The Commonwealth Games is a looming financial disaster for the Bracks’ Government

Gerard Jackson
BrookesNews.Com
Monday 13 March 2006

Last year Premier Bracks announced that the 2006 Commonwealth Games would be an economic bonanza for Victoria. He even predicted that they “will have the biggest impact on the Victorian economy that any major event has ever had in Victorian history”. Any simple soul would assume, therefore, that the Games would produce a net economic benefit for the state.

So far this financial genius and his fellow economic illiterates have run up a massive $2 billion bill! How did they manage to do this when the original estimate was less than $200 million? Easy. They are hopelessly incompetent and their advisers are not much better. They are also becoming increasingly desperate. This is why Bracks had the outrageous nerve to threaten any media outlet with a $240,000 fine if it publishes pictures — taken on public ground, mind you — of rehearsals of the Games' opening ceremony. By hook or be crook is this mob’s motto.

Putting aside Bracks frantic and despicable efforts (including the sleazy Solomon Lew deal) to try and salvage something from this looming financial disaster, let us take a look at the shonky economic reasoning behind this fiasco. According to this bunch and their vulgar Keynesian advisers increased spending will spur economic growth in the state, even though the spending will be on consumption.

Taken literally, this would mean that Victoria, or even the country, does not need to encourage commerce and capital accumulation, it only needs to encourage — at considerable public expense — gigantic sporting extravaganzas. I guess we could call this Bracks’ version of Roman economics or simply Bracksian economics.

Whatever we care to call it we are obviously dealing with the dangerous fallacy that consumption drives the economy. Yet any economist worth his salt will cheerfully tell the layman that consumption only takes place at the expense of investment. (This, incidentally, is why economists sometimes call growth forgone consumption).

What Bracks and his mates are giving us is phoney-baloney economics. Unfortunately no one in Australia’s rightwing establishment, particularly the Liberal Party, seems capable of recognising this fact.

Economics is an inherently difficult subject that involves complex chains of reasoning. This is probably why certain hoary fallacies are always being resurrected, albeit dressed in different clothes. Sometimes the new clothing is so alluring that it easily deceives the layman, and frequently those who should know better.

Part of the problem is the old one of economic advisors and commentators lacking the intellectual capacity to take into account secondary consequences. Bad economic advisors only consider the immediate, visible and direct consequences of an economic decision. They do not enquire into first principles or investigate the long run results of the decision. They can only chant that “in the long run we are all dead”. Well, we’re not.

Then we have the forgotten-man problem. If the government spends $2 billion on, for example, the Commonwealth Games, this expenditure must ultimately-come from the taxpayer, our forgotten man. Therefore for every dollar the government spends on these games a dollar must be taken a way from a taxpayer. A $2 billion expenditure means that taxpayers will have $2 billion less to spend on the things they value most. It follows that there can be no net increase in spending.*

“But ah”, say Premier Bracks’ supporters, “tourist spending will cover any subsidies and so the games ill pay for themselves”. It makes no difference. In fact, in this situation the damage done by the subsidy could actually be compounded by increased tourist spending.

Critics of this view will also point to the visible effects of the expenditure. They will count the number of jobs it created, the payrolls it generated. The amount of materials that have been used and the number of contractors that were hired will be cited as evidence in support of the social and economic merits of the Games.

This is precisely what happened with the KPMG study commissioned by the State Government’s Office of Commonwealth Games Co-ordination. According to this study the Games will generate an extra $3 billion of spending in the Victorian economy.

As expected, Bracks was first of the rank to present this study as irrefutable evidence that this additional expenditure will add to the state’s economic welfare. This, as I have already pointed out, is a glaring fallacy. All that the government will have done is divert hundreds of millions of dollars of spending from the pockets of individuals. This process will not add one cent to economic welfare; at best it merely alters its composition. That many think otherwise is due to their failure to recognise indirect and secondary economic consequences.

Therefore the argument still holds even where tourist spending exceeds the subsidy. In fact, in this situation the damage done by the subsidy could be compounded by increased tourist spending misdirecting production.

What are some of these consequences? They are all the goods and services that would have been produced and consumed (not to mention forgone savings) by those from whom the billions of dollars were taken. This must also mean that the jobs that were needed to produce all those goods and services have been destroyed. These sacrifices are what economists call opportunity costs.

(It’s possible that by financing the Games in part by drawing on credit created by the banking system a sudden a surge in jobs can be generated. But this effect would only be temporary and would eventually disappear once the Games were over).

We have now reached the consumption-drives-the-economy fallacy. This is one of the most invidious and persistent fallacy’s in economics. It was one that the classical economists thought they had permanently laid to rest. However, Keynes gave it a new lease of malign life in his The General theory of Employment, Interest and Money (1936).

Putting it simply, the Keynesian view is that the economy is driven by consumption spending*. This is nonsense. It is savings that fuel the economy and it is entrepreneurship that drives it. Without savings there is no investment. Without investment there is no real growth. As for consumption, it is the sole object of production.

If we wish to increase future consumption, we must reduce current consumption, or at least its rate. Unfortunately it is not generally realised that consumption only takes place at the expense of investment.

If consumption is the force that drives the economy one would expect consumer spending to exceed business spending. It does not. As a proportion of total spending, business spending greatly exceeds consumer spending. This truth is concealed by the fact that GDP, a value-added approach, grossly understates total spending by omitting intermediate spending. It can never be sufficiently stressed that only savings and investment can raise a country’s productive capacity and thus total demand, not consumption.

The Commonwealth Games are obviously pure consumption. They can add nothing to investment As already pointed out, by using public money the Games divert funds from investment to consumption. If bread and circuses were all that was needed to promote economic welfare the Roman Empire would never have suffered an economic decline.

The absurd notion that you can make a country or a state prosperous by robbing Peter to pay Paul was thoroughly discredited by John Stuart Mill in his seminal essay (Of the Influence of Consumption on Production) he wrote in 1829 and from which I shall quote at length:

The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be like the dews of heaven, which return in prolific showers. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow: that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune.