economy
3 Feb 2009
Good Old-Fashioned Handouts...
With some smart politics thrown in. Ben Eltham dissects the Rudd Government's $42 billion economic stimulus package
The next installment in Australian neo-Keynesianism is in: $42 billion in Commonwealth spending to "kick-start" the economy, with the likelihood of another 1 per cent interest rate cut from the RBA to boot.
It's a mix of old-fashioned handouts and public works spending, with some clever shoring up of the Government's education and green credentials thrown in.
Nearly $13 billion will be spent on cash handouts to "working Australians", single parents with school-age children, students on Austudy and farmers. Perhaps 8 million Australians earning under $80,000 a year will get a cash payment of $950, although the details on who counts as a "worker" have yet to be defined. Parents with a kid at school will also get $950 for every school-age child. The money is due to arrive in April.
Another $12 billion will go to physical infrastructure and construction projects in public schools: according to Rudd, it will be "the single largest school-modernisation program in Australia's history". Every one of Australia's 7500 state primary schools will get a new building: either a "21st century library", a "multi-purpose hall" or money for modernising classrooms. Secondary schools will also get money for science and language buildings and for maintenance.
A further $6 billion will be spent on social housing, with the aim of adding 20,000 new "units of social housing" to try and cut the national homelessness rate by a quarter. More money will also go to maintaining existing public housing so that approximately 2500 dwellings are renovated up to livable standard.
And, as a sop to concerns about climate change, nearly $3 billion will be spent installing insulation in the roofs of rental and owner-occupied homes. This will certainly be welcome in the many parts of southern Australia that suffered through last week's heatwave, but it will also help cut electricity consumption and therefore greenhouse gas emissions as well. Rudd claims the measure will prevent the emission of some 49 million tonnes of carbon dioxide.
Of course, schools and public housing are maintained and run by the states, and that has already posed a problem for Rudd's education revolution. This time around, Rudd has threatened "zero tolerance" for any state governments who don't quickly spend the Commonwealth's money. The Commonwealth clearly intends to play hard-ball with any state treasuries who try to hoard federal money in order to prop up their own balance sheets. Given that most states will desperately need Canberra's money to stay solvent, this is far from an empty threat.
Business gets some further relief, with a 30 per cent allowance for small businesses making necessary purchases and capital investments, on top of the 10 per cent allowance announced last year.
All up, it's a $42 billion "nation-building and jobs plan" which will send the budget $22 billion into deficit this year and $35 billion into the red next year. Unemployment is expected to rise to 7 per cent, while interest rates are of course expected to keep falling — perhaps even to 2 per cent. "Nobody likes being in deficit," declaimed the Prime Minister, "and I don't like being in deficit at all." But he is firm in his message that "this is not a question of choice" — it is what we are required to do.
On the other hand, there was no announcement on labour market programs or workplace training (though Rudd foreshadowed a subsequent announcement on this front). Nor did pensioners or self-funded retirees receive any extra largesse. And there were no tax cuts.
Rudd's package is both good macro-economics and very smart politics. On the back of his (somewhat disingenuous) assault on neo-liberalism in The Monthly, Rudd has seized the opportunity afforded by extraordinary times to reframe the national economic debate.
The schools investment in particular is canny politics. Our nation's private schools benefited from massive Commonwealth stimulus in the Howard years, while public schools crumbled. The outcome was an increasingly two-tiered system in which public schooling suffered in comparison to swankier private schools. The new measure, which Rudd argues "will take a feat of national organisation and planning we haven't seen since the 40s" (in other words, since the last wartime economy), will make a huge difference to our nation's largest stock of human capital. It's an unprecedented investment which will be cheered on by primary school teachers and principals across the country.
The other investments announced in the package are also badly needed and therefore just as welcome — particularly the investment in social housing.
Malcolm Turnbull has been left on the back foot for the time being, unable to directly criticise the package but instead pledging to "work with" the Government while scrutinising the spending package "line by line". With a shadow treasurer already the laughing stock of the nation's economists, he is going to have to read carefully to avoid being sidelined in the current debate.
In the long term, Turnbull must fancy himself a chance at a 2011 election fought on Labor's economic record. In the short-term, the Australian economy continues to deteriorate.
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I hardly think this latest stimulus package illustrates a reframing of the national economic debate - more like business as usual.
The fact is, neverending economic growth is unsustainable.
Megan,
only 14 months ago Kevin Rudd was trumpeting his credentials as a fiscal and economic "conservative." Now he’s spending money like a Wall St CEO with a redecoration budget.
I think the economic debate has changed - by necessity - and Rudd is of course using the opportunity to highlight his willingness to engage in deficit spending. It’s an entirely valid point, especially given the incoherence of the Coalition on the issue of deficits.
Nevertheless, as MeganY says, never ending economic growth, or never ending any growth, using non-renewable resources, is totally unsustainable.
I certainly do not see any new thinking in any of this. Politics as usual, certainly.
All "Ayatollah’ Rudd is doing is attempting to prop up ‘business as usual’, and in the end, this is defeatist thinking.
Where, Oh Where is the real Green thinking. Somehow, I see the evil totally pro-free-market hand of Martin Ferguson in everything. Scary, that man! Dazza.
It would be good to start subsidising renewables, but from the government’s perspective it wouldn’t produce high volumes of jobs quickly enough (that project needs to be included as a medium-term plan).
This package appears to answer some basic requirements: What can we do quickly? What things create work for otherwise unskilled or unemployable people? What things might present a political and or social dividend in the medium term?
At the moment the government is also subsidising its preferred voting constituencies, but under the circumstances it might well consider subsidising the supplier - i.e. sell this widget and we’ll pay you a bonus. This directs the funds straight into consumption, rather than the discretionary pocketing of the ($950, etc) windfall.
I too would prefer that economic growth (i.e. consumption) was managed downward and a sustainable economy accelerated, but I think the government is trying to manage more immediate imperatives.
The pre Christmas cash giveaway seems to have been at least a partial failure, so throwing more cash in the same direction simply seems to be a way of achieving nothing at great cost.
The official interest rate in the USA is down to 0.5% with no obvious stimulatory effect on their economy, so why should further interest rate falls have a beneficial effect on ours? Indeed, for retirees who rely in part on interest earnings to balance their budgets the fall in interest rate has already had a material effect on their ability to spend and help the economy.
The insulation scheme has some potential, but would be more satisfactory if it was a part subsidy on any energy saving initiative, rather than a gift to the insulation industry.
As MeganY implies, there is no recognition that fundamental changes are occurring in the world, and the failed policies of yesterday are unlikely to bring us salvation. On the contrary, they might well make the situation worse.
Gloom at the end of the tunnel? Glen
Cumos, Dazza and Glen
I trained in biology so I am certainly aware that indefinite growth is unsustainable.
Having said that the immediate task at hand here is to alleviate the recession in private demand by stimulatory fiscal policy, and for that reason I support the government’s measures.
As the US economist Paul Romer has shown, economic growth is not simply about consuming ever more resources. Some types of economic growth can lead to less resource use and lower environmental impact because they produce goods and services more intelligently and cleanly. Truly renewable energy, if we ever manage it, would fit this bill - but so do more prosaic activities like better-trained teachers and upgraded IT systems in hospitals.
There’s also the moral point of the human impact of economic recessions: on jobs, on families and people’s everyday ability to make ends meet.
I would like to think, after looking at this stimulus package, that somehow the economic situation is bringing other priorities back into balance, like education and health care infrastructure and training, medium-density low-income housing… Maybe it was a fortuitous circumstance, allowing Labor to tackle these items on their agenda under the guise of having their hand forced.
My goodness Ben you have fallen asleep on the job again! You are a great PR proponent for Rudd but the punters above are making some very valid points, although one cant criticize Rudd for making life easier for down-trodden Mr and Mrs Citizen we should all be grilling him on the basics and known facts which are:
1/ Why has there been no fundamental policy change since Rudd gobierno took power?
2/ Why is the oil lobby still steering cabinet? Fuelwatch was an insult to any Australian.
3/ Forget Climate Change, why does Australia not have a national energy strategy - thats rhetortical of course - the answer is that Ferguson helped finish Howard work and most of our energy is on contract of sale to China - so any move toward such a debate would expose this government as nothing more than a baton exchange with the last government.
4/ Given that more revelations are coming out re Stanley Ho and the Rudd China connections - (there is a big clue here :) - why are the opposition not going for the jugular - another rhetorical - the Chinese took a bet either way and Ian Tang and Ho pumped millions $ into their accounts as well.
5/ Has anyone noticed that the Chines are doing quite well at the moment - grabbing more bargains in the minerals and energy sector. Good thing Rudd speaks fluent mandarin - those contract approvals could get complex!
Oh boy, the deficit we had to have, like Keating, Rudd is yet another sheep in wolves clothing - and Australia as a nation moves closer to that final fire sale - must get back to my mandarin lessons!
singha99, there is an improvement to another energy saving rebate. If you are replacing your electric hotwater system with solar or heat pump there used to be a $1000 (means tested) rebate from the federal government. This is now $1600 and is not means tested. You can apply for this rebate or insulation but not both.
I agree that the package doesn’t reframe the national economic debate, though at a lesser level that a mammoth shift to a non-growth, sustainable economy would entail. It seems like the politics are mostly reduced to tired old wedging, with little reframing.
42 billion but only 3 billion to tackle anything climate-change related - and that boosting an element of the housing sector? I’m not against it but it’s hardly a reframing. 6 billion for social housing? Again, I think it’s a good step for homeless needs, but something that both reduced homelessness further (why stop at a quarter?), and relieved the home-ownership and home-rental prices more would be welcome; developers might not that it though. 13 billion handouts but nothing for pensioners or the (growing) unemployed? Good for middle-class votes, but ditto points above, and with plenty of Howard echoes.
But making any of the issues avoided a greater priority would open options to the opposition for attack, if not now, then later as the electoral cycle demands more policy differentiation along ideological and ‘competence’ lines. (That’s separate from the idea of other Climate Change measures needing more time to come online, as mentioned in the comments here - there are still several larger, faster options for climate change that could have been explored but haven’t been.)
The schools refurbishment is a reframing from the Howard years, but public schools have been highlighted by the Rudd government as a priority for some time, so I don’t think that’s a reframing at this point either - more a matter of using the actions of the time to further established policy priorities.
sorry, poor editing before posting; I meant in para 2:
‘…developers might not like that though."
Hmmm –
The fundamental error Kevin Rudd in all likelihood makes is :-
With a Keynesian handout the thinking is - the handout stimulates economy, for such time as the economy is in a temporary period of recession.
Perhaps stated in other words, where the private sector has, for what ever reason temporarily stalled, the government on behalf of the populace borrows over the long term, to spend in the short term.
It is a short term fix - such that the populace does not experience the short term jolts that cyclical economies too often occasion.
The specifics of how exactly the stimulus is formulated or effected is largely a polemic of politics and policy. That the ALP will obviously choose to favor its constituent – its just the way democracies work.
This is all fair and okay, in so far a it goes…
But the causes of this global RECESSION (a euphemism - as we face a very long international DEPRESSION ) isn’t unknown - and to try stimulating without consideration to the root cause, is naive.
Two distinct schools of thought govern understanding and analysis in this regard:-
Firstly Economists largely analyze the juxtaposition and structuring of interest, full employment, price stability and of course GDP - such is their thinking, and largely a product of the deconstruction of their discipline / school of thought.
WHEREAS
Secondly Not so with international asset managers - who after the thought of Harry Markowitz, and the Capital Asset Pricing Model and the Optimum Portfolio Theory where asset managers implement investment policy at the ‘ efficient frontier ‘ talk in terms of ‘risk’ (asset price volatility) and the pricing of that ‘risk’.
The root cause of this global recession is based on the miscalculation of international risk.
Politicians traditionally talk in terms of the former narrative - probably and largely because academic political studies’ departments tend to lag severely behind the day-to-day operations of international capital markets. Curricula are entrenched, academia self effacing, etc.
This is a disjunct - a ‘language’ disjunct perhaps or in terms of current jargon a ‘narrative’ disjunct - betwixt economists, reserve and federal bank governors internationally, (and in this case the important role and thinking of Fed Reserve Chairman Greenspan emeritus who largely talked US interest rates and the maintenance of price stability) in one school AGAINST that thinking in the other school of the huge international assets managers whose ‘narrative’ goes to ‘risk’ and the pricing of that risk.
Arguably the cause of humanities biggest economic ‘mistake’ can be attributed to the international assets managers quantitative theory and risk determinations by the ratings agencies Standard and Poor, Moodys’ and Fitch. These three agencies, are a product of the CAPM school and have consistently priced risk as if asset price variability is subject to Brownian motion - not unlike the motion that is akin to the spasmodic wanderings of ovum crazed spermatozoa.
But humans minds and actions are not random, we do interact…thus when everyone priced assets based on mispriced formula, the formula failed to confirm the pervasive correlation and hence continued to misprice !
It was an error that fed upon its self – self fulfilling over repeated cycles of asset expansion BUT in the final test, proved to be WRONG. At the tails of asset pricing (i.e. when things start to go wrong) the analysis has now shown to be totally and completely incorrect.
THE CAUSE OF THE GLOBAL CREDIT CRUNCH IT IS AS SIMPLE AS THAT…
This has resulted in the largest economic crash and burn ever seen..
Painful correction is now underway.
And the assumptions of growth are now to be reconsidered. In this process the worlds capital markets have braked into a virtual standstill catapulting country, after country into recession, and the neo-instantaneous halt results in whiplash that is to jar the world for some many years to come.
The consequence is that Rudd, and the dogma of the ALP is understandably and with respect, about twenty years behind the curve in terms of the functioning of the capital markets! As well meaning as Mr. Rudd is, he has simply no idea - it is simply way too avant-garde!
Slowly a consensus will emerge as to where asset risk ‘should’ in the future be priced. What is clear is that;
i) ‘risk’ has been underestimated, and will never revert to the trade-off that pre exists this collapse.
ii) mistakes made are corrected though the inter-temporal gap . (i.e. the kids pay for their parents excesses …)
The two school of thought are not, as you’d expect, mutually exclusive. Yet for the while this can only be explained from a CAPM model or perspective – and it isn’t going to be short term! The economists will ultimately/eventually incorporate this impact into their future paradigms.
What it probably means is that internationally we face a long period where the outputs to capital demand imply the debtor nations have experienced GDP ‘s that will never be achieved into the foreseeable long term capital expenditure horizon.
Kevin Rudd’s premise for a short term ‘fix’ does not recognize either the severity OR the permanence of what has ‘just gone down’. His temporary stimulus is an attempt to cling to a past of excess, and tho’ it will stimulate to greater or lesser effect in the short term, in the further or broader horizon, and at the frontiers of internationalism Australia and the debtor nations will not revert to the prior status quo.
Thus all that Rudd will be doing is accumulating more baggage and debt on ‘generation Z’ (and it is no irony - that those kids just starting their schooling are at the end of the alphabetic tether !)
[ George Soros has long predicted this in terms of a very coherent theory of reflexivity – but Soros has never been recognized for his work as he is outside recognized academia’s hallowed halls (and ….well …for Rockjaw and his ilk – a Jew!) ]
[This ‘error’ is the meta-basis to the CDO blowout, the collapse of the pricing of interest rate swaps, the freezing of the debt securities and the failure of BASEL II to curtail asset price expansion, … ]
Well … so it goes? dunno4sure¿
Denko, another that is unrecognised outside of academia but has a pretty good handle on the problem you address is Nassim Nicholas Taleb. For me personally the problem is one of democracy. If we treat credit, and its corollary, debt, as a public good, then the mechanisms that price risk, as you put it, should exist to the benefit of all, from the lowest paid to the independently wealthy. I believe the whole notion of capital markets, and the function they serve society, needs to be reexamined. Debt has made a small minority very wealthy, and at the expense of the great majority.
Now you say that future economists will build the present failure into their future models to avoid repeating the mistake. To my mind this is half right and half wrong, and you capture this when you state this was an error that fed upon its self – self fulfilling over repeated cycles of asset expansion. Markets tend toward disequilibrium, I think this is something Minsky has written on. For me the model must capture the human aspects of society and not try to determine risk using such things as you put it the spasmodic wanderings of ovum crazed spermatozoa. If we price risk according to the pain it will cause and not the likely hood of its occurrence our capital markets will be more conservative, but then what haev liberal markets really delivered? Astronomical house prices and levels of debt never before seen. But then we can only ‘price’ risk differently if those who are hurt the most have a say. The US has the lead here. As Andrew Forrest so arrogantly put it today on ABC radio, recessions are good times, good times to buy. And when you are as rich as he is, it is all a game, and up is down, down is up, and the world really is flat. For me I would prefer our collective hands on the wheel. If this means slower growth and lower profits I don’t care. Capitalism is good and seems to work pretty well, but keep control of the supply of credit in the hands of the government, where the people are the ultimate arbiter.
Benjamin Shah
Nassim Nicholas Taleb of course! :o)
Thank you. Cheers…
If you mean by Keynesian Economics that Demand + Supply = a Market, it’s a bit rich to call $42 million a ‘kick start’, as the Economy has not exactly come to a grinding halt. I would describe the package as more like a fiscal and monetary stimulus designed to keep the Economy ticking over, albeit on only three cylinders.
And its also an exaggeration to describe this package as ‘nation building’; ‘a jobs plan’ with an emphasis on Education and Housing for the less priveleged, maybe.
However, while the Health sector is neglected once again, ‘nation building’ it aint.