The fiscal stimulus

February 17th, 2009 at 2:00 pm by David Farrar

MacDoctor has an excellent response to the analysis done on Pundit over the $9 billion . Tim Watkin on says most of the stimulus is “old money” not new.

reponds:

Tim gets understandably offended by the fact that fully half of the fiscal stimulus is new spending already earmarked by Labour, including, amusingly enough, the purchase of Kiwirail.

I should point out that Tim’s problem is due to the fact that he is interpreting the words Fiscal Stimulus in the very socialist fashion used by Rudd, Brown and Obama – all died-in-the-wool Tax-and-Spend socialists. Fiscal Stimulus in this sense of the word means “Invent large sums of money from nowhere, then spend it like there’s no tomorrow”.

Bill’s answer is straight from Treasury – who are about as socialist as Roger Douglas. To them, Fiscal Stimulus means “amount of extra money being put into the economy” – nothing more, nothing less. Labour’s committed spending counts towards a fiscal stimulus just as much as National’s new spending. This is normal accounting practice and is not some strange plot by National to impress the media.

There is a big difference between “spending” and “stimulus”.

Tim’s objection to the inclusion of Labour’s extra spending appears to rest on the groounds that it occurred well before the economic crisis. This is meaningless in terms of the stimulatory effect it will have on the economy. Had it not been for the economic crisis and fact that New Zealand was moving in to a recession, Labour’s spending may well have kept inflation above the 5% mark, so stimulatory was it. The economy does not care where the spending was approved by Labour or National, it will still react to it in definable ways.

Tim also seems to object to the inclusion of spending on schools and roads on the understanding that these were already approved by Labour, but just moved forward. It seems to have escaped him that that is exactly what is required – an increase in current expenditure rather than later spending. Almost certainly, Labour would be doing the same thing, if it was still in power.

Those from the left want “extra” spending because that is what the left believe in – higher taxes and more government spending. But that is not the only way to increase the fiscal stimulus and bringing spending foward is, as MD says, an excelletn way to do that.

We are going to face a horrendous deficit and debt problem for at least a decade. If the Government is playing smart by having a large stimulus, without incurring ongoing expenditure that we have to borrow to pay for, good on it.

Having said all that, there is a fundamental mistaken assumption that Tim and the guys at Tumeke! and the Standard have made. It has also been made by the media and by Messrs. Rudd, Obama and Brown. It is the assumption that it is the amount of money being spent that is important. This is entirely false. It is actually how and where the money is spent that is vital.

Rudd has injected money directly into peoples pockets. This is a very popular move, but one that provides only a very short lived stimulus. Obama has huge swathes of useless “pork” in his package. Brown appears obsessed with owning banks.

Key, on the other hand, is spending frugally and carefully in the places he thinks he will do the most good for the economy in the long run. He has little money to play with (thanks, in large part, to Labour) and is making the best use of it he can. Arguing about the actual size of the stimulus is like arguing about the colour of the bus that is about to run you down.

I can only say I agree,

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16 Responses to “The fiscal stimulus”

  1. PaulL (5,776 comments) says:

    I’d go even further.

    Most of the financial crisis we currently have is a crisis of confidence. That is to say, it is all in people’s heads. There is no underlying problem with the productive sector of the economy – all the same factories exist, all the same farms. The problem is that people have stopped buying, because of their fear about the future.

    The stimulus, to my mind, is intended to convince people to start spending again. To jolt them out of the mind set that they need to be overly cautious. In such an environment, the question isn’t at all how much you spend, but more about how you market it. The most astute move possible would be to spend nothing at all more, but convince everyone that you had, that everything was going to be all right, and they should go back to buying consumer goods like they did in the past.

    In that light, reannouncing existing spending looks like exactly the right thing to do. And when the lefties complain about it, they are diluting the effectiveness of the marketing, and in effect sabotaging the economy. We should prosecute them all for treason.

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  2. PhilBest (5,112 comments) says:

    Sorry for the repetition, but governments can not stimulate an economy by taking money out of it and putting it back in somewhere else. Our problem is already largely because so much money is being lost in such churn, and in blatantly inefficient use of money by the government. They would definitely stimulate the economy simply by leaving more of this money in it and ceasing to spend on the most wasteful things.

    They would definitely stimulate the economy at no cost, simply by removing the red tape and shackles on progress and regulations that strangle and punish businesses. If someone was to do a list of all the projects that are lined up but delayed by RMA and other permission issues, I bet it would all add up to one handsome stimulus. If someone was to add up all the work that employers would be prepared to pay strictly casual, no-strings-attached workers to do, I bet it would add up to one handsome stimulus.

    We may think we can afford the luxury of protections of workers and the environment and spending money on culture and diversity, and so on; billions of other people in the world would tell you that it is possible to be in conditions where you are just thankful for anyone putting their entrepreneurship on the line and giving you a job today so you can eat today. We have a long way down to go before we are that bad, but we need to recognise when we are slipping down towards that and away from cushy, equal, green, safe and secure, Nirvana. If we fail to recognise this and do what it takes to halt the slide, the harder our landing will be at the bottom.

    Governments borrowing money to stimulate the economy, help to crowd out the private sector from lending markets and raise the cost of finance. Or if the finance is readily available due to expansion of credit, boy, are we asking for trouble further down the track.

    Infrastructure spending helps the economy to a certain extent; a new road will reduce the time taken for goods to be delivered, for example. But the biggest stimulus the government can give to the economy under our current conditions, are the stimuli that cost the government and the taxpayer nothing other than the cost of changing a few laws and regulations.

    And I haven’t even started on the effect of tax cuts, especially in company tax.

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  3. PhilBest (5,112 comments) says:

    PaulL, when people are, on average, in debt up to their eyeballs, and you give them a one-off handout, they will not spend it. They will start spending again only once they see sustained and ongoing improvement in the amount of their discretionary income. We cannot make employers who are already on the skids, give their workers a pay rise, the only way we can do this is by cutting taxes.

    And it will only work in the long term, if the government does not just borrow or print money to make up the difference. They need to stop spending money on the least productive, no, the most wasteful activities. Our grandparents did fine without a ministry of womens affairs and a ministry of cultural development and around 50% of the stuff our government spends its money on. There are a lot of things that would not result in the world ending if they were axed; but we might be asking for the world to end by defying prudence and hanging onto them.

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  4. big bruv (12,380 comments) says:

    I note that Bill English did a runner from the house just before Sir Roger asked him a curly question, Bill is turning out to be a bloody embarrassment.

    Key should just bite the bullet and beg Sir Roger to become minister of Finance, the country needs him in that job right now.

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  5. emmess (1,334 comments) says:

    We do not need much of fiscal stimulus now because we are lucky through Labour incompetence that caused the high interest rates we should have enough stimulus via monetary policy.

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  6. s.russell (1,486 comments) says:

    PaulL and PhilBest are both right.

    The nastiest part of the recession is the crisis of confidence that is stopping people from spending, not any great issue with the productive economy – as PaulL says.

    But PhilBest is also right that until people recover confidence (see that sustained and ongoing improvement in the amount of their discretionary income) they will save not spend.

    I’ll add a third point. Prior to this recession people were spending too much – borrowing imprudently for present consumption. It was not sustainable. That imbalance needs to be fixed. People need to repair their personal balance sheets by repaying debt, and when they resume spending, do so on a more sustainable level – based on rising incomes from improved productivity, not borrow and hope that high property prices will make all right.

    Thus I say that people ARE RIGHT to resist being pushed into resuming their spendthrift ways. I am sorry we have to have a recession, but WE DO have to have one to restore the balance.

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  7. gd (2,286 comments) says:

    Yes paull and Philbest are both right. And my wife intends to do her little bit to boost the economy Shes informed me both the house and the bach are getting a makeover this year and she wants to upgrade her car. Oh and the winter wardrobe is about to be purchased.

    And who am I to argue with her. its made round to go round and when it stops going round the shit hits the fan.

    That why JK and BE have got to ramp up the tax cuts and reduce Government waste. Put Rodders in charge of the AXE GANG Forget razor gang Its too small This lot needs a big axe.

    I would just love to be let loose in some of those Government Departments to do an operational Audit on them.

    To find and follow the circular electronic paper trails that go around and around and around. And to root out the duplications and chop the ‘contractors” all doing ‘make work” that produce the reports that noone reads.

    Oh Yes its all there After 9 years of the Socialists you can bet your boots its all there. Waste on a gigantic scale

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  8. What would Hayek say (51 comments) says:

    From Organisations and Markets http://organizationsandmarkets.com/2009/02/10/alex-rodriguez-admits-to-personal-stimulus-package/

    Peter Klein |

    NEW YORK — Yankees’ star third baseman Alex Rodriguez admitted to receiving a series of personal stimulus packages from 2001 to 2003. “My trainer said my actual output was well below my potential output so we needed to pursue an expansionary nutritional policy.” Now suffering from a debilitating disease caused by prolonged exposure to stimulus, Rodriguez said he had “little choice” but to ask the trainer for even more stimulus, as well as putting every aspect of his personal and professional life under the trainer’s control. “Bold action is needed,” said a spokesperson for Major League Baseball. ”We cannot depend on stimulus alone to create home runs or long-term athletic growth, but at this particular moment, only stimulus can provide the short-term boost necessary to lift Alex from a recession this deep and severe.”

    Rodriguez’s trainer said he was pleased with his new authority and blamed the player’s health problems on “lack of oversight” by baseball officials. “We didn’t have enough regulation,” he complained. Baseball analyst Paul Krugman said he supported additional stimulus and the trainer’s new powers but worried that the plan “doesn’t go far enough.”

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  9. Chthoniid (1,967 comments) says:

    I’m trying to help also ;) We gave the IRD a wodge of cash on 7 Feb (ha, take that you pesky deficit) and with the bit of o’seas income that’s trickled in, am getting myself a nice new camera lens. Of course, with prices jumping 50-70% for lenses, this may be the last new lens I buy for a while.

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  10. Paul Williams (868 comments) says:

    What Hayek Would Say – that’s bloody hilarious. Cheers.

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  11. side show bob (3,660 comments) says:

    PaulL and Philbest you are not entirely correct in you assumption that the economic downturn is the result of a crisis of confidence. I have plenty of confidence and are happy to spend but one must be careful when one’s income has fallen some 40% in a year. I would add a dose of reality to your crisis and no it’s not in my head.

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  12. LC (162 comments) says:

    The lack of confidence in my head seems to be supported by the loss of value in my assets with the difficulty in getting loans for expansions. Wait a minute – the last two factors are real, so maybe it’s not a loss of confidence, but that big dose of reality about to hit us later this year.

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  13. kiki (425 comments) says:

    In 2001 the IMF started talking about the trade imbalances between China ( mostly) and the west and gave two options a slow unwind (optimist) or a fast unwind (pessimist).

    This is about costs and earning potential. We have spent 20 years importing low inflation and then using the resultant low interest from this low inflation environment to fund our lifestyle. We have lived on a memory of past economic growth thinking this will return to enable us to pay off our increasing debt but we haven’t created products to sell back to those we have imported from.

    We still rely on farm products and that’s not a ticket to high pay.

    This is not a crisis in confidence it is the point where globalisation becomes our enemy as we have got fat and lazy thinking the world won’t change and we will always be on top. Watch as inflation kicks in and reduces our buying power down to that of Chinese peasants because we don’t produce anything they can’t except unpolluted milk powder but with our debt levels that will be theirs soon anyway.

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  14. wikiriwhis business (3,302 comments) says:

    Is this crisis putting more countries into debt with the IMF who will now be able to control and manage them?

    methinks so.

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  15. getstaffed (9,188 comments) says:

    Watch as inflation kicks in and reduces our buying power down to that of Chinese peasants because we don’t produce anything they can’t

    Exactly! We live in a global marketplace, yet we’ve spent the last 20 years pretty much focused on internal wealth redistribution strategies (aka moving tenners back and forth between our pockets) rather than building products, services & IP that the rest of the world wants. That redistribution focus has been sold to us on the basis that it’s ‘fair’, while I maintain that it’s simply ensured that we all slide backwards together while disenfranchising many NZers with a ‘state knows best’ attitude.

    The next few years are going to be very tough for us. Either we pretend it’s not happening to us (while secretly knowing that it is.. and hoping that we can ride it out until the next generation picks up the tab), or we knuckle down and start re-engineering our productive sectors towards internationally differentiated products and services.

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  16. PhilBest (5,112 comments) says:

    SideShowBob, I have been posting repeatedly here about how bad the underlying fundamentals are in NZ, eg household debt, private overseas debt, and so on. The only thing stopping us, and the Aussies, I might add, from suffering a crash bigger than the USA and UK and almost as bad as Iceland’s, is that our “confidence” is still actually much higher than is justified.

    I think we haven’t got a hope of maintaining that confidence until our economic growth lifts our fundamentals back up to where they should be; if we had 10% per annum economic growth we might make it in around seven years. But we haven’t got ANY economic growth, we’d given that away even before any crisis hit, and our electorate hasn’t got a bloody clue about the need to restore it or how to restore it.

    When WFF is abolished, and NZR is cut away from around the taxpayers neck, and the government is back to 20% or less of GDP, and logging resumes on the West Coast, and projects from my new carport to hydro dams are allowed to “just happen” because they are a good thing and disallowing them or delaying them would be a bad thing: and a few other crucial indicators like that, I will believe that the NZ economy has a chance.

    Even the “secret agenda” that the Nats had to forswear before the benighted NZ electorate would trust them in office, would be too little, too late.

    So my above comments about “confidence” should be understood in that light. Economic outcomes are affected as much as 50%, by morale and confidence.

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