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Aug 2, 2009

Kevin Rudds new vision of the past.

One of the Graphs from Tim Andrews in Thoughts on Freedom article.

A recent diatribe by Kevvie Rudd in the Sydney Morning Herald, “Pain on the road to recovery,” raises the hoary old arguments he has pushed in the past that the current financial crisis is the result of “a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector.”

That’s right, folks, in case you missed it among all that regulation, all of our problems are the result of unrestricted, unrestrained, unregulated, uninhibited, unprincipled, and unmitigated, laissez-faire, free market capitalism.

In what could be best described as Kevin Rudds new vision of the past he comes out with the following:
“The alternatives were to do nothing or, worse, effectively replicate the Premiers' Plan of 1931 when governments cut expenditure, thereby compounding the problems created by a private sector already in retreat. The result, of course, was an economic rout, appalling unemployment and a decade of negligible growth through the 1930s.”
(The Premiers' Plan involved reductions of about 20% in government spending, public works and wages, and balancing the budget.)

Tim Andrews makes a great response to this in “Thoughts on Freedom,” with his article, “Stimulus Economics: The Data Says NO!” pointing out the vastly different results obtained between the US and Australia over the following period:
It is clear that 1931 is the year the policies diverge.
From the beginning of the year, the U.S increases spending by 45%, Australia cuts it by 15%. If the fundamental theory underpinning ‘stimulus’ economics holds, we should see, almost immediately, a change in outcomes. Australia’s GDP should decrease, whilst GDP should increase in the U.S. Similarly, unemployment should go up in Australia, and fall in the U.S.

So. What happened. This time I went to the OECD (behind paywall) to find out US and Australian GDP per capita during the early years of the depression, and plotted them such that 1929 was the base year of this index. And guess what happened?

Australia’s GDP starts to grow. In the U.S it continues plummeting. In fact, almost immediately after Australia resolved to slash the size of government, it’s GDP began to rise.

I can not stress this enough. In the year that US Government spending increased 45%, GDP fell a whopping 17%. I repeat, 17%. In Australia, where government spending fell 15%, GDP increased 5%. In the following year, while the U.S “stimulated” economy fell 2%, Australia’s grew a whopping 7%. While the U.S economy eventually begins to improve, as the business cycle kicks in, it does so at a considerably delayed rate to Australia, where the government did not crowd out the private sector thereby delaying the recovery.

There could be no better example of how the economics behind ‘stimulus’ packages fail.
I thoroughly recommend the full article.

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