I don’t suppose many Americans know this, but they ought to:
Australia recovered from the Great Depression much more quickly
than did America by doing the opposite of what America is doing
today.
This was despite the fact that relative to America it had huge
disadvantages: with a population of less than eight million at
the time, its economy, and of course its domestic market, was a
fraction of the size of America’s.
It had a very small industrial and manufacturing base, was
chronically short of investment capital, and was dependent on
agricultural and some mining exports. It had a bloody-minded and
strike-prone workforce (just before the Depression struck, one of
its biggest manufacturers, Sunshine Harvesters, moved to Canada
where wages were higher but strikes fewer). To make matters
worse, it had first a left-of-center Labor federal government
under Prime Minister Scullin and then a right-of-center United
Australia Party federal government under Prime Minister Lyons,
neither of which were marked by great economic competence and
which were committed to counter-productive protectionist policies
— even, crazily, putting high tariffs on importing the equipment
its own farmers and miners needed to get it some export income.
It did, however, have one thing going for it which more than made
up for the rest: it did not have pseudo-Keynesian “stimulus”
policies to any significant degree, or their equivalent, the New
Deal. Apart from undertaking some relatively minor public works
it did not attempt to spend and tax its way out of recession.
Writing in the Australian journal Quadrant for March,
2009, economist Steven Kates of the Royal Melbourne Institute of
Technology has provided approximate unemployment rates for the
USA, Britain and Australia from 1929 to 1938. The figures are
quite astonishing, including respective rates of 23.6%, 22.1% and
23.0% in 1932 and 19.0%, 12.9%, and 8.9% for the three in 1938.
(For the full table, scroll down
here.)
What saved Australia was that the Scullin Labor government, which
had been slow to recognize the onset of the Depression, in 1931
adopted the so-called “Premiers’ Plan” which had been put forward
by a number of the States. This had none of the sophistication of
Keynes. On the contrary, it advocated some very simple and
old-fashioned nostrums: to cut public spending by a whopping 20%,
to return to budget surpluses, and to cut wages. This wage cut
went through the public as well as the private sector.
My father, Sir Hal Colebatch, the West Australian government
representative in London, had his salary halved. Previously, in
the Senate, he had spoken for economic stringency and against
stimulus spending with somewhat colorful imagery which, when
first I read his old speeches, made decades before I was born, I
never dreamed I would be quoting as relevant now:
“To the outside world we present the sorry spectacle of a
rudderless ship … drifting in a storm-tossed sea along a
rock-bound coast … In discordant voices the crew yells for the
broaching of the last barrel of biscuits and the final keg of
rum.” The phrases “pork-barrel” and “ear-marks” were not around
then, but the general picture is pretty clear in 2009.
There were some dangerous corners cut: the Australian Navy, for
example, was reduced to four ships in commission at its lowest
point, but the plan, aimed at reviving business confidence, did
have one advantage over the New Deal: it worked.These figures
also show, of course, that Britain recovered far ahead of America
without the benefit of anything like a New Deal or a stimulus
package, and despite various structural problems unemployment was
falling dramatically there even before British re-armament got
under way.
What saved Australia, pulled it back from an abyss that might
have meant actual starvation, and gave it an economy strong
enough to meet the challenge of the Second World War, was simply
the application of classical economic theory, which was more or
less the exact opposite of what Keynesianism prescribed, the
opposite of the New Deal, and the opposite of the stimulus
package.
Indeed, Kates points out that in a posthumously-published
article, “The Balance of Payments of the United States,” in the
Economic Journal in 1946, Keynes virtually admitted that
he had been wrong in undermining classical economic theory, and
that he now felt a duty to remind his own disciples that
classical theory “embodied some permanent truths of great
significance.” He lamented the fact that “much modernist stuff,
gone wrong and turned sour and silly, is circulating in our
system, also incongruously mixed, it seems with age-old poisons
…”
The present prime minister of Australia, Kevin Rudd, appears at
present intent on proving himself a far worse and more damaging
economic ignoramus than his predecessors Scullin and Lyons. He
has adopted a smaller version of the U.S. stimulus package and
spent some time, not listening to and ranking the advice of
economic experts as he is paid to do, but writing a cranky,
embarrassing, 8,000-word essay on the need for “social democracy”
to “save capitalism from itself.” On the world scale Mr. Rudd and
his essay and his stimulus package and disregard for classic
economic theory probably don’t matter much. But the US stimulus
package does.
