\t\t\t\tA few things came up today which I thought I would write about – albeit briefly (but then that is all relative I suppose). In general I am scaling down blog activity on Fridays. But today the Australian government released a final evaluation report on one of its big fiscal stimulus infrastructure projects. The Report attracted the typical biased headlines – massive government waste. Over in the UK, the wreck of News Limited’s News of the World proved – once again – that the private sector cannot be trusted to self-regulate resonating what we learned from the financial crash but seem to have forgotten already. These two observations are related and so today I consider the notion of government waste.
\n
\nFirst, I thought this insight from Geoffrey Robertson – – resonated with what is going on at the moment:<\/p>\n
News of the World proved that self-regulation was bound to fail, whenever cutthroat circulation was at stake, to instill any sense of ethical conduct, or even respect for the criminal law, in the business of tabloid infotainment<\/p><\/blockquote>\n
Self-regulation is one of those neo-liberal myths that has allowed capital to run rife and create havoc in the world without many repercussions for the top-end-of-town.<\/p>\n
In the same way that the UK Press Complaints Commission<\/a> set up in 1991 is a joke – a chimera of oversight which operates to allow the government to claim they are acting in the best interests of society without doing anything – it is clear that regulatory oversight of the large Wall Street bankers failed to stop them undermining public purpose.<\/p>\n
There needs to be stronger oversight that will actually lock people up. In the specific case of NOTW scandal it remains to be seen how many of those who actually benefited financially – and I mean in more significant ways than the actual operators – go to jail. The number will not be large (if more than zero).<\/p>\n
Second, there was an interesting article in the Melbourne Age today (July 8, 2011) – Current a\/c deficits don’t deserve bad rep<\/a> – which reported on a speech made by a senior RBA official who said that “(b)ig current account deficits can actually be a good thing”.<\/p>\n
The official called for a “more nuanced analysis of current account positions, rather than a simple focus on headline numbers”, which mainstream economists tend to focus on and conclude that deficits are bad.<\/p>\n
If the trading component of the Current Account is in deficit then in real terms local residents are enjoying net real benefits at the expense of other nations. I will come back to the notion of “real” soon.<\/p>\n
The article also noted that “(o)ver the past 50 years there was an average deficit of 3.1 per cent of GDP” and so you see that the typical outcome whereby the national government would run a budget deficit was the reason that the private domestic sector was able to save in net terms.<\/p>\n
The Australian Treasury is forecasting that “Australia’s current account deficit will be four per cent of gross domestic product (GDP) in 2011\/12” which means that for the private domestic sector to net save overall and start reducing its debt levels (which reached record levels prior to the crisis), the budget deficit has to be at least 4.01 per cent of GDP over the same period.<\/p>\n
This also means that the external sector will continue to drain aggregate demand from the national economy.<\/p>\n
The Budger Paper No. 1 – 2011-12<\/a> carries an Appendix of historical budget outcomes and the forward estimates.<\/p>\n
The budget deficit was 4.3 per cent of GDP in 2009-10 and with the Federal Government now in austerity mode (courtesy of the so-called “mining boom of our lifetime” which continues to be so small that the external sector drains growth) the forward estimates for 2010-11 are 3.6 per cent then 1.5 per cent of GDP in 2011-12.<\/p>\n
You can imagine that with the private domestic sector now not spending and trying to reduce debt and the external sector deficits averaging 3.1 per cent of GDP, the fiscal austerity plans of the Government will reduce growth and become unsustainable as a result of the adverse movements in the automatic stabilisers.<\/p>\n
Simple arithmetic tells you that.<\/p>\n
Real versus nominal efficiency<\/strong><\/p>\n
While on the topic of News Limited (which is in shame now over the NOTW scandal) – its local rag that parades as a “respectable” daily newspaper – The Australian – carried a story today (July 8, 2011) – BER waste tops $1.5 billion<\/a>.<\/p>\n
The Australian is heavily biased in its reporting towards promoting free market values and never ceases to run mindless beat-up stories about government inefficiency and the need for more deregulation – especially when it benefits the American (who used to be an Australian) owner’s interests. There reporting during the last federal election was a disgrace with one opinion piece after another wheeled out each day promoting the election of the conservatives.<\/p>\n
So today’s report comes as no surprise because it seeks to perpetuate the notion that the Federal Government’s Building the Education Revolution program<\/a> – which was a key component of the Government’s fiscal stimulus intervention – was a waste of money.<\/p>\n
The claim that the BER “has wasted $1.5 billion in eastern states” is music to the ears of the free market lobby – many of which benefited from handouts associated with the fiscal stimulus packages and who generally enjoy a range of corporate welfare payments (direct and indirect) courtesy of the federal government.<\/p>\n
Leaving aside the obvious ideological bias, the report is plain wrong in terms of understanding what waste is. It seeks to promote a concept of “waste” that has no meaning in a fiat currency system. I realise what I am about to write will appear to be counter-intuitive and difficult to accept at face value. But many of the myths promoted by the deficit terrorists play on intuition – which is a very poor substitute for thorough understanding.<\/p>\n
The news article says that:<\/p>\n
MORE than $1.5 billion has been wasted in the eastern states under the federal Government’s Building the Education Revolution schools stimulus program, with the nation’s two biggest states failing to provide value for money under the program.<\/p>\n
The third and final report into the BER, conducted by former investment banker Brad Orgill, has found Victorian and NSW, have not delivered value for money for public schools under the program with public schools charged an average of up to 60 per cent more for school buildings, despite no differences in quality.<\/p><\/blockquote>\n
The article then quotes a range of building costs “per square metre for all classrooms, halls and libraries delivered” and compares them across the nation (by state) and type of education provider (private\/public) under the BER program.<\/p>\n
The data is taken from the Building the Education Revolution Implementation Taskforce: Final Report<\/a> – which was published this morning by the Government. Be careful if you want to read the report – it is a large file.<\/p>\n
The accompanying Government Press Release<\/a> is also interesting. Juxtaposing the News Limited spin on the Final Report (selective reporting of statistics etc) with a broader reading of the actual Final Report is a salutary exercise.<\/p>\n
It will confirm that The Australian is not interested in balanced reporting.<\/p>\n
For overseas readers, The Building the Education Revolution (BER) was a large-scale public stimulus program that provided involved over “23,670 construction projects” being “delivered by 22 government and non-government education authorities” to build new school infrastructure particularly in primary schools. The infrastructure was in the form of new classrooms, halls and libraries.<\/p>\n
The Final Report shows that “completions are at 92 per cent with 98 per cent of funds having been committed”. The projects saved the construction industry from a severe downturn during the worst of the crisis. Typically the construction industry is an early victim of a recession. In the 2008-10 period, the construction industry in Australia actually boomed courtesy of the fiscal stimulus.<\/p>\n
Please read my blog – Fiscal stimulus and the construction sector<\/a> – for more discussion on this point.<\/p>\n
Despite the claims by the deficit terrorists that the BER was a total disaster the Final Report finds that:<\/p>\n
BER has however also been the subject of valid complaints from approximately 3% of school communities.<\/p><\/blockquote>\n
In other words, a very small percentage of projects generated valid issues.<\/p>\n
But all these details aside – what about the substantive claim that the Federal stimulus was waste because in some states the provision of a school building cost less than in other states – and that private operators were pocketing “rents” from the scheme unnecessarily?<\/p>\n
First, from a macroeconomic perspective, the fact that unemployment and underemployment rose several percentage points during the crisis and are still well above the pre-crisis levels is evidence that the overall fiscal stimulus was insufficient in its impact on aggregate demand. In that sense, the waste of the stimulus are the lost jobs that arose because the Government were too cautious.<\/p>\n
So – categorically – the stimulus was not large enough nor has been maintained for long enough.<\/p>\n
Second, the pocketing of “rents” (that is, payments which were above those necessary for the tradespersons to supply their labour) have distributional implications. Some private operators definitely made a significant amount of money from the BER program and probably more than they would have made in normal circumstances for delivering the same services. I reflect on the abnormal nature of the circumstances below.<\/p>\n
But the only relevant question arising from a skewed distribution (relative to what?) is whether the fiscal stimulus could have delivered more jobs per dollar than it did if the distributional benefits of the stimulus were different. I have no doubt that the Government could have created hundreds of thousands more jobs than they did if they had have targeted jobs in a different way.<\/p>\n