Well I’ll see your stimulus, and I’ll halve it!

Like the Opposition, I actually do believe that the Rudd Government’s blockbuster $42 billion stimulus package should be subjected to a reasonable degree of scrutiny. I don’t buy the government’s line that this stimulus package is so incredibly urgent that the Senate should not be permitted to conduct an inquiry, bargain or make contrary recommendations. On the other hand, given the economic climate, I do believe the Senate should be seeking to maximise both robustness and swiftness of deliberation when tackling the package – mutually opposing principles perhaps, but then we live in rather difficult times.

This is where I part company with Opposition Leader Malcolm Turnbull. I honestly believe that Turnbull’s rhetoric on the stimulus package is out of whack with the majority of his economic policy peers globally, and the general mood out there in the electorate. In most other scenarios, I would agree that tax cuts are a vastly more sensible means of passing excess government funds back to the electorate than one-off handouts. The scenario that the Rudd Government and the rest of the world faces today, however, is somewhat unique. The economy needs additional activity to be fostered now, not incrementally over the coming years. The results are in for Federal Labor’s December 2008 stimulus package, and they seem positive. The Coalition has painted itself into a corner now, with a series of ugly budget blowouts in the coming years the only possible saving grace for their position.

This leads us neatly to the other quirk in Turnbull’s rhetoric. By proposing that the government’s stimulus package be halved, Turnbull is gambling that the fear of the economy tanking as a result of government inaction is less than a fear that the deficit in the budget is going to get out of control and plague federal governments in the years to come. Some folks in the media and Liberal operatives are already trying to frame the current situation as the “deficit we had to have”. This is strangely enough true, although perhaps not in the way that some are trying to frame it. The abrupt reduction in projected tax receipts for the Federal Government as a result of the global financial crisis could not have been predicted in May last year, and even if the Coalition won at the polls in late 2007, it would find itself in the midst of a budget deficit today. This is a deficit that is not of Federal Labor’s making. It may be somewhat extended by their actions, but given their actions are quite closely tied with the prescriptions of the world’s economic orthodoxy, the Rudd Government has some defences in reserve if it needs them.

Politically speaking, this was not the right time for Turnbull to skimp. Unless the Opposition punches some serious holes in the Rudd Government’s package over the next week or so, it is not going to gain any political capital from this odd little diversion into one-downsmanship. I also don’t believe for a moment that the Coalition caucus unanimously backs Turnbull’s stance. They seem to just be biding their time and hoping that Turnbull is going to somehow get lucky by pursuing this approach.

Rudd’s reaffirmation of the Third Way?

There’s been quite a bit of buzz in the media over the weekend about a 7700 word essay on the challenges posed by the global financial crisis that the Prime Minister has produced for the next edition of The Monthly magazine. Apart from being quite a uniquely direct intellectual contribution to debate by the sitting leader of a nation, the essay looks set to revive hostilities along traditional ideological lines. In seeking to frame the global financial crisis as a signal that the neoliberal economic doctrine popular in recent years is fundamentally flawed, the Prime Minister is opening the door for Federal Labor to make a return to its social democratic roots. One could almost believe that Tony Blair’s nerdy antipodean brother is alive and well and living at Kirribilli House.

Those lovers of ideology over at The Australian have already produced not one but three opinion-based pieces on Rudd’s essay, together with a video analysis from Dennis Shanahan. Both Paul Kelly and Lenore Taylor see the essay as an opportunity for a new era of distinction between Australia’s major parties to begin, with Rudd’s Federal Labor visibly leaning a little towards socialism, and Turnbull’s Opposition staunchly defending the free market liberal agenda. There is more than a hint of the suggestion in both pieces of an unspoken truth; these guys really want Turnbull back in the game, and Rudd’s Labor tarred with the old-school, old Labor brush. Of course, they don’t really give away whether or not they have actually seen the complete essay.

As someone with a fairly inherent social democratic bent, I don’t really see a problem if the Prime Minister makes an attempt in the essay to use the fallout of the global financial crisis to push for a more balanced economic agenda. In an time when the leader of the free world is engaging in large-scale nationalisation programs and propping up insolvent giants, surely only the most deluded observer could believe that something was not a bit rotten in the state of the global economy’s regulatory regimes. At least for me, the need for greater balance in the nation’s economic affairs has been apparent for some time; it’s just plain common sense given the problems we know the world is facing today – an absurd patchwork of rich and poor, and a subliminal devaluation of the common good. To a large extent, Rudd may be seen as getting on the bus far too late, if he really does believe that it is only the global financial crisis that has engendered a need for significant systemic change. I will however reserve judgement on the essay until it is published in full.

The magazine will be available in newsagents this Wednesday. You can read the first 1500 words of the essay online here.

ELSEWHERE: Mark has more at Larvatus Prodeo, as does Jason Soon at Catallaxy.

Must be funny, in the rich man’s world

This afternoon I visited the local Westfield shopping uber-complex to finish up (okay, inch closer towards finishing up) the Christmas shopping. Even considering the season, and that there are now only sixteen shopping days until Christmas, it really did seem as though the place was just a little bit more nuts than usual.

Interestingly, the handouts started dropping into the accounts of punters today. While I am a little sceptical about the format and actual worth of the government’s stimulus package, its effects are in some respect already plain to be seen. Judging by some of the most popular Google terms that found their way to even this little blog over the last twenty-four hours, it does seem that there are a few excited people out there:

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I only hope that if there is a second round of stimulus measures next year, it is delivered by the Prime Minister rolling through towns in the back of an open-top car, throwing handfuls of banknotes out of bulging hessian sacks. For the moment at least, that is the image that sticks in mind for me in relation to the government’s response to the financial crisis.

Let’s just hope for the sake of the national economy and those who are really struggling that it goes someway towards delivering the goods. Of course, if the December 2008 consumer spending figures suggest otherwise (even allowing for the usual Xmas boost), the government might just have a bit to answer for in the new year.

Those terrible “d” words

There is no denying that the rhetoric that the Prime Minister has employed to describe the current global economic situation is strong, and the Rudd Government’s actions so far have been tailored accordingly. Over a month ago, when announcing his government’s $10 billion package of stimulus handouts, Rudd described the current crisis as “the greatest global financial crisis since the Great Depression”. This assertion is not entirely unjustified when one considers the extraordinary ramifications we have observed so far, but on the other hand, the Prime Minister was walking on shaky ground by linking the current financial crisis to the word “depression”. It’s something like rhetorical guilt by association. Depression? Did he really say depression? As in, the Great Depression? And, so on.

In short, Kevin Rudd’s personal approach to the economic situation as Prime Minister seems to revolve around straight talking, with a cautiously pessimistic bent. If things could get worse, then the Prime Minister seems to want to make it clear to everyone that they should be prepared for things getting worse. Rather than trying to create an oasis of blissfully ignorant confidence at the head of government – something the Howard Government probably would have done in the same position – the Rudd Government seems hellbent on highlighting the uncertainty that does exist. Nobody really knows just how events are going to play out. Just like other governments and indeed commentators, Federal Labor does not really know if the current crisis is going to take several months or several years to peter out.

It is in this sort of environment that the Prime Minister has elected to finally entertain that great Australian shibboleth for economic “incompetents” – the dreaded budget deficit. Samantha Maiden has the details in The Australian, and the full statement delivered by Rudd to parliament is here:

Kevin Rudd has conceded for the first time that Australia’s budget may have to go into “temporary deficit” if the global financial crisis worsens.

“If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that Australian revenues will reduce further,” Mr Rudd said.

“Under those circumstances, it would be responsible to draw further from the surplus and if necessary to use a temporary deficit to begin investing in future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.”

“In fact, failing to do so would irresponsible – and would sacrifice growth and jobs. But any such action would need to be consistent with the discipline of maintaining a surplus across the economic cycle.”

It is probably well past time for one of the most misguided economic conventions of the modern era to be buried. Anybody who owns a home or invests in property will be able to tell you that it often makes sense to borrow money in order to invest for the future. Anybody who runs a business can tell you that it sometimes make sense to borrow in order to grow the business, even if the current bottom line is not healthy enough to support such a step. The doctrine that suggests that budgets deficits are always “bad” effectively is also suggesting that investment for the future should be mercilessly limited, and that important projects too big to be funded by governments should be dumped.

As long as the Rudd Government takes care to ensure that any funds borrowed are spent wisely and on measures that are effectively certain to benefit the national economic situation, I personally see no problem with the government going into deficit. It would obviously amount to poor governance to consistently deliver budget deficits, but the odd one, if put to proper use, can definitely work to the greater benefit of the nation.

Should Federal Labor consider cutting GST?

In the current global economic environment, governments across the world are looking for ways to stimulate spending in their domestic economies. Consequently, the beleaguered British Government is set to temporarily cut the rate of their VAT (value-added tax) for a one to two year period, in the hope that it will stimulate spending in the immediate term. Toby Helm and Heather Stewart have the details that are at hand for the moment in The Guardian:

Alistair Darling will make a high-risk bid to lead Britain out of recession tomorrow, when he is expected to cut VAT and entice the British people to go on a pre-Christmas spending spree.

Last night, as Darling put the finishing touches to the most important financial statement of Labour’s 11 years in government, there was speculation that he might slash the rate to 15 per cent [from 17.5 per cent], a move that would cost the government about £12.5bn a year.

This is an interesting development because it raises a few questions about the Australian Labor Party’s stance on the local GST. Historically, of course, Labor opposed the introduction of the GST at the 1998 election and fought a second unsuccessful election campaign in 2001 on a policy of GST “rollback”. Now that the GST has been in place for practically a decade and is firmly part of the architecture of federal-state funding, it would appear unlikely that the Rudd Government would seek to manipulate it at this juncture. Cutting the rate of GST in Australia would have considerable implications for state funding, given that all revenue generated by the tax flows through to the state governments. In short, for the rate of GST to be reduced, one would have to think that the existing federal-state funding framework would need to in the least be padded by some non-GST contingency funding from the Federal Government – or perhaps reframed altogether.

The other part of the puzzle worth considering is whether lowering the rate of GST would realistically have any effect on consumer spending at all. Let’s say that the rate of GST was cut by the Federal Government tomorrow from 10% to 5% – an astronomical 50% cut. Consumers presumably would have more money in their pockets every week as a result of their reduced weekly spending – money that may or may not then be reinvested in more goods and services, stimulating the economy. Given present consumer confidence and the vast uncertainty that still exists with respect to the global economic situation, it is questionable as to whether cutting GST would actually result in a positive outcome, a fact that Peter Mandelson points out in the Guardian article with respect to the proposed British VAT cut.

In any case, it would appear that the Rudd Labor Government could not realistically afford a rate cut of anything like that magnitude without going into deficit. The revenue generated for the states from the GST in 2008-09 was projected at $45.5 billion, meaning effectively that funding such a 50% GST rate cut would cost in the ballpark of $22.75 billion; a figure already exceeding the now optimistic total budget surplus of $21.7 billion projected back in the May Budget. Without some credible evidence suggesting that cutting the rate of GST even by a small amount is definitely going to deliver results, it would be a highly risky endeavour for the government to pursue it.

Mister fast money schmicko no longer quite so schmicko

In a political sense, it is increasingly looking like the global financial crisis has been just what the doctor ordered for British Labour and in particular Prime Minister Gordon Brown. As The Guardian reports today, a Mori poll has Labour trailing the Tories by only three points now, an amazing seventeen point improvement on what polls were suggesting a few months back before the worst of the crisis hit. For someone like myself, who lived through an extended period whereby it seemed that David Cameron and the Tories were interminably ahead of the Prime Minister by ten points or more, it’s really all quite astonishing.

So why the shift? There is surely a multitude of reasons, but I am going to offer some observations about the comparative public images of Gordon Brown and David Cameron. Brown comes across in the media as a dour, boring, wonkish man. I dare say that a majority of Britons descend into a microsleep the very moment that he appears in front of them on the television, the very second that his voice starts droning across the airwaves in earshot. While the going was good economically, twelve months or so ago, it is probably fair to say that Brown was not really in tune with the entrepreneurial energy of the times. The British people wanted boldness; they wanted action. They were not adverse to a little risk taking by their government. This is of course where the poll success of David Cameron comes in; a young business type actually willing to embrace new age concerns like global warming. He represented a fresh change and a clean break from the past. Sure, he was probably a little wet behind the ears compared to his rival, but he promised to deliver the energy that the Prime Minister seemed to lack.

Now, the tables have turned. We have entered troubling economic times, when suddenly ordinary people are interested in what dour, boring wonks have to say. They are concerned for their future. They are worried about their employment prospects. They are no longer in the mood to take financial risks, or to take a punt on an unknown quantity like David Cameron. They want surety and certainty, and someone who has a lot of experience behind them and the intellectualism required to fortify the nation against the chaos of the global financial situation.

It would be an interesting exercise to plot the poll ratings of Gordon Brown against the FTSE over the last twelve months. And it will be interesting to see if Gordon Brown manages to surge to a lead in the polls over the next six months, on the back of his superior credentials with respect to the financial crisis that seems to currently have observers the world over in a bit of a tizz.

Talking the financial crisis up and down

There can be no denying that Prime Minister Kevin Rudd and Treasurer Wayne Swan, in particular, have brought a concerted air of solemnity to their communications regarding the global financial crisis. It has become almost cliched for our leaders and media commentators to assert that these are “tough times that we are living in”, or to compare the recent machinations in our financial markets to Black Monday, the oil shocks of the 1970’s, or even the mother of them all, the Great Depression. The national mood is a heady brew of overstated pessimism and introspection, and few have the confidence to predict exactly how events will unfold in the future.

The importance of confidence for consumers and the world’s remarkably flaky financial markets can’t really be overestimated at this stage. This creates a bit of a conundrum for government; on the one hand, the situation should probably be talked up, in order to send positive signals out there to those willing to listen. On the other hand, the government needs to keep its mood in touch with that of the Australian people. The last thing the Rudd Government wants to do is engage in rank triumphalism over Australia’s position in relation to the financial crisis when a lot of people out there are hurting as a result of it.

It would seem that the Liberal Party is happy to send positive signals with respect to the financial crisis, and to wear on its sleeve any criticisms arising from it being out of touch (some would suggest this is its natural disposition). Shadow Treasurer Julie Bishop appeared on Channel Nine this morning suggesting that Rudd needs to be more positive in relation to the crisis, offering this hyperbolic vignette to support her case:

Ms Bishop said shopkeepers in an Adelaide shopping centre had sent her a clear message.

“A number of shopkeepers … said to me that every time the Prime Minister goes on the nightly news and says ‘it’s going to be tough and ugly and hard’, they know that sales will be flat the next day.”

Former Prime Minister John Howard sent the Rudd Government a similar message on Fox News yesterday, urging the government to steer clear of comparisons of today’s crisis with the Great Depression. He is not without a point, but clearly the line upon which the government needs to walk here is fraught. Federal Labor is getting hit by the Opposition and some punters for talking the crisis up. If it talks the crisis down while the problems related with the crisis remain, it will also get hit by Opposition and the punters.

Rudd and Swan, knowing that this truly is a global financial crisis and that for the most part it is beyond Australia’s control, are erring to the negative side at the moment. Although we could perhaps do without some of the “Great Depression” hyperbole, I am not sure this is necessarily a bad thing given the reality of the situation that Australia faces. When the United States sneezes, we need to do what we can and hope for the best, because we simply don’t have the economic equivalent of an influenza vaccine on hand.

A great big blob of ego speaks

That’s all I could see when in the middle of A Current Affair this evening, the head of Malcolm Turnbull appeared suddenly to deliver this somewhat nebulous message to the nation. It’s fascinating that Turnbull seems to already think himself the Prime Minister elect after less than a month in the job; as well as the right person to be lecturing the nation on the causes of the financial crisis the world finds itself in. Of course, true to form, he could not resist the opportunity to have a half-hearted jab at the government during his address:

Regrettably, Mr Rudd’s Government missed the warning signs at the beginning of the year and talked up inflation, and consequently interest rates, at precisely the wrong time.

Eh? Regrettably, it seems the Turnbull Opposition didn’t really have anything to say to the nation in this instance that necessitated a public address, apart perhaps from satisfying the Opposition Leader’s ego. Rudd’s address to the nation explained the stimulus package his government was introducing, and neglected to make any petty digs at his political opponents. Nor did the Prime Minister take the opportunity during his address to attack the Liberal Party for the inflationary snake’s nest it left behind when it left office last year. That’s called statesmanship, see. Someone should inform the Member for Wentworth that getting your mug on television in primetime does not in itself constitute statesmanship.

The Turnbull Opposition have already agreed to support the government’s stimulus package without amendment or suggesting any alternative measures. In other words, as is apparent if one reads the transcript of Turnbull’s address, this stance doesn’t really leave much for the Opposition to say to the nation. This leaves me thinking… has there ever been a televised address to the nation by an Australian politician with less substance or purpose than this one from Malcolm Bligh Turnbull?

The Rudd Government’s bribe program… I mean stimulus package

I must admit to having some mixed feelings about the Rudd Labor Government’s $10.4 billion stimulus package, announced today. On the one hand, there is certainly quite a bit to like about the package from a Labor point of view. It specifically targets those who are likely to be hardest hit during the trying economic times we find us in; namely low income earners, pensioners, and people trying in vain to buy their first home. It is courageous and decisive, and in effect has forged a bipartisan approach to the financial crisis. Politically speaking, it will no doubt be a big winner, particularly with Christmas fast approaching.

I also have some concerns about the package. Firstly, it must be noted that the stimulus package is being delivered for the most part in the form of lump sum payments to the electorate. In the past I have been highly critical of the Howard Government when it has delivered “taxation relief” through the bundling out of ad hoc lump sum payments, and thus it is only fair for me to call Federal Labor out accordingly on this occasion. Lump sum payments to targeted interest groups raise some serious questions about political expediency, and also whether or not the government is actively encouraging the electorate to spend the stimulus payments frivolously by delivering them in such a throwaway form. For a lot of people, handouts like these from the government feel like a free, one-off bonus payment, that it is okay to completely splurge away. These sorts of payments do not feel like “earned money” to such people. They feel like obligation free gifts, and effectively serve to distort the normal consumption cycle for taxpayers.

I suppose one rebuttal to this line of argument would note that the world is experiencing a financial crisis right now, and that therefore a program of lump sum payments now is justified. If the stimulus package was spread out as a form of weekly or fortnightly additional allowance payments to pensioners and low income earners, it would likely not produce the desired effect, which is to stimulate the economy now. This rebuttal leads us to a second possible criticism of the stimulus package; is it really necessary now? The Reserve Bank has just cut the cash rate by one percent. The stock market has been a bit up and down over the past couple of weeks, but there are signs just over the last couple of days that the situation is stabilising. Are we really in such a dire situation at the moment that blowing half the budget surplus on a series of handouts is justifiable? I can’t say I am too sure either way, but in the very least, it is questionable.

The third potential negative point that I think is worth considering with the stimulus package relates to our old friend, interest rates. It is fascinating to me how quickly the nation has apparently moved from a mode of economic operation where the government is actively trying to reduce inflation, to one where the government is frantically trying to stimulate growth through arguably inflationary policy measures. It is a point that has been alluded to by Opposition Leader Malcolm Turnbull, who seems to want to have a bob each way by pledging his support for the package but foreshadowing possible repercussions for inflation:

Opposition Leader Malcolm Turnbull backed the strategy and said it would help cash-strapped pensioners but noted it was fiscal concerns, not compassion, that had prompted the government to act.

He also questioned whether existing homeowners might end up bearing the brunt of the bonus for low-income Australians.

“We trust that the government has taken into account advice from Treasury and considered the impact that this stimulus may have on the Reserve Bank’s ability to continue reducing interest rates,” Mr Turnbull said.

So overall, it’s great that these payments look like they are going to go to the right people (for a change!), but it is almost impossible to deny that these lump sum payments have been inspired by a prominent chapter in the Howard/Costello book of economic management. Not to mention a prominent chapter in the Howard/Costello book of election-winning pork barrelling measures. That aspect of this stimulus package, even if it is somewhat unintentional, absolutely galls me.

Paul Krugman wins Nobel Prize

It has been announced this evening that Economics Professor and New York Times journalist (but is that the right order?) Paul Krugman has won the Nobel Prize in Economics. There is some good background information on Krugman and the specific aspects of his work that won the prize at the Nobel Foundation site here.

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The Nobel Museum in Stockholm


Of particular interest is this succinct scientific background paper [PDF], which gives a great overview of Krugman’s contributions to trade theory for all of us lay-economists. The introductory paragraphs excerpted below paint a good high-level picture of trade theory prior to the contributions of Krugman and his likeminded colleagues in the field: 

As of the mid-1970s, trade theory was based on the notion of comparative advantage. Countries were assumed to trade with each other because of differences in some respect – either in terms of technology, as assumed by David Ricardo in the early 19th century, or in terms of factor endowments, according to the Heckscher-Ohlin theory developed in the 1920s. The latter was exposited by Bertil Ohlin in his 1933 monograph Interregional and International Trade; Ohlin was awarded the 1977 Economics Prize for his contributions to trade theory.

These theories provided good explanations of the trade patterns in the first half of the 20th century. But as many researchers began to observe, comparative advantage seemed less relevant in the modern world. Today, most trade takes place between countries with similar technologies and similar factor proportions; quite similar goods are often both exported and imported by the same country. At least among the richer countries, intra-industry trade – whereby, for instance, a country both exports and imports textiles – came to dominate relative to inter-industry trade – whereby, for instance, a country exports textiles and imports agricultural products.

I recommend having a full read of the PDF – interesting stuff. Lord knows in today’s sport and entertainment-obsessed world, we do not honour the people who achieve great academic success nearly enough.

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Stockholm by night.