The Stimulus that Made Australia Far Worse Off than if Nothing had been done at All

I have an article at Quadrant Online where you don’t get to choose the heading and which is called, The bill comes due for Rudd’s quack cure but does truly get to the heart of the matter. Every so often, I’m sure, a government will actually spend money in a sensible way and legitimately take credit for some positive outcome that hastened things a bit if left to the private sector. Governments are still dining out on their achievement with the Snowy River in the 1950s as if that is the typical outcome to be expected from public expenditure. But in the sixty or so years since it is hard to come up with great expenditure achievements by governments. I’m sure there are some outside the roads and airports variety but I just can’t think of any offhand. The Pink Batts, School Halls and NBN expenditures are more typical of what you get from government.

But let me draw your attention to the conclusion of this article which discusses the actual reasons for Australia’s soft landing which followed the same recession found everywhere else on the globe. Such nonsense to argue that we avoided recession but that’s the myth. My own take on what made things better list the following:

As for the reasons that the downturn here was not as bad as it has been elsewhere, there are four parts to the explanation that I can see.

There is firstly the extraordinary fiscal situation the government inherited. We not only had no deficit, we actually had no debt. Australia was the only country in the world not to have any public debt whatsoever, a situation that it is almost impossible to imagine returning any time soon.

There was then the mining boom built on the back of the Chinese stimulus. That has gone, in large part because the Chinese must now themselves deal with the problems that their own stimulus created in their own economy. But we have added to our own slowdown in mining through a series of policies that have made miners more reluctant to invest in Australia.

Third, our banking system was almost entirely untouched by the financial crisis which spread internationally due to the ownership of various toxic assets generated in the US financial system. Our banks were fine, so Australia had no problems of this kind to overcome.

And lastly – but this will make little sense to most people – the RBA kept interest rates up rather than pulling them down. No quantitative easing in these parts with the result that the national savings we generated were used more productively than elsewhere. You can’t stop governments from squandering what they squander, but at least the private sector was kept on the straight and narrow.

Interestingly, there is an article in The Australian today which touches on this same question. David Crowe has an article titled, The stimulus we didn’t really need which lets Rudd off easy. The title should be “The Stimulus that Made Australia Far Worse Off than if Nothing had been done at All” or something along those lines. Interesting, there is a four point discussion of the same thoughts I wrote up at QoL in which Warwick McKibbin mentions China and our banking system’s strengths, but then mentions the fall in the dollar which I have my doubts about and then this one extra.

Because where we differ is over interest rates. Sure they were brought down during the GFC although only late in the day but then they were raised again and then again and then kept relatively high. Those low interest rate Keynesian types will be the ruin of us all. Thankfully our RBA governor didn’t buy into any of it.

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25 Responses to The Stimulus that Made Australia Far Worse Off than if Nothing had been done at All

  1. stackja says:

    You can’t stop governments from squandering what they squander

    Voters can demand that governments stop squandering what they could squander.

  2. Popular Front says:

    Obumma tried the same nonsense on in the USA. A large chunk of the MSM wasn’t buying it however and labelled it ‘porkulus’, which is how I viewed it here.

  3. JNS says:

    Steve,

    There was a fifth important factor as well – the exchange rate fell to the low 60’s against the USD from around the mid 90 cent level immediately before the GFC.

  4. Bruce says:

    I read Mr Crowe’s article over lunch. I agree with a lot of it, but he failed to mention that Ken Henry was thereafter appointed to the role of special advisor to Julia Gillard.

    The Treasury cost benefit was poor and over optimistic, which fits the view that Henry is quite partisan. That is likewise supported by the appointment of Mr Parkinson, ex head of the Climate Change department as his replacement at Treasury. The ALP would never appoint a non-fellow-traveller to advise Ms Gillard, they are perfectly predictable in their politically nepotistic appointments.

    As it happens I did and still do agree with Henry’s cash splash: “go early, go hard and go households”. It fitted the need to crack the Australian consumer out of the blind panic mode that we fell into when Bear Stearns fell and car sales (for example) ceased utterly. But everything after that, batts, school halls, was completely wasted and a lot of it rorted.

    We now have about $80 billion of debt to pay back because of that mistake. Costing us $4 billion a year in interest which could be being spent on infrastructure or services.

  5. H B Bear says:

    Much of the strength of the Australian banking system is due to their being continually capital constrained by domestic savings, thus limiting their ability to make bad lending decisions. The last time the major banks were not capital constrained was the deregulation period following the Wallis Report and foreign bank entry – and look at how that ended up.

    The few times Australian banks, primarily NAB, have ventured overseas they stuffed it up in both the US and UK/Ireland. AMP and a couple of others have done it in insurance too.

    While the Australian regulatory environment is one of the better ones by world standards, much of the stability is derived from the typical oligopoly market structure, reduced competition and excess prices paid by consumers.

  6. Will says:

    The ALP would never appoint a non-fellow-traveller to advise Ms Gillard, they are perfectly predictable in their politically nepotistic appointments.

    It’s favouritism, not nepotism. The ALP do it in spades for those who agree with their ideology, and when the LNP are in power they don’t sack them and appoint public servants who advance their agends.

    We now have about $80 billion of debt to pay back because of that mistake. Costing us $4 billion a year in interest which could be being spent on infrastructure or services.

    more like $260 billion and climbing. The interest payments would buy a lots of Gonski/NDIS/hospitals.

  7. blogstrop says:

    The idiocy of politics now is that the one successful renewable energy program – the Snowy Scheme – would not be done at all due to Environmental Nazis.

  8. Stan Ronalds says:

    I am not an economist, but having grown up in one of Europe’s Communist countries, I never cease to be amazed at this fascination with central banks and particularly with their meddling in the economy via creating money from thin air and manipulating interest rates (‘monetary policy’).
    Has the West not learned that central planning does not work?
    What enormous wisdom does a bunch of bureaucrats hold, that allows them to set a ‘one size fits all’ interest rate?
    Why do we need to have the central banks support the financial sector’s irresponsible lending practices when inevitably the sh*it hits the fan by bailing them out, be it directly (TARP, quantitative easing, suspension of mark-to-market accounting etc a.k.a. Europe/USA) or indirectly (by giving them an essentially free use of the AAA government credit rating in the GFC as happened in Australia).
    Bad behaviour is rewarded in this way, moral hazard is removed, too-big-to-fail institutions abound. Recessions are not allowed, bad businesses cannot go bust. Checkmate is the result; the world is drowning in debt, the ‘recovery’ is the weakest one in living memory, with the ‘solution’ apparently being yet more debt, more money printing and more meddling.
    We can’t now apparently let the TBTF institutions go bust, so let’s rape the poor old taxpayer some more.
    Over the years, ‘monetary policy’ and similar forms of central planning have been put on the same philosophical foundation as government-run healthcare. Everyone seems to think the world would collapse without it, and yet it is undoubtedly at the root of the current crisis. With ZIRP everywhere, what is the next step? Yet more meddling and regulation, without a doubt. Why not try negative interest rates, like in Denmark?
    What could possibly go wrong, eh?
    Here’s an idea? Why not give the free market a chance for one? Make governments live within their means? Let people get on with their lives? Stop rewarding failure? Let bad businesses go broke?
    One can dream, hey.

  9. Noddy says:

    Please tell who sold off the Commonwealth Bank?
    Recent announcements of CBA profits must rate the decission to sell as one of the greatest balls up of any politician party!
    And where did the money go…. likely spent by Rudd.
    Trust a politician… like hell!

  10. Paul says:

    I could never quite work out how you dealt the impact of a global debt crisis by throwing as much money overboard as possible. It only made sense if the real plan was to damage Australia.

  11. Alan Grey says:

    You forgot to mention the fraudulent Treasury report which headlined a chart purporting to show a high correlation between stimulus spending and recovery.

    Yet this chart omitted EVERY data point that contradicted the reports stated conclusion of stimulus helping.

  12. Wazsah says:

    When you say – “…the RBA kept interest rates up…” –
    I seem to recall a period where the RBA was indeed doing that at the exact same time the Govt had the stimuli dials turned to Full-On.
    So the RBA was trying to cool off what the mad Govt was still heating. Like driving a car with brakes & accelarator on at same time.
    We must never forget. Our children and grandchildren must be told what they will be working to pay off.

  13. Tom Valentine says:

    The exchange rate fell between June 2008 and December 2008.If it had been allowed to continue,it
    would have protected the Australian economy.The “fiscal stimulus” pushed it up and did not create jobs on a net basis.The fact that the spending did not create any productive assets means that it had
    no redeeming features.

  14. I agree with McKibbon and Makin that the exchange rate was part of the story. An important part. Just after the GFC hit the Australian dollar went down to about 60c, but then when the Australian government started borrowing money from international markets, they drove the exchange rate up and crowded out net exports.

  15. Jim Rose says:

    Eugene Fama notes that government bailouts and stimulus plans seem attractive when there are idle resources (unemployment) – but
    1. Bailouts and stimulus plans must be financed.
    2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
    3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
    In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

    In modern Australian politics, it is standard to promise to fund new spending proposals and return to surplus soon.

    That makes the Ricardian theory of deficits the most optimistic theory of deficit spending. Throw in some animal spirits, and it is safe to assume that deficits will lead to more than 1 to 1 tax rises in the future. Why is ignorance about future taxes always assumed to under-estimate future taxes?

    It is well knows that the fiscal burden in ageing will lead to tighter future budgets and higher taxes too. Another reason why the Ricardian theory of deficits the most optimistic theory of deficit spending

  16. sdfc says:

    If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.

    It’s a fiat money economy Jim.

    John

    There was a slump in global trade while the Aussie was heading to 60c. Then import volumes rose and the Aussie climbed.

  17. crocodile says:

    Commodity prices also took a pretty savage hit around the same time. Export dollars didn’t look too hot.

  18. wreckage says:

    Commodity prices also took a pretty savage hit around the same time. Export dollars didn’t look too hot.

    All the better, then, to let the dollar fall.

  19. jupes says:

    But in the sixty or so years since it is hard to come up with great expenditure achievements by governments.

    Well the US government put a man on the moon 40 odd years ago.

    Probably the most impressive act in my lifetime.

  20. crocodile says:

    All the better, then, to let the dollar fall.

    Are you suggesting that the reserve bank moves to exchange rate targeting rather than interest rates ?

  21. Tom Valentine says:

    No Croc-just that they let the market achieve its own level.For example if commodity prices fall the
    $A will fall reducing the impact on the Australian economy.It worked in the Asian Crisis and would
    have worked in the GFC if the government had sat tight.

  22. Rob MW says:

    “There is firstly the extraordinary fiscal situation the government inherited. We not only had no deficit, we actually had no debt. Australia was the only country in the world not to have any public debt whatsoever, a situation that it is almost impossible to imagine returning any time soon.”

    Steve – I’m sure that the State and Local Governments and the Constitution would fiercely disagree with that statement, unless of course, State debts were not Commonwealth guaranteed.

  23. The Pugilist says:

    Much of the strength of the Australian banking system is due to their being continually capital constrained by domestic savings, thus limiting their ability to make bad lending decisions. The last time the major banks were not capital constrained was the deregulation period following the Wallis Report and foreign bank entry – and look at how that ended up.

    The few times Australian banks, primarily NAB, have ventured overseas they stuffed it up in both the US and UK/Ireland. AMP and a couple of others have done it in insurance too.

    While the Australian regulatory environment is one of the better ones by world standards, much of the stability is derived from the typical oligopoly market structure, reduced competition and excess prices paid by consumers.

    Interesting point HB Bear. I agree with your first paragraph in particular. I think the international lending imposed a discipline – there was always the threat of a wholesale funding ‘run’ on Australian banks. This discipline was applied by internaional lenders and not the regulatory authorities. The government is keen to point out that the gfc bank guarantees were another key plank that enabled Rudd to ‘save’ the economy. I strongly disagree with this view and also think that the vast overreaction by Rudd and Swan made our financial system less stable in the long-run. They introduced moral hazard into the Australian system. Then, later on, the passing of legislation to get rid of depositor preference and allow the issuance of covered bonds (despite warnings against doing so from APRA) entrenched deposit insurance at the centre of Australian financial system worsened the moral hazard problem here…
    Rudd sees panicked action as a virtue, but I believe he and Swan made our financial system much more prone to crises in future.
    I tend to agree that our comparative lack of competition in the banking sector does make it more stable…

  24. sabrina says:

    In future, politicians super should be held up before they make major spending decisions. They should be made accountable somehow. Many of the past spending decisions have turned out to be dud, with the taxpayers eventually picking up the tab, while the pollies merrily enjoy their super untouched. Where is the accountability?
    Also, the PPL is a poor decision. With so much in front, it should be dumped. If not before the election, then soon after once the books open up to scrutiny. Not many voters will disagree with that.

  25. Craig Mc says:

    I like to visit LP for the LOLs, and it never disappoints.

    When casting your vote, just remember that Liberal governments are economic wreckers. This one is going to be worse than the last one in that regard. You want a functioning economy in 10 years’ time? Put labour above Tony’s Wreckers.

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