return to letters list

Let's hope next G20 answers credit, debt expansion
letter published in The Australian Financial Review, 9 September 2009

The outcome of the Group of 20 finance ministers' meeting in London is remarkable on more than one count.("G20 holds line on stimulus", September 7 & "Global comparison fans spending debate",
September 8 ).

First, despite many views suggesting  the recession is over,  the decision to continue "expansionary monetary and fiscal policies ... until recovery is secured"  scarcely sends a message of confidence in that regard. One cannot help wondering why the "expansionary" policies pursued to date have not been more successful.

Second, a major rationale given by G20 attendees- including by Treasurer Wayne Swan - for continuing "stimulatory" policies seems to be that government support was withdrawn too early during the 1930s depression, resulting in a double dip.

 But analysis of Organisation for Economic Cooperation and Development data of per-head real growth during the depression shows that the only country to have a double dip was the United States. Every other "advanced" country experienced almost continued growth after the initial bottom, including Australia whose real growth per head averaged nearly 3 per cent from 1931 to 1939 after the cutting of government spending as agreed under the Premiers Plan of 1931.

True, the US's double dip followed Franklim D. Roosevelt's cut in government spending in 1937 (about 4 per cent real)  but that was after a 35 per cent real increase over the preceding three years. Analysis of Roosevelt's policies suggests more important reasons for the second fall in GDP in 1938 of about 4.5 per cent real ( much less than the initial drop of over 25 per cent between 1929 and 1933).

The  poor performance of the US economy during the 1930s undoubtedly reflected government antipathy to "big business"and the "selling" of  the government as the saviour, contributing to the major fall in private investment;  as well as the encouragement given to unionism.

Third, while G20 attendees acknowledged that the recession reflected deficiencies in regulation, there appear to have been no explanation of why  monetary policies allowed the clearly excessive expansion in credit and debt. 

My suggestion is a B minus mark. Let us hope that Pittsburgh  makes a B.

Des Moore
Director, Institute for Private Enterpise
South Yarra Victoria.

return to letters list