Saturday, May 30, 2009

Stimulant or waste?

There was an excellent article in today's The Age by Ross Gittins.

He runs his line over the stimulus and the claims by Turnbull and the Liberals that Rudd and Swan have been economic vandals, throwing away money and putting Australia into debt forever and a day for no good reason.

First he states some facts that everyone just needs to remember:

In last year's budget the Government was expecting cumulative surpluses of $79 billion over the four financial years to 2011-12. Now it's expecting cumulative deficits of $191 billion over the same period.

The recession's effect in slashing expected government revenue explains almost two-thirds of that cumulative deterioration of $270 billion. Only the remaining $97 billion is explained by the Government's explicit spending and revenue decisions since last year's budget.

Get that? About 35% of the turn around in the budget is due to the spending by Rudd, the rest is all down to the Global Financial Crisis and it wouldn't matter if an amalgam of John Maynard Keynes and Milton Friedman was Treasurer, that $173 billion would be gone.

Now of the $97 billion, Gittins calculates that about $30 billion of that is due to the rise in the pension. It was something the Government didn't need to do, so if you want to criticise them for spending money they didn't have, then that's where you should start. (Oddly however Turnbull likes to take credit for the Government doing this spending...).

So the remaining $67 billion is the stimulus packages. Here's Gittins again:

Although it isn't caused by the recession, it's certainly motivated by it, since it's intended to reduce the worsening in unemployment. It's supposed to have been guided by certain principles, known as the three Ts: spending was to be timely, temporary and targeted.

It's clear that all the labelled stimulus spending is temporary - that is, once-only rather than continuing. You promise to do something, you do it and there's no further primary call on the budget.
The next criterion for stimulus spending is timeliness. This says you need to get the money out and spent as quickly as possible. You're trying to minimise the extent of the recession by stepping in with your stimulus as early in the process as you can.

Agree with that proposition? Good - but now we have a problem. Another proposition is that, if we're going to spend taxpayers' money, we ought to make sure we spend it on something worthwhile, something of lasting value to the public and the economy.

This last point is the argument of the Liberals - the "cash splash" was a waste, it was "Paris Hilton like" if you believe Turnbull. But as Gittins points out, it was actually necessary:

...there's a conflict between timeliness and worthiness. The most worthwhile stimulus is careful spending on much-needed infrastructure. But major infrastructure projects can take months, even years to plan, design, authorise and organise.

And the harder you try to make sure the money's going where it's most needed and will yield most benefit, the longer it takes to get off the ground.

Now this is pretty obvious. Let's bring it down to the personal level (which the Liberals like to do when they make it sound like Rudd is wracking up a big credit card debt). Let's say you have been given the task of putting $1000 into your local town's economy. You can do two things - go down to the local department store and buy, buy, buy; or you could decide to spend it on something "worthwhile" and thus decide you're going to employ a local plumber to fix up your bathroom. Problem is the plumber is all booked up, and he won't won't be able to fix your bathroom till October.

Now if speed is not a priority then you go with the plumber. But if you know your town needs an extra $1000 going around now you spend it, because you realise by October, the local department store will have gone out of business.

If you really had your way though, you would do both - which is actually what Rudd and Swan did:

Their stimulus spending has gone through three stages: first, the cash bonuses announced in October last year and in February this year; second, the small "shovel-ready" capital works (on primary schools, road black spots, rail crossings, roof insulation and public housing) announced in February; and, third, the larger and longer-term infrastructure projects (on road, rail, ports and broadband) announced in the budget.

Gittins explains the rationale behind all three stages:
The cash bonuses' main virtues were that they were timely (they could be paid out within a few weeks) and, particularly in the case of the December payments, targeted at the people most likely to spend them because they were needy.

So they got that money out quick (and heck if 0.175% goes to dead people, then so be it - no doubt the money will be spent by whoever holds that person's estate).

The shovel-ready capital works were timely (work could begin within a few months) as well as producing ongoing benefits to the community. They were targeted in the sense that they were selected to be quick-acting, needed and of social benefit, and also in the sense that there's no risk of the money being saved rather than spent in the first round of payments.

So we're getting something for our money, but it's not taking too long.

The major infrastructure projects are temporary (no commitment to further spending once the projects are completed) and targeted (in the sense that only the most beneficial projects were selected) but not timely (there will be delays before the projects are commenced and they may not be completed until well after the recession has passed). But, of course, they score highly on worthiness.

And this last type is the one that makes us all feel warm and fuzzy.

You see what we have here is actually a pretty damn strong strategy, but Gittins points out that because the stimulus payments came first people think they account for most of the stimulus - in truth they account for about a third. Turnbull thought tax cuts were a better way of doing the stimulus, but ask yourself were you more likely to go down to the local department store and buy something because you got $900 in a lump sum, or because you got an extra $34 in your fortnightly pay packet?

If you're honest, you know that the tax cuts would be lost in the mix. The extra $900 though gets you thinking about a weekend away, a TV, some new tires on your car, a new set of golf clubs etc etc.

The fact is anyone who thinks the Government threw the stimulus payments away because the ALP are poor economic managers is living in fantasy land. If they did it without stages two and three, the criticism would be valid. But they didn't, and it's not.

So when you hear debt and deficit, there are two things to remember:
1. Even without the spending, the economy would be deficit and debt.
2. Without the initial quick stimulus, the economy would, like the local department store, be closed by the time the long term infrastructure gets around to being done.

Ask yourself what you would prefer - less debt and a lot more unemployed, or more debt and less unemployed.

People who say that in the current environment we can have less debt and less unemployed would be better employed counting hairs on their palms.
The fact is the private sector has shrunk, and so the Government has to step in - and that costs money.
But the choice is yours. Cast your vote accordingly - the ALP and Liberal parties have certainly made their positions clear.

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