Fiscal policy has a poor record of success in stimulating the economy. Organisation for Economic Co-operation and Development member economies have spent billions of dollars attempting to stave off recession and, with the exception of Australia, have failed.
Anyone who wishes to claim that the stimulus package has staved off an Australian recession needs to explain why similar policies have failed everywhere else.
A substantial component of the stimulus packages consisted of cash handouts. At the time we were told these handouts would be quickly spent and would stimulate the economy. The first cash splash was timed to coincide with Christmas. While Christmas sales were robust, they were not unusually high or greater than could have been forecast. The Australian Bureau of Statistics' household consumption expenditure series -- as good an empirical measure for what people did with their $900 handouts as we are going to get -- shows no unusual spending.
The stimulus packages were advertised as supporting many thousands of jobs. Yet much of the spending was targeted at the construction and education sectors, industries not known to suffer from unemployment.
The logic of the stimulus packages is that labour is fungible: unemployed brokers and bankers might get jobs building school halls and highways.
Nevertheless, it is the education spending of the second package that is especially problematic. The Australian has done a fine job reporting on the extraordinary waste that has occurred in this area. This phenomenal waste goes far beyond teething problems.
The stimulus packages are predicated on the assumption that spending a dollar, any dollar, on any shovel-ready project is a good thing. It gets even better if that project is somehow related to education. The logic is that education contributes to productivity; therefore the government is promoting future productivity.
It is not clear, however, that a good education system, or our future productivity, relies heavily on school halls. Good education is about people; the Rudd government is simply providing bricks and mortar. This is not to deny that school halls provide valuable community benefits and social capital. But the marginal benefit of a school hall on future worker productivity discounted back to the present will be a very small number.
If we were going to have stimulus spending, the government should have looked to get the best bang for its buck. There is no indication that the government has done anything like the necessary calculations about the costs and benefits of its spending, or the most effective way to spend it.
So we have paid for stimulus packages that contain a lot of spending but little actual stimulus. The spending is very low quality. This is especially problematic as the government will be borrowing to finance this low-quality spend. Projected government debt is not high by international standards but will be high by Australian standards.
Public debt has unfortunate consequences. It crowds out private investment and distorts the economy away from investment in favour of consumption. The deadweight costs of public finance combined with the economic inefficiencies of government spending combine to make it very unlikely that the stimulus packages would add any value to the Australian economy.
So why has Australia done relatively well in the past year? Australia entered the crisis with sound public finances; the budget was in surplus and the commonwealth had no net debt. But, just as significantly, Australia has the legacy of a generation of economic reform and liberalisation. This legacy has previously served us well; Australia did not go into recession during the East Asian crisis or in the early 2000s.
The free-market shock absorbers operated to insulate the economy from some of the worst effects of the crisis. The currency depreciated (and has subsequently appreciated) and the stock market has fallen in value. A deregulated labour market has allowed employers and employees to renegotiate employment conditions to reduce hours worked and to job-share.
At the same time the Reserve Bank of Australia -- a commonwealth agency -- has lowered interest rates by more than 4 per cent. In the lead-up to the crisis, Australian regulators took a very conservative approach to regulation and Australian financial institutions themselves have been reasonably conservative. All this implies that many of the weaknesses that plagued foreign economies, especially the US, were not evident in Australia. Australian economic institutions, public and private, have worked well.
The return to activist fiscal policy is retrograde. It undermines the important and difficult reforms undertaken since 1983. In particular it raises the problem that fiscal and monetary policy could undermine each other. Policy confusion cannot be the foundation of a prosperous future.
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