Remember crowding out?
Back in the days of the financial crisis, when the Rudd government, in the face of hostility from the Coalition and much of the media, deployed large-scale fiscal stimulus to protect jobs and prevent a recession, a number of arguments were deployed against it by the right.
One was that people would never spend stimulus payments — they would only spend permanent tax cuts (that was a myth peddled by economists who simply liked reducing the size of government no matter what). In fact there are now extensive studies in both the US and Australia (including work by Andrew Leigh when he was an academic) showing households immediately spent around 40% of stimulus payments, and low-income households up to 70%.
Another was “crowding out” — one of the enduring myths of neoliberal economics, again peddled by economists who hate government and think it should be minimised wherever possible. Wikipedia defines it as “when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market”.
The idea is lenders and investors would be more attracted to the higher credit rating of the federal and state governments when they issued debt, compared with the lower ratings for companies, starving those companies of credit.
Joe Hockey tried the “crowding out” rubbish in 2009. “We must ensure that fiscal policy does not result in the government crowding out private sector access to affordable credit in a growing economy,” he warned, saying that the Rudd government’s deficits were “placing upward pressure on interest rates domestically and has an effect internationally, making it more difficult for enterprise”.
Unfortunately for Joe, interest rates peaked at 4.75% in November 2010 (far below the ~7% of the Howard budget surplus years) and then, as Labor’s debt continued to grow, rates proceeded to fall. By the time Hockey became treasurer on the back of his debt and deficits campaign, interest rates had fallen to 2.5%. Moreover, Australia under Julia Gillard and Wayne Swan had enjoyed its biggest ever mining investment boom.
We didn’t hear much about crowding out after that, although Alan Jones tried to claim the Turnbull government was doing it. And the idea still lingers. The Financial Review ran a piece from the Financial Times a year ago warning about it.
So how goes the “crowding out” thesis at a time when the Coalition sent debt soaring from 13% of GDP in 2013 to a third of GDP over the next two years?
The March quarter financial national accounts from the Bureau of Statistics (ABS) issued last week showed no evidence of crowding out as private sector borrowings surged to record levels. The ABS said the quarter saw a “record total demand” for credit of $218.8 billion. This, the ABS said, was driven by private non-financial corporations ($153.2 billion), while households and government borrowed $41.9 billion and $17.5 billion respectively.
“Demand for credit by private non-financial corporation was driven by equity raising and was dominated by a large corporate restructure which resulted in investor funds repatriated to the Australian stock market,” the ABS said.
Now, true, that restructure was by BHP, which ended its dual list in London and thus brought around $119.4 billion of capital onto the ASX.
Take that out, and it still leaves net borrowings of $45.1 billion by non-financial corporations (non-banks). That was more than twice the $17.5 billion borrowed by governments in the quarter, while households borrowed close to $42 billion.
“Business borrowing was the strongest seen in the last two years,” the ABS pointed out.
Time “crowding out” was crowded right out of the neoliberal lexicon, perhaps.
