My colleague Sinclair Davidson has a piece in The Australian today taking on the received wisdom about the stimulus package, and asking the essential question:
Fiscal policy has a poor record of success in stimulating the economy. Organisation for Economic Co-operation and Development member economies have spent billions of dollars attempting to stave off recession and, with the exception of Australia, have failed.
Anyone who wishes to claim that the stimulus package has staved off an Australian recession needs to explain why similar policies have failed everywhere else.
Not all stimulus is created equal. Injecting money into the economy isn’t like stepping on the accelerator: you have to choose the most appropriate valves to inject the money into.
So there’s a lot of assumptions you have to make to believe that the specific mix of stimulus spending and industry support enacted by the Rudd government has been the only successful mix in the world. (Remember, it’s not even the specific mix that the government wanted. Ruddbank, a pretty substantial part of their plan, was defeated in the Senate.) Are our Treasury officials the most informed, most courageous, and least ideologically-biased in the world, that they could recommend the best stimulus where their international colleagues could not? Or are our politicians just the least craven and most responsible? (I think it is fair to assume we have averagely talented bureaucrats and averagely talented politicians. Some cultural cringe mightn’t go astray here.)
Anyone who says that what matters most is the size of the stimulus will eventually come up against the fact that other countries have spent more and are in worse situations. Timeliness might be a factor, but let’s not pretend that “shovel-ready” is anything more than rhetorical flourish – most of the building projects are just starting work now. Could we have had tax cuts by this stage? (Could they have been really really massive?)
As Sinclair points out, looking at the specific mixture of spending, the stimulus has been very poor. Indeed, it would be hard to think of less productive assets to invest in. School halls might be valuable in and of themselves, but their connection to future productivity is, well, let’s say tenuous. And the community infrastructure projects are comically mundane.
Certainly, there could be other factors, outside of the control of government stimulators, that have meant countries with bigger stimulus packages have had worse results. But the same holds true for Australia. Sinclair nominates two: our flexible labour market, and that independent central bank we’ve spent so long developing. You may want to pick some others.
Hey, world’s best practice for stimulus could turn out to be $900 cheques subsidies for insulation. But how on earth did the government guess that?