Damning Verdict on Stimulus - Adam Creighton

Adam Creighton for The Australian - 13/07/13 

 

IF the economy stumbles, then clearly it wasn't big enough; if it continues to grow, then obviously it worked. Proponents of so-called Keynesian fiscal stimulus, such as Kevin Rudd, enjoy a superficially unassailable argument.

  
"Had the government not intervened, with a temporary, targeted and timely national stimulus strategy as we did, what would've happened? The economy would've gone into recession as those around the world did," Rudd said at his National Press Club address on Thursday.

In late 2008 and early 2009 Rudd initiated a whopping $52.5 billion of stimulus, a bonanza of pink batts, housing grants, school halls and $900 cheques with money borrowed at about 5.5 per cent. Now back in the Lodge and seeking re-election, Rudd is keen to bolster his economic credentials by enshrining his place as Australia's economic saviour during the global financial crisis, which pummelled economic growth worldwide.

Australia's economic output per person in fact shrank for three successive quarters from the end of 2008, and unemployment surged from 4.1 per cent in August 2008 to 5.9 per cent in June 2009.

But we avoided recession, at least one defined by the arbitrary criteria of two successive quarters of negative growth.

Academic authors have delivered damning verdicts on the efficacy of Rudd's fiscal stimulus, which the government is yet to refute.

Tony Makin, an Australian economics professor at Griffith University, has forensically examined Australia's national accounts in the critical months during 2008 and 2009, when the global economic free-fall risked dragging Australia down, demonstrating clearly that government spending did little to boost economic activity. The spending on pink batts and school halls came much later.

What kept the economy afloat was the Australian dollar's collapse - down more than 20c against the US dollar in late 2008 - which prompted an export goldmine at the same time that China's demand for resources was rapidly growing.

"The federal government's direct contribution to the change in consumption and investment was minimal, with its major impact arriving several quarters after it was deemed necessary," Makin writes.

As for the notorious $8 billion worth of cheques that hit Australians' bank accounts in April or May 2009, a more recent paper by four academics, including a Treasury official, shows Australians on average spent only an extra $1 of their windfall, saving much of the rest.

"The effect of the fiscal transfer on the change in household consumption expenditures is insignificant and quantitatively small - the average household spent less than 0.2 per cent of the income windfall," the authors write.

These outcomes are not unique. In a 2011 study, Makin and Paresh Narayan, a finance professor at Deakin University, highlight the remarkable off-setting relationship between public and private savings in Australia from 1980 to 2008, suggesting the recent surge in household saving is at least in part a nervous reaction to the Rudd government's fiscal excess.

"Fiscal policies adopted by various Australian governments over recent decades, either to use budget deficits to counter downturns or build surplus to lift national saving, have been almost entirely impotent in achieving their intended goals," they argue.

Nor are these outcomes unique to Australia.

The accompanying chart reveals starkly what a comprehensive failure stimulus has been in the US, which along with Australia and South Korea introduced the biggest economic stimulus packages globally to fight the GFC. The present US unemployment rate has been consistently far higher than where proponents of the plan said it would be.

None of this should surprise. The world's economic seizure in 2008 seemingly invalidated decades of economic research that had relegated any active management of the economy to independent central banks. The "temporary, targeted, and timely"surplus some bureaucrats dream of too often becomes permanent, politicised and protracted in the hands of politicians. Almost one-third of Australia's stimulus was spent in 2010, long after it was required.

Makin tells Inquirer: "Treasury presumed the economy would quickly resume trend growth courtesy of the fiscal stimulus, but instead the economy has experienced a prolonged hangover, growing at around half its pre-crisis rate on a GDP per head basis. This partly reflects pervasive policy uncertainty about how the budget deficit and public debt will be reversed, which has severely crimped household and business confidence."

Belief in stimulus rests on the fallacy that government enjoys resources beyond those of its hapless paymasters - its taxpayers - or that people go about their lives oblivious to the debts governments are incurring on their behalf.

To say stimulus doesn't work is not to argue that governments should not run budget deficits during recessions, and surpluses in better times. It is inevitable that tax receipts wax and wane with the economic cycle. But the evidence on Australia's response to the GFC suggests deliberately trying to boost economic activity is futile and indeed costly. Australian taxpayers now pay an interest bill of about $12.5 billion a year and rising, thanks to the federal government alone, much of it stemming from the Rudd stimulus measures.

The Prime Minister's claim to have saved Australia from economic crisis is risible unless and until these studies are disproved.