My post More economics 101 - the economics of Malcolm Turnbull drew a thoughtful response from Andrew Laming, the Liberal member for Bowman. I have been remiss in not bringing this up before onto the main blog - it gets lost in the comment section.
The latest Rudd stimulus package has passed. However, Andrew's arguments are still relevant to the longer term.
Just a note on your excellent analysis.
This is not a debate between a small Coalition and a large Government stimulus package. It is not about supporting a larger intervention if you are bearish about Australia and smaller if you are optimistic.
This debate is about whether $42 billion spend AS PROPOSED is appropriate in quality and quantity.
Once committed, the $42 billion becomes opportunity cost. That's why Mr Turnbulls's proposed scrutiny of the package in the Senate is so vital.
This debate is not about whether the world will recover from the recession. Of course it will. The real argument is whether the stimuli, as proposed represent cost-effective recession aversion.
Highest level analysis asks - how and when is each stimulus dollar of GDP deployed to pre-empt economic threats and have maximum impact maintaining jobs, and in turn, Australia's GDP growth.
Judge the package not on the social infrastructure it delivers or that people are "paying down home loans and that is no bad thing." This is akin to treating a skin cancer patient with a weight loss program.
We all want nation-building, but in a recession, a specific set of measures are prescribed to maintain economic activity (reduce the length and depth of recession), and to position the economy to achieve the most sustainable growth recovery (so that we are better placed than our competitor economies when we all enter the post-recession phase.
Readers will know of those elements: PREVENTION: high-multiplier expenditure, targeting the most vulnerable domestic sectors to job losses, and ADAPTION: where losses occur, reducing frictional unemployment through rapid retraining and redeployment into economic infrastructure - which reduces costs to business, builds confidence and prevents further job losses.
Finally, with the current fiscal fixation, don’t underestimate the ultimate power of monetary policy. Australia's comparatively higher interest rates allow significant room for stimulus which is not available to other economies, which will restore confidence and entrepreneurialism without sending Australia into generational debt.
As an aside...
Your excellent graph was part of my analysis of ABS retail sales for December. It is irrelevant that December was $700 million more than November. To understand the stimulus, four factors enter the calculations;
1. Temporal factors. Treasury now says they only expected 10% of the stimulus to enter the economy in December (they didnt say that back in December). Most (they hope will turn up in Q1 and Q2 this year).
2.Annual cycles: because every year, Australians spend remarkably close to 11.1% of their annual retail spend in December (as they did in 08, despite stimulus),
3. Year by year comparison: the degree to which December 08 increased from the 4 Decembers before it, relative to the annual growths in each of those years.
4. Monthly trends (your graph), because even with all the pessimism post-Lehmans, it shows that retail sales held up July-November. Too many people grasp at November's slip and infer trends. Remember the stimulus came before we even had the ABS November 08 figures.
My case is that Dec 2008 WAS ALWAYS GOING TO BE SOLID. That position is supported by all four points above, together with the confidence of falling interest rates, particularly cheap fuel and the Christmas effect (where people spend irrationally at Christmas (even at tough times), then compensate, with a rational slump in the first three months of the following year(see Xmas 2007).
It is difficult to argue that the December stimulus saved/supported/created any jobs, because department stores and the household sector (big winners from the stimulus), can and did further discount to maintain sales volumes and retain staff.
In the end, massive discounting plus the stimulus - achieved sales volumes of $300 - 850 million above expectation.
I argue that such a result neither justifies the stimulus, nor assisted much in averting what lies ahead for Australia in 2009.
ps: It was the tax cuts announced in May 2007 which "introduced a structural element into the deficit." Bringing those cuts forward is merely a one-off tax expenditure.
In posting Andrew's comment in this way, I am treating it as a guest post. For that reason, I am not going to comment on it at this point, but leave it stand as a contribution to discussion.
I left my own post hanging on the issue of crowding out. I will discuss this further in my next post.