catallaxy files

catallaxy in technical exile

Thoughts on the stimulus

with 14 comments

The latest issue of the IPA Review has a piece I wrote on the stimulus package. I’m reproducing it here – there may be small editorial differences between this version and the published version.

‘Timely, targeted and temporary’ is a phrase we have heard a lot over the past eighteen months. ‘Go early, go hard, go household’ is now being widely credited with having averted an Australian recession. Yet we now hear that some of the stimulus money is being held over to 2011-12 when economic growth is forecast to be quite strong. This makes a mockery of the ‘temporary’ and ‘timely’ claims being made.

We know the government went hard on the stimulus; according to the OECD Australia spent nearly five percent of 2008 GDP in order to avoid a recession. That stimulus consisting of two packages of $10.4 billion and $42 billion is being estimated to add one percent of GDP growth in 2008-09 and one and a half percent in 2009-10. It is not clear that spending five percent in order to gain about two and a half percent is money well spent, but that was the choice made at the time.

The government didn’t just go ‘household’, it also went ‘school hall’. Australian schools will almost all have brand new halls; whether they want them or not. The horror stories being published in The Australian on a semi-regular basis demonstrate the silliness of this whole proposal. Single-pupil school have new school halls, schools due for closure have new school halls, while large schools where students cannot fit into existing facilities will get new school halls that remain too small for the student numbers. In short, the government adopted the kind of one-size-fits-all approach where centralised bureaucrats excel so well.

This type of macro-wastage is just the tip of the iceberg. Stories are also beginning to emerge of micro-wastage. Over-charging by contractors will haunt these projects for so time.

A plumber friend of mine has recently tendered for a number of jobs created via the government school hall scheme. Despite having quoted 3 times his normal price he has won 85 percent of the tenders. However, in each of these tenders he has not included the cost of plumbing required to get to the actual hall. So once his job is complete no water will be able to travel to or from the building unless they engage him to do more work. He believes this will add an additional cost of 100 %.

If all the money is being spent on the halls themselves it is an open question as to who will pay for the water to be actually connected. No doubt, the Commonwealth will try to shift the cost onto the States or even the local school communities. A lot of lamington drives and school fetes are going to be needed to tidy up this mess.

Anyone with the temerity to ask questions or even criticise the spending has been pilloried as being hard-hearted and indifferent to the hundreds of thousands of Australians who would be thrown out of work but for the stimulus. To put that claim into context, even with the stimulus the increase in unemployment has been 217, 900 people between February 2008 and September 2009. Yet the government continues to claim it has ‘saved’ jobs.

The government has identified a new enemy, ‘academic economists’ – those who argue against the stimulus package are also labelled ‘blackboard economists’. This labelling is by Senator Doug Cameron (ALP, NSW) who has no tertiary education and qualified as a fitter and turner before becoming a union official. Not that there is anything wrong with that. In the Government Senators’ Minority Report to the recent Senate Inquiry into the Stimulus Packages (page 53) we see this astonishing statement (emphasis added).

A view was expressed by a minority of academic economists that Governments should do little, if anything, to limit the impact of deep recessions on the economy and workers. The retrospective advice from a minority of academic economists who are completely opposed to government intervention in the economy demonstrates the difference between “blackboard economists” and those economists who have responsibility for fiscal and monetary policy of a real and practical nature.

It is probably not appropriate to describe this sort of statement as a brazen lie, but it is extraordinarily misleading. Of the four academic economists who appeared before that Senate inquiry three argued against the packages – three out of four is simply not a minority.

Furthermore the advice of the three academics was hardly retrospective. Tony Makin, for example, has written many articles over the past year criticising government policy. I appeared at the February 2009 Senate Inquiry and argued against the package at that time. The Hansard records me as saying (emphasis added)

In my opinion, the package does not contain enough stimulus relative to the spending that it contains, and the spending that it does contain is of poor quality. This kind of stimulus package has a very poor track record of success, and economically we cannot really expect it to succeed.

The other thing that I want to emphasise is that the government is not doing nothing, if you will forgive the double negative. The Reserve Bank has lowered interest rates quite substantially over the last while and the automatic stabilisers will kick in as unemployment starts rising, tax receipts start falling and welfare payments are being made. So there is no urgent need to rush a package of this magnitude through the parliament at this time. That does not mean that the government should not be doing anything at all; but, in my opinion, it should not be doing this.

I went on to recommend that payroll tax cuts be undertaken or that a GST holiday be adopted. It is not at all clear that advocating a cut to payroll tax constitutes being indifferent to the ‘economy and workers’.

But rather than consider the merits of the arguments being put to them, the Government Senators chose the smear (at page 58-9).

One of the defining features of the global financial crisis is that its causes and remedies have undermined the central tenets of neo-liberal economics. Those academic and business economists who subscribe to neo-liberal economic theory have been quite active in recent times defending their faith.

Neo-liberal economics is a ‘faith’, and a discredited faith at that. As Milton Friedman famously remarked, ‘there is good economics and there is bad economics’ and unfortunately we now have a government that is hostile to good economics. This cannot bode well for the economy at all.

This raises the issue of the type of economics practiced by Ken Henry – the governments’ economic advisor. When asked about the role of academic economist, Dr Henry replied

whilst being very aware of those issues for many years, I can tell you that, confronted with the crisis that the world has been dealing with these past 12 months or so, those few quibbles with the use of expansionary fiscal policy—or expansionary monetary policy, for that matter—or other actions of governments to prop up credit markets are not ones that I considered should detain us for too long. They were rather quickly put aside.

That is all well and good. It is his job to advise government, and if government wants to pursue a range of policies it is his role to advise on those policies and perhaps even implement those policies. Henry, after-all is a public servant, it is not his place to make policy.

The difficulty with that perspective, however, was a 30 October 2009 front page article in the Australian Financial Review. The article by John Kehoe relates how Henry’s mother saved the Australian economy. Apparently, Mrs Henry had phoned her son during the weekend that the government was fashioning its first stimulus package and told him she was worried about the economy. We then read,

With his mum worried too, the Treasury secretary decided there was no choice but to advise the Prime Minister to instigate the bank guarantee scheme and the first $10.4 billion of a series of stimulus packages credited with saving Australia from the full impact of the global crisis.

To be sure, some poetic licence may have been employed in the telling of the story; nonetheless this is a very troubling anecdote.

We know that no formal modelling was undertaken in support of the first stimulus package. We now know that the package was accepted by government on Henry’s advice and say-so. But what does he, or the government, hope to gain by bringing his mother into the debate? Is this some effort to portray Henry as a dutiful son, thinking of his mother while spending the national treasure?

Certainly, it does detract from a very significant backflip. Last year we were being told that the government was ‘unapologetic’ about its package. Now Henry is saying

History may judge that first stimulus package as too early, too large or the configuration of it was wrong, but my view was that we needed to do something big and do it quickly.

‘Too early, too large and wrong’ just isn’t as snappy as ‘go early, go hard, go household’ but that is just what some blackboard economists were saying all along, and maybe Henry is coming around to that view.

Written by Sinclair Davidson

January 8, 2010 at 10:57 pm

Posted in Uncategorized

14 Responses

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  1. My view on what’s in play here ideologically remains the same, a year on.


    January 8, 2010 at 11:57 pm

  2. However bad Australian policy was in late ’08/early ’09, it was much worse in the US and UK. So despite the wastage and debt in the stimulus packages, we are likely to outperform those countries into the foreseeable future.
    And while I think Henry is an egomaniac and a disgrace to the profession, he is barely worse than Fels and Samuels, who likewise did the government of the day’s bidding (GST and grocery/fuelwatch, respectively) to protect and enhance their own power and position.


    January 9, 2010 at 12:08 am

  3. Interesting proposition, mute.

    So if Henry was looking for work wouldn’t he be supportive of these clowns policies rather than giving it to them with both barrels?

    You leftwhingers are all the same aren’t you? You think others are like you- they can’t strong beliefs- projecting your own intellectual dishonesty on others.


    January 9, 2010 at 1:18 am

  4. With the latest US unemployment figures demonstrating the continued failure of Keynesianism, Mark Zandi’s graph is more germaine than ever – proving that the stimulus has had no effect whatsoever.


    January 9, 2010 at 1:55 am

  5. WTO chief Pascal Lamy cites stimulus frenzy for unlikelihood of world economic recovery in 2010.


    January 9, 2010 at 2:39 am

  6. I thought we had agreed that ideology has no place in economics CL?

    Silly me


    January 9, 2010 at 7:36 am

  7. Sorry, JC, I don’t follow. Are you saying that Henry has been slamming Fels and Samuels? In what context? And I don’t know how you discerned any ‘leftwhinger’ tendencies in my comment. Aren’t lefties a fan of all three of these men?


    January 9, 2010 at 9:37 am

  8. Mute:

    Weren’t you were referring to Henry Ergas?


    January 9, 2010 at 10:29 am

  9. The stimulus is all about ideology, Rog, which is why you mocked it last year:

    “…the effect of stimulus packages is further to reduce the supply of capital, and thus to worsen the recession or depression.”

    “Both sides of politics are to blame, Turnbull was up here saying how they should spend big money on a new freeway to stimulate jobs.”

    Do you still say that Rudd is a “toxic bore,” by the way? You used that phrase with a link to this image last year.


    January 9, 2010 at 11:10 am

  10. Speaking of toxic bores..


    January 9, 2010 at 11:26 am

  11. JC, Sinc’s post refers to Dr Ken Henry and that’s who I was criticising.


    January 9, 2010 at 12:18 pm

  12. Heart felt apologies mute. I thought you were referring to the other Henry, the good version and not the one that speaks to wombats.

    You’re obviously referring to Ken Henry, that’s the one that tries to send newly minted graduates on suicide watch as a result of depressing valedictory speeches.



    January 9, 2010 at 12:37 pm


    120 000 jobs created (at most) – 42 bln spent – $350k per job net of the interest bill, inflationary pressures, trade balance effects, deadweight losses and spending/allocation inefficiencies?

    Semi Regular Libertarian

    January 9, 2010 at 12:39 pm

  14. Cl:

    The references you’re making about Rogette’s 180 is a little passe in view of the fact that was so 2009. A lot of water has gone past under the bridge since then culminating with the wedding to Geoffrey.


    January 9, 2010 at 12:41 pm

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