Speaking of the meeja, I hope you all enjoyed Rupert’s latest tirade – this time blaming the decline of the US education system on – you guessed it – the teacher unions. Who woulda thought?

I’ve got to start buying the Monthly more often – it’s a great little magazine. I’d really like to see people on the Left support it and it become an institution. We should hassle librarians to take out a subscription if it’s not at our local libraries.

I cannot identify one propaganda sheet for the government presently – though a flotilla of conservative ghostships – so I would suggest, ‘The Monthly’ is safe.

It’s interesting ‘The Monthly’ let him use them as a publication of choice; if they’re not careful they’ll just become a propaganda sheet for Labor-in-Power, just as the Windschuttle Quadrant seems to have become a propaganda sheet for the Howard-Government-in-Opposition.

My point is that if you push Keynesian economics too far you in fact end up doing the opposite of what Keynes prescribed. Putting your foot firmly to the floor while the economy is already basically at full employment would have horrified Keynes.

The reason why Australia did so in the ’70s had a lot to do with politics. First, Billy McMahon’s pre-election budget was very inflationary (Liberals forget that when attacking Whitlam). And we had a social democratic party out of power for a generation that was trying to catch up with what was considered a normal welfare state in other first world countries (read “The Lucky Country”, we actually weren’t that great on issues surrounding poverty during the Menzies years – no suprise!).

Whitlam tried to correct his mistakes by appointing Bill Hayden, but both were wrong as far as Keynesian economics is concerned.

I don’t think right-wingers can argue their deregulation agenda hasn’t gotten a run. They’ve been successful both in doing away with financial regulations and preventing regulation from keeping up with innovations in the financial sector. It’s been tried, it failed, we’ve all lost 20% off our super as a result.

To everyone else, I’d to get this straight – Keyensianism in the economic sense is not about the long-term size of the government sector – it is primarly an explanation of how the self-correcting mechanisms of economies can take a long time to work, if at all, and that in the mean-time, governments can use demand management policies to speed that adjustment up.

The failure of the 1970s was that policymakers were so used to thinking in terms of effective demand, that they didn’t realise that what they were facing was a supply shock. As a result, as unemployment increased, they attempted to stimulate the economy in the traditional way, which ultimately generated stagflation – because the natural unemployment rate was rising. Policymakers at that time effectively believed that there was a long-run tradeoff between unemployment and inflation – whereas there is only a short-run tradeoff. In practice, policymakers need to be able to differeniate supply shocks from demand shocks – because the appropriate responses are different.

The origins of the current shock are very complex. But part of the problem is that policymakers and economists spent far too little time worrying about unsustainable growth in asset prices, excessive gearing, and how credit risk was distributed. Regulators were too far behind financial innovators and the growth of cross-border financial instutions. Excess savings in many developing countries that ended up funnelled into property markets rather than productive investment also played a role. We are now paying a price for all of that now.