The Harsh Couch - 2016.06.08 Skeptic Shock Syndrome

#1

Service to others is the rent you pay for your room here on earth. - Muhammad Ali

This is a companion discussion topic for the original entry at http://theharshcouch.com/thc/2016-06-08/
#2

The topic of the government as “economic managers” came up again.

My view is that the role of government as managers of the economy, in Australia and other developed economies at least, is overstated. Unless they are going on a regulatory/deregulatory binge (eg setting up regulation that facilitates the creation of new markets, deregulation, privatisation), government policies have a relatively small impact within an economic cycle (subject to the infrastructure caveat below).

Global and domestic economic cycles and forces have far more of an impact, as do the aggregate efforts of the workers, managers and also the allocators of investment capital (overwhelmingly the private sector ie market forces in aggregate).

So governments taking credit (or being assigned blame) for periods of economic prosperity is largely bullshit. For example, growth in the Australian economy from the mid-2000s through to around 2012 was driven and underwritten largely by Chinese demand. Labor or Liberal, wouldn’t have made much difference.

If anything, the economy does well despite the attempts by governments to influence the economy.

I suspect that the government is credited with a larger-than-reality role in economic management because of democracy. That is, we get to vote for the government, we’d like to think we have some degree of control over things, so it makes us more comfortable feeling that the governments we (in aggregate) elect have some degree of control. That’s more existentially comforting than living with the knowledge that our fates are largely in the hands of unknown, unseen and uncontrollable forces (cf the existential comfort offered religion).

Also, most of us grew up under the influence of the Keynsian aggregate demand model, which stresses government spending and pump priming as a policy mechanism to influence the economic activity. I think this leaves a lot of people with a mistaken understanding of the relative impact of government spending on the economy.

Certainly, as a capitalist whose role is to allocate billions in capital within the US economy at the moment, government policy doesn’t have much immediate relevance to most of my work. It’s in the background, it occasionally is relevant, but it’s usually a second or tertiary issue. Governments create laws and policies that are part of the foundations on which economic activity operates, but it’s a bit like the soil under your feet on a football pitch. It’s been fairly stable for years, you take it for granted and it’s infrequently a motivating factor for how you make decisions in the economic, money making game.

Infrastructure caveat - my comments above are largely directed to the notion of the government being a steady hand on the tiller of the economy, reacting dynamically to day-to-day, month-to-month ebbs and flows in the business cycle.

A separate case is the role of the government in funding or creating the room for others to fund infrastructure, both hard (roads, rail, ports, NBN, etc) and soft (education, worker rights, healthcare, courts etc). This is an area where the government really does make a difference and provide value that the private sector/market economy is unlikely to fill. Even privatised infrastructure projects (eg privately built and owned tollroads, power stations) rely heavily on government involvement via concessions, offtake agreements etc.

A problem we have is that this sort of infrastructure creation is long term stuff with long term pay offs. However, the news and election cycles and human attention spans are short term and infrastructure projects don’t deliver short term benefits to a government, unless there is a short term angle eg job creation or some other short term shiny bauble.

EDIT: A counterpoint to my argument - market sentiment can have a huge impact on economic activity and the government does have a significant impact on sentiment. I recall a discussion with some very senior people at my bank around the time of the Abbott-Turnbull transition, where it was openly acknowledged that the change to Turnbull had a large, positive impact on market sentiment and optimism, hence economic activity. Similarly, the perceived competence of a government as economic managers can impact sentiment.

#3

Another counterpoint to my own argument - interest rate policy is a policy lever which can have a lot of short term impact. That’s set by the notionally independent Reserve Bank of Australia, but the choice of the RBA board is determined by the government in power.