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The economy tanks as politicians look the wrong way
Gerard Jackson
Recent economic commentary has merely served to demonstrate once again how bad our economic pundits are. Devoid of any critical faculties they relentlessly parrot the fallacious doctrine that consumption is the key to economic recovery. Every movement in consumption and consumer sentiment is monitored as carefully as a doctor notes the pulse of a feverish patient. It never occurs to them to question the method of national accounting. It never crosses their minds to consider that omitting from the accounts the masses of spending on intermediate goods just might be a terrible error, just as they never raise the simple question: "If the accounts are value-added then how can they be gross?"
Failure to see the gross error at work must result in erroneous conclusions. For example, Greg Evans director industry policy and economics at tje Australian Chamber of Commerce and Industry, claimed that the Rudd Government's initial $10.4 billion spending binge saved the economy from a steep contraction. George Megalogenis — and economics writer for The Australian — argued that the financial crisis was caused by consumers who "closed their wallets across the world in the December quarter" (The live now, pay later trap, 21 March 2009).
From the earliest days of the so-called "business cycle" observers noted that the higher stages of production — particularly the capital goods industries — not only felt the first impact of a recession but the drop in output in these sectors greatly exceeded the contraction in the consumer goods industries. We are witnessing the very same phenomenon today.
If Megalogenis were right then the closing of "wallets across the world" would have preceded the contraction in manufacturing. Yet manufacturing in the US has been contracting for 13 months and for at least 9 months in Australia. According to Greg Evans' logic Rudd's $10.4 billion spending splurge should have seen manufacturing rebound. Instead it continued to contract. The table below shows what an awful state manufacturing is in.
Moreover, we can expect the situation to worsen. In response to a downturn it was the central bank's rule to lower interest rates which in turn would stimulate industry and trigger an economic recovery. In simple English, central banks would 'steer' the economy by manipulating the money supply. It should be stressed that monetary expansion is the heart of this monetary policy.
The following chart shows that the money supply has been comparatively flat for sometime. We can see that in May last year the Reserve raised M1 and bank deposits significantly but then let them go flat again. Of particular interest is that the sudden increase in the monetary base that started last September had no effect on M1 or bank deposits, at least up to January. Should this situation continue one can expect the Reserve to once again lower interest rates.
It should have been obvious to our economic commentariat that faced with a flat money supply manufacturing would eventually contract and that this contraction would not only precede the contraction in consumer spending it would be proportionally much greater. This is borne out by the figures. Manufacturing has suffered a significant decline while in comparison consumption remains stable.
All that Rudd's spending did was to increase consumer purchases. Desirable as this is from the point of view of the consumer it does nothing for economic growth even though it can cause GDP to rise. What matters is not consumption but spending on projects that raises the value of labour's output. This and only this can raise real wages. Encouraging consumption at the expense of savings will retard this process.
Rudd, like Obama, is following in the destructive footsteps of Gordon Brown. Australia, the UK and the US are being led by economic and historical illiterates, men who are criminally ignorant of how free economies functions and the forces that destabilise them. Unfortunately our media commentators are every bit as bad.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 30 March 2009
PMI
Production
Employment
Average wages
Source: The seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Australian PMI
Source: Reserve Bank of Australia.