Economics doesn’t add up
In the end, we are all dead. What do plumbers, garbagemen and economists have in common?
They all deal domestic products.
Yes, it’s a Dad Joke and an old one and you’ve heard it before.
I re-run it this week only because most trades have nothing at all in common with economists. If plumbers and garbos and any other tradies left behind as much mess as economists and if they got it wrong half as many times, they would all be out of a job.
Fortunately for economists, the rest of us understand so little of their dismal science that when they get it wrong, as they so often do, we scarcely notice.
Only when they express mild surprise, as they did this week, do we learn that things didn’t add up as expected.
Happily, early this week the news wasn’t as dismal as the science.
Economists had been tipping a COVID-induced 6 per cent fall in quarterly profits. Instead, operating profits for the June quarter surged 15 per cent, despite a collapse in sales.
It was a surprise until you start to think about it. If the government spends $35bn in wage subsidies and a $15bn direct jab in the arm of business, that will likely do nicely.
A low wages bill and more corporate welfare than usual — who cares if sales are down 11 per cent so long as profits are up?
As the Australian Bureau of Statistics reported, even in some hardest-hit industries like hospitality, profits were up 86 per cent. And up 84 per cent in arts and recreation.
Now the folk at the ABS are never given to exuberant displays of joy. They are the most serious stick-insects you are ever likely to meet, but even they conceded this was almost good news: the sharpest jump in profits since the mining boom of 2016.
But then, later in the week, came the news from ABS figures that the nation was in the sharpest recession since reporting began.
The GDP, the gross domestic product that economists and plumbers have in common, was down the toilet.
Oddly, in the space of a few days, profits were up but the economy was down? If I could with gross figure out that, I wouldn’t be a humble journo.
Stay with me. Most of us know nothing of economics, which might be only a little less than the economists know. You and I have always been misled into thinking that a proper fiscal approach at home is to spend no more than we earn. But there might be another way, as the federal government displayed this week. I’m sorry but all your monetary caution and boring responsibility might have taken you down a bleak and blind alley.
There is a new economic theory doing the rounds and we may all have been monetary mugs.
It is known as Modern Monetary Theory (MMT) and it reminds us that the money we earn doesn’t represent an ingot of gold or a tonne of wheat. It is just a piece of paper or a digital number. It costs nothing to produce and has no intrinsic value. So why don’t central banks crank up the Gestetner machine and produce as much moola as we need to spend our way to greater happiness and security for all our citizens?
After all, China has been doing this successfully for years and we have been quite happy to trade their yuan for our dollars.
The ink mightn’t have been quite dry but the exchange has allowed China to buy a fair old chunk of Australia.
And so far (patriotism aside), where’s the harm?
Nothing is new under the sun. In 1933, the British economist John Maynard Keynes wrote to the financially embattled president of the US Franklin D. Roosevelt suggesting a tactic he called “deficit spending”.
Simply printing more money and spending your way to full employment and prosperity was Keynes’s doctrine. He put it this way.
“If the treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on welltried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there would be no more unemployment … and
Caricature: PAUL NEWMAN the real income of the community and its capital wealth would probably become a good deal greater than it actually is.”
Whatever did FDR make of this? Keynes was not a comedian nor a satirist, but that is how it must have seemed.
At the time, Keynes was in fact probably the most famous economist in the world but that was back in an era when economists actively sought public profiles.
FDR never did adopt the creativity of burying money but in his New Deal strategy to pull America out of the depression he used the idea as a metaphor.
He printed and spent money he didn’t have. And it worked.
With profits up and the economy in recession, the Reserve Bank has indicated this week that they will crank up the Gestetner and print more money.
Anyone got a better idea? I thought not.
Meanwhile, not so much digging holes but filling them in seems to be the Tasmanian approach to economic recovery. Driving around the joint, I have never seen so much road work. Lollipop men and blokes leaning on spades, having a smoko, are everywhere.
I hope it works because it has added half an hour to my trip to the lakes where I am self-employed and paying myself $10 for every trout I don’t catch.
Back to Keynes and FDR before I go.
The story goes that president Roosevelt eventually spoke with Keynes and asked: “I understand you are saying if I get men to dig a hole and then pay them to fill it in again, that will solve my economic problems?”
“That would about do it Mr President.”
“All right, Mr Keynes, but what would this mean in the long run?”
“Well, in the long run, Mr President, we are all dead.”
NOW THE FOLK AT THE ABS ARE NEVER GIVEN TO EXUBERANT DISPLAYS OF JOY. THEY ARE THE MOST SERIOUS STICK-INSECTS YOU ARE EVER LIKELY TO MEET, BUT EVEN THEY CONCEDED THIS WAS ALMOST GOOD NEWS: THE SHARPEST JUMP IN PROFITS SINCE THE MINING BOOM OF 2016.”