Remember crowding out?
Back in the days of the financial crisis, when the Rudd government, in the face of hostility from the Coalition and much of the media, deployed large-scale fiscal stimulus to protect jobs and prevent a recession, a number of arguments were deployed against it by the right.
One was that people would never spend stimulus payments — they would only spend permanent tax cuts (that was a myth peddled by economists who simply liked reducing the size of government no matter what). In fact there are now extensive studies in both the US and Australia (including work by Andrew Leigh when he was an academic) showing households immediately spent around 40% of stimulus payments, and low-income households up to 70%.
Another was “crowding out” — one of the enduring myths of neoliberal economics, again peddled by economists who hate government and think it should be minimised wherever possible. Wikipedia defines it as “when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market”.
The idea is lenders and investors would be more attracted to the higher credit rating of the federal and state governments when they issued debt, compared with the lower ratings for companies, starving those companies of credit.
Joe Hockey tried the “crowding out” rubbish in 2009. “We must ensure that fiscal policy does not result in the government crowding out private sector access to affordable credit in a growing economy,” he warned, saying that the Rudd government’s deficits were “placing upward pressure on interest rates domestically and has an effect internationally, making it more difficult for enterprise”.
Unfortunately for Joe, interest rates peaked at 4.75% in November 2010 (far below the ~7% of the Howard budget surplus years) and then, as Labor’s debt continued to grow, rates proceeded to fall. By the time Hockey became treasurer on the back of his debt and deficits campaign, interest rates had fallen to 2.5%. Moreover, Australia under Julia Gillard and Wayne Swan had enjoyed its biggest ever mining investment boom.
We didn’t hear much about crowding out after that, although Alan Jones tried to claim the Turnbull government was doing it. And the idea still lingers. The Financial Review ran a piece from the Financial Times a year ago warning about it.
So how goes the “crowding out” thesis at a time when the Coalition sent debt soaring from 13% of GDP in 2013 to a third of GDP over the next two years?
The March quarter financial national accounts from the Bureau of Statistics (ABS) issued last week showed no evidence of crowding out as private sector borrowings surged to record levels. The ABS said the quarter saw a “record total demand” for credit of $218.8 billion. This, the ABS said, was driven by private non-financial corporations ($153.2 billion), while households and government borrowed $41.9 billion and $17.5 billion respectively.
“Demand for credit by private non-financial corporation was driven by equity raising and was dominated by a large corporate restructure which resulted in investor funds repatriated to the Australian stock market,” the ABS said.
Now, true, that restructure was by BHP, which ended its dual list in London and thus brought around $119.4 billion of capital onto the ASX.
Take that out, and it still leaves net borrowings of $45.1 billion by non-financial corporations (non-banks). That was more than twice the $17.5 billion borrowed by governments in the quarter, while households borrowed close to $42 billion.
“Business borrowing was the strongest seen in the last two years,” the ABS pointed out.
Time “crowding out” was crowded right out of the neoliberal lexicon, perhaps.
That’s right BK. Take down these neo-liberal, free market myths one at a time. They were all lies and their proponents were all liars. Don’t expect them to stop peddling it though.
Obama had a chance to fix the banks in the usa. Clinton let them free. Bush added to the fire
Have a look the info is there , they dont care because people dont look to fdnd out
I can only agree and draw your attention to last week’s Q&A where individual businesses from the area in Melbourne around Werribee were whingeing that they have to pay the new minimum wage amount of 5.1% c. One of them was calling for the government to reduce tax to pay workers their $1/hour wage rise. There’s no doubt about small business or business generally. They are always whingeing about their responsibilities and are asking for handouts and are always trying not to pay their employees. No wonder there are so many commuters in outlying suburbs who would rather travel up to 2 hours one way to work and the same back again than simply get a low paying unrewarding job with these leeches on society and exploiters of labour.
Small business I can sympathise with because a lot of them are very cost focused. Raising prices is far more critical to them than the big business over the street that is going to raise prices anyway at some point and would barely feel the impact of the wage increase.
From what I have seen of small businesses during my travels up and down the inland east coast for the few years prior to Covid, very little of what I ever paid for was rung up on the till.
Post Covid with its enormous resultant cashless transactions, we may soon see the truth of how small business is fairing poorly, or not.
Interstingly coffee shop owners are whinging they cant find experienced staff. They seem to think that you just open a business and leave the training for others to do. There was a time before we imported a training system that doesnt work from the UK, that business trained their own people. This was a time when being able to learn and do a job meant more than a qualification. Now the expectation of some is that somehow an all knowing government can provide that via the TAFE system . I could write an essay on this but it reallt narrows down to who you want to run small businesses the busnees person or some government policy.
The not neo con or neo liberal that’s personal responsibility. There is a huge difference
My stimulus cheque immediately went to buying a new Australian-made hot water cylinder as the old one had bitten the dust the day before the payment arrived.
Just as nonsensical as “choice” and “trickle down” theory. Forty years of neoliberal ideology is now discredited with wealth inequality especially in America is much worse. Even a rich country like Australia there are thousands here really struggling.
Just marking time till MMT becomes mainstream…
Of course it’s mainstream. Trouble is the last mob decided that the money they printed could go straight into their mates’ pockets, rather than do anything useful. Same in the USA.
Unfortunately the new lot seem to have gone back to the “fiscal austerity for a balanced budget” kitchen table model, probably for appearances sake. We’ll see how long that lasts.