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Kevin Rudd's idol FDR did it, so why doesn't he?

By Alan Moran - posted Monday, 9 March 2009


Kevin Rudd’s essay in The Monthly, “The Global Financial Crisis”, represents a profound misunderstanding of the nature of the market economy and the causes of the present crisis and its parallels with that of the 1930s.

Mr Rudd is blind to the fundamental source of the crisis we now have - a long period of over-easy credit creation by central banks - primarily the US Federal Reserve but also by other central banks, including our own. His prescription is to have the government spend the economy out of the coming economic slump, charging like a socialist Sir Galahad to save capitalism from itself. This allows him to use funds from current savers and future generations -impairing the growth capacity of the economy. He wants to spread these funds widely, thereby gaining political credits.

This can’t work but it may offer support to the economy for a year or more until the piper has to be paid.

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Mr Rudd’s remedies for addressing the current economic downturn are conditioned on his views of how the US pulled out of 1930s Great Depression. Unfortunately his understanding of the event is deficient. For example, he seems to be unaware that the US stayed in recession throughout the 1930s in spite of continued pump priming by the Roosevelt administration.

In his Monthly essay, “The Global Financial Crisis”, Mr Rudd named me as a “neo liberal” (evil incarnate) for proposing cuts in public sector wages. Unfortunately, on this and many other aspects, his essay represents a profound misunderstanding of the nature of the market economy, the causes of the present crisis and its parallels with that of the 1930s.

Mr Rudd argues that public servant wage reductions were a policy of one of his nemeses, Andrew Mellon, the US Treasury Secretary prior to Roosevelt. He is unaware that one of the first acts of his idol and model, President Roosevelt, on attaining office in 1933 was to cut all government employees’ pay by 15 per cent. Congress reversed these cuts over the following year or so.

Mr Rudd seems equally unaware that, as a result of continued deficit spending by the Roosevelt administration, the US stayed in recession throughout the 1930s. Hours worked in 1938 were no more than in 1932 and it was only the onset of World War II that brought economic recovery.

In fact such expenditure restraint policies are being generally followed by governments other than those tied to the failed Keynesian approach that Rudd finds so attractive. Even President Obama, in his first Executive Order, introduced a freeze on White House salaries. Singapore has reduced salaries of the top public servants by 12-20 per cent with further cuts foreshadowed.

The Irish prime minister, among other expenditure saving measures, is implementing an average 7 per cent reduction in gross pay for bureaucrats, teachers, police, firefighters, road cleaners and everyone else on the public payroll, in the form of a levy to finance their pensions.

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Public servants have long pointed to the wages in the private sector as beacons on which their own remuneration should be measured. But the near guarantee of job security that public servants enjoy is worth a considerable premium compared to workers in the private sector. This has been recognised by London’s Lord Mayor Boris Johnson who has pointed out that in England the generosity of public service remuneration packages have become unacceptable in view of economies forced on the private sector employees.

In Australia, Standard and Poor’s downgrade of Queensland’s debt adds $200 million to that state’s interest bill. Other states will face the same deficit pressures as their profligate spending is highlighted by revenue shortfalls by lower taxation income from resources, house sales and even the GST. State governments have less scope than federal governments to borrow (and no scope to print money).

In the US several states are already beginning to confront the budget imbalances this creates. Speculation is that California will fail to cut spending and be the first state to declare itself bankrupt.

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This is a longer version of an article first published in The Australian on February 25, 2009.

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Alan Moran is the principle of Regulatory Economics.

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