Focussing on fiscal fillip and folly

A big hurrah went up from right-leaning quarters of the blogosphere after the Business Roundtable’s Roger Kerr sounded out on the shortcomings of fiscal stimulus in the NZ Herald.

Kerr is particularly bothered by the pressure on the government in these recessionary times to increase its spending to give the economy a fiscal lift and likens increased spending to throwing petrol on a fire.

Among his points:

* Listening to some commentators, one would think the recession has given governments the ability to produce wealth and jobs out of thin air.

* Huge rises in core Crown spending in recent years – some $25 billion since 2000 – saw New Zealand lead the world into recession.

* More spending now would be like throwing petrol on a fire. To its credit, the Government is largely resisting the pressure to add to the waste in Government spending programmes.

* Hundreds of economists in the United States are saying the Obama Administration’s so-called “stimulus” package is reckless. It looks likely to drive the US Budget deficit to about 12 per cent of gross domestic product, create huge public debt, and necessitate big tax increases or spending cuts down the track.

* It is now widely considered that Government policy mistakes caused the banking collapses of the 1930s, protectionism aggravated the decline and New Deal spending was largely ineffective. But many governments, under populist pressures to “do something”, seem to have forgotten those lessons.

Whale Oil has eagerly welcomed Kerr’s counsel.

Finally we are starting to get some sane words about “stimulus” as the tax and spenders increase their wailing that the government borrow our way to prosperity.

Whale Oil contends –

…what has been overlooked by all of the tax and spenders is that Labour has stimulated away for 9 years spending willy-nilly on civil servants and wasteful projects all the while announcing spending they had no funds for.

And –

Indeed, we in New Zealand also had our own lesson in stagflation and fiscal expansion. It was called Muldoonism and yet the tax and spenders seem to want to return to that style of economic vandalism. The last thing we need is a spendulus package like the ObamaMessiah has wrought on the American public.

DPF at Kiwiblog says Kerr has made some excellent and timely points.

And NZ is already facing a decade of deficits. And if these deficits remain, tax increases are also inevitable in NZ.

He simply says “yep” to endorse Kerr’s arguments that

* Further increases in Government spending will worsen the balance of payments rather than do much to increase output, even in the short term. Longer term it would raise future tax and debt burdens and risk a resurgence of stagflation.

* The imperative now is to switch resources into the international trading sector to increase exports and cut imports. By marking down our exchange rate, the rest of the world is telling us that is what we have to do.

DPF says reducing Government spending as a percentage of GDP does not mean you are spending less money.

If you get higher GDP growth, then you can still maintain social spending. The trick is to have spending increase at a slower rate than GDP growth.

No Minister agrees a massive stimulus talked about by many would be like pouring fuel on to a fire.

He has listed others who have written like-minded pieces on the topic in recent times, providing “some rare common sense …to counter what appears to be some liberal-left consensus to push our government into some orgy of spending to allegedly curb recession.”

It’s great to see a good debate on this fiscal stuff.

But Alf is bothered that “government spending” can be too easily denounced without a proper appreciation of what it does and does not do for an economy.

He suspects at least some of those who question the stimulatory properties of fiscal policy might be getting their ideas from Big Claude, a genial bloke who sometimes wanders into the boozer in Eketahuna for a beer and a natter about this, that and the other.

Claude got the whiff of an education in fiscal policy at the London School of Economics before being thrown out (something to do with cheating) before the first term was up.

Hence he didn’t get around to distinguishing capital spending from the government’s day-to-day spending on pens and paper, or state-sector wages from “transfers” (including national super payments which are not spent by governments at all – they are spent by old farts like Fred Barringfoss when they buy Claude a drink).

Claude doesn’t distinguish, either, between “good” spending (investment in things that enhance GDP growth, like better roads, communications, electricity systems) and “bad” spending (yep, there are dozens of examples).

Nor did he get around to the lectures on good borrowing (again, for capital projects that help lift economic output) and bad. Debt shouldn’t be shunned just because it is debt.

As to New Zealand’s being the first country to slip into recession, Alf wonders about monetary policy and our 20-years obsession with inflation targets. In recent years this has pushed up our interest rates, in turn pushing up the exchange rate as overseas investors rushed to take advantage of what’s on offer here for savers.

Umpteen analysts kept saying the NZ dollar was over-valued. As we can now see, it was, and this made things tough for exporters to hack it in overseas markets.

Finally, Alf is fascinated to find Kiwiblog drawing attention to some good stuff on noted American economist Greg Mankiw’s website.

Mankiw was prompted to write by the debate in the US over the stimulus bill and the belief among the some observers that economists are hopelessly divided on issues of public policy. He says –

That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

He refers readers to a book he wrote which includes a table of propositions to which most economists subscribe, based on various polls of the profession.

He has reproduced the list, together with the percentage of economists who agree:

For example, 93% agree that a ceiling on rents reduces the quantity and quality of housing available.

And 93% agree that tariffs and import quotas usually reduce general economic welfare.

Number four on the list –

Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)

This does not mean it’s smart to let things get out of hand in the spending or tax-cutting department, because –

A large federal budget deficit has an adverse effect on the economy. (83%)

But the big teaser is how much stimulus should come from tax cuts and how much from increased government spending?

There’s the rub.

Manwiv notes that the proposition about fiscal policy does not distinguish between taxes and spending as the best tool for purposes of macro stabilisation.

Maybe the question should be added in a future poll, he muses.

But he doubts the answer would make it on to his list of widely agreed upon propositions.

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