GDP?

I’ve always been bemused that GDP growth is the standard metric for economic strength and standard of living. I think GDP growth is a very weak metric. My reasoning is that GDP measures the strength of the economy in dollar value. What GDP ignores is that, as a result of momentous technological progress, what we get for a dollar is growing much more rapidly than GDP. For example, if you purchased a computer ten years ago, and then a computer today for the same dollar value, what you get for your money today is orders of magnitude more than what you would have got back then. My smartphone is infinitely more powerful than my first PC. So in my mind, metrics for valuing technological development are far more critical than metrics measuring production by dollar value. Governments seem to completely ignore this. They become very concerned when GDP growth isn’t up to par, whether it’s 0.1% higher or lower than anticipated, while ignoring the fact that nonetheless technology is exponentially powering ahead as strongly as ever before. As a result, many consumer goods are developing very rapidly, as is our (technological) standard of living. I’d like to see more widespread use of technological development metrics when evaluating the strength of the economy. No single metric can fully characterise an economy or its people’s standard of living. We need to employ a greater diversity of metrics to fairly reflect this and technology should be at the forefront.

The case against stimulus

Following the global financial crisis (GFC) governments all around the world, including Australia’s, engaged in knee-jerk stimulus spending, aimed at ‘kick starting’ the economy. Advocates argue that such spending stimulates demand, which subsequently triggers increased circulation of money and credit. I’d like to dispel some misconceptions about such policy.

The entire stimulus argument is based on demand side (or Keynesian) economic principles. However, demand side stimulus is only one approach to stimulating an economy. The other is supply side stimulus, involving tax cuts and removing regulation barriers, which inhibit production. Supply side stimulus has the advantage that, like demand side stimulus, it stimulates circulation of money, but has the added benefit that it stimulates people to earn more, invest more and save more. In this sense, supply side stimulus is superior to demand side stimulus.

The argument that Keynesian economics, i.e. the government borrowing large sums of money and spending it, is beneficial is based on false assumptions. When the government borrows money, it doesn’t come out of thin air. Rather, it is borrowed from someone. That someone is generally the private sector. Thus, to establish whether Keynesian stimulus is beneficial one must ask the question “does the government or the private sector allocate capital more efficiently?”. If the government allocates capital more efficiently then it makes macro-economic sense for the government to borrow money. However, if the private sector allocates it more efficiently then it is counter-productive to do so. If the former is always the case then it would make sense to abolish the private sector altogether and transition to a centrally planned economy. Clearly this isn’t the case. While in some instances government spending is more valuable than private sector spending (e.g. vital infrastructure that the entire economy critically depends upon), this isn’t always valid. Thus, before engaging in Keynesian stimulus one must analyse the details of how the government plans to spend the money, and evaluate whether this spending represents more efficient allocation of capital than what the private sector would otherwise do. The answer to this question varies, depending on the government’s and the private sector’s spending intentions. The problem I have with the stimulus packages of various world government is that they haven’t performed a full macro-economic cost-benefit analysis to determine whether their allocation of capital is optimal. Rather, they present simplistic arguments for the benefits of stimulus spending, and then spend the money willy-nilly without much consideration as to whether its allocation is superior to the commensurate private sector spending.

To compound the problem, governments retrospectively justify their stimulus spending by arguing that the economy has improved since the policy was implemented. This is a highly unscientific claim, as the governments have no idea how the economic dynamics would have evolved had they not engaged in stimulus spending. The reality is that economies naturally periodically go through boom-bust cycles. Therefore to wait for a bust cycle, implement a particular policy, then wait for the recovery and claim that it was a direct consequence of policy is folly.

I won’t argue that government spending is always bad, nor will I argue that governments borrowing money is always bad. What I do argue is that world governments have presented a simplistic and shallow case for their actions and have failed to perform any in-depth analysis of its overall benefits. Therefore I remain highly skeptical about the merits of their actions. Their actions have put major world economies into almost inescapable levels of debt, which in the long term will result in higher taxation and lower provisions of services and infrastructure. In the long term this could be catastrophic.

On the labour market

This is the speech I gave recently to the Liberal National State Council on the labour market.
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Ladies & Gentlemen,

The labour market is a particularly important issue facing our society at the present time. It affects many different areas of our society, including the unemployment rate, workplace conditions, people’s income and job satisfaction.

In particular, I’d like to discuss the ups and downs of different approaches to the labour market and what I think is the optimal approach.

The labour unions have long advocated a highly regulated approach to the labour market. They strive to enshrine workplace conditions, salaries and the content of workplace contracts in law.

One area in particular that unions actively try to enshrine in law is salaries. The unions have long tried to regulate incomes in the form of minimum award wages. This approach is fundamentally misguided. Legislated minimum conditions achieve only one thing – to make it illegal for people to work. If someone has a productive capacity of $6 an hour and the minimum award wage is $5 and hour, that person will have no difficulty getting a job. If we now increase the minimum award wage to $8 an hour, that person is not going to get a salary increase to $8 an hour – they’ll be out of work. And all other labour market regulations have a similar outcome. They price people out of jobs, undermine their ability to negotiate the terms of their workplace contracts, and make the labour market extremely inefficient and uncompetitive.

I advocate a different approach altogether. There should be only one workplace law, and that is to enforce contract. The contents of a contract ought to be something that is freely negotiated between the employee and the employer. But once that contract is signed it needs to be respected – by both parties. And enforcing this contract should be the role of government.

The unions are very critical of this approach. They argue that people deserve better conditions than what they agreed to in their contracts and they resort to extortion tactics to achieve these better terms of contract. They engage in strike action, immoral political lobbying, rallies and sometimes even violence to achieve this objective.

The unions also argue that they are there to represent workers. Let there be no mistake, unions do not represent workers – they represent paying members. They represent people who pay a significant amount of money to be represented by these organizations. As a result, people who choose not to join a union are left at a competitive disadvantage. Even worse, people without jobs are at a huge competitive disadvantage because not only do they not receive any union representation, but they are priced out of the market by artificially high minimum award wages.

Essentially what unions do is to artificially pump up salaries and conditions that are not commensurate with productivity gains. This has exactly one effect, and that is to create inflation. When people earn more, without a corresponding increase in productivity, people have more money to buy goods with, but the amount of goods to buy hasn’t changed. So money loses its value, which is inflationary and results in higher interest rates. And when interest rates increase, people are paying more on their mortgages, more on their car loans, more on their credit card debt, and so any gains made by increasing their salaries is completely wiped out by the higher interest rates. This is completely counterproductive.

There is no better person to decide the terms of their contract than the prospective employee. Employees don’t need to have their terms, conditions, and salary dictated by either unions or the government. In a free society, people should be at liberty to negotiate these things for themselves.

100 Megabits

One of Kevin Rudd’s main goals is to implement a blazingly fast nation-wide 100Mb/s national broadband network, at a cost of around $43b. This would place Australia at the pinnacle of world broadband networks. Frankly, I can’t think of a single bigger waste of tax-payer’s money than this (especially when we are due to run huge deficits). After all, what does one use 100Mb/s for? Movies, music and porn – that’s it. I’m a fairly heavy internet user, yet I can’t for the life of me think how I would use anywhere near 100Mb/s. You don’t need 100Mb/s to check your email. You don’t need 100Mb/s to do research for your high school essay. You don’t need 100Mb/s to chat to your Mum over Skype. All you need it for is BitTorrent. Should the government really be spending several tens of billions of dollars of taxpayer’s money on subsidizing BitTorrent? I don’t think so – especially given that governments around the world are spending billions of dollars trying to fight copyright infringement. It would be much more cost effective to subsidize rental video outlets and adult stores, which would have the same effect for a fraction of the cost.

I see two possibilities for how this scheme could develop. First, given that it is estimated that use of the network by the end user will cost around $200/month, there is a very real possibility that few people will want to pay the price to use it, in which case the resources will have been wasted. Alternately, lots of people might start using the network for its speed which will put private sector ISPs out of business, since they will be unable to compete against this newly created, heavily subsidized behemoth. This could have devastating implications for the telecommunications industry and might effectively socialize this critical sector of the economy. Either of these possibilities is undesirable.

In Australia, like in other developed countries, the market has proven very effective at providing broadband services to our residents. If a 100Mb/s network hasn’t already developed in the market, this is probably a fairly good indication that such a network would be economically unviable and therefore shouldn’t be pursued by the government.

This post has been cross-posted at the Australian Libertarian Society’s blog – Thoughts on Freedom.