Friday, March 27, 2009

A Future of Promise?

Earlier this week, Wayne Swan made a speech titled "A Future of Promise".

Having read through this speech, I find myself at odds with many of the assertions made. Some of which I have articulated:

Assertion 1: “There was a clear commitment from the world's 20 largest economies to substantial fiscal stimulus, because Finance Ministers from across the political divide understand the importance of boosting demand to avoid a damaging loss in output and much higher unemployment.”

No doubt, this is in reference to the 3rd point of the G-20 communiqué dated 14th of March. Interestingly, this point ends with the following statement

We will ensure the restoration of growth and long-run fiscal sustainability.”

If fiscal sustainability is important, we must ask ourselves, whether or not cash bonuses are the most effective means of stimulating the economy. Many economists (for example, consider Tony Mankin's recent article) question the effectiveness of this policy.

It appears many economists throughout Europe and America also do not believe that fiscal approach is not the best way forward. The chorus of criticism and concern seems only to be getting louder.

Assertion 2: “Consider that we were among the first to announce a major stimulus package. Likewise, our moves on bank guarantees and special purpose vehicles have been in place ahead of the crisis point arriving.”

I am not sure if being first, is something to be proud of, especially in this instance. At the time, the package was criticised as being rushed, ad hoc and lacking a thorough analysis of its impacts.

Interestingly, one of the two initiatives cited, bank guarantees, proved to be less than successful. Recall the many pension funds that were frozen days after the ‘bank guarantee’. Recall the many people who could not access their money.

What made this policy initiative particularly bad was that it was totally unwarranted. Essentially, the Rudd Labour government enacted a policy that is practically meaningless. Furthermore, I believe it also had a negative impact on our confidence as it needlessly raised hysteria regarding our banks and economy.

Assertion 3: “... This is the model – act early; minimise the depth of the problem; be in a position to recover faster. In short, stay on the offence.”

Recall the countless examples in history when acting early, staying on the offence etc, has proved to be disastrous. Perhaps, one of the most well known is "rumble in the jungle". The world heavy weight championship was won by a man, who stood firm, took a few hits and then defeated his opponent by landing well-aimed blows.

Assertion 4:
“The results of our first stimulus package, mostly delivered in December, speak for themselves. Despite the full horror of the global recession, consumption in Australia still held up in the December quarter.

Retail trade figures in Australia increased by 3.8 per cent in December – the biggest monthly increase since August 2000 – a standout result in a world where consumption has slumped elsewhere.”
Retail sales exceeded expectations marginally for one month. Surely there is more to show given the amount of money handed out.


What about the dramatic increase in the savings ratio that we also witnessed?

What about the recent factory closures linked to this so called retail success?

Assertion 5: “And while there's no telling how many people kept their jobs as a result of this stimulus, we do know this is a turnaround of more than 30,000 jobs on the previous three months.”

The effectiveness of economic policy cannot be judged on something that cannot be accurately measured, or as in this case measured at all!

Assertion 6: “That's why, when the global economy took a turn for the worse early in the new year, the Government did not hesitate to act again.”

“Unfortunately some fall back on ideology. Some think we should let events run their course. Some opportunistically deny our economy is being buffeted by global forces. Unfortunately, no matter what the changing circumstances, their answer is always the same: don't intervene; let it rip; let the cards fall as they may.”

“This isn't sound economic policy; it's a failure of policy courage. Or worse, the false prescriptions by people actually willing Australia to fail.”

Let me be frank, I am not against fiscal stimuluses per se. I do however object to economic mismanagement. It must be remembered, that for every dollar spent now, it means a dollar plus interest must be paid back in the future. Therefore, every dollar borrowed now must be done intelligently with careful consideration. Budget Deficits (Fiscal Policy in our current climate) = Borrowing from the future.

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