Archives for posts with tag: stimulus

One of the key economic policy battles in the first term of any government is to shape the public’s understanding of the previous government. Howard and Costello successfully associated the Keating and Hawke governments not with a massive program of economic liberalisation, but with “Beazley’s black hole,” a supposedly hidden fiscal deficit that was used to justify sharp spending cuts. The first Rudd government could and should have made more of Howard’s failure to make the most of the mining boom, squandering much of the benefit in unsustainable tax cuts, but they failed to ram this message home.

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Inspired by this analysis of the jobs crisis in the US, I thought I’d have a look at how Australia compares to the US and Europe.

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John Howard’s biographer, David Barnett, has a piece in the Drum today arguing against the use of fiscal stimulus in recessions and against Keynesianism in general. Setting aside the philosophical and theoretical arguments he makes, I’d like to examine his empirical claim, namely that fiscal stimulus has not worked, and the somewhat peculiar methodology by which he comes to this conclusion.

Barnett writes:

“It hasn’t worked…. In Australia, unemployment has just gone up, instead of down. At 5.4 per cent it is more than a percentage point higher than it was when the Howard-Costello government went out of office. That is around another 130,000 people without jobs.”

He knows, or should know, that the appropriate comparison isn’t between what was and what is, but rather between what is and what otherwise would have been. To assess the efficacy of a particular course of action we need to know the counterfactual: what would unemployment be today if the government had not implemented its fiscal stimulus? Economists can and do differ about the answer to that question, but to evade it entirely by making a comparison between 2007 and 2010 and thereby imply that all other things remain equal is disingenuous at best.

Interestingly, though, Barnett seeks to establish a counterfactual of sorts by drawing a comparison with Canada. He praises the Canadian Government, saying “Canada did not stimulate. The Canadian government responded to the GFC by cutting back on its expenditure. Canadian exports rose”. Notice how he shifts the goal posts, using exports rather than unemployment as the metric to evaluate the efficacy of macroeconomic policy.

Nevertheless, his argument about Canada provides us with the opportunity to follow Barnett’s own chosen methodology by comparing 2007 (pre-crisis) unemployment with present unemployment and imputing the difference to a failing of public policy. To be clear, I think this approach is not particularly useful, but Barnett seems to be of the view that it is appropriate, so we will follow it.

If we follow this approach, we see that unemployment increased by a greater amount in Canada than in Australia, off a higher base, both in absolute terms and as a proportion of the labour force.

Unemployment rate – November 2007 Unemployment rate – October 2010 Number of additional unemployed people
Australia 4.5% 5.4% 141 700
Canada 5.9% 7.9% 417 500

So, on that measure, it certainly seems odd to suggest that a simple comparison of pre-crisis and post-crisis macroeconomic aggregates in Canada and Australia demonstrates the folly of fiscal stimulus.

But what if we accept Barnett’s suggestion that it is international trade that should be the barometer of policy success or failure? Well, our balance on goods and services (our exports less imports) looks pretty healthy to me:


The Australian editorial page, February 18 2009:

This newspaper has, with some reservations, supported the Rudd Government’s budget stimulus packages. The Government is right to seize the initiative to do whatever it takes to prevent the global crisis producing recession in Australia. That initiative includes two sizeable budget stimulus packages – the first worth just over $10.4 billion, announced in October, and a second tranche of $42 billion, which will include millions of cheques to Australians to encourage them to spend now.

The Australian editorial page, October 8 2010:

Kevin Rudd’s intellectually fragile essay proclaiming an epochal change in the relationship between the government and the market looks faintly ridiculous with the passing of time but it betrayed his view that interventionist government should act as a counterweight to self-interested capitalism and laid the philosophical groundwork for an excessive Keynesian binge.

In recent days the IMF has publicly argued that “markets need to end their addiction to credit ratings”. They suggest:

[t]he real solution lies in reducing the reliance on credit ratings as much as possible. This should start with removing the mechanistic use of ratings in rules and regulations, which some countries are already beginning to do. Investors must be weaned off credit ratings too. Policymakers should persuade the larger ones, at least, to perform their own risk assessments as part of deciding what to buy or sell.

I wonder what our State governments will make of this advice, given that they behave as if their sole task is to maintain the public balance sheet in a state that will please Standard and Poors.

The IMF has also examined the evidence in favour of fiscal austerity, assessing when and to what extent governments should begin to repair their balance sheets in the wake of a recession. They end up finding that fiscal contractions are contractionary, and fiscal expansions are expansionary, a vindication of Keynes. This might seem obvious, but it’s far from the ‘Washington Consensus’ view imposed on various nations throughout the 1990s.

The results suggest that recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized reces- sions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries.

I’m not sure what has happened to the IMF, but this sudden rash of common sense is definitely a good sign.

Bernard Keane has a great post in today’s Crikey that systematically demolishes the anti-stimulus arguments of Ferguson and others.

Niall Ferguson is in Australia, sponsored by a right-wing think tank, spruiking the anti-stimulus party line. He has an op-ed in today’s Australian in which he declaims the insignificance of the stimulus, castigates the mining tax, doffs his hat to his broadsheet hosts by taking a swipe at the Fairfax press, and even has a little dig at Krugman without even mentioning his name (Stiglitz, “unlike some Nobel prize winners… hasn’t allowed the Swedish central bank’s gong to super-size his self-esteem”).

Stripped of the thick veneer of partisan rhetoric, Ferguson’s main point appears to be that Labor cannot claim the credit for all of the jobs created in the period since the enactment of the stimulus packages. He doesn’t quite claim that Labor can claim none of the credit, though he comes close.

Ferguson instead attributes Australia’s relatively strong economic performance to:

“1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry.”

By “the Howard Government”, he presumably is alluding to the budget surplus it bequeathed the Rudd Government, notwithstanding the structural deficit that was hidden by the boom. To which I say: yes, of course, that didn’t hurt. If our national fiscal balance had already been in some parlous situation, going into further deficit to stimulate the economy would have been less politically possible and more economically risky. So, reasonable observers can agree that it didn’t hurt that we entered the crisis with plenty of fiscal room to move. Still… does that mean that without the stimulus, the mere fact of the Howard Government’s budget surplus would have somehow managed to sustain output and employment?

Regarding the RBA, no reasonable observer disputes that monetary policy had a big role to play in stimulating the economy, so here Ferguson deftly establishes a nice little straw man that he can blow down with his anti-Keynesian rhetoric.

China: again, no dispute. No one argues that all economic activity in Australia over the past 18 months or so has been solely sustained by the fiscal stimulus. Still, it’s interesting to ask this question: without our domestic stimulus, would China’s demand for our resources have been enough to sustain the levels of output and employment that we’ve enjoyed over the past 18 months? Brazil exports a lot of mineral resources, and its economy shrank last year. It’s also interesting to ponder the role of China’s own domestic stimulus in contributing to our resilience; we derived great benefit from that. Perhaps that very interdependence is why the noted luddite Keynesians of the IMF urged nations to adopt a stimulus package of 2% of GDP back in the thick of the crisis. Ferguson’s anti-stimulus narrative makes no mention of the benefit that we derived from our neighbours’ stimulus.

On the mining industry, yes, we’re lucky to have all that coveted metal under the ground. Still, was mining really responsible for sustaining output and employment? Let’s have a look at the facts. Mining industry employment peaked in November 2008 at 179 600. A mere six months later, it was down to 152 300. In those six months, the height of the crisis, the mining industry shed 27 300 workers, 15% of its workforce. As Ken Henry said, “had every industry behaved that way our unemployment rate would have climbed to 19 per cent.” Does that really sound like an industry that single handedly got us through the crisis?

Regarding lady luck, I am unaware of any robust econometric analyses that indicate that luck is the primary determinant of national economic growth. Luck is, of course, important, but if economies can rise and fall purely on the basis of luck then macroeconomics is the most pointless of disciplines. Then again, perhaps I have a different standard for being “graduate seminar sure” of the cause of our position, as Ferguson puts it.

We need our own Krugman to take arguments like these head on. (I nominate John Quiggin for the job, incidentally).

In my first post on this blog I linked to one of many recent Niall Ferguson piece in which the right-leaning economic historian castigates Keynesians for their stimulatory tendencies. Ferguson is adamantly opposed to the idea that when there are lots of idle resources (labour and capital) and not much sign of private demand for those resources resuming, Government should step in to fill the gap. He doesn’t even believe that’s the case when the usual first-choice policy level, monetary policy, has reached the limits of its usefulness, a nominal interest rate that is close to zero.

What’s interesting is that Brad DeLong has unearthed a Ferguson piece from the New York Times in 2003 in which he argues precisely the opposite. Ferguson was apparently convinced back then, with the US and world economies in a much less parlous state, that the US federal government could step in to boost aggregate demand without threatening runaway inflation or imperilling its own solvency.

What led to Ferguson’s change of mind? I suspect it is nothing more than a change in the political party in power.

Ferguson accuses Krugman of the opposite crime, of opposing deficit spending in 2003 and supporting it in 2010 for reasons of partisanship.  The difference between the two is that Krugman can point to significant differences in context that warrant a changed position. Principally, the nominal interest rate is at its zero bound. Another factor is that this has been (and is, for the most part) a truly global downturn, precluding a typical export-led recovery.