“We are all Keynesians now.” It’s a phrase that has been attributed to Richard Nixon – though, as with all Nixon stories, you’d be well advised to check the tapes before repeating it under oath.
The Guardian resurrected it this week in reference to Boris Johnson’s coronavirus stimulus package. Of course, they managed to find a way to be opposed to the government spending a heap of cash (a recommendation made so often in their pages that it might as well be on their masthead).
Here in Australia, even the supposedly economically rational Liberals are now all aboard the stimulus train. The government has committed to a stimulus package, with Treasury estimating the cost at $17.6 billion.
There will be cash-flow subsidies, but only to small and medium businesses (we aren’t yet scared enough to support big business), and wage subsidies for apprentices. The instant asset write-off gets expanded. Cash is likely to be heading to pensioners and other welfare recipients.
Other than the asset write-off – $700 million across the forward estimates – and possibly the accelerated depreciation provisions – another $3.2 billion – the remainder of the $17 billion package are short-term “holding” measures aimed at propping up aggregate demand. In other words, their sole purpose is to try and maintain the status quo in the face of uncertainty.
There is no longer-term thinking involved in this.
Supporters of stimulus may argue the short-term approach is precisely the point: this is about maintaining demand in the economy until it recovers under its own steam.
But there are three problems with this. First, we have not even really begun to feel the effects of the virus across the broader economy. The tourism sector and other China export-focused sectors are feeling a pinch but nothing resembling the complete shutdown of businesses (that has happened in Italy this week) is occurring in Australia.
We simply don’t know how bad it might get, or for how long. This continuing hit on confidence will sap the effectiveness of any stimulus package aimed at maintaining the status quo. Maybe this stimulus will work, and maybe it is enough, but it’s functionally a $17 billion stab in the dark at this stage. How many $17 billion stabs can we afford?
Second, it minimises the role the RBA should be playing in managing demand in the economy. Fiscal stimulus is no substitute for properly executed monetary policy. The government should be managing the public health aspects of this, as well as providing stability to those in need through welfare payments.
The RBA should be aggressively pursuing conventional and – as RBA deputy governor Guy Debelle flagged this week – even unconventional monetary policy options to keep the economy on track. And unlike fiscal stimulus, monetary policy is far easier to unwind when economic conditions improve.
Finally, if the government is going to spend money in preparation for an economic downturn, it should do so in a way that will also generate longer-term benefits in case the stimulus effect doesn’t work.
Finally, if the government is going to spend money in preparation for an economic downturn, it should do so in a way that will also generate longer-term benefits in case the stimulus effect doesn’t work. Bringing forward already legislated tax cuts would be one way of doing this, which may have a short-term stimulatory effect but also improve productivity longer term.
And importantly, the opposite is also true. Increases in welfare payments, not to mention the creation of new welfare entitlements – such as the Greens-urged government-funded sick pay for casual workers – introduced under the umbrella of short-term stimulus, will be a permanent drain on the taxpayers’ wallet, and hence productivity.
Part of the problem is the belief that a small plus or minus in the quarterly GDP figures is the thing that makes a difference in the real economy. If the figure comes in at +0.1 per cent everything is fine, while -0.1 per cent is a catastrophe.
The government will get the blame for the latter, while it seeks to claim sole credit for the former (as repeated claims that Rudd and Swan ‘saved’ Australia from the GFC show).
But the important thing is not the accounting identity that makes up GDP, where any increase in government expenditure directly translates to an increase in GDP. Its what’s happening in the real economy.
If we have $17 billion (or $70 billion for that matter) to spend on the economic response to coronavirus, we would be better off in the longer term focusing on creating the conditions that would lead to a stronger recovery, rather than pinning our hopes and money on short-term stimulus solely to avoid a technical recession.
It is also worth noting that any money spent on the public health response is likely to be equally as effective as any other forms of fiscal stimulus.
Opposition to fiscal stimulus is not simply about holding on to the surplus at all costs – although that may have been a significant motivating factor for the government.
Indeed, it’s not hard to imagine that once the treasurer was convinced the surplus was no longer attainable, the siren’s call of being seen to do something was irresistible.
It is not clear this government appreciates the difficulties it will face as a result of this decision. Sure, the usual assurances are being spread around that the fiscal taps will be turned off once the crisis is over.
But economic history tells us that is far easier said than done.
The 2020 budget was supposed to be the one that finally turned off the taps Rudd and Swan opened in 2009. Swan tried and failed to deliver a surplus in 2012, famously announcing four years of surpluses that turned rapidly into deficits.
Morrison and Frydenberg, too, announced we were back in the black. Instead, we are headed in the other direction once again.
The phrase that comes to mind here is “those who fail to learn from history are condemned to repeat it”. That phrase has been attributed to Edmund Burke and Churchill (among others), both of whom we would be better to listen to in a crisis than tricky Dick Nixon.