The dictum that “a little knowledge is a dangerous thing” rings very true in the run-up to the federal budget. Limited understanding of macroeconomics, in particular, has been evident from the mantra that the economy needs sizeable fiscal stimulus in the form of increased government spending to boost aggregate demand.
High school and first-year university students of economics everywhere learn that hiking government spending counters recessions and lowers unemployment, as originally proposed by John Maynard Keynes during The Great Depression of the 1930s. But prescribing this as the excuse for a big-spending budget is seriously flawed in current circumstances.
This recession is not remotely related to any previous recession Australia has experienced. Caused by government-imposed restrictions on private firms, it has first and foremost shrunk the aggregate supply, or production side, of the economy.
It has been as though the heavy boot of government has depressed a large, coiled spring. Lifting that boot by removing the restrictions would see an automatic rebound in economic activity, although given the pressure applied, especially in Victoria, the recoil would certainly fall short.
That does not mean, however, that governments should now step in and increase unproductive public spending to boost aggregate demand as this will raise other macroeconomic risks.
Please click here to read the full ‘Budget 2020: we need a strict supply side focus to fix this government induced recession’ article originally published at The Spectator, written by Griffith Asia Institute researcher, Professor Tony Makin.