Thursday, 20 September 2012

The Depression in Australia

Julie Novak today at Catallaxy ( sorry I do not link bad posts) tries to show having a balanced budget was what got Australia on the road to recovery.

Let us look at what actually happened.
Angus Maddison’s Estimates of Australian Real GDP from Butlin (millions of 1990 international Geary-Khamis dollars)
Year | GDP | Growth Rate
1927 | $34,716
1928 | $34,164 | -1.59%
1929 | $33,834 | -0.96%
1930 | $32,181 | -4.88%
1931 | $32,720 | 1.67%
1932 | $31,878 | -2.57%

1933 | $33,696 | 5.70%
1934 | $34,991 | 3.84%
1935 | $36,424 | 4.09%
1936 | $38,160 | 4.76%
1937 | $40,336 | 5.70%
1938 | $40,639 | 0.75%
Maddison 2006: 452).
(thanks Lord Keynes)


Now what was the Premier's plan
The key architect and publicist for the plan, Copland, transposed it into a conceptual framework. It consisted of
  • a depreciation of the currency sufficient to restore real income in export industries to 90 per cent of its former level
  • a reduction in real wages of 10 per cent
  • a general reduction in real government salaries and wages expenditure of 10 per cent
  • a super tax of 10 per cent on income from property
  • an expansionist monetary policy based on the purchase of government securities by the Commonwealth Bank with a view to maintaining the general level of prices
  • a proportionate reduction in rentier income derived from securities (Copland 1934:66–7).
(thanks Alex Millmow)

So after the austere budget of 1931 growth actually contracted ( as it did in the UK).

Why did growth start in 1933?

The large scale devaluation ( an academic by the name of Bernanke called it massive. He co-wrote a paper with a Martin Parkinson.)

As Ralph Hawtrey said a large devaluation would cause inflation.
This gave the authorities two advantages
1) The liquidity trap was no more and thus monetary policy now worked ( this was why he thought the General Theory not necessary unfortunately the UK experience proved him wrong.)
2) real wages fell quite a bit. This helped reduce unemployment

Let us remember the best the unemployment rate got to between 1933 and 1939 was 8%!

So the balanced budget had nought to do with any recovery tepid that it was.

As usual what is written on Catallaxy is entirely incorrect