When Toyota announced it was going to exit domestic manufacturing in three years time the Victorian premier, Denis Napthine, immediately jumped onto a plane to Canberra to appeal for stimulus spending. As if we didn’t already know how badly that kind of government spending works. As if unemployed auto-industry workers would get jobs building roads.
That sort of logic applies when all you’re interested in is the macro big picture, as opposed to what is actually happening on the ground. Let’s have economic activity – any economic activity as long as politicians can stand around in fluoro vests looking important. Well, frankly, that is just not good enough. Large scale government spending to ‘stimulate’ the economy makes the assumption that all economic activity is homogenous – whereas we know that both capital and labour tends to be highly heterogenous. So an increase in public infrastructure spending is going to be a highly imperfect substitute for a decline in manufacturing activity.
The other consideration is that the auto-industry was highly subsidised – the long-term benefit of the collapse of the industry is that there will be fewer distortions in the economy. So it hardly makes sense to increase distortions elsewhere through increased government spending. If there are good arguments for infrastructure spending then lets hear them.
The notion of shovel ready projects was a terrible idea five years ago and still remains a terrible idea today.