Now that's an economic conservative

Gary S Becker is a softly spoken man with thinning white hair. He's fairly small, though only physically; intellectually, he is a giant.

I met this economics Nobel laureate last weekend at the Mont Pelerin Society's (MPS) New York special conference, 'Classical Liberal Responses to the Global Financial Crisis'. Becker's quiet, careful analysis of how we should fix the crisis – though focused on the US – suggests a different approach to that taken by Prime Minister Kevin Rudd's government so far.

Rudd these days likes to deride the last 30 years as a failed neo-liberal experiment, yet if Becker were sitting across the table from him, the economist would probably remind our PM that despite the free market's huge imperfections, the so-called neo-liberal policies implemented by many left and right governments these last few decades have delivered huge accomplishments: the world's extraordinary growth since the 1980s; the way whole countries have lifted large proportions of their people out of poverty – eg. China, Mexico, South Korea and Chile – many of which are important trading partners for Australia. Also, life expectancy and health in both poor and rich countries have risen dramatically; trade has expanded, and there have been great reductions in world inequality.

The Nobel laureate's guiding principle for a government like Australia trying to grapple with the economic crisis is 'Do no harm', also the first rule of medicine.

That basic principle seeks to avoid the unintended consequences of well-intentioned actions. Such as those we saw last September and October when Australia's federal government guaranteed Australian bank deposits to stop runs on banks, yet unintentionally triggering a run on non-guaranteed mortgage trusts.

The 'do no harm' principle flies in the face of the 'doing something is better than doing nothing' action-man posture of many Western governments. Becker worries that knee-jerk, almost random policies can easily make a bad economy worse.

Yet so many other economists find the notion of big-spending stimulus packages appealing.

I note that when Keynes first advocated these policies, the West looked nothing like today. Check the photos of London, New York, Sydney or Melbourne in the 1930s. Recall the weak infrastructure in place, the hardly-existent planning laws and the sweatshop labour practices we find unacceptable in the West today.

Becker notes that during World War II, the US was suffering unemployment of 17 per cent, not the 8 per cent of today. It's easy to reduce unemployment, as they did, if you swiftly mobilise millions into the armed forces. Thankfully, that is neither a problem nor a solution relevant today.

The better news is that it is easier to imagine that massive stimulus packages might work in a developing China, where there is an enormous structural job still to do and they are unburdened by Western-standard laws and sentiments. There, these projects can be mandated quickly, commenced quickly and possible even finished quickly. Do you really expect that to happen in red-tape, log-jammed Australia?

Of course Australia wants new infrastructure to make us even more competitive in the future. But what are those projects? Even if we have them, the reality is that unless they've already been given the official planning and design green lights, and most have not, it will take years to spend wisely the billions our government wants to splurge. It will take ages even to kick-start many of these projects.

Further, there is a risk that if these big projects are not thoughtfully considered, we will simply move resources and skilled employment away from one productive sector to another, shifting employment rather than creating it and possibly creating wage inflation at the same time.

And what's the bet many of these projects will largely be in marginal electoral seats?

Becker worries, in Keynesian terms, that there will be a very low multiplier from the various proposed stimulus spending programmes. He suggests the multiplier could be as low as zero, and is likely to be less than one.

Spending Australian taxpayers' $42 billion to generate a value of somewhere between zero and $42 billion doesn't seem too bright, especially when future taxpayers will have to foot that same $42 billion down the track in higher taxes and/or inflation.

As Becker reminds us, there are no free lunches. What governments spend now, they must recoup. Think about that when you get your next $900 cheque from the Rudd government.

Becker ventures some alternatives for what governments should do, both short-term and longer-term. Here are some of them:

Short-term

– Reduce taxes, don't increase them. Presumably, citizens and businesses will spend their own money more wisely than the government will.

– Reduce government spending, don't increase it.

– Deal with toxic assets in a consistent and foreseeable way. This is a period where Becker observes that risk is dominant and we need to reduce uncertainty, not increase it. In the US, he notes, there have already been too many about-faces.

– Though Becker is not a climate change sceptic, he urges caution on the magnitude of what we do about global warming in the short-term.

Longer-term

– Go easy on additional regulations. For example, he sees mark-to-market as a good system yet one that needs improving. In practice, he says, it has become a mark-to-model system because it doesn't deal well with periods where thin markets provide inadequate price information.

– Don't regulate the pay of executives. He believes the market is better than governments at working out what's fair. I doubt there could be a single significant corporate board, certainly in Australia, that hasn't been looking hard at its remuneration policies in light of the crisis.

– Increase capital requirements for financial institutions relative to their assets. This is to deal with the too-big-to-fail problem and the moral hazard created by the recent bail-outs: the bigger you are, the more likely you'll get bailed out. So Becker advocates firms pay a price for size.

This capital charge should not be introduced, he stresses, until after the current crisis is well over. Imposing it too early could be suicide. Banks would cut back even further on credit. Also, the charge should not be so large as to discourage growth totally since society still needs institutions large enough to benefit from diversifying risk, which smaller ones are less able to.

The Australian government is unlikely to shift course away from its stimulus package. But it's helpful to know what a true 'economic conservative' would do with our money.

If I'm right about the possible merits of a Chinese stimulus over an Australian one, perhaps it's China's stimulus that provides the package Australia really needs.

If so, Mr Rudd doesn't have to do much more than pick up the phone and, in his best Mandarin, encourage his Chinese counterpart to get moving even quicker. The faster China stimulates, the faster global trade will re-ignite and the faster Australia will get back on track.

That will cost Australia a lot less than $42 billion.

John M Green is a company director, a writer and also a book publisher at Pantera Press. He was previously an investment banker and earlier, a lawyer.