A 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.
First, I thought this insight from Geoffrey Robertson – – resonated with what is going on at the moment:
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
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.
In the same way that the UK Press Complaints Commission 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.
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).
Second, there was an interesting article in the Melbourne Age today (July 8, 2011) – Current a/c deficits don’t deserve bad rep – 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”.
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.
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.
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.
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.
This also means that the external sector will continue to drain aggregate demand from the national economy.
The Budger Paper No. 1 – 2011-12 carries an Appendix of historical budget outcomes and the forward estimates.
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.
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.
Simple arithmetic tells you that.
Real versus nominal efficiency
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.
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.
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 – which was a key component of the Government’s fiscal stimulus intervention – was a waste of money.
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.
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.
The news article says that:
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.
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.
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.
The data is taken from the Building the Education Revolution Implementation Taskforce: Final Report – which was published this morning by the Government. Be careful if you want to read the report – it is a large file.
The accompanying Government Press Release 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.
It will confirm that The Australian is not interested in balanced reporting.
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.
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.
Please read my blog – Fiscal stimulus and the construction sector – for more discussion on this point.
Despite the claims by the deficit terrorists that the BER was a total disaster the Final Report finds that:
BER has however also been the subject of valid complaints from approximately 3% of school communities.
In other words, a very small percentage of projects generated valid issues.
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?
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.
So – categorically – the stimulus was not large enough nor has been maintained for long enough.
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.
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.
For example, in this blog – 90,000 jobs for 42 billion is a bad strategy … – I reported on CofFEE estimates that if the Government had have introduced a Job Guarantee and paid the workers the current national minimum wage (with holiday pay etc) it could have hired 557,000 full-time equivalent workers for around $8.3 billion per year.
Instead they out-laid $A42 billion for an estimated 90,000 jobs. The reason they didn’t pursue a better targetted job creation strategy lay in their ideological dislike for such schemes. The very same ideology that the conservative press is being motivated by to criticise any government fiscal intervention.
But the substantive point here is that the deficit terrorists are not focusing on a lack of job dividend. Rather, they just claim that government intervention is always undesirable (unless it is lining their own pockets). That bias was evident in this News Limited report today.
Third, for a sovereign government that issues its own currency there is not meaningful concept of waste that is specified in terms of $A net outlays. This is a controversial point I suspect.
Take two projects: A and B. They both deliver a building of similar dimensions and quality in different regions. Contractors providing building A charge twice as much as the contractors who provide B and the government officials lack oversight to determine why? The buildings are delivered on time and appear to be satisfactory against the specification.
Question: Is there any waste in Project B relative to Project A?
Answer: From a Modern Monetary Theory (MMT) perspective, there is no waste.
Both projects use the same quantities of real resources and transform those resources into a similar real output. There is no waste that matters in the sense of resources going astray.
The fact that the Government paid the Project B contractors twice as much in nominal terms ($A) does not constitute waste unless we were already at full employment and the nominal demand that was created in the Projects (wages, salaries, equipment purchases etc) was pushing up against the inflation ceiling.
Presumably, the contractors in Project A and B distributed the income earned in a way that added to aggregate demand, which then stimulated further employment and output via the spending multipliers.
The Final Report did find some quality issues and in that sense the real resources are being transformed into an inferior outcome. But these were small issues in a very large program.
Some might argue that paying Project B contractors twice as much stops the Government from spending on other worthy programs and that is waste in the sense of an foregone benefit. My reply is obvious – there are no financial constraints on the Federal Australian government and by spending X more $As on Project B the government is not reducing its capacity to pursue any meaningful and beneficial project.
Politically they might be constrained but then that is another debate altogether.
The only time they would be constrained in real terms would be at full employment and then the need for a large-scale fiscal intervention would be absent.
Please do not assume that I think the national government should be throwing millions towards unscrupulous building contractors. The argument I am making is more substantial than that and takes us back to first principles.
In general, governments should spend and tax to advance public purpose. I do not think pushing millions into the hands of dodgy builders was a good strategy but the waste I have in mind is the foregone employment that was involved because their fiscal stimulus was not as well designed as it might have been.
That is not the concept of waste that that the mainstream media is headlining today nor what the deficit terrorists focus on.
Reflections on the government stimulus rescue
At the time the Government introduced the fiscal stimulus the deficit-terrorists starting to search for examples of what they called waste.
I recall this insight from the Sydney Morning Herald’s economics commentator Ross Gittins who said his article (March 3, 2010) – Rudd pays for avoiding recession:
Years ago a central banker explained to me that, in his bank’s efforts to keep the economy from being blown off track, it was never a good thing to be too successful. Really, I said, why not? Because if you’re too successful at eliminating evidence that the economy had a problem, it won’t be long before people are questioning why you took the steps you did when, clearly, there was never a problem.
I agreed with that assessment. I was interviewed a lot during that period about the need for the stimulus and the waste that was self-evident. It was always hard explaining to the audience the point I am making here.
It was clear that some parts of the stimulus intervention were poorly thought out – for example, the now-scrapped insulation program. It wasn’t a very good program because it didn’t create very many jobs at the bottom end of the labour market.
The design of any fiscal stimulus should be all about maximising the number of jobs that are created to minimise the damage to the labour market arising from the slowdown in private spending. Putting insulation into ceilings and allowing all sorts of unskilled private operators to reap large profits was not a very sensible strategy.
But we also had to appreciate – historically – that large-scale stimulus interventions of the type taken by the Australian Government – which in international terms was early and large relative to GDP – are very complicated and you can expect some administrative inefficiencies. Imagine if the private sector had to ramp up investment spending within a 10-12 weeks – what do you think would be the outcome of those projects?
It is also clear that the neo-liberal era has been marked by a major reduction in Federal Departmental capacity to design and implement fiscal policy interventions – given the obsession with monetary policy and the major outsourcing of “fiscal-type” government services to the private sector. Many of the major Federal government policy departments are now just contract managers for outsourced service delivery.
So with the voluntary reduction in “fiscal space”within the federal government over the last 20 years or more it is no surprise that the overall capacity of the government machine to implement complicated nation-wide infrastructure programs has been diminished.
The Final Report of the BER Taskforce supports this assessment:
Across the country the number of state government employees stating their occupation as ‘civil engineer’ has practically halved over the last 30 years, from 4,480 in 1976 to 2,547 in 2006. The same trend has occurred for architects. This has diminished state governments’ in-house capability. In addition, there has been a marked de-professionalisation with a reduced focus on specialist skills (engineers and architects) relative to generalists, including in title designation. The only state government that can claim to have all the attributes of an informed buyer of capital works projects currently is the Queensland Government.
That was a major lesson for the future from the fiscal interventions. We can no longer deny that fiscal policy is required to address serious swings in private spending. The crisis has shown that monetary policy is – categorically – an ineffective tool in dealing with aggregate demand failures of the sort we have witnessed in the recent years. In that context, governments must develop forward-looking capacity to ensure that it has project implementation skills when they are required.
Also while complex fiscal interventions will not be perfect in design or execution you have to consider what would have been the case if we had have followed the Chicago school (or the Harvard school) line – and left it to the private market to sort the mess out. It is clear to me that we were facing a repeat of the Great Depression such was the damage to the financial system and the plunge in real output in the major economies.
Finally, the Australian downturn was less severe than we thought at the time of the intervention. It is easy to look back with the benefit of the 20-20 vision and think that the Government acted too quickly to arrest the slowdown. But the major point is that at the time the stimulus packages were designed and announced, the Government believed we were on the precipice of another Great Depression. The international events demonstrate that the crisis has been very severe. So the government rightly assumed that there would be major idle labour skills available to be brought back into productive work. That was a reasonable assumption and the fact that the downturn hasn’t been as bad as that demonstrates that the fiscal stimulus has been very effective.
The fact that the labour market has still not recovered some years after the first deterioration began is evidence that the fiscal intervention was not sufficient.
Further, as noted above I would have concentrated the stimulus on efforts to provide public sector jobs to the most disadvantaged workers who bear the brunt of unemployment and underemployment. They are still idle and without sufficient income. It would have delivered much more to the economy than competing for tradespersons with other “private” demands for those services, however, weak they were at the outset of the crisis.
As an aside, to close the circle on the opening thought on self-regulation, the BER Final Report noted many deficiencies in the private sector trades:
The Taskforce has observed a number of construction industry wide issues6. These include:
- inadequate use of technology to deliver coordinated project design documentation;
- the potential for conflict of interest of private certification if aligned to the delivery managing organisation;
- substandard workmanship which may be a result of low completion rates of trade
- a trend to generic skills for project managers rather than technical qualifications backed by significant hands on construction experience.
The de-skilling of the private sector is another story for another day. But the fact is that private work for private contractors in Australia is also very shoddy. The neo-liberal degradation of our principle training institutions over the last 30 years are catching up with us. We should always remember that the public sector was the main training institution in Australia through apprenticeships in the large infrastructure departments.
Many of those tasks have been outsourced or privatised and the training capacity eliminated by profit-hungry private operators.
Meanwhile, the US President – in entering “debt reduction” talks with the Republican rabble in Congress just confirms he wants to be a one-term president. They will play him for all his stupidity.
The Saturday Quiz will be back sometime tomorrow – even harder than last week!
That is enough for today!