The fiscal stimulus as ‘experiment’

Aus­tralia is a small, open econ­o­my with a flex­i­ble exchange rate. There is con­se­quent­ly a real pos­si­bil­i­ty that any increase in demand caused by fis­cal eas­ing will mere­ly raise inter­est rates, induce cap­i­tal inflow from abroad, appre­ci­ate the cur­ren­cy and reduce net exports. With growthin Chi­na and Japan slow­ing sig­nif­i­cant­ly, why imple­ment mea­sures that could exac­er­bate Australia’s expect­ed export down­turn?” extract from The Aus­tralian

Ergas points out the pro­posed stim­u­lus is “too much, too soon”. He notes

Unem­ploy­ment is pro­ject­ed to remain fair­ly close to the non-accel­er­at­ing infla­tion rate of unem­ploy­ment (the rate that is sus­tain­able in the long run) in the near term. Giv­en the scale of the pro­posed spend­ing, there is sure­ly a risk that the Gov­ern­ment is deplet­ing its ammu­ni­tion and accu­mu­lat­ing future costs before the case for doing so is well-estab­lished”

While the first two crit­i­cisms are of the strat­e­gy, Ergas’ third, fourth and fifth crit­i­cisms are even more strong­ly tied to the ques­tion­able evi­dence basis for the stim­u­lus

  • …Even if the pack­age did cre­ate jobs, many of these would mere­ly be dis­placed from more pro­duc­tive activ­i­ties. As Trea­sury sec­re­tary Ken Hen­ry said in March 2007, when the unem­ploy­ment rate was the same as it is today, ‘in an econ­o­my oper­at­ing at, or close to, full employ­ment, any gov­ern­ment inter­ven­tion will shift resources, includ­ing jobs, from one activ­i­ty to anoth­er and impose a dead­weight loss of effi­cien­cy on the econ­o­my’”
  • When gov­ern­ments spend mon­ey on projects whose costs exceed their ben­e­fits, they make us poor­er… there seems lit­tle rea­son to expect the spend­ing com­mit­ments envis­aged in the stim­u­lus pack­age to yield net benefits.There is, for exam­ple, ample evi­dence that the states do as poor a job of allo­cat­ing main­te­nance expen­di­ture on exist­ing infra­struc­ture as they do in select­ing new infra­struc­ture.” [A point that Gary Banks made force­ful­ly in his recent paper on evi­dence-based policy&mdashPWG]
  • Final­ly, the pack­age lacks a cred­i­ble strat­e­gy for return­ing to bud­get bal­ance.”

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