THE DISTILLERY: Keynes again

With one exception, it's all Fairfax today with a broad range of topics on offer.

First up is Ross Gittins of The Sydney Morning Herald who weighs in for Keynes, "... the world's economic policymakers have swung back to Keynesian demand-management, with Australia the prime example of its success ... Last week's upward revisions of their forecasts for growth by Treasury and the Reserve Bank confirm that the recession has been milder and the upswing earlier than originally expected. Why? Largely because [of] the application of Keynesian stimulus ... Some of the stimulus has come from monetary policy (lower interest rates) ... I include this as Keynesian policy because it was Keynes' key contention that governments (and central banks) could and should intervene to manage demand in the short term.”

Gittins wrote an excellent piece on Saturday underlining the often overlooked point that it's ludicrous to regret a stimulus package that has provided the growth it aimed to achieve. However, today's paean to Keynes ignores several important facts. First, Gittins argues that " ... the shape and timing of the Rudd government's various packages were influenced by its desire to avoid two successive quarters of contraction ... it was a smart tactic that recognised the key role to be played by the management of confidence and expectations. And it worked.” Perhaps, but Gittins does not mention the role played by immigration. Over the past twelve months, Australia's population has been boosted by as much as 2.5 per cent or nearly half-a-million people. If we use the measure of GDP per capita then Australia did not avoid recession. These same migration levels are putting upward pressure on asset values. Likewise for the First Home Owners Grant. Second, Keynesian demand management by central banks in part caused the crisis in the first place. Through being too ready to cushion economic shocks, central banks allowed debt levels and asset prices to grow to dangerous levels, as argued by Martin Wolf of the Financial Times recently. Are either of these healthy long-term policies?

Gittins appears to be combating the ceaseless attack on the stimulus emanating from The Australian. And it continues today with David Uren taking up the baton. Uren argues " ... the government's hopes are pinned on economic weakness and the opposition's on strength ... With the economy recovering more rapidly than expected, it is being called to account by the opposition for doing too much ... Unless [the government] can come up with a new narrative, it will be left on the defensive over the legacy of debt and denied the credit for saving Australia from joining the rest of the advanced world in a sharp and painful recession.” But left on the defensive against whom, this column must ask? The Australian may have so short a memory of the crisis that it can't recall the catastrophic seizure of global banking, the collapse in world trade and industrial production and the mass bailout, but this column is confident that the Australian people will remember it. For those looking for more on the sometimes self-referential nature of the the Murdoch media, try John Stewart.

Back at Fairfax, The Age has two other ideologically coloured comments. The first is by Kenneth Davidson, who argues that the Future Fund should be closed because "the nation can use the $60 billion fund in more productive ways than for speculation on financial markets.” Davidson makes some good points, not least being " ... the fund has set up five subsidiaries in the Cayman Islands tax haven. The fund does not pay Australian tax but it presumably shares the benefits from tax avoidance by companies in which it invests that have set up head offices in the tax haven.” Davidson would rather see the funds deployed in nation-building activities, particularly "The need for investment in renewable energy and especially alternatives to coal is overwhelming if Australia is to escape 'peak oil' and global warming relatively unscathed.” However, his piece tails off rather badly with a range of investment suggestions like a "very fast train” between Sydney and Melbourne, and "household micro combined heat and power systems fueled by plentiful natural gas”. While this column acknowledges the urgency of Davidson's investment priorities, the suggestions are so vague that they do little more than provoke a fear of bridges to nowhere.

The second piece is an op-ed by the executive director of the Centre for Independent Studies and notorious libertarian Greg Lindsay (with Roger Bate). The pair argue that "free trade has long been essential to the wealth and wellbeing of the Australian people”. The piece argues against a rising number of protectionist deals in the US, Europe and China, and reckons "This trend could be disastrous for Australia”. Lindsay finds hope in that " ... the case against protectionism is strong ... Surely no one would argue that Victorians would be richer if only they were unable to purchase goods from Queensland and NSW ... Similarly, Australia would gain in no way if it were to enact trade barriers with other nations”. Now, this column supports free trade because it does enhance prosperity and because it keeps nations from invading one another for their resources. But this argument does nothing to enhance that support. The analogy comparing state borders with national borders is bogus. Interstate protection is nonsensical because labour can follow any shift in the industrial base across state lines. It cannot easily cross national lines. Like it or not, a line of reasoning is at work in protecting local jobs from moving offshore. Pretending the logic doesn't exist is hardly supportive. Moreover, why has the GFC, the cause of rising trade tensions, not even been mentioned? Where is the analysis of the hollowing out of American manufacturing? What about questions of currency manipulation? What about the prices paid for financialisation and its bailout? Where is the analysis of how these trends affect Australia? Simply repeating yesterday's dogma will not defend free trade.

More incisive fare is available from Alan Mitchell of The Australian Financial Review, who looks into the carnage of the GFC and finds hope for a Copenhagen-like climate deal. Mitchell notes that the "IMF estimates that the G20 advanced economies will have to impose tax increases or cut spending by about 8 per cent of GDP over the next decade.” He links this to the idea that "Suddenly it is possible to see governments warming to the idea of an emissions tax. If they have to impose new taxes anyway, why not tax greenhouse emissions”. Why not indeed. Unfortunately Alan Kohler of Business Spectator is, to say the least, less optimistic with his contention that "that's what's at stake for us in Copenhagen: higher taxes or higher unemployment – or, of course, a global weather disaster."

Also in the AFR, Stephen Grenville runs through a list of the challenges facing global authorities in their attempts to address "too big to fail”. Grenville's line that "Government protection has come to cover 'management, shareholders, creditors and depositors'" and that "... the stage has been set for risk to be ignored”. Hear, hear. Curiously though, Grenville never mentions Australia, which certainly suffers some of the same problems.

In other pieces, Adele Ferguson has an interesting piece on the winners and losers arising from super reform, and the AFR's Due Dilligence column take a contrarian view on Transurban, highlighting the risks in creating a standoff with its takeover suitors and largest shareholders, the Canadian pension funds.