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We need productivity boosts, not sugar hits

By Henry Thornton - posted Tuesday, 3 February 2009

It would be astounding if the Reserve Bank did not cut Australia's cash rate today, possibly or probably by another 100 basis points.

Most recently, the International Monetary Fund has been embarrassed by its fourth or fifth downward adjustment to its predictions about global growth. Now the IMF suggests global growth will be close to zero in 2009 and not much better in 2010.

At Davos, politicians, businessmen and analysts exhibited deep gloom. Anatole Kaletsky of The Times suggested last week that the views of such "opinion leaders" are a contrary indicator, and their gloom should be our cheer. Certainly, this time last year, the great and the good at Davos were relatively cheery, their optimism clearly contradicted by events in the past year.


Governments everywhere are discussing, or implementing "stimulus" packages of fiscal expansion. Economic theory calls only for fiscal stimulus when monetary stimulus fails, like "pushing on a string", as Keynes said.

I doubt that Australia needs much fiscal stimulus, except that which improves national productivity and competitiveness.

Handouts to battlers, spending on infrastructure, physical infrastructure like railroads and ports, or "enabling" infrastructure, such as spending on R&D and education, and tax cuts all have been implemented or are under active consideration. All actions of this type have their pros and cons, but too much should not be expected. Temporary "sugar hits" in battler bailout may be saved (or gambled away) and no budget can afford too many handouts.

Infrastructure spending takes time to organise and may come on stream just as other forms of spending is cranking up. Tax cuts appeal most to deep-dyed conservatives, as they leave decisions to spend or to save in the hands of those who earn the money.

Global fiscal policy will influence the global tide of economic activity, but winners and losers will be decided in part by policy actions in each nation. Fiscal actions that increase Australia's productivity and competitiveness are the most sensible option, as they will improve Australia's position when recovery comes.

National leaders and the international agencies are saying the right things about the avoidance of a slide into protectionism. But industrial bailout - of banks, motor vehicle manufacturers or property developers - is a form of protectionism.


The major banks are so important to the global economic system that they cannot be allowed to fail. But allowing failed bankers to walk away with bonuses that in aggregate add up to tens of billions of dollars is at best unpalatable, and in any case is morally unacceptable. Allowing bank shareholders to escape with their capital augmented by taxpayer's funds is also morally unacceptable. Henry has no problems with part-nationalisation or even full nationalisation of banks that need to be bailed out by capital injection of taxpayers' funds. Such an approach gives taxpayers a chance of eventually recovering the money used for the bailout. However, it must be stressed that companies requiring injection of fresh capital should first go to the market.

Companies requiring new capital would naturally investigate merger, sale of equity to investors, including in cashed-up nations such as China or wealthy nations in the Middle East, or put themselves in the hands of administrators to arrange an orderly wind-up. These are all alternatives for boards of directors unable to swallow the deal a government might offer.

Governments demanding tough terms for corporate bailouts would encourage rapid adjustment in the capitalist system and the net effect might be rapid reconstitution of failed enterprises under new management and the further encouragement of capitalism in nations not currently strong bastions of free enterprise.

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First published in The Australian on February 3, 2009 and on Henry Thornton's blog.

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at

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