The Costs Of It All

The past six years Down Under have been a complete repudiation of Keynesianism and deficit spending. In spite of a minerals boom, racking up a few hundred billion AUD in debt and a ballooning public sector (especially in healthcare and education), the Australian economy continues to suffer from record unemployment and anemic growth.

To pretty much sum things up:

1) Australians voted for Rudd because he promised them benefits.
2) To pay for the benefits he raised taxes and racked up debt.
3) In line with Ricardian equivalence, investors left and employers started firing.
4) Australians essentially screwed themselves.

A simple premise lies at the heart of all this: all Government spending is taken from someone else. Every job "created" by the public sector is a private job lost.

Keynesians claim that if the private sector lacks the confidence to hire, governments must. But the question then becomes one of whether the Government can inspire confidence amongst the private sector.

A maverick Government like Singapore's might pull this off. But few others can.

The Keynesian emphasis on "demand" is misleading. Demand is simply a proxy for confidence and credibility. 

Employers understand that every dollar of this "demand" and every benefit paid will be eventually recouped from them via taxes. It's merely a matter of which industries will subsidize others, and when payment is due.

Furthermore, they are aware of the temporary nature of Government stimulus. Some may turn to rent-seeking and set up new enterprises to capture the monies being distributed. But these are inherently short-lived and unstable affairs which disappear as soon as stimulus is withdrawn.

Few will be misled into believing that a genuine recovery is underfoot. In fact, wasteful or poorly-targeted stimulus measures may be taken as a sign of incompetence, crippling investor confidence further.

So they react accordingly. They cut hours. They stop investing in Australia. And they fire staff.

Hence the sorry situation in Australia today.

The next time a politician promises to "support our schools and hospitals" and "create jobs", think of the costs. Ultimately, you will always pay.