Time for an update on the perpetual motion machine of Keynesian economics.
We’ll start with the good news. The Treasury Department commissioned a study on the efficacy of the so-called stimulus spending that took place at the end of last decade. As discussed in this news report, the results were negative.
…a scathing new Treasury-commissioned report…argues the cash splash actually weakened the economy and damaged local industry… The report, …says the…fiscal stimulus was “unnecessarily large” and “misconceived because it emphasised transfers, unproductive expenditure…rather than tax relief and/or supply side reform”.
The bad news, at least from an American perspective, is that it was this story isn’t about the United States. It’s a story from an Australian newspaper about a study by an Australian professor about the Keynesian spending binge in Australia that was enacted back in 2008 and 2009.
I actually gave my assessment of the plan back in 2010, and I even provided my highly sophisticated analysis at no charge.
The Treasury-commissioned report, by contrast, presumably wasn’t free. The taxpayers of Australia probably coughed up tens of thousands of dollars for the study.
But this is a rare case where they may benefit, at least if policy makers read the findings and draw the appropriate conclusions.
Here are some of the highlights that caught my eye, starting with a description of what the Australian government actually did.
The GFC fiscal stimulus involved a mix of new public expenditure on school buildings, social housing, home insulation, limited tax breaks for business, and income transfers to select groups. Stimulus packages were announced and implemented in the December 2008, March 2009 quarters and ran into subsequent quarters.
For what it’s worth, there are strong parallels between what happened in the U.S. and Australia.v
Both nations had modest-sized Keynesian packages in 2008, followed by larger plans in 2009. The total American “stimulus” was larger because of a larger population and larger economy, of course, and the political situation was also different since it was one government that did the two plans in Australia compared to two governments (Bush in 2008 and Obama in 2009) imposing Keynesianism in the United States.
Here’s a table from the report, showing how the money was (mis)spent in Australia.
Now let’s look at the economic impact. We know Keynesianism didn’t work very well in the United States.
And the report suggests it didn’t work any better in Australia.
…fiscal stimulus induced foreign investors to take up newly issued relatively high yielding government bonds whose AAA credit rating further enhanced their appeal. This contributed to exchange rate appreciation and a subsequent competitiveness… Worsened competitiveness in turn reduced the viability of substantial parts of manufacturing, including the motor vehicle sector. …Government spending continued to rise as a proportion of GDP… This put upward pressure on interest rates… this worsened industry competitiveness contributed to major job losses, not gains, in manufacturing and tourism. …In sum, fiscal stimulus was not primarily responsible for saving the Australian economy… Fiscal stimulus later weakened the economy.
Though there was one area where the Keynesian policies had a significant impact.
Australia’s public debt growth post GFC ranks amongst the highest in the G20. Ongoing budget deficits and rising public debt have contributed to economic weakness in numerous ways. …Interest paid by the federal government on its outstanding debt was under $4 billion before the GFC yet could reach $20 billion, or one per cent of GDP, by the end of the decade.
We got a similar result in America. Lots more red ink.
Except our debt started higher and grew by more, so we face a more difficult future (especially since Australia is much less threatened by demographics thanks to a system of private retirement savings).
The study also makes a very good point about the different types of austerity.
…a distinction can be made between “good” and “bad” fiscal consolidation in terms of its macroeconomic impact. Good fiscal repair involves cutting unproductive government spending, including program overlap between different tiers of government. On the contrary, bad fiscal repair involves cutting productive infrastructure spending, or raising taxes that distort incentives to save and invest.
Incidentally, the report noted that the Kiwis implemented a “good” set of policies.
…in New Zealand…marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered.
Yet another reason to like New Zealand.
Let’s close by comparing the burden of government spending in the United States and Australia. Using the OECD’s dataset, you see that the Aussies are actually slightly better than the United States.
By the way, it looks like America had a bigger relative spending increase at the end of last decade, but keep in mind that these numbers are relative to economic output. And since Australia only had a minor downturn while the US suffered a somewhat serious recession, that makes the American numbers appear more volatile even if spending is rising at the same nominal rate.
P.S. The U.S. numbers improved significantly between 2009 and 2014 because of a de facto spending freeze. If we did the same thing again today, the budget would be balanced in 2021.
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” I can only imagine what his otheranlayes are like”
Yes I only read this and given Mr Mitchell accepted this mediocre paper by Tony Makin ( one example he said the stimulus boosted the exchange rate, it actually fell!) I can only imagine what his otheranlayes are like. you should pay attention to what people say not what you say!
“I have nor read Mr Mitchells’s analyses”
Hahaha. I can see this has been a complete waste of time. Good day.
Mate that has nothing to do with with the issue except the raising of taxes was essential to Greece’s program to help via the Troika.The Troika said an economic program right out of the classical economics manual would bring recovery in Greece. It did the exact opposite.
Classical economics simply says you must have a balanced budget like Keynesian economics it is agnostic on the size of government
I have nor read Mr Mitchells’s analyses nor have I commented on them. All I have said is that both Estonia and Europe are prime examples of showing how classical economics does not work.
If it did work then no-one would have heard of Adolph Hitler and Bruning would be the great leader who got Germany out of the Great Depression. He made it worse
Well….as I’ve said before: the fact that you’re using the struggles of Greece- a country where government spending is over 50% of GDP, added large tax hikes to their already high tax levels, and has the lowest Ease of Doing Business ranking of any OECD high income country- as a refutation of Dan Mitchell’s economic views is just bizarre.
Also the fact that you apparently consider those policies to be the definition of classical economics.
Or the fact that I’ve twice asked you what you disagreed with regarding his analysis of Estonia and the so-called “austerity” in Europe, and you completely ignored it both times.
It’s been three days now. This is getting tiring.
what is odd a bout it Classical economics demands a balanced budget no matter what condition the economy is in.
Which points am I avoiding?
Again, you seem to have an odd definition of “classical economics.” You also seem to be going out of your way to avoid responding to any point I make.
Zack, the evidence is in if you adopt contractionary policies when the economy is contracting then the economy gets worse. Hells bells even Hayek realised his advice to Bruning was wrong!
This gets to why classical economics is so bad. It is contractionary when the economy is contracting and expansionary when the economy is expanding. i.e. it is pro-cyclical not counter-cyclical.
Andrew,
You are so right. The rationale for lefties is always “we just didn’t do enough.” Anyone who lives long enough and pays attention will see variations of this repeated over and over.
Maybe lefties view it as a no-lose strategy. If a government action works, hooray, it works. If it fails, it’s because we didn’t do enough of it. But there is never an admission that government action itself tends toward failure. It’s funny and sad.
In the UK the Parliament of 2010-2015 spent the most per head of any 5 year Parliament in its history. That’s using inflation-adjusted real numbers.
Yet there seems to be a consensus among lefties that the amount spent was insufficient.
You could not make it up. At least the Australian Treasury has acknowledged that the quality of spending is more important than the quantity. And a recent OECD analysis has found that subsidies and pensions have negative multipliers ( thanks for finding that one Dan ). These things need wider publicity.
If high and increasing taxes, government spending 50% of GDP, and ranking 61st in the World Bank’s Ease of Doing Business (the worst of any OECD high income country) are your definition of classical economics, then sure, I guess Greece is an example of its failure.
As for Estonia and European “austerity” in general, as I said, you can use the search bar to see Mitchell’s previous posts on the subject. Feel free to let me know how you disagree with his analysis.
of course it is. They were promised the economy would improve if they implemented the measures. They suffered a depression! So did Estonia. If he thinks they it successful then he is living in lah lah land.
Greece as an example of the failure of “classical economics”? Thats…interesting. You may want to use the search bar to see Dan Mitchell’s thoughts on Greece, Estonia, and European “austerity.”
adopting austerity when you shouldn’t. Trying to have a balanced budget when the economy id falling is madness as Keynes said way back in 1936 Try Estonia or Ireland. Greece is going well and of course Europe
It is somewhat ironic Keynesian is far more tight in terms of fiscal policy when the economy is good than Classical economics which is quite loose!
nottrampis, how do you define “classical economics” and which countries are you referring to?
so Tony Makin’s embarrassing analysis is okay with you.
Why did China;’s stimulus work yet Australia’s somehow did not. why was there two clear up wards boosts to consumption following the stimulus yet none before or after?
How about another way of viewing it. How come every nation that adopted classical economics after the GFC had a depression ( a reduction of 10% in output ) . Europe did really well adopting it as well!
Or even another way the IMF found fiscal multipliers increased during zero bound moments.
So many similarities to the 1950s unreconstructed communists! How ironic
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