Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Recovering from the fiscal side-effects of COVID-19

By Tony Makin - posted Friday, 19 June 2020


Comparisons have frequently been made between the economy-wide impact of the 2008-09 Global Financial Crisis and the COVID-19 Crisis, and of the budgetary responses to them. Both were what economists call external shocks, the first originating in Australia's largest foreign investment partner, the second in its largest trade partner, though mainly resulting from the lockdown response.

Each time federal and state governments of the day reacted by immediately opening the public spending spigot on the presumption this would mitigate the economy-wide impact of the shock along Keynesian lines, oblivious to the harmful future consequences of such action.

The easing of monetary and credit conditions was fully warranted and aspects of the fiscal response targeting firms and private sector employment, the JobSeeker program in particular, also had merit.

Advertisement

However, like the GFC fiscal response, the Covid-19 pandemic leaves an economically threatening legacy of high budget deficits and public debt, this time potentially doubling at federal level alone, to reach over a trillion dollars in a few years.

The notion that copious government spending mitigates the macroeconomic impact of a crisis is, however, a Keynesian fallacy. Suddenly injecting government spending is not akin to injecting liquidity and bank credit via emergency monetary easing, because government spending has to be funded from somewhere; in Australia's case, mostly from abroad.

Unlike emergency monetary responses to increase liquidity and loosen credit availability, panic government spending binges - particularly of the cash splash and welfare support kind - cannot be readily withdrawn once announced, and have lasting negative macroeconomic consequences.

Crude Keynesian macroeconomics in its original form presumed the economy was closed to international influences, there was mass unemployment of unskilled labour, and the banking system was broken. But Australia is an open economy with a fully functioning banking and financial system and skilled workforce which means fiscal policy works quite differently to the simple-minded Keynesianism taught in high schools.

Few have ever appreciated what British critic of Keynes, Hubert Henderson, said decades ago:

"Nothing has done more .. to lead modern economics astray than the practice which Lord Keynes brought into fashion in the 1930's of reasoning on the hypothesis of a 'closed economy'…

Advertisement

Budget deficits are mostly funded from abroad meaning that we do not 'owe the debt to ourselves' but instead owe it mostly to foreigners. Bond issues to fund budget deficits in the tens of billions are already enticing strong capital inflow from abroad which is strengthening the exchange rate and worsening the economy's international competitiveness.

In this way, the exchange rate is mimicking its behaviour in response to the Rudd government's counterproductive fiscal response to the GFC when the exchange rate appreciated to historical highs (over $1.10 against the $US) due to the fiscal 'stimulus' then that induced foreign capital inflow to buy government debt.

That severely worsened Australia's competitiveness, contributing to the euthanasia of parts of the manufacturing sector. This is exactly what any good university macroeconomics textbook will tell you.

  1. Pages:
  2. Page 1
  3. 2
  4. All

This article was first published in The Australian.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

13 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Tony Makin is professor of economics at the Gold Coast campus of Griffith University and author of Global Imbalances, Exchange Rates and Stabilization Policy recently published by Palgrave Macmillan. He is also an the academic advisory board of the Australian Institute for Progress.

Other articles by this Author

All articles by Tony Makin

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 13 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy