Tuesday, October 14, 2008

Rudd's fiscal stimulus

Kevin Rudd's $10 billion fiscal expansion package makes some degree of sense as a preemptive way of offsetting the impending effects of a (likely) impending international recession on the Australian economy. This move will complement the recent interest rate cut and the dramatic decline of the Australian dollar as a means of stimulating the economy.

Under flexible exchange rates the main tool for stabilising the economy is monetary policy not fiscal policy.  Part of the effect of a fiscal expansion will be to drive up local interest rates which will to some extent undo the welcome monetary relaxation.

The major effect of fiscal policy, in general, is to determine the allocation of resources across the public and private sectors of the economy. But the current expansion is mainly to increase spending by pensioners and families with children which will primarily drive demand which is probably welcome.  The doubling of the first home buyer's grant will mainly drive up real estate prices and have a negligble effect benefitting new home buyers.

The search by Labor Party yokels for viable infrastructure projects is deeply troubling. It is partly a search by disgruntled socialists for an alternative to to private enterprise. It is also partly a search by third-rate Labor politicians for opportunities to grand-stand. Governments around Australia are retreating from a past commitment towards thinking rationally about public investments. The $1 billion the Victorian Government is wasting on the Northern Dog - the central Victorian attempt to resolve water resource problems by promoting dubious 'water efficiency improvements' - is an early instance of fiscal stupidity.  My fear is that many more stupid projects are in the pipeline.

3 comments:

sir henry casingbroke said...

"It is partly a search by disgruntled socialists for an alternative to to private enterprise. It is also partly a search by third-rate Labor politicians for opportunities to grand-stand (sic)."

I am not sure whether your blog is a serious discussion of economic issues, or an attempt to play light relief sidekick in some party political vaudeville revue.

Let's throw the switch back to reason H. Monetary policy will fail unless the government has some measure of control over the banks' behaviour. Cajoling them (Rudd/Swan) or trying to browbeat them or shame them (Turnbull) - they have no shame anyway - won't work. Taking equity along with board seats would surely help. It could also help in getting them to help with inquiries about their exposure to RMVs - but about that later.

I would say that the current ALP strategy is panic disguised as forthright action, it is not an attempt to install socialism by sleeper socialists lurking in the ALP. I mean look at the people who have been making economic policy for the Labor side - Costa, Latham, Tanner - hardly your bunch of stealthy socialists, are they . Who are the people you are talking about? Name them.

One major issue is that the banks are not saying how big their exposure is to the reinsurance of the cdos, the so-called risk management vehicles that banks bought up in their rush to gorge themselves on ever bigger profit.

The problems is that big banks around the world including ours snapped these instruments as they were such huge earners. But the problems were that that the CDOs' credit protection is some 10-15 times (maybe even 20 times, nobody knows for sure) the actual face value of the triple-B-rated subprime bonds they sought to protect.

No wonder Kevin and his fellow commies on the treasury benches feel their sphincters tightening.

hc said...

Fair go Jack I support the package - the handout parts anyway - but the clamor by the left to spend more on infrastructure at a time when the economy is still close to full capacity is crazy. The stupid Food Bowl Modernisation program in Victoria will cost $1 billion and looks like being a total waste of money. My fear is that there will be a steady stream of such high cost projects.

You live in NSW. Do you trust Labor on public infrastructure provision?

Sir henry casingbroke said...

That's a reverse Dorothy Dixer and obviously a leading question in view of NSW labor government's wholesale destruction of infrastructure generally and public utiltities in particular. But as well you know, this has nothing to do with "socialism" nor with Labor anything but with bozos like Costa applying to NSW what he learned in his US Gordon Gekko university study tour.

"As Costa sits down at the computer to show me some Milton Friedman videos he has discovered on YouTube, I ask if the elderly man whose portrait stares down at him from a shelf is his grandfather. He gleefully informs me it is the Austrian economist F. A. Hayek." (Grovellingly laudatory article in Der Australian by Imre Saluszinsky, the English Lit academic turned lunar right political commentator for the Dirty Digger). He also has portraits of Ronald Reagan, reports Imre. So there you go H.