In 1936, in the preface to the German version of his General Theory of Employment, Interest and Money, John Maynard Keynes suggested that his theories were best suited for a closed totalitarian system. It is also this theory that postulated that it is economically productive for the government to fund one group of workers to dig a hole and another group to fill it. Yet it is this theoretical framework that guides much of Australia’s economic policy.
Last week, in response to a question asked following his National Press Club address, Treasurer Josh Frydenberg said “It is important to go to the supply side. Thatcher, Reagan, that’s an inspiration.” In this statement, the Treasurer well demonstrated this government’s greater competence in politics and spin rather than in public policy and outcomes.
This reference to Margaret Thatcher and Ronald Reagan, neatly dropped in, achieved its objective; to change the narrative away from the parlous state of the Australian economy and Commonwealth budget and to a culture war around the economic policies of Reagan and Thatcher. Thus, since this speech, much of the Australian political commentariat industrial complex has been talking about what was done 40 years ago rather than what needs to be done now. For example, to address the fact that Australia’s three levels of government now combine to account for well over 50% of national GDP; a previously unimaginable level.
One such member of the political commentariat who never misses the opportunity to misunderstand history and economics, stepped in with a 1,200 plus word effort in The SMAge earlier this week.
It might be imagined that a senior economics writer for a major metropolitan newspaper would have some cursory knowledge of, you know, economics or perhaps economic history. But in her recent contribution, Jessica Irvine evidences Karl Popper’s observation that “true ignorance is not the absence of knowledge, but the refusal to acquire it”. Irvine’s attempt would have until recently been marked as a fail at most universities, but we seem to live in interesting times.
In her missive, Irvine attempts to describe the economic policies of Thatcher and Reagan and to explain supply side and demand side economics. There is much to be said about Irvine’s analysis but before assessing the policies of Thatcher and Reagan, or Irvine’s assessment of same, consideration needs to be given to the context of the time.
The late 1970s and early 1980s were the height of the cold war. A time when many experts thought the economy and productivity of the Soviet Union were in significantly better shape than of the West and the Soviets were on path to economic hegemony. The West was at the same time beset with economic underperformance, due in no small part to the stagflation (high unemployment and inflation) of the times.
The US economy was particularly suffering because of the dual effects of the 1970s oil shocks and the wash through of previous budget deficit monetisation policies, its application of not so modern monetary theory. The UK was also in the midst of its own economic challenges, due also in no small part to the sclerotic and statist policies implemented by its Governments after World War 2. This was the UK where the heads of Government departments believed that it was their role to facilitate “the orderly management of decline” of the United Kingdom.
Into this quagmire stepped Margaret Thatcher and Ronald Reagan, two leaders who were mocked before and after their terms in office. In this theme, Irvine attempts to suggest that both Reagan and Thatcher, upon election, were somehow converted to liberal philosophies and economics, by a cabal of nefarious economists:
Having previously adhered to the more “wet” liberal philosophies of state paternalism and intervention as a minister in the Heath government, as prime minister, Thatcher unleashed a suit of radical neoliberal policies aimed at freeing up the economy that would collectively become known as “Thatcherism”.
[B]y the time he won the 1980 presidential election, Reagan, too, had undergone a conversion to the principles of free markets and lower taxes advocated by economists such as Milton Friedman.
Those more familiar with the biographies of Thatcher and Reagan know better and that there were never any conversions.
In 1964, when delivering his famous a Time for Choosing speech, Reagan observed that “No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth!”. And during the term of his Governorship of California between 1967 and 1975, Reagan returned $5.7 billion to Californians in the form of tax relief and left office with a $554 million budgetary surplus, a triple-A state bond rating, and a more progressive state income tax system.
At a 1975 Conservative Party policy meeting, when challenged by one of her “wet” liberal colleagues, then Leader of the Opposition Thatcher took out of her handbag a copy of Friedrich Hayek’s Constitution of Liberty, slammed it on the table and declared “This is what we believe.”
There were no in-office-conversions.
Thatcher and Reagan set about implementing a number of supply-side policies. These were based on the notion that economic growth is most effectively achieved through reduced taxation and reduced regulation rather than central planning and resource allocation. Supply side economics is best articulated through (Jean-Baptiste) Say’s law that say supply creates its own demand. Or more simply, we work so that we can consume, rather than the Keynesian construct that we consume so that we can have jobs. It is this (Keynesian) nonsense that perpetuated the myth of consumption driven economic growth.
Say actually wrote, “as each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”
And this is what Thatcher and Reagan did. They cut taxes. They cut regulation. They permitted production to bloom and as a result, their economies boomed. As an aside, the resultant economic success of the US and the UK laid the platform for the ultimate demise of the Soviet Union, but what did capitalism ever do for the people?
Unfortunately, this is all history. And whilw it is novel that Treasurer Frydenberg makes mention of Thatcher and Reagan, there is no evidence that beyond this flurry of rhetoric, any supply side policies will follow. It should, after all, be remembered that the last legislated income tax increase Australians were subjected to was from the Abbott Government and that the current Treasurer (Frydenberg) and previous Treasurer (Scott Morrison) have overseen significant increases in regulation.
Economic reform is hard work. It does not afford ribbon-cutting opportunities and it does not delivery “announcables”. We may hope for economic reform but we should plan for disappointment. After all, for our political class, the pleasures of giving speeches are much better than the labours of governing.
Illustration: Ronald Reagan Presidential Library.
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