Stimulus Packages
There are some interesting debates happening on various stimulus packages around the world. Take this AAP article on Kevin Rudd’s:
ECONOMISTS have raised concerns the Federal Government’s cash handouts to millions of people will be blown on pokies and plasma televisions.
The Government wants to give payments of up to $950 to individuals as part of its $42 billion economic rescue package….
Reserve Bank board member Warwick McKibbin called for the payments to be scrapped.
“A cash payment … only has the potential to temporarily stimulate demand and has no long-run benefits to the economy,” Professor McKibbin told the inquiry last night.
He said it would be better to bring forward tax cuts or temporarily cut the GST.
So what will the money go on. remember this is a one off payment, not a permament change in income:
Sinclair Davidson, professor of economics at RMIT, slammed the handouts.
“Do we believe that Australians have not been borrowing and spending enough on alcohol, pokies and tobacco, and that there aren’t enough plasma televisions around?” he asked the inquiry.
Then we look at the polls in the US on the Obama package:
In a CNN/Opinion Research poll, 54% of respondents said they favor the stimulus plan that the Senate is expected to pass on Tuesday. And 64% said they felt the bill would help the economy recover. …
But 55% of respondents said that even the less expensive Senate plan would cost too much in spending and tax cuts, according to the survey. In addition, 30% think it’s just the right amount of money and 13% said the government needs to spend even more.
The amount of pork in the Obama package is huge, and it is interesting that already most Americans say the package is too large.
Then back home Rob Hosking at NBR argues not to go too large:
Today’s infrastructure announcements from the government should provide a welcome boost for the economy, even though the $500 million spend is hardly earth shattering.
But too much stimulus – and it is not difficult to have too much – and ministers risk an inflationary surge and large interest rate hikes just as they head into the next election. …
Hosking continues:
There is already a fair surge of stimulation working its way through the New Zealand economy.
On the monetary side, the Reserve Bank has more than halved interest rates over the past six months and will continue cutting for until April or maybe even June.
The official cash rate was 8.25% just over six months ago: it is now 3.5% and likely to go to 2%.
It is very important to remember interest rate changes have a lag effect of 12 to 18 months before they fully work their way through the economic system.
That is a key point. Many of the effects are delayed and you risk having all this stuff kick in as the recession is ending, resulting in inflation.
February 11th, 2009 at 3:52 pm
Rudd’s first “stimulus” package was a disaster… around 20% of it was spent immediately, with noticeable rises in – amongst other things – losses on the pokies. The rest was banked, which gave no part of the economy anything (other than bolstering the banks’ bottom lines, already looking as comfortable as ever thanks to a government guarantee (which in itself was short sighted and nearly wrecked non-bank savings institutions)).
Now he’s doling out a second lollipop and hoping we’ll all patriotically queue at the shops looking for the “Made in Australia” label before we spend.
That Rudd and Swan could have such a simplistic understanding not only of economics but also human psychology beggars belief. Say what you want about any of the administrations in NZ but none of them were this dumb.
When I get my $950 it’ll be going into the bank as insurance against the noticeable fall-off in demand Ive begun to experience. If things stabilise I might buy the kids’ birthday presents with it later in the year but it could just as likely be spent on paying the rent.
This isn’t an ideological difference – I’d feel more comfortable if Peter Costello or Paul Keating were Treasurer, for instance – it’s just stupidity.
February 11th, 2009 at 3:56 pm
How many feeble minded cargo cultists out there actually believe that governments can take money out of the economy, either by taxes or by borrowing that crowds out private sector borrowing; and put it back in again AND IT WILL HAVE GROWN in value……..???????
If you want an in-depth analysis, read “Why Government Spending Does Not Stimulate Economic Growth”, by Brian RIEDL.
Any slightly intelligent politician who reads that, or refuses to read it at all, is culpably guilty.
A simpler analogy is the swimming poll, with a bucket chain of people taking water out at one end and tipping it back in at the other; and expecting the overall level to rise, when in fact a certain amount of water has to be lost through spillage and evaporation; and the faster the bucket chain is expected to work, the more will be lost.
The only exceptions are in fact infrastructure that will increase productivity; such as new roads that will allow traffic to flow faster; even then, “Private” roads and user charges would be the better solution.
One columnist put it very well, the Obama “stimulus” package is 90% social policy and 10% economic policy.
February 11th, 2009 at 4:06 pm
All these “stimulus” packages and “liquidity” measures are just pissing into the wind. The multiplication of credit, went to levels that are way too big for governments to cope with once it unwinds.
Steve Keen points out that all the US government’s stimuluses have done so far, is move the over-gearing ratio of credit (debt to M “0″) from 47 to 1 to 36 to 1; still hopeless, and the banks are understandably hanging onto every bit of REAL money they get. What the people running the ship are TRYING to do, will not work at all unless they do it on a Zimbabwe scale, but that would have Zimbabwean consequences.
I really do believe more and more, the people who say that depression and bankruptcies are the only way “out”; and that we will get that anyway in the end, only it will be worse, for all the political staving off the day of reckoning.
February 11th, 2009 at 4:13 pm
Hi Philbest – I’d agree that at least NZ is not in need of much of a keynesian stimuls package (demand side) – already has a lot of fiscal impulse underway including lower OCR as DPF points out. I’d argue we have a supply side problem so the story should be more about introducing a certain Milton Freidman and improving NZ’s productivity.
February 11th, 2009 at 4:13 pm
From Lew Rockwell’s latest column:
“…..President Obama is under the impression that history owes him $1 trillion right now to spend on whatever he wants. His language is strident and full of irritation that anyone would question his right to live out his personal dream of being Franklin Roosevelt to George Bush’s Hoover. This, he says, is what the election was all about……
“…..It just goes to show you that the presidency is something like a drug. It makes people lose all connection to reality. Part of the reality that Obama needs to recognize is that the New Deal was a calamity far worse than the initial market downturn that began it. He needs to stop basing his policies on dumbed-down civics texts versions of events and consider the economic logic.
With his rhetoric and policies, he has decided to demonize private enterprise, just as FDR did, as a way to present government as the great savior. Now, think about this. If there is a way out of the recession, it will have to be provided by private enterprise. It will come by new businesses, business expansions, entrepreneurship, new technology, and this will be the source of lasting jobs and prosperity.
You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools! These activities amount to capital consumption. They are not sources of investment. You can say that they are stupid tasks or wonderful tasks, but it is not a matter of ideology as to whether such public projects will make us all wealthier. They will not. They drain the sources of wealth from society. They represent a cost, not a blessing.
That was also true of Bush’s dumb stimulus program. He was only bailing out his friends at our expense. The effect was to give a little longer life to institutions that were failing anyway. It’s pathetic that the Republicans ever went along with it. You will notice that the scheme didn’t actually work.
Well, Obama is doing the same thing, though rewarding a different set of friends. This is not wealth production. This is wealth consumption. Do enough of this nonsense and you can destroy the livelihoods of an entire generation…..”
YEP : “You will notice that the scheme didn’t actually work.” People ARE starting to notice.
Advice to John Key and the Nats. Be brave. Buck the trend. In a couple of years, you will be able to say, “we didn’t make that mistake”.
February 11th, 2009 at 4:18 pm
Thanks, Whatwouldhayeksay:
Something else very valid I read recently, was that back in Keynes’ time, increasing government spending from 15% of GDP to 45% of GDP, “temporarily”, probably was a “stimulus”.
NOW, unproductive government spending by way of entitlement, is already such a high proportion of GDP all the time, (lots of it are those “temporary” measures that turned out to be permanent, funny, that) that the effects of anything “discretionary” they might try and do on top, are crowded out.
February 11th, 2009 at 4:34 pm
With the latest press releases on what national will revert back to Labours policy, looks like the national party has reused everything that was in previous ministers top draw.
using Kiwi Rail as part of the economic stimulus . Tick
Building state houses . Tick
Insulating houses Tick
The only thing they thought of was the increased broadband, no doubt that will be dropped back to labours plan in 6 months
February 11th, 2009 at 4:35 pm
Philbest – yes, on eof things often forgotten about Keynes was the type of stimulus he advocated for, and that overall level of government involvement in the economy. People have forgotten the limitations and just embed in the stimulus long term. Keynes generally saw stimulus as a short/medium term response but then for government to ease out again.
February 11th, 2009 at 5:48 pm
I would like to see centres set up in each district or city where anyone could go by choice and do community work for the minimum hourly rate whenever they liked 7 days a week. This would enable people to earn extra money for particular purposes while at the same time improving their local community.
A family could raise extra money for a better car, a holiday, school uniforms etc. Fundraising groups could use the work to raise money for various tasks etc. by donating the money raised.
I envisage the work being mostly labour intensive type work, cleaning up highways, removing rubbish, painting public buildings etc. Work should be available for all including disabled and older people.
I see that this type of work would give those prepared to work an opportunity to do so while at the same time improving community facilities and allowing a variety of people to reconnect with their community.
I acknowledge that to work such a scheme would require a lot of further thought and detail however I have found that there is a willingness in the community to work hard and that working together on these type of projects with a wide crossection of the population is rewarding and uplifting.
February 11th, 2009 at 6:25 pm
Key’s package is small. This might explain his awkwardness during his visit to the Big Day Out.
February 11th, 2009 at 6:42 pm
or ‘Gay Out’
February 11th, 2009 at 7:21 pm
In the words of my generation, Epic Fail.
February 11th, 2009 at 8:16 pm
Thanks Christopher – I learned two things – not to be a try-hard and the meaning of epic fail.
February 11th, 2009 at 8:45 pm
Maurieo, the problem, when it hits us, is that we are going to find it difficult to raise the funds to cover our fx deficit at something like 23bn for the last year (on a GDP of 160bn) and at the same time people overseas are going to stop buying the stuff we make and coming over here to take photographs. So we have to make different things that people want to buy (long term solution), or wait until they start buying the stuff we currently make (also long term, and not really a “plan”). There’s no centrally planned answer, the sooner we have a way to deal with the shock when it hits us the better. Like you, I think, the solution needs to be addressed at a local level and based on ideas and innovation at a community level.
February 12th, 2009 at 12:20 am
Quite right Fred and Phil. National should just be more honest and say that you can’t expect the government to stop the recession. Is that what Labour claim they could do? Spend up large enough and everything will be rosy? Keep living beyond our means as a country just as we have every year since 1974! Reality has to bite sometime!
February 12th, 2009 at 9:11 am
One off payments do have the lowest impact on economic growth as they generally are just banked. Tax cuts have the second lowest effect on economic growth for largely the same reasons, although the effect is less significant due to the extra money being dished out a little as a time. The highest economic growth effect comes from money delivered through food-stamps or increases in welfare payments to the poor – as this money gets spent immediately and therefore does the rounds of the economy pretty quickly, creating/saving jobs and the like. (figures were from the US stimulus package bill).
Bringing it back to New Zealand, it seems strange that National would allocate $5 billion to infrastructure projects, yet only spend 10% of that amount now. Surely you want to hit the recession hard and early? What are they waiting for regarding the other $4.5 billion of spending Bill English says they will undertake?
February 12th, 2009 at 12:48 pm
gee.that guy at nbr is in/has a serious case of ‘denial’ going on..
..eh..?
phil(whoar.co.nz)
February 12th, 2009 at 1:01 pm
oh..and of course..dpf..a man who looks fondly back a his last turn near the levers of power..
..in that national shitfest /shafting of the poor..in the 90’s..
..argues against economy-stimulatory payments to the poor/worst-off..
..(and dips deep into his bag of yellow journalism tricks..to repeat/push that talkback standard/sneer..
..”..they’ll just spend it on the pokies’..
..that’s an ew..!..for him..eh..?)
..and against a (closing the wage gap with australia?) decent increase in the minimum wage..
..no surprises there tho’..
..as the last time national were in power they raised the minimum wage by a gobsmacking 87 cents…in nine years..
..and they only did that because new zealand first screwed it out of them..
..as part of a coalition deal..
..so..no surprises there..
..in presenting his ‘yellow’ arguments against any relief for the worst off/most suffering..
..dpf is just continuing in his long-held role as a media warrior..
..in the class war against the poor…
..and for the likes of him/his class..
.(.and i wonder if any those simplistic/stupid low-wage people who national suckered into voting for them..
..on the grounds of ‘change’..and that ‘nice mr key’..
..are now going..
…duh..!..doh..!..(or whatever..)
..and hey dpf…!
..how is your payday going so far..?
..y’know ..the business/personal gummint-handouts you have received..?
..(oh sorry..!..that’s right..you don’t call them handouts..do you..?
..you call them ‘tax-breaks..eh..?
..(isn’t language/nuance/spin a wonderful art..eh..?..)
..so..
..any chance on a ballpark figure for your payday..?..so far..?
..phil(whoar.co.nz)
[DPF: So far $1.7 million, but most of it has come from Cheney and is in US dollars so it may get bigger yet]
February 12th, 2009 at 1:08 pm
and of course..nine years of no raises from national..
..wouldn’t have gone any way towards creating that wage-gap with australia would it..?
(y’know..that wage-gap key used to pretend to fret about..?..
..and promised to ‘fix’..if he/national were elected..?
..gee..!..that was only a matter of weeks ago..eh..?..those promises..?
..wha’ happened..?
shit..!..
..we haven’t all been ‘hollow-men-ed’..have we..?
..it kinda/sorta looks that way..
..eh..?
phil(whoar.co.nz)
February 12th, 2009 at 5:17 pm
yes dpf..you jest..
..but seriously..!
your personal/business handouts (sorry..!..’tax-breaks’..i keep forgetting..!..)..from national..
..must be adding up to quite a tidy sum..by now..
..eh..?
..but no raises/such largesse for those most in need..?
..eh..?..
(and you aren’t engaged in a class-war.?..
..eh..?..)
phil(whoar.co.nz)
February 12th, 2009 at 5:21 pm
of course..the only consolation..
..is that key will be/is doing everything he can to ensure he is a one-term prime minister..
..(anyone who dosen’t do what is needed/required..
..will just be tossed out..)
..and i think we will have forgiven goff by then..
..bit ’till then..?
..shit..!..eh..?..)
phil(whoar.co.nz)
February 12th, 2009 at 5:38 pm
“ECONOMISTS have raised concerns the Federal Government’s cash handouts to millions of people will be blown on pokies and plasma televisions.”
I agree with Phil – what a f*cking insult! I know poor people who don’t have ANY nice lavish things, or ANY expensive habits, who work extraordinarily hard and would probably appreciate US$950 in the hand, or a bit less personal tax, or whatever because they currently spend EVERY DOLLAR THEY EARN (yes EARN) ON RAISING THEIR CHILDREN on a single income, and renting a roof and keeping the lights going.
But one thing I’ve seen over the years is that there are always arsehole economic theorists on $250K+ who will happily typecast poor people as wastrels, idiots and architects of their own demise, I just can’t understand why…