swan haunted by keynesian curse

John Maynard Keynes died in 1946

SMH April 13, 2011: There must have been a particularly inspiring English teacher at Nambour High School in the early 1970s, because first Kevin Rudd and now Wayne Swan have caught the essay-writing bug. But the two appear to have studied under a less exacting history teacher. In his 2009 essay for The Monthly, Rudd underestimated the historical resilience of neo-liberal thought. And Swan, in his debut essay for the Australian Fabian Society this month titled “Keynesians in the recovery”, has sought to rewrite history entirely from the commonly accepted “we’re all Keynesians now” to the more controversial “Labor was Keynesian all along”.

According to Swan, the prime ministers John Curtin and Ben Chifley were only the first of many Labor luminaries to “adopt [the British economist John Maynard] Keynes as their economic guiding light”.

Swan’s account entirely glosses over the “recession we had to have” under the Hawke and Keating governments which, caught up in their enthusiasm for free-market reforms, initially spurned the idea of “pump priming” the economy. While the recession began in 1989, it was not until 1992 that the Labor government responded with a “One Nation” infrastructure stimulus package and even later still, in 1994 – after it became clear the first attempt was insufficient – that it stepped up with a “Working Nation” jobs stimulus package.

In fact, it was the memory of this failure that prompted the former treasury secretary Ken Henry to urge Rudd and Swan in late 2008, when it was clear the global financial crisis had reached a dangerous phase with the collapse of the US investment bank Lehman Brothers, to “go early, go hard and go households” with a Keynesian, counter-cyclical stimulus spending package.

Keen to prove Labor’s economic credentials, Rudd and Swan at least proved good students in Keynesian economics. In fact, although he does not claim it in his essay, the title of Australia’s Most Keynesian Treasurer is rightly Swan’s.

If you don’t believe me, believe John Quiggin, perhaps Australia’s most famed Keynesian economist: “If you think of Keynesianism in the narrow sense of fiscal policy, I would say Swan counts as the most Keynesian treasurer and Ken Henry as the most Keynesian treasury secretary. We have never seen as big and rapid a fiscal stimulus as we got [during the global financial crisis]”.

Despite Swan’s protestations that he is only the latest in a long line of Labor Keynesians, the Treasurer is a pioneer in the field. Economists often argue that Keynes’s ideas seemed to have failed so often – as they did in the 1970s when a period of postwar government spending gave way to a period of steep price rises and stagnating growth – because they have never been properly implemented.

For example, observing the backlash in the US during the global financial crisis against the stimulus plan of the President, Barack Obama, the economist Paul Krugman argues the stimulus simply did not go far enough. Critics watched the Congress spend billions of dollars and still the economy sank into deep recession and the jobless rate struck double digits. “Bam! Keynesianism fails again,” they cried. Rather, Krugman argues, Congress should have spent at least double the initial amount if it was serious about stimulating the economy out of recession.

In Australia, under Swan and Rudd, things were quite different. The size of our stimulus spending, representing about 2.9 per cent of gross domestic product in 2009 and 2 per cent last year, was second only to China’s.

Rudd and Swan quickly heeded Henry’s advice and had stimulus cheques in the mail by Christmas. The former finance minister Lindsay Tanner memorably likened it to “kitchen-sink-o-nomics”. Only when Australians were confident the government was going to throw everything at it, did they relax and continue spending, averting job losses and recession.

Of course, other factors helped, such as the Reserve Bank halving interest rates and the continued strength in demand from China for our commodities, helped in no small part by its own stimulus package.

But Swan’s and Rudd’s response to the financial crisis emerges as one of the finest practical executions of Keynes’s advocacy of counter-cyclical government spending. It demonstrated, for one of the first times, that, executed properly, Keynes’s prescriptions work – they can save an economy from recession.

But – and here lies the rub – Swan’s and Australia’s experience also demonstrates clearly that any victory achieved under these terms will be a pyrrhic one.

Indeed, Swan is the first Keynesian treasurer to discover what I call “the Keynesian curse”. Woe betide the politician forced to dig up the bones of that particular dead economist and deploy government spending as their battle plan. If you are successful, no punter will believe the threat of joblessness and recession was as real as you said it was.

The Keynesian treasurer must expend considerable political and financial resources enacting the stimulus plan. It will hamstring you financially from anything else you wanted to achieve in government. And no mug punter will ever thank you for it. In fact, they will seize on any perceived wastage to argue you are unfit to govern.

Keynes once argued that governments could bury dollar bills in bottles and employ people to dig them up and it would still be worth it to stimulate the economy. But Australia’s experience shows clearly that while some voters would benefit from the employment, many more would complain loudly about the terrible waste of money.

The only comfort available to the Keynesian treasurer is the knowledge that if you hadn’t acted, and the economy had plunged into recession, they’d beat up on you even harder.

Such is the Keynesian curse.

Ross Gittins is on leave.

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2 Responses to swan haunted by keynesian curse

  1. Magpie says:

    Although a bit unfair with Keynes, the song is pretty catchy:

    Keynes vs Hayek round 2

    Have fun!

    • Magpie says:

      Well, I’ll be damned.

      I just noticed this now: the video was co-produced by the Mercatus Center of George Mason University, which just so happens to receive money from the Koch brothers, if memory serves.

      THATS’ why Hayek won the fight.

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