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.
The BBC reports that there has been a very big drop in Government borrowings in the present year. The financial position is being helped by two things: (1) the levy on bank balance sheets and (2) a significant drop in public sector borrowings.
It is my contention (and yes it is just theory not necessarily fact), that when the Public Sector have the lion’s share of the investment dollar, that the private sector suffers. This is because the Investment pie is limited, which means any increase in Public Sector borrowings reduces the amount of investment dollars available for the private sector. When the private sector is not able to borrow money to expand this leads to a contraction of the economy as the private sector will not be able to employ more people, or it has to let staff go in order to meet other debt requirements.
In other words, what I am contending is that Government Stimulus action does not work because it takes investment money out of the private sector, which means that the economy is disrputed. What I am arguing here is that the “stimulus” money does not come from tax receipts but from further public sector borrowing. In other words, Government action does not impact in a favourable way within the economy and it actually makes matters worse, not better.
My theory is not based upon the current experience, but upon the experience of the late 1960s, early to mid 1970s when there was global stagflation. Most economists address the stagflation by referring to the oil price shocks, however, I see this as a miniscule reason for the stagflation. There were two price shocks, one around or prior to 1972 and other during the Iran Revolution. In recent years we have experienced more oil shocks for a variety of reasons, but Saudi Arabia has actually pumped out more oil to keep the market smooth. The price of oil is really not as important as some believe, because we do not have any real control over the prices that the cartel (an oligopoly) agree to charge for their output.
One thing that was common in that period, in Australia, the USA and in the UK was that each country had a government that was into prolifigate spending. In the USA it started under LBJ, and Nixon had to try and rein in the spending, followed by Carter, another profligate spendder. In Australia it started at the end of the 1960s when McMahon was Prime Minister, followed by the prolifigate spending of the Whitlam era. In the UK it was the Wilson years of profligate spending. It is my view that the stagflation arose because of the difficulty of providing investment dollars to the private sector because the money available for investment was being swallowed up by the public sector.
During that same period, especially here in Australia, we had rising inflation, strikes and demands for higher wages which were granted because the ALP were in charge, followed by a further rise in inflation. Even though this looks simplistic, by 1974 the stagflation was actually quite evident, and these factors explain why it was a wage-price inflation which was fuelling the problems within the economy. By the end of 1975, and beginning of 1976, here in Australia most jobs had dried up, especially with regard to the requirement for newcomers in the field of accountancy (there were no jobs available for the majority of graduates). This was the point where we had the beginning of the Fraser government which also led to a wages freeze being implemented. (Nixon also imposed a wages freeze).
The turnaround in Australia occurred only when public sector borrowings began to drop and the budget was balanced or was turned into a surplus. Here in Australia this was a gradual process because we went from the Fraser government to the Hawke-Keating government when public sector borrowing got out of hand once again. Note: under Keating as Treasurer there were extremely high interest rates which were very, very painful for mortgagees. We got through those extremely high interest rates, which were greater than 17% before they began to fall again. Credit card borrowing interest rates were above 20%. Under the Howard government the Federal Budget went from deficit to surplus, but that has been frittered away by the KRUDD-Dullard governments.
So long as the rise in wages is kept under control, that is, it is related to a shortage of skills and not from some annual or bi-annual increases, then inflation itself is more or less kept under control. The way in which the Reserve Bank has been handling any inflation has been to increase interest rates, but in the present conditions the policy of the Reserve Bank which is to operate through interest rates alone can be quite harmful. The uncertainty that exists today has led to consumers holding off their major and minor purchases as long as possible.
We are yet to see the impact of the proposed carbon-dioxide tax. I have no doubt that the imposition of such a tax will have devastating consequences upon the economy. It will not bring about prosperity. It will cause massive increases in some commodities (which the government model has not predicted), and this is because a number of unknown factors have not been included in any modelling. Take for example the cost of refrigerant for supermarkets. This is something that will be taxed. Can you see how the price of frozen items will rise? Can you see how that will impact upon the cost of meat and dairy products?
As we continue to head towards stagflation, the last thing we need is this particular tax which will cause a massive downturn in the economy. (again this is theory, but so is any model that claims an opposite scenario).
Public sector borrowing eats into the investment dollars, which in turn leads to a decrease in private sector borrowing and expansion within the private sector. The end result of this cycle is that business is not in a postion to continue to hire. At the same time taxes on employment also hold back businesses from permanent hiring. Most businesses have to keep below a certain staff level in order to avoid the higher taxation costs. A reduction or the dropping of such taxes would increase the levels of employment.
Ah, Greece. It seems that even though there are lazy Greeks, there are others who simply want work, but they cannot find it during these hard times. I guess we could call the situation in Greece a very deep recession. I have reported on some aspects of the Greece economy that has led to the conclusion that a lot of the economic problems in that country is due to the laziness of the people. Since when do people retire at the age of 45? It is insane, because that kind of retirement age can only have one very bad consequence – that of reducing the base from which taxes come, leading to an ever increasing gap between social welfare and taxes. I would have thought that anyone who is serious about discussing the subject would at least recognize that there are just some things that lead to a government debt problem when those things are allowed to get out of control.
Der Spiegel is leading with an article that gives a slightly different angle to the question of why the Greek economy is in deep doo doo, and why it is likely to default regardless of any rescue packages. The answer my friends is blowin’ in the wind… oops, that should read the answer is to be found in the pork barrels supplied by and to the elites in Greece. According to Der Spiegel the ordinary people of Greece are doing it so tough that they are lining up for handouts from the churches on a daily basis. Now do not get me wrong, I feel for anyone who lost their job in 2009 and cannot find another one. I feel for anyone in that particular situation, and yes, I do think that such people need some income support, but they also need government to provide the means to help them regain useful employment via good labour market policy. According to this article, Greece has had a real problem with elitist cronyism and it has been the families of those privileged few at the top of the political tree that have benefited the most:
George Provopoulos, governor of the Bank of Greece, believes torpedoing the austerity package, as the country’s conservative opposition tried, would have been “suicide.” Still, Provopoulos also believes Greece has “reached the limit” and that it would be impossible to squeeze any more out of the people.
In remarks to the conservative newspaper Kathimerini, he spoke about what he saw as the root cause of the crisis. “There is little doubt that the failings of (the existing social and political) system hindered the implementation of policies that would have averted the existing ills,” he said. “We are paying the price of past mistakes.”
The emergency financing will help Greece through the next months and it will buy the rest of the EU some time — time in which the euro crisis may ease somewhat. But it’s unlikely that it can save Greece. The last few decades have seen an elite, with the Papandreou, Karamanlis and Mitsotakis families at its core, establish a system of economic patronage. They threw around billions the government didn’t actually have and showered friends and relatives with prosperity that was all based on credit. These leaders bloated their country’s administration so that everyone could have a piece, and created a bureaucratic monster in the process.
The political parties’ business dealings were always more about favors than policies. Anyone with access to public funds used them to buy friends and voters, who were then beholden to the party — and to the family running it. The result for Greece has been a feudal democracy, where the generations come and go, but the names remain the same: Papandreou and Karamanlis and Karamanlis and Papandreou, with a Mitsotakis thrown in every now and then. No other European democracy has seen the like.
Who knew? In a country such as Greece, where the Communists threw out the monarchy in the 1920s (Prince Philip had to be smuggled out of the country when the royal family escaped) Greece started on its road to being an absolute basket case. The party elites behaved just like party elites that are to be found in Russia, China, Indonesia, the Philippines, as well as in Central America, South America and let’s not forget the same thing that happens in African nations, where the dictators get rich and the poor get poorer. In the majority of cases it is the left that leads the way with this cronyism, as well as the wastage and the vote buying. We see it in Australia, and especially since 2007 when there was a change of government. It is happening in the USA with the incumbent in the White House wasting money on weekly parties, as well as other unnecessary expenditures, including the great pork barrel of all pork-barrels, the money being given to non-farmers, who are taking advantage of the legitimate case that Tom Pigford had against the Agricultural Administration due to its discriminatory policies. They call it Øbama money, but the real name should be PORKY PIG money.
There is something strange going on at the moment. For the first time in my lifetime, the USA is on the brink of being forced into Marxism. I am not going to beat around the bush, and I will name the beast as Marxism. What is so strange is that this is like deja vu, but only as it relates to Australian politics. The issue is precisely the same one that was controversial in Australia in 1973 – universal health cover. There were other issues, such as the out of control spending of the Whitlam government, that also seem to be reflected in everything that is going down in the USA. Or so it seems, because it is like “everything old is new again”, just like in that song…..
As I continue my topics, I hope to be able to find information off the Internet that will shed light on the Whitlam years in Australia, and I hope without the hysterics that surround some of the situations that arose at the time. I remember the Whitlam government because I was on the brink of adulthood and I was studying economics and related subjects during the Whitlam years. I remember the whirlwind of spending – health, welfare, education, regional development… and the list goes on. I remember the scandals that erupted, and the final one – the Kemlanhi affair – that in the end helped to bring down the Whitlam government. I remember the fuss when the Opposition parties in the Senate withheld Supply, which brought on the last crisis that culminated in the sacking of the Whitlam Government by the Governor General. I remember the public servants getting their knickers in a twist with all of their protests over the “sacking”. In fact, who can forget when each year the ABC gets its lather going by remembering this “incident” with their rose coloured glasses firmly planted on the face.
From the political point of view, the one thing that is overlooked by the Australian lame stream media is that the people did speak, and give their view at the ballot box. Gough Whitlam was defeated in the election that followed the sacking by the Governor General. Malcolm Fraser had formed a caretaker government until the ballot could be held, and “we the people” spoke, with a resounding landslide victory against Gough Whitlam and his government.What the ABC and cronies do not tell however, is that in some areas of Australia the news was not greeted with anger, but with joy. In fact when I heard the news I was “dancing in the streets”, happy in the knowledge that Whitlam had been sacked and was no longer causing havoc as far as the Australian economy was concerned. Most of my neighbours were equally happy with the news, and so despite what the Australian lame stream media continues to portray about these events, there is another untold side to the story on the sacking of the Whitlam Government. We did get rid of the closest thing we had to a Marxist takeover in Australia since the second world war.
Even though we managed to get rid of Gough Whitlam, it would seem that people soon forget the kind of devastation that comes from these Marxist policies. Also, younger people who have had no knowledge of what really took place are on the voting rolls. They only have the version of events as depicted by the Australian lame stream media. They are unaware of what in fact took place, and why it was that the majority of the voters kicked Whitlam out. As a result, we find ourselves in a similar predicament today. Kevin Rudd seems to be intent upon having a reputation as a big spender that is far worse than that of Gough Whitlam. He has spent unnecessarily on a “stimulus”, providing money for pork projects and schemes that are both foolish and wasteful. (these projects include the insulation debacle, as well as the solar panel debacle that is still brewing and about to blow up). Under Malcolm Fraser, Bob Hawke, Paul Keating and John Howard Australia had prospered. Yes we had some hard times, especially in the 1980s, but with the introduction of the GST the Australian budget went into surplus – then the Rudd Government was elected and the surplus very quickly disappeared due to the wasteful policies that have been implemented.
From the analytical point of view there is much study to be done. One of the things that marked the Whitlam years, and also the Fraser years (a lag effect) was stagflation. We had high unemployment, high interest rates and high inflation. The stagflation was prolonged (which explains why it affected the Fraser years) which meant that it took Australia a long time to recover from the excesses of the Whitlam government. Some of the measures taken by the Fraser government and then again by the Hawke-Keating governments were painful at the time. We had very high interest rates. During that period we could get a high interest yielding term deposit account for something like 17% p.a. It also meant that the mortgage interest rates were high. By 1986 we saw interest rates reaching more than 19% p.a. which was extremely painful for new homeowners (we purchased our first home just before the interest rates rose steeply but after the period where some homeowners had their interest rates frozen, so yes we got hit by the high interest rates).
For the first time since the failure of the Whitlam Government Australia has a government that could be described as Marxist. This time the policy pursuits include the attempt to foist cap n tax (or crap and tax) upon us. The thing is that initiating legislation that will set up hedge funds for the selling of greenhouse licenses is going to do zip for pollution. On top of that AGW has already been proven as a fraudulent theory, but Rudd will not give in and let it go.
During the Whitlam years Australia had its battle over healthcare legislation and health insurance takeover. You could say that the doctors did have a minor win on the subject because a complete takeover did not happen. However, what we have is in my view disgusting. We do not need government determining how much can be paid to doctors for their fees. The artificial fee that is imposed actually makes it more expensive to see a doctor or get a medical service than if the government had no say in the subject. It really is a joke, and yes the out of pocket expenses are quite high, especially when the government refuses to recognize a procedure such as the thin prep which is better than the Pap smear for detecting cancer.