 2008 Obama donator and bundler. The funds that came from the government were a payback for that support during 2008. Despite the large amount of the loans given Solyndra failed. Why was that?
Actually, it is not hard to give a reason for the failure of Solyndra, it was the wastefulness that took place around the time that the loan was given. The money was not wisely invested in securing the future of the business, but it was wasted on buildings etc. that added no value to the product being produced. This is a simplistic, on the surface analysis, but I am sure that there are people who have taken the time to analyze what went wrong.
The point to make here is that even when Government chooses to invest there is no guarantee there will be success in the future. It takes more than crony capitalism to make a business successful. It takes research into the market, as well as good marketing etc. etc. to ensure the long-term viability of a business. Government on the other hand can hinder any young business through the imposition of red-tape. Solyndra was given a boost, yet it failed. Obviously blame must be laid at the feet of the owner of the business.
As a case study for why crony capitalism does not work, Solyndra is an excellent example of government interference in business.
This is one of the thorniest subjects that I have attempted to tackle, but after the crap about “you did not build that”, I think it is time to take the nonsense that has come from Elizabeth Warren and her ilk to task. For several years there have been some very dense people who have raved on about such things as responsibility for the building of roads, and quite obviously they are the ones who have it all backwards – because they are in fact ignorant when it comes to commercial law and its origins in England. The US laws are in fact based upon the English Common Law and it is the same here in Australia. I will therefore touch upon this subject based upon an historical perspective and overview.
In the pre-industrial England, the villages had what is known as the Common Green. Obviously the Common Green was owned by everybody in the town. At the same time most roads were not considered to be private property. I feel certain that there are very likely legal cases where the access to what was considered to be private roads was disputed. Also, England had some toll roads, where people had to pay the owner to access the road. The USA and Australia both have a mix of public roads and toll roads. I have been on some of the roads leading from Pennsylvania and into New Jersey where a toll was charged every so many miles. The money collected from the tolls was used for the upkeep of the road. If memory serves me at all, I can also remember that there were roads in and around Connecticut, Massachusetts, and New York State. (I cannot remember the exact location because we were on a train when we passed the particular road). There are many, many examples of toll roads in the same region. Here in Australia we also have toll roads which have served a similar purpose – the government provided the funds for the road e.g. Sydney Harbour Bridge, the Sydney Harbour Tunnel, the M4, and the F3 being examples – and the motorist paid a toll to help pay off the debt relating to the building of the road. Some recent roads have been funded and built by private companies (such as the M2 and the M7) but with the government’s approval. Either way government is involved with the decision making with regard to these roads.
We pay taxes for the purpose of funding the building of these roads. We also pay taxes and levies to fund the fire brigades, ambulance services, police etc. etc. These are public utilities and services. That is why taxes are properly used to fund such services. Here in Australia we do not have the more local level of police that one finds in the USA. It is the State Government that provides the service throughout each State. There is another branch of policing that is the Australian Federal Police which deals with both the ACT and anything that might happen overseas. That service is paid out of our income taxes and the budget is provided at the Federal level.
The true absurdity has to be when people fail to recognize that our taxes are paying for what are services that cater for public use, not private use. People like Elizabeth Warren fail to make the distinction between what is public and what is private, in an effort to obsfuscate the truth. What it really shows is that people like Elizabeth Warren who is supposed to have some economic nous are in fact quite ignorant of the historical perspective with regard to what is private and what is public, thus they come to what I consider to be extremely stupid conclusions regarding “you did not build that”, or at least comments along the line of “you did not build the roads that help your business” are extraordinarily stupid, because business pay taxes and the taxes are used to build the roads, thus the businesses have in fact contributed to the building of the roads.
Government did not build the railways, but private individuals did. In some cases government took over the running of the railways (this is true in Australia) but eventually the ownership has been returned to the private sector. Keeping to the Australian example, the first lines that were built included the St. Kilda line and the Port Melbourne line which were built by private enterprise. However, having private enterprise building the railways had its own difficulties because of the differences being used in gauge. I doubt it was necessary for government to take over the railway lines except for a few things: (1) the Great Depression and the Depression of the 1890s had impacted upon the owners of the railways (2) the need for a uniformity in the gauge. (3) the railway system just like the road system was in use by the public at large. It should be noted that in the last 10-20 years the ownership has reverted to private hands. Government could have handled some of those issues differently, simply by legislating the requirements for building a railway line for use by the public.
Basically, what I am saying is that those who make those arguments are the ones who lack logic in what they are saying because they are the ones who have not delved into the historical perspectives including case law on the subject.
Yesterday it actually looked like the Indonesian government was finally doing something positive about the people smuggling operations that is so rampant. In fact 5 military officers have been arrested as they were escorting a group of Iranians and Syrians to a drop off point – to catch a boat to Australia. To the average Australian that arrest must be welcome news but there is a real sting in this story.
First of all, I believe that the Indonesian villagers who did the tip off about this particular operation deserve a lot of praise because it is through their actions that one group of people have been prevented from getting on those boats and heading to Australia. The boats are arriving at the rate of about 2 per day at the present time.
Now for some parsing of the story that is being told, because it highlights why there is so much corruption, and why these people smugglers have not been stopped before now. That sting happens to be that the Indonesian government does not properly fund its own military meaning that they must get funding by whatever means are possible, including running a people smuggling operation.
According to the report from the Age, there are thousands more of these illegals in the region where these military officers are stationed. This means that they have been getting paid to escort these people to the boats in the village near the sea, and they are paid large sums of money for their cooperation. The fact that the Indonesian government does not fund its own military is all the evidence that is needed to push Indonesia on doing more to stop those boats.
The problem belongs to Indonesia because it is due to the corruption that is rampant within the military, brought about by the lack of government funding that is a cause of why Australia is being hit with so many boat arrivals.
The other side of the coin remains the attitude of the present government. By giving a green light to these illegal immigrants the government of Australia has created a rod for its own back. They are providing bridging visas etc. and they are processing these people without the necessary security and medical checks.
This latest group that have been prevented from arriving consist of Iranians and Syrians. I am surprised that there are Syrians making the journey, because those who have fled from Assad have been holed up in camps within Turkey (along the border). They are being cared for by Turkey, and there is no need for them to flee. That begs the question about these individuals who have been caught…. who are they? Why are they with Iranians? The Iranians cannot claim refugee status because there is no official war in that country. These are not refugees and asylum seekers. They are illegal immigrants or as they could in fact be from the government of those countries (keep in mind that Syria is a satellite of Iran).
I am going to open up this topic for discussion because it is something that impacts all of us. Here in Australia we have illegal immigrants (I refuse to call them asylum seekers and think that it is a misnomer to label them as such) arriving almost daily by the boat load. One journalist has dubbed the RAN as the RAN Taxi Service because the navy is being called upon to not just intercept the illegals and their boats but has been used to “tow them to safety”.
Here in Australia these illegal immigrants are a drain upon the economy in many and various ways. I am sure that this is one thing we have in common and I think that it is well worth discussing the ways in which these illegals are such a drain. Over here it used to be that the illegals were placed in detention camps for years at a time. Then they caused riots, committing suicide, and going on hunger strikes. This is despite the fact that in detention they get everything handed to them including use of the internet and a TV.
Since the people over here were foolish enough to put the ALP back into power the situation has been rapidly deteriorating with the number of illegals increasing rapidly and the number of boat arrivals growing at a phenomenal weekly and even daily rate. Their trick is to send out a distress signal and the navy will not turn them back towards Indonesia.
In terms of cost, we can start with the costs of having the navy patrolling the northern waters on the lookout for illegal fisherman and illegal immigrants. It adds up to millions of dollars each year. To this you can add the cost of accommodation for these illegals, and then there is the welfare payments, on top of that. They are preventing Australian families who are in need of emergency accommodation from getting that accommodation, and that means more Australians living on the streets whilst these illegals are being housed.
Illegal immigration is an enormous burden on any economy, especially when these people are getting our tax dollars being spent on them.