Australian fiscal policy

by on August 21, 2010 at 6:59 am in Economics | Permalink

Ivan, a loyal MR reader, requested:

Thoughts on Australian fiscal policy?  Stiglitz is a fan, but it seems to me there was much more room for monetary expansion.

http://www.project-syndicate.org/commentary/stiglitz128/English

The subtext is that Australia has not experienced a downturn comparable to that of other developed countries.  Here is a very good FT piece on the topic, maybe it is gated.  It points out a few facts:

1. Australia was running surpluses in good times and now, even after some fiscal stimulus, their debt-gdp ratio is only six percent.

2. Australia has experienced ongoing positive shocks from Chinese demand; even in the last year Chinese two-way trade went up 30 percent for them.

3. Their "initial fiscal stimulus package heavily focused on cash hand-outs to pensioners and low earners."  In other words, it possessed some aspects of a helicopter drop, being combined with expansionary monetary policy.  Note that lately they have been tightening on the monetary front.

4. Some people believe that the Australian property bubble simply has yet to burst.  Here is a related chart.  Maybe they're simply behind the times.

Their high-risk, high-return strategy of cultivating Chinese demand could blow up in their faces.  We're still in the high-return phase of that cycle.  This is exactly the sort of scenario I analyze in my earlier book Risk and Business Cycles, now in paperback.

rjs August 21, 2010 at 8:28 am

australian economic thinking is heavily influenced by professor billy mitchell & modern monetary theory…

http://bilbo.economicoutlook.net/blog/
http://en.wikipedia.org/wiki/Chartalism#Modern_proponents

Adrian Ratnapala August 21, 2010 at 9:38 am

I’m mostly with Tyler. On his point (3) I would like to add that non-helicopter drop aspects of the stimulus were what caused the scandals such as the graft in school buildings and the attack of the Deadly (Insulation) Batts.

But I have question. Everyone appluads Austria’s banking regulation. But can someone explain what were the key differences between Oz and countries that did worse? That’s not a rhetorical question, I’m curious.

vak001 August 21, 2010 at 1:38 pm

it seems to wikipedia OZ’s Debt/gdp is more like 17.6% than 6%.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Lefty August 21, 2010 at 4:25 pm

test

BKarn August 21, 2010 at 5:40 pm

“How about THAT. Running A Surplus During Good Times.

Don’t the Austrailians know it is the Peoples Money.”

You need a new schtick.

Yancey Ward August 21, 2010 at 9:04 pm

So, Bill, what mud are we in? Are we in deep mud because of the deficits or not? How do we get out of the mud? By doubling down on what you say was bad policy from the last recession?

TGGP August 22, 2010 at 1:03 am

rjs, I was under the impression that economic viewpoint was marginal everywhere. Could you provide some info on the links between Australian policy-makers and Prof. Mitchell?

Lefty August 22, 2010 at 4:32 am

“As someone who has intimate knowledge of the home insulation program. Let me tell you it is worse then the media beat up.”

Given the incredible extent to which the media went to portray a relatively small handfull of incidents as being representative of the entire programme itself while conveniently forgetting to make it clear to an entire country that the volume of installations done in the 12 or so months that the programme ran for was around 12-15 years worth of jobs under normal circumstances so that apples were not remotely being compared with apples (because the actual facts would have been dull and hardly worthy of a big selling newspaper headline) you now have me worried that we are on the verge of a national disaster. With around 1.1 million installation jobs done under the programme but only around 8.5 million houses in Australia, surely every one of us should have a relative, friend or acquaintance who has had their house burned down, been electrocuted or fried in thir bed?

Please provide eveidence to support your claim that the truth is even worse than the astonishing, senseless braying of the media pack otherwise you are stretching credibility almost as far as they have.

“Dumping money into an unregulated industry is the stupidest thing you can do.”

At what stage was the industry “unregulated?”

“If you had insulation installed under the scheme, insurers don’t want to insure you”

And this is the fault of the programme……..how? That is the fault of a mindless beat-up being doggedy pursued by the media until the public came to accept fantasy as fact.

“Whilst the number of house fires is remarkably low given the number of installs”

We agree. Perhaps you should have used your intimate knowledge to impress this fact upon the MSN. Not that it would have made any difference since it would have run counter to the narrative they had decided to present.

“The government should have spent that money on true infrastructure that we needed. Better rail links, ports, the NBN, anything that we vitally need”

I don’t disagree. But the purpose was to quickly support employment in a very large industry which is especially prone to heavy job losses in downturns. There are things I would have favoured spending on instead. But many of them would still be on the drawing board now because they are not able to be rolled out quickly.

The whole point was to prevent employment from collapsing.

CMc August 22, 2010 at 10:20 am

Without doubt some of the weakest points ever made on this blog. Things certainly have been going down hill here for a while. Are we at the bottom yet?

Ted Craig August 22, 2010 at 12:35 pm

Canada and Australia are the same story: smaller populations plus high commodity prices equal little effect from downturn. It’s an impossible to duplicate formula for all the economic alchemists.

Yancey Ward August 22, 2010 at 6:33 pm

Even people like Krugman have stated that what you spend it on is much less important than just spending. The United States Government has run deficits of greater than 10% GDP for two years in a row with another looming. How much is enough?

Drewfus August 22, 2010 at 8:05 pm

Lefty, the first stimulus was about $10B. Assume a multiplier of 1.3 and thats $13B of extra aggregate demand in $1300B/year economy. Are you really suggesting that that was all it took to rescue the Australian economy from “the greatest economic disaster since the Depression”?

The second stimulus was about $43B i believe, but that went into more structured projects, some of which, like the schools buildings program, are still be spent on now. The second round of stimulus was just as late as everywhere else, and rejected in the senate by the opposition. Australian beauracrats do not have some special ability to suddenly jack up investment expenditure in an efficient manner that other countries lack.

By saying Australia’s performance was down to luck, i meant that the state of Australia’s federal budget, monetary policy, public debt, state of the banks, low mortgage default rates, stong economic ties with China, etc, were all favorable to the current government, which inherited these, but was not responsible for them. The Australian government got lucky in a way that the Obama administration definately did not. That’s no reason for saying that the American administrators were relatively incompetent compared to their Australian equivalents. How many houses were burnt down in the US due to a bungled home insulation scheme?

As far as i’m aware, Stiglitz did not give any indication as to what elements of the Australian stimulus made it “the best designed” in the world. Was it the size, the timing or the efficiency of the programs that so impressed the great man? And in what manner did everyone else perform so badly on these criteria? He just doesn’t say. People aren’t really interested in the details, they’re only interested to hear that their worldview has been vindicated and that the confidence and trust they place in the leaders of the country is justified. That is the role that travelling economists like Stiglitz partake of.

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