The economic equation

It’s a Jewish shoppers dream.  Apparently we have to spend.  It’s part of the trickle down theory of economics, that if we consume, the economy grows. 

Except that there has been a huge rise in living costs.  Carmel School fees have gone up by an average of 8%, and whilst this can be justified in the context of the local market, the impact of this fee rise on young families will be immense.  I don’t know too many Carmel families that will be doing extra shopping with Government handouts. 

From the viewpoint of disposible income, Australia is now well past the optimum earning level to sustain our traditional standard of family living in aggregate terms.   It now all comes down to basic economics.  Remember how we learnt in school about how Roosevelt spent his way out of the great depression, and how economic stimulus is contingent on Government development and infrastructure development?  Well, there is now a real risk that this formula will be tried again, and worse still, that it will backfire.

We know that the US Government is spending big.  Consider the bailouts of certain US firms who have been given financial rescue packages.  Economic analyst  Michael West identifies a staggering $3.652 trillion dollars to date, with a further $4.8 trillion worth of commitments already made and George Bush has not even left office.  The list includes:

  • Bear Stearns: $29 billion
  • AIG: $144 billion
  • Fannie Mae: $100 billion
  • Freddie Mac: $100 billion
  • Car industry: $200 billion
  • Wall Street: $700 billion
  • IndyMac: $8 billion
  • JP Morgan: (post Lehman insolvency): $138 billion
  • Currency swaps from the Federal Reserve: $620 billion

 Not to mention that in the last two years more than a million jobs have disappeared from the USA, a quarter of which occurred last month. 

It is naïve to think that Australia is insulated from economic decline.  It is also time to move beyond the fairly well justified compliments that have been extended to the current Government for their economic response to date. 

In a Jewish contexts, there are many Jewish economic viewpoints on how to manage the current Global Financial Crisis by engaging values of process over outcomes, and by recognising that equality of wealth is not a defining precept (but equality of opportunity is).  One of the most insightful items is on Jewish World Review. 

With this in mind, I have been considering one very big difference between Australia’s activities versus the US.  The Australian package has been directed at the consumer, not the entity. 

Many families and pensioners received a payout this week.  Business owners and those who fit the nanny states definition of high income earners (including yours truly) were excluded from this payout.  It has not taken long for the media and some social commentators to castigate the average citizen for not knowing how to responsibly spend the money. 

I do not begrudge the inequity of the economic stimulus we have seen this week, provided it meets a broader economic need.  I think that reaching consumers ahead of business with the stimulus is a double edged sword, but in this case the right move to make.  However I do think there is also a third way.  If we are aiming for economic growth, then we need to transition jobs from bureaucratic and administrative agencies that redistribute wealth, into incentive programs that encourage new business and thereby create wealth.  I would be more inclined to see the funds used to develop employment incentives for vocational trades.  The Government could opt to  purchase apprenticeships and skill development ahead of mass welfare.

Also, lowering the cost of health and education (both private and public), and removing state and local taxes in the form of property rates, payroll tax, stamp duty, car registration and similar burdens would greatly increase the disposable income of consumers.  The mooted 2% drop in GST would have little impact due to inflationary offset, only because this is a consumption tax.  The remaining measures would be very tangible. 

We are overtaxed in Australia, and the best form of economic relief would be for the Government to lower the regulatory cost, instead of taking hold of the diminishing crop of corn in one hand, and throwing back a few kernels with the other.

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