Welcome to Dr Lincoln's blog

Welcome for visiting my blog. Hope you enjoy the visit and always welcome back again. Have a nice day!


Max Corden too biased on the debate of fiscal stimulus

Comments on Current Account Blog “Corden on fiscal stimulus”, the Australian, posted by David Uren, 27/05/2009, http://blogs.theaustralian.news.com.au/currentaccount/index.php/theaustralian/comments/corden_on_fiscal_stimulus/

Some economists are renowned for their ideological approaches to economic policies. Corden has just provided a perfect example recently.

Corden, I suspect, must be, or at least now sounds to be a Keynesian. He is too biased in his analysis of government stimulus to counter criticisms over reckless fiscal spending disguised or misdirected as fiscal stimulus.

He said there are two flaws in the notion that fiscal stimulus now will leave future generations worse off. He said for the fhe first one as follows:

“First, there is the total value of the bonds (and equities) acquired by the savers as the result of the rise in incomes brought about by the stimulus. These are assets, and it has been shown that their value is equal to the bonds issued by the government to finance the stimulus, which are the taxpayers liabilities.”
“Hence, there is a set of assets that exactly offsets the liabilities on which conservative critics of stimulus policies have focused.”
Is Corden correct in the context of countering criticisms? No, unfortunately. This can be easily understood through the following two examples. Example one: what answers one will get, if saying to a family going to face foreclosure of their home that, don’t worry, there are assets that is the total value of loans by the banks that equal to your liability, you should see the value those assets in the society’s balance sheet. The answers may piss off the questioner.

Example two: what answers one will get, if saying to the shop owner who has just been robbed that, don’t worry, there is no loss to the society as a whole, since there are gains to those robbers the same value equal to your loss. Surely the questioner will be pissed off by the answers.

These two example show how ridiculous Corden’s argument is. It is not just the total values that matters. The distribution of those values in the society, or between intergenerations in Corden’s case, that equally matters!

Corden’s second point is to allow the reasonable possibility that there will be positive legacy for the future generations if some of fiscal stimulus as investment turns out to be socially productive. Yes, there is no question that some fiscal investment will be socially productive. On that point Corden is correct. However, the argument is incorrect and wrong in the entirety or totality in the context. To see this point, one only needs to look at what has been happening in Australia’s fiscal stimulus packages over the past six months or so. First, there were the first cash handouts in November last year, proudly labelled by the government as fiscal stimulus. It was a waste, though not completely wasted to be precise, in stimulating the economy to say the least. To say the worst, it was a fiscal bribe. Or one may say it was a complete mess up by an inexperienced Keynesian government.

That was not the end of the matter. In March/April this year, the government has devised its second fiscal stimulus package that included another cash handouts, in the face of mounting evidence that the first one was ineffective in stimulating the economy because a large part of them were saved rather than being spent. To the government’s credit, however, the second cash handouts were a little fairer than the first one, because every taxpayer, except high income ones, would receive a cash handout depending on their taxable income in 2007-08. That was an improvement, a clear improvement. But the intergenerational consequences of inequality are there, the government used future generation’s tax liability to give cash to the current generation.

For Corden’s argument to be creditable, fiscal stimulus needs to be made in such a way, as Corden argued, that the social rate of return of this investment were equal to the rate of interest that applied to the tax liabilities, these two - the tax liabilities and the benefits of first-period public investment would be completely offsetting. Is that reasonably possible in reality? No! The answer is so clear if one looks at the Australian government’s recent proposal of a national broadband network at a proposed cost of $43 billion. There was no feasibility study, no business plan, no economic study, nothing at all. As the minister for finance said, that number was a guestimate, pulled out of the air, because the government feels it is in the national interest to have such a network, to do so. Can you trust anyone who approaches an investment of that magnitude in such a way so the result will be good?

Corden must be living in a very different world of idealistic Keynesian, where not only the government knows all the necessary information, it is also working completely and entirely in the interest of the country, it is so capable in deciding fiscal priorities, so business like approaching to investments. I am afraid that does not exist and Corden must be dreaming.

There is no question that there is a need for fiscal stimulus in the face of a great recession. The debate is not about that need or not. The debate is about what the fiscal stimulus should be and how that should be done, whether it is effective, whether it is done with the minimum costs to future generations. Ideology, whether they are political or economical, is unhelpful to the debate, and unhelpful to getting the stimulus right to lift the economy out of recession.

No comments:

Post a Comment