04 February, 2009

Brother, can you spare a grand?

It looks like some time around April, the government is going to give me $950. It's part of the latest round of economic stimulus packages. The opposition has expressed doubt that the grants portion of the package will do anything, leader Malcolm Turnbull saying. “If you give people one-off windfall lump sums in uncertain times they are more likely to save it than to spend it.” The government rejected that criticism, citing Westfield statistics showing a surge in December sales at their Australian locations, following the last round of grants, but not similar bumps in their New Zealand and US outlets. The government might also have mentioned some Howard government grants to people on benefits that were actually meant to offset increases in the cost of living but nevertheless came in the same week as a spike in the sales of plasma screens.

Even so, the opposition is probably right to say that most people are unlikely to go out and spend it all, but isn't it better that they have it for when they need it? Either way, we know we are in uncharted economic territory when the opposition is complaining that Australians are saving too much.

It is somewhat refreshing though to see governments react so relatively quickly to the revelation that much of their economic thinking over the last three decades has been wrong. Mind you, it isn't as if they had much choice. This is not the kind of stuff-up that you can keep hidden on the other side of the world. One of the first things the Australian government did was to guarantee all deposits in all Australian banks. This immediately averted a run on the banks, which was already beginning, and had the knock-on effect of overseas money flowing into the country from account holders who want to be sure their money is safe. So Citibank's loss is the NAB's gain. Fine by me.

But there can be no doubt now that much of the world's economy has all been based on a false assumption. Even Alan Greenspan, poster child of the free market, has admitted to a flaw in the system that he never saw before. And why would he see it? When you believe that the market is self-regulating and self-correcting, why would you consider flaws? Obviously I'm no economist – anyone who knows the first thing about economics figured that out long ago. But it seems to me that the free market is kind of like a machine. It works perfectly, until it doesn't.

The computer you are reading this on has most likely been programmed to check itself, update itself, diagnose itself and correct itself. Left to manage itself, it should constantly self-regulate and self-correct and all you need do is enjoy the benefits. And that's how most computers work. Until they don't. Despite anything that Microsoft or Norton or even Apple say, everyone knows that there's no substitute for a bit of informed vigilance on the part of the user. If you find your computer running awfully slowly, or giving you strange messages or suddenly having new programs that you didn't know about, you don't just assume that the system knows what it's doing and will right itself. You assume that there is something wrong with the system and it needs intervention from someone who knows what they're doing.

Just as no-one has ever been able to build a perpetual motion machine, no-one has ever been able to design a perfectly self-regulating economic system. Unfortunately, many have had to learn this latter fact the hard way. The “hands off and let the market decide” policies of the last 25 years have been thoroughly discredited and one of the sad aspects of that is that so many of its surviving proponents are now comfortably retired or reliably ga-ga and will never have to face the consequences of their failed experiment. Some who still cling to the notion of a self-regulating, self-correcting market will argue that no government has ever been truly hands-off and that it's the tinkering around the edges of the free market that caused the problem. That's like changing the oil in your car once in twenty years and then when the engine blows up, blaming it on the one time you actual did change the oil. The problem is that you didn't change the oil enough. Machines have to be maintained and so so economies.

At this point, the analogy (and, indeed, the economy) breaks down because a machine will behave in a predictable way based on a certain set of circumstances. Economic rationalists assume the market will too, but that fails to take into account the vagaries of human nature. Free market theory assumes that people and companies will act in their own interests. But people don't always do what is in their own interests. It's not in anyone's interests to smoke, but people still do it. Governments attempt to reduce the damage done by these people who act against their own interests by raising taxes on cigarettes, assuming that people will do what's in their economic interests, even though we have already established that we're talking about people who do not act in their own interests. I only know of one person who stopped smoking because of the amount they were taxed, and that's probably one more than most. They have also banned smoking from pretty much every place it's possible to ban it from, and only fringe groups have complained that it's an intolerable restriction on freedom and the natural order of things. I believe the restriction of people's ability to smoke and gradually making it socially unacceptable has worked far better in reducing smoking than any appeal to people's self-interest. It takes human nature out of the equation.

Speaking of human nature, there remains the question of what to do with my $950. It's always been my nature to take any windfall and put it away until such time as my own personal economy needs stimulating. Is this greedy of me? Unpatriotic? I don't think so. I don't need a new TV or washing machine or interstate holiday right now. If I were to spend the payment on any of those things, or fritter it away on wine, clothes and CDs, that would just be spending for the sake of spending. I'm not well off but I am doing alright at the moment. That could change in the future. I don't know if it might be two weeks or two years, but it will be reassuring to know that if times get tougher, or I have a sudden expense, there will be money there to put towards it. So Malcolm is right to predict that not everyone is going to go out and spend their grant immediately. We don't want a binge-and-purge economy anyway. But it will make people more secure in knowing that if they need the money, it will be there, and that alone will be enough to loosen people's budgets a little bit.

Someone once defined 'consumer confidence' as people's desire to spend money they don't have on things they don't need to impress people they don't like. In this climate, it might be enough for people to know they do have the money for things they do need.

Recommended reading:
Crikey's Bernard Keane on Turnbull's response to the Rudd package

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