Australia's second pump-priming stimulus announced yesterday will prove every bit as wasteful as last October's $10.4 billion package. Predictably, the failure of the first stimulus merely brought Keynesian deficit adherents to claim that things would have been much worse without it, or that it was insufficient for the job.
Now we have a new package valued at $42 billion over four years. This includes $12.7 billion in handouts to the less well-off. And it comes on top of bank guarantees and a $30 billion fund to bail out shopping centres.
The stimulatory measures address a downturn that is the culmination of a decade or more of lax monetary policy in Australia and overseas. This easy credit policy has fed a cancerous growth of lending for assets that are vastly overvalued.
The fundamental distortions in the economy have brought people to recognise a fall in the real value of their savings. Coupled with this is the collapse of demand for our main exports. Looming economic collapse has brought the government to promote increased consumption by diverting funds from those who have saved to those it thinks will consume. The aim is to lift demand and jump-start a cycle of investment and growth.
Such pump priming will only retard recovery and leave a painful legacy of debt to be serviced. Unwinding the misallocation resulting from monetary mismanagement will inevitably bring hardship, but the current measures are exacerbating the damage.
As governments themselves have few resources, pump priming can work in one of three ways: it can divert "idle" savings into consumption; it can expand the amount of money and trick people into increased spending by making them think they are richer than they are; or it can draw resources from foreign lenders.
Financing deficit spending with government bonds reallocates savings to personal consumption. But "idle" savings do not exist and the policy simply denies resources to private investors. And many businesses like Qantas are showing that they have a desperate need to tap into savings, if only to rebuild the greatly reduced value of their assets.
The second alternative, printing money, is the approach that got us to where we are. It means inflation, and at its worst the runaway inflation experienced by Germany 90 years ago and by Zimbabwe today.
Lifting consumption by borrowing funds from overseas has the merit of leaving a legacy only on future generations. But borrowings are for investment and not for consumption. In any event, Australia already has excessive overseas borrowings. Measured by the deficit on the balance of payments current account, over the past eight years overseas borrowings have averaged 5 per cent of GDP, equivalent to a quarter of the nation's gross savings. And while it is beneficial to supplement domestic with foreign savings in order to allow more investment for faster growth, Australia's growth has been unspectacular and is now in reverse. The capital imports have been used to finance domestic consumption and not to create additional wealth.
The new package has a larger infrastructure component than that announced in October, offering prospects that the spending might lift future income levels and capacities to repay the debt. But the specific measures are geared to projects with low returns -- public housing, schools, community centres and solar heating.
Lower official interest rates were also announced yesterday. Notwithstanding the Reserve Bank's culpability in the downturn, yesterday's interest-rate cut seems appropriate since, on published aggregates, recent monetary growth does not appear to be excessive.
Assuming the government is forswearing the printing presses, it must be intending to finance its deficit by borrowing. Not only does this cannibalise funds that would otherwise go to rebuilding the economy, but budget deficits projected for the next four years indicate no exit plan to pay back the borrowings.
This new package will provide only a short-term boost to consumption. Since fundamental imbalances remain, the boomlet will peter out. The economy will then, at worst, start experiencing rapid inflation or, at best, result in the sort of economic stagnation that Japan suffered throughout the 1990s when it followed similar policies now being pursued by the Rudd government.
What is needed is a renewed focus on reducing government waste. This would allow increased scope for people to rebuild their savings and attract them to productivity enhancing investments.
Unfortunately, however, we are seeing the Rudd government's energies squandered in desperately thrashing around the prison in which it finds itself, instead of building an escape tunnel.
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