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February 4, 2009
Will the $42 billion stimulus package---the Nation Building and Jobs Plan--- do its job? Will it give the desired boost to economic growth in a vulnerable economy, and help ease the rise in unemployment? Will this kind of timely support soften the pain? Can this question be explored whilst avoiding the toxic, partisan polemics of a Janet Albrechtsen about neo-socialism downunder?
Stephen Kirchner, a research fellow at the Centre for Independent Studies, suggests that it is possible to avoid polemics. His argument is that activist fiscal policy doesn’t work. He outlines it thus:
Historical experience with fiscal stimulus packages in Australia and abroad is far from encouraging. Japan, for example, rolled out one stimulus package after another for the better part of a decade during the 1990s, to little effect. Why is activist fiscal policy generally ineffective in stimulating economic growth? The failure of discretionary stimulus measures reflects a basic reality that governments cannot create economic activity, they can only redistribute the income and wealth created by the private sector.
Why so? Helping the unemployed to retrain is a good idea. So is money for public housing and helping people to make their houses more energy efficient given the climate change scenarios of increased temperatures. Who could argue against refurbishing school infrastructure, more money for maintenance and increased investment in new infrastructure (eg.,libraries for primary schools and laboratories for secondary schools). These measures were temporary as well as timely.
What then are the reasons for the failure of countercyclical discretionary fiscal policy? It's more than being the measures could have been better targeted, or the states tightening their budgets in a recession. Kirchner says:
The problem for all governments is that these unfunded fiscal stimulus measures ultimately have to be paid for out of future taxes. An unfunded fiscal stimulus package of $42billion is thus equivalent to announcing a $42billion future tax increase......The danger with activist fiscal policy is that governments relax the criteria for good policy for the sake of pushing money out the door. By throwing out the constraint that new policy measures should be fully funded, they abandon the fiscal discipline that would otherwise force the government to choose carefully between competing alternatives.
What then is the answer, given that Kirchner says that doing nothing is not an option and no mention is made of market failure?
Kirchner says that the correct focus for fiscal policy is the structural and supply-side measures that will deliver sustainable gains in future prosperity. His argument is that budget balance could be expected to swing into deficit as a result of the operation of the so-called "automatic stabilisers", those components of government spending and revenue most closely tied to the level of economic activity. The automatic stabilisers have the very desirable effect of cushioning the economy from the downturn.
This cyclical deterioration in the budget balance is ultimately self-correcting. When the economy recovers, the cyclical component of the budget balance can be expected to improve, without the Government having to make explicit policy decisions other than to allow the automatic stabilisers to do their work.
I presume that "supply side" measures refer to tax cuts but what does "structural" measures refer to? Reducing public spending to address the issue of big government (Leviathan?). Does that mean cutting back on the welfare state? Does it mean tcutting back on the middle class welfare of the Howard years? Does it also include tax reform? The basic CIS position is to empower individuals to meet their own needs and reduce their future dependence on government. Does that mean in the current situation encouraging increased savings?
Kirchner's argument is premised on his assumption that markets are self-correcting. Thus
in credit and other financial markets, the present crisis can be interpreted as a global re-pricing of risk following an extended period in which risk was incorrectly priced. Again, no government or regulatory intervention was required to set in train this market correction. We may not like the price signals generated by markets in the context of the credit crisis, but that does not mean the market is not working or the price signals are wrong.
That misses the main point. Government intervention was necessary to prevent the financial and credit markets from self-destructiing. The judgment was that Wall Street had to be saved to prevent the collapse of the financial system.
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Albrechtson reckons that classical economic approaches of balancing budgets and containing expenditure is the proper response, and she is opposed to central planning and big government. She says:
There is no surplus. That's long gone. The dream is central planning and big government. Wasn't the Howard /Costello Government an example of big conservative government?
Albrechtson adds that the state premiers are using the crisis to eye off Rudd’s billion-dollar deficit kitty to fund their own failings in education and housing, pay off their union supporters with pork dressed up as jobs protection, or spend money on marginal seat infrastructure disguised as nation-building, or justify a return to central planning and big government.
Her position beneath the polemics appears to be is that it is a "myth that heavy doses of government intervention “saved capitalism from itself”. Japan is used to back up the claim.