catallaxy files

catallaxy in technical exile

GFC and government panic – repost from 8 December 2009

with 5 comments

I’m reposting this as it is still of interest.

David Gruen presented a paper at the Australian Business Economists Forecasting Conference today where he basically admits the government, and its advisors, panicked last year. Of course, he doesn’t say that – rather it is a self-congratulatory piece whereby the government, acting early and decisively, saved Australia from a recession.

In contrast to the ‘official’ story, consider an alternative. The Treasury has a long history of poor forecasting, and got it wrong again. They told the government that we’re going to hell in a basket and the government hocked us to the eye-balls and spent money on all sorts of inefficient infrastructure. Gruen provides some nice graphs comparing actual performance to forecast performance.

Fiscal 1

Fiscal 2

This is what happens when you follow Ma Henry’s advice. Let us not forget this Senate exchange (on the first stimulus package).

Dr Gruen—No formal modelling was done of that package. Certainly, analysis was done of that package, but it was not formal modelling.
Senator JOYCE—So we have spent half of the nation’s surplus without a formal modelling of the package, is that correct? We have spent half of the nation’s surplus without a formal modelling of the effects of the package?

Dr Gruen—I can confirm that the package was $10.4 billion and that no formal modelling was done. I can confirm that no formal modelling was done.


Gruen now makes all sorts of arguments to justify this wasteful expenditure. Apparently avoiding a recession at any cost is a ‘good thing’. He dismisses the Ergas-Robson cost-benefit analysis of the stimulus package by talking about ‘disequilibrium’ as if that somehow changed the story. If it does he hasn’t explained that at all. Rather he implies that Ergas and Robson need to explain why recessions are not long-lived. But they never said that recessions are long or short-lived. Gruen’s comment is a complete non-sequitur – mind you, that probably applies to the whole paper.

The problem Gruen faces is to explain why fiscal policy has apparently succeeded in Australia and failed everywhere else. Obviously, he wants to claim credit for Treasury and the government, and that is understandable. But he has yet to make that case. The evidence presented today simply reinforces the view that that government went too early and spent too much. Of course, that is before we look at the appalling quality of the spend.

Update (13 Jan 2010): The Assistant Treasurer Nick Sherry insists that unemployment will rise to over 8% in the second half of 2010.


Written by Sinclair Davidson

January 11, 2010 at 6:31 pm

Posted in Uncategorized

5 Responses

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  1. The ma Henry link won’t work.

    Sinclair Davidson

    January 11, 2010 at 6:36 pm

  2. Did fiscal policy fail or succeed in China? What about Singapore and Malaysia?

    Peter Whiteford

    January 12, 2010 at 10:04 am

  3. Peter – I don’t have data for those economies. My understanding is that Singapore did experience recession (-3.5% for the year ending June 2009) – so any anti-recession policies adoted by its government must have failed.
    See previous posts here and here.

    Sinclair Davidson

    January 12, 2010 at 11:13 am

  4. Yes it would have been wise to dismiss the Ergas/Robson advice as they clearly hadn’t read the paper they were relying on as Ken Henry showed in Senate hearings.

    I am perplexed why any modelling needed to be done.

    Modelling needs data. There was little data of what was happening in the December quarter but all officials knew it was very bad.

    Sinkers people have been explaining for yonks why there are differences amongst countries reaction to fiscal policy.

    perhaps you should undertakes an elementary macroeconomic subject as your understanding is poor and thus why you have been wrong on almost anything to do with the GFC.

    Treasury didn’t panic at all.

    note how use of fiscal policy is now defined as being successful if a country avoids a recession.

    you would need to adopt fiscal policy BEFORE it occurs like ummmm Australia

    Butterfield, Bloomfield & Bishop

    January 12, 2010 at 12:13 pm

  5. “Modelling needs data”

    Some of the most useful models are those that ask questions like “what would have to happen around the economy for this action to be a good thing?”

    Models are projection tools, not forecasting tools. A more complicated way of thinking : If X then Y.

    I am surprised that nothing like this was done.

    Many projects in business have got into very deep weeds treating the output of a model as something that is going to happen.

    Ken Nielsen

    January 12, 2010 at 12:21 pm

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