The recession in pictures

March 5, 2009

If you want proof that giving people cash handouts won’t keep Australia out of recession here it is – in a picture.

This graph prepared by Alex Robson of the ANU and Concept Economics following the release of yesterday’s GDP numbers shows that while growth in Australian household income has gone up (due to the stimulus package), growth in household consumption spending is down. People are saving the handout – they’re not spending it.

If you want to get technical this graph supports what economists call the ‘permanent income hypothesis’. Basically it means that people are smarter than governments. People are not going to spend short-term one-off bonuses if they think they’ll need the money later on. This is the point that John Taylor of Stanford University made a few weeks ago when he was interviewed on the ABC’s Lateline. (I’ve previously sent you the link but if you’ve lost it, it’s here.)

Last weekend The Australian published two important articles on the economic crisis. The first was by one of Australia’s leading economists Henry Ergas and the second by Niall Ferguson, the best-selling British economic historian.

I often get asked ‘what are you reading at the moment?’ I’m currently working my way through Team of Rivals about Lincoln’s cabinet. Barack Obama read it and apparently it was the motivation for him to make Hilary Clinton Secretary of State. Scott Hargreaves reviews it in the latest IPA Review.

Keeping with the historical theme one of my favourite books last year was The Pursuit of Glory: Europe 1648 to 1815 by Cambridge history professor Tim Blanning.

The chances of the government introducing an ETS decline by the day. If you want to know why, read Tom Switzer’s op-ed from yesterday in The Australian. And in The Age Tim Wilson argued that now is not the time to turn our back on free trade, and Chris Berg argued that now is not the time to shut our doors to immigration.

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