Exposing the Fundamental Flaw in Rudd’s Stimulus Logic.

I’ve spent the latter part of today trying to get my head around the complete spending spree that Rudd is proposing. And I have uncovered a rather shocking fact: even if you accept the (discredited) Keynesian stimulatory economics on which it is based, it will have NO immediate impact whatsoever. Even judging the bill on the grounds Kevin Rudd sets out, it fails miserably. His press releases – where he claims this is an urgent cash injection to stimulate the economy – are lies. This is something neither the media nor the opposition have picked up on, yet it strikes at – and destroys – the core of Rudd’s promise.

Allow me to elucidate.

Rudd argues that we need to spend all this money now, to revitalize the economy. In doing so he proposes a combination of “tax bonus” checks and spending.

For the purposes of this post I’ll ignore the tax bonuses (which in many instances are simply welfare spending – not only do many of them go to people with no income, but welfare eligibility requirements are substantially increased) and merely comment that a Bush Tax Credit of $600USD was tried earlier and had no effect. Rather I’ll focus on spending, which, as the second reading speeches say, is the core of this stimulus. Remember once again the urgency in which the Government urged it had to be passed.

For the 2008-2009 financial year the government is only proposing an additional 1.8 billion dollars. The stimulatory impact of didilly-squat.The remaining 30 billion or so on infrastructure promised? Much of it will not even begin until 2011-2012. HOW IS THIS IMMEDIATE ACTION???

Now let us look at how this 1.8 billion will be spent:

Education: $987 million for “schools and other education to provide high quality teaching and learning to all Australian children, creating good foundation skills and positive life opportunities“. Worthy or not, this is not in any way stimulatory – and isn’t the infrastructure spending promised.

Australian Tax Office: $50 million. The ATO is getting $50 million. STIMULUS??!?!?!? Get real.

Housing: $200 million. Mainly I believe to repair government owned housing. No new housing will be built. Stimulatory effect of drop in the ocean.

Department of the Environment: $39 million. Why? to ensure “The environment, especially those aspects that are matters of national environmental significance, is protected and conserved” Laudable perhaps, but certainly not stimulatory.

Department of Infrastructure, Transport, Regional Development and Local Government: 480 million. And this is brilliant. Look how it’s broken down for this financial year: 230 million in “assisting the Government to provide, evaluate, plan and invest infrastructure across industry sectors” and 250 million in “assisting regions and local government to develop and manage their futures” WTF??? The stimulus for the most part seems to go to paying consultants to develop vision plans!!!

The government claims that protecting the environment, increasing the ATO and preparing for instrafstructure will lead to GDP growth. Bullshit. This is no more than a long-term left-wing grab-bag of goodies for the future that will have no impact on the economy again. Kevin Rudd is using the current economic crisis as an excuse to scare people into voting for legislation that has no link to the economic crisis at all, hoping they won’t read it or would be fooled. Why else would he try to suppress parliamentary debate. This – again – is a joke.

There are numerous other problems with this package. I note for instance that it doesn’t include interest payments on the s**tload of debt labor will get us into. But the fact remains that EVEN IF JUDGED ON ITS OWN CRITERIA, THIS PACKAGE EPICALLY FAILS.

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3 Responses to “Exposing the Fundamental Flaw in Rudd’s Stimulus Logic.”

  1. Trout Says:

    A few points:

    1. Although many traditional Keynesian ideals have been discredited, expansionary fiscal policy as a response to an economic downturn is hardly controversial. In general, few economists would argue otherwise. Also, New Keynesian’s arguably (and quite sadly) dominate the study of economics today.

    2. Although a fair bit of the spending will not occur until 2010-2011, most of the spending will occur in 2009-2010, which is likely when we will really need it. Anyways, all evidence suggests that this economic downturn will last for sometime. Spreading the spending over such a period of time is actually, in my opinion, a good move. We don’t necessarily need such a large injection of funds at this very moment, with estimates of the inflation rate at around 3.7%, and the unemployment rate at approx. 4.4%. It’s when inflation starts to fall, and unemployment starts to rise (which will inevitably happen over the next two years) that we will need the injection of funds.

    3. The wording given above with regards to how the spending will occur is extremely vague, and given I should be doing my thesis and don’t have time to search for specific details, it’s hard to comment on the exact effect of such spending. Nonetheless, I disagree with your assertion that such spending (for example, on education) will not be stimulatory, (i.e. “Worthy or not, this is not in any way stimulatory”). If new school buildings are built, the construction/building industry is stimulated. If teachers are hired that otherwise would not be employed, then additions are made to employment and aggregate demand in the economy. Basically, it would be hard to spend such money and not stimulate the economy in some way. I’m by no means arguing that the spending decisions are perfect, but they will help the economy to some extent.

    Basically, I don’t entirely agree with how the money is being spent, but to make statements such as “THIS PACKAGE EPICALLY FAILS”, and “This is no more than a long-term left-wing grab-bag of goodies” is going a bit overboard. Rudd is basically following the ‘textbook’ strategy for dealing with such a situation. He’s got some of the specific details wrong (in my opinion), but to argue anything more then is akin to arguing against mainstream economic thought, and basically, is bad policy.

  2. Tim Says:

    I’m glad to see the UQLC continues it’s fine tradition of supporting economic freedom.

    In any event, I agree the wording is vague, and this is incredibly problematic, but new schools aren’t actually budgeted for this year (or so my calls to various parliamentary offices told me). They havn’t started the appropriations for that – it’s coming in the future.

    I agree that “we don’t necessarily need such a large injection of funds at this very moment” – the problem is that that isn’t what rudd is aruing. Read his comments. He is arguing that the justification for passing this is that it needs to happen now.

    As for your “few economists would argue otherwise”, with all due respect that isn’t true : http://www.cato.org/special/stimulus09/cato_stimulus.pdf

  3. motion29 Says:

    Quite apart from the exposed flaws in this new debt binge we’re potentially embarked upon, Is more about bribing the targeted 12million Australians for the next election.

    That and fattening up the finances for infrastructure projects to dole out to the troops to keep their vote up.

    Electoral viagra is probably the best description. It is true to say that we oppose these measures on principal but the politics of it are working against us.

    Turnbull better be ready for a Leadership challenge towards the end of the year if his numbers aren’t turned around.

    There’s only one man I’d want to reverse the $200 billion debt ceiling measures and the existing spending they’re embarked upon.

    The Prince of Malvern!

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