Labor attacks 'treasury' report discrediting stimulus

Labor has questioned the bona fides of a report apparently commissioned by the Treasury that plays down the role of big government spending in helping Australia survive the global financial crisis.

Written by Griffith University professor Tony Makin, a long-term critic of the so-called cash-splash during the crisis, it finds "no evidence fiscal stimulus benefited the economy over the medium term".

"In sum, the nature of Australia's fiscal stimulus was misconceived because it emphasised transfers,unproductive expenditure such as school halls and Pink Batts, rather than tax relief and/or supply side reform, as occurred for instance in New Zealand," the paper says.

"Largely implemented after the worst of the crisis had passed, fiscal stimulus countered the effectiveness of monetary policy by keeping market interest rates higher than otherwise and therefore contributed to a strong exchange rate. This worsened Australia's international competitiveness and damaged industries in the internationally exposed sector, particularly manufacturing."

Australia is one of the few countries in the developed world to have escaped recession during the crisis that began in 2008. Others, including New Zealand, did not.

Professor Makin has previously been taken to task by the Treasury for his criticism of economic stimulus during the crisis, which it said was "based on a theoretical model that does not apply in Australia's case in general and assumptions that did not hold during the global financial crisis".

The status of his new paper is unclear. It is dated August 2016 but did not appear on a Treasury website until late Friday morning after requests for it and after two newspapers were apparently given early access to it. Even then, it wasn't placed on the Treasury website itself but on as lesser-known site entitled "Treasury Research Institute" which the treasury says was established earlier this year to report on "topics of interest to Treasury to encourage work or collaboration with Treasury".

Only on Friday afternoon did the treasury create a link to the Treasury Research Institute from its homepage. It said the institute would "regularly publish papers to the site on topical economic and policy issues, written by both external contributors and staff".

Labor treasury spokesman Chris Bowen said he would write to the secretary to the Treasury, John Fraser, to ask why he commissioned work by a "well-known ideological opponent of the stimulus package".

He said its release seemed to have been designed to distract attention from government's backflips over energy policy and to preempt calls for further stimulus in the wake of national accounts figures showing the economy going backwards.

On Wednesday, Treasurer Scott Morrison attacked Labor's spending during the crisis, saying: "They gave money to dead people and thought that was going to grow the economy; that was a nonsense".

Mr Bowen said the Treasurer ought to be concentrating on the present rather than the past.

At the time, the Organisation for Economic Cooperation and Development and other international bodies had praised Australia's response to the crisis as "one of the best designed and implemented in the world".

In The Age and Sydney Morning Herald

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Austerity is the giant 'natural experiment' that cost a British treasurer his job

What if the prime minister sacked the treasurer and promised to govern for everyone, not just those near the top?

"That means fighting against the burning injustice that if you're born poor you will die on average nine years earlier than others; if you're black, you're treated more harshly by the criminal justice system than if you're white; if you're a white working-class boy, you're less likely than anybody else to go to university; if you're at a state school, you're less likely to reach the top professions than if you're educated privately; if you're a woman, you will earn less than a man; if you suffer from mental health problems, there's not enough help to hand; if you're young, you'll find it harder than ever before to own your own home."

The prime minister is Britain's Theresa May, outlining a new set of priorities. And yes, she did sack the treasurer as soon as the Queen commissioned her on Wednesday.

George Osborne had been Chancellor of the Exchequer (Britain's treasurer) since the Conservatives won office in 2010. Inheriting an economy only just emerging from the global financial crisis he blamed Labour for the resulting debt and introduced a £40 billion ($70 billion) austerity budget that hiked the goods and services tax and slashed welfare and infrastructure spending in order to quickly restore the budget back to surplus.

I should point out that there's no real parallel in Australia. Despite all their talk about quickly restoring the budget to surplus, Tony Abbott and his treasurer Joe Hockey were far too clever to attempt to do it here, as are Malcolm Turnbull and Scott Morrison.

The ratings agencies applauded, and Britain's economic recovery collapsed. The Nobel Prize-winning economist Paul Krugman says the UK was almost unique in having "gratuitously chosen to pursue austerity".

Six years of depressed economic growth later the ratings agencies took away its AAA credit rating anyway in the wake of Brexit vote. The vote was in part a reaction to what British citizens had had to endure.

Now a new study, by Larry Summers and Antonio Fatas of the US National Bureau of Economic Research, finds that rather than boosting confidence and economic growth as the British treasury had expected, or at least damaging it for only a short time, the austerity budgets in Britain and its neighbours appear to have left "permanent scars", lowering economic growth for good though a process known as hysteresis.

Hysteresis is a scientific word referring to the phenomenon by which when some materials are heated or given an electric charge they change permanently, not reverting to their former state when the heat or charge is removed

While they don't put numbers on the lower economic growth they think Britain will have to permanently endure as a result of the austerity budgets, other estimates suggest the UK economy is 4.5 per cent smaller than it would have been had the budgets not depressed an already weak economy. And to little effect. The wonder of mathematics means that winding back GDP growth in order to cut the debt-to-GDP-ratio itself pushes the ratio up.

Krugman says Britain has just conducted what amounts to a giant natural experiment. We'd be wise to note its results. Theresa May already has.

In The Age and Sydney Morning Herald

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No skills, no clues. The states that mismanaged the Education Revolution

BUILDING BADLY

Building the Education Revolution

NSW

Cost per square $3500
Projects complained about 8%

Victoria

Cost per square $3000
Projects complained about 4%

South Australia

Cost per square $2500
Projects complained about 1%

Western Australia

Cost per square $2000
Projects complained about 1%


The Lost Lessons of the BER Program, Centre for Policy Development. Building costs are adjusted for remoteness of location.

Were the Building the Education Revolution projects run badly? Only in states where governments that chose not to run them, according to new research published today that targets NSW and Victoria for special criticism.

The analysis by the left-leaning Centre for Policy Development finds the Labor governments in NSW and Victoria performed the worst on just about every measure when it came to handling the funds doled out during the 2008 financial crisis to build new school halls.

In contrast the Liberal government in Western Australia and the labor government in South Australia performed well.

Only 1 per cent of the projects in the smaller states received complaints compared to 8 per cent in NSW and 4 per cent in Victoria. The costs in the big states were $500 to $1500 per square metre higher.

The study says the big difference is that NSW and Victoria contracted out most of the management to big building firms. South Australia and Western Australia managed the projects themselves...

“Victoria and NSW divided up their state into large geographic areas and said to the contractors - it’s your responsibility to make sure these schools are built. The smaller states still had the functioning public works departments and did the work themselves,” said lead researcher Tim Roxburgh.

“Victoria really had no choice, the cutbacks in the Kennett era had stripped the place of engineers and architects. NSW did have the capacity to manage its program itself but didn’t bother.”

“It is not that governments need to build things from floor to roof, what they do need is enough expertise to interact skillfully with the private sector in order to achieve value for money. At some point someone in the public service needs to know something about the details of engineering.”

The study finds the similar pattern in Catholic schools which generally did well making use of in-house expertise. The exception was Sydney where a large area was contracted out and built expensively.

“What's really worrying is that this must happen all the time. We only know the Building the Education projects because records were made public. We don’t know about other projects in which NSW and Victoria are getting bad value for money because they have lost their expertise,” Mr Roxburgh said.

Published in today's Sydney Morning Herald


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Guess what? Stimulus payments stimulate, so we're spending big

In just one month...

Department stores spending up 3.4%

Cosmetics and pharmaceuticals up 2.5% *

Shoe store spending up 2%

Clothing outlet spending up 1.7% *

Takeaway food spending up 1.9% *

* Record high

ABS 8501.0, Seasonally adjusted

Australians stormed back into shops in June as back-to-back interest rate cuts, midwinter sales and $2.85 billion of government handouts pushed spending on shoes, clothes, cosmetics and takeaway food toward record highs.

Department store sales, languishing ever since the last round of government bonus payments delivered during the global financial crisis, jumped 1.2 per cent in May and a further 3.4 per cent in June to record the biggest two-month gain since $19 billion of stimulus payments were delivered to Australians between December 2008 and April 2009.

The $2.85 billion of handouts delivered in May and June were intended to provide early compensation for the carbon tax and to support parents with school children. Retail figures released yesterday show instead they pushed up spending on takeaway food 1.4 then 1.9 per cent to a new record high and spending on clothes, shoes and cosmetics and pharmaceuticals 1.7, 2.0 and 2.5 per cent.

Over the year to June total sales were up 5.4 per cent, the best result since the global financial crisis and its associated stimulus payments in 2009.

‘‘Across the board, Australians have clearly felt like they were a little more inclined to spend their pennies in June than they have for quite a while,’’ said Australian National Retailers Association chief Margy Osmond. “This is a great set of figures, but it’s not the ‘recovery’ yet.”

The government handouts were paid into bank accounts in May and June ahead of the new financial year in order to create a budget surplus in 2012-13. But Westpac economist Matthew Hassan said he expected the retail spending boom to continue beyond June because it was also fuelled by interest rate cuts worth around $1.2 billion and tax cuts that only took effect in July....

“Going forward there will be some delayed spending of June's cash and further rate effects and tax cuts to come, but the sales growth will likely moderate as the direct impact of stimulus rolls off,” he said.

CommSec economist Craig James said there was a chance the “perfect storm” of stimulus measures could change consumer psychology.

“Is it all a mirage? We’ll find out in the next few months,” he said. “It’s reading like a well scripted play. We’ve had sizeable rate cuts, federal government handouts, tax changes and lower petrol prices, as well as lower retail prices.”

“Hopefully, consumers are now seeing the glass as half-full, not half-empty. The risk is that spending has merely been brought forward. But if deflation continues, Aussies will keep spending.”

The Bureau of Statistics figures suggest that over the past year the high dollar and discounting have pushed down retail prices have 0.2 per cent. The prices charged by food retailers are down 0.9 per cent, the prices charged in department stores down 0.8 per cent and those charged for household goods down 1.8 per cent. Clothing and footwear prices have climbed 1.1 per cent over the past year although in the past two quarters they have turned back down.

Treasurer Wayne Swan said the volume of goods sold was now growing at its fastest pace in three years.

“There will always be challenges,” he said. “But we have the best combination of solid growth, low unemployment, a record pipeline of investment, healthy consumption, contained inflation and lower interest rates.”

The Reserve Bank board is expected to keep interest rates steady at its meeting next Tuesday after delivering four rate cuts in that have sliced almost one percentage point off standard variable mortgage rates.

In today's Canberra Times, Sydney Morning Herald and Age


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8501.0

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The circular bike track. Our hastily-assembled stimulus program

A bike track that goes round in circles probably isn’t what Bob Brown was thinking of when he levered $40 million out of the government’s stimulus program to be spent on bikeways as part of a “major new investment in public transport”.

Applicants for the funds were meant to demonstrate how the money would create alternative transport options. But the auditor general has found the Department of Employment never assessed applications against that criteria and didn’t always rank them according to employment criteria.

One grant of $179,682 allowed Queensland’s Sunshine Coast council to build an 850 metre long, five metre wide circular track for competition cyclists to do laps. Instead of being funded up to 50 per cent by the Commonwealth in accordance with the guidelines it was 100 per cent funded.

The auditor general finds the department “did not undertake any analysis” of each application’s ability to contribute to the program’s stated objectives and had “no processes in place” to compare claims of jobs created.

Instead it identified projects as either meeting all of the criteria or not and then handed all of them - both those that did meet all the criteria and those that did not - to the then minister Julia Gillard or her assistant minister asking the minister to circle ‘approved’ or ‘not approved,’ “regardless of whether the department had assessed the project as meeting all criteria”...

Although approved by Cabinet in October 2009, many of the projects continued well beyond the global financial crisis. More than 80 per cent missed their due completion dates. The final $2 million of payments was sent out in June 2011.

The auditor general found that while most applications for funds came from Labor electorates, approvals for funds did not disproportionately favour those electorates.


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Evidence: Stimulus spending creates jobs

Delightfully, it is evidence from a Coalition program

It’s been one of the most fiercely-fought debates of financial crisis, conducted mainly in the absence of evidence: Do government stimulus programs create jobs?

The Coalition has derided Labor’s stimulus programs as “wasted money”. Labor says without the tens of billions it spent building school halls, insulating home roofs and sending cheques to taxpayers Australia’s unemployment rate would have skyrocketed.

Today the journal Economic Letters, publishes an attempt at an answer.

Economists Christine Neill and Andrew Leigh have been able to do what those before them have not: measure the effect of stimulus spending on individual regions by comparing those that received stimulus dollars with those that did not.

Christine Neill is an Australian at Wilfrid Laurier University in Canada. Andrew Leigh was until recently an economist at the Australian National University and is now a Labor MP. He completed the research while at the ANU but the long delays in the journal process mean it has only now been published.

The usual problem in such a study is finding a controls - regions as economically depressed as those that received government payments that had to make do on their own...

It can’t be done for Labor’s stimulus payments. They went to all Australians who fitted the financial criteria and to all regions throughout the country.

But Dr Leigh discovered this wasn’t the case for an earlier program run by the Coalition.

The so-called Roads to Recovery program begun in 2001 directed money for roads to some local councils and not to others.

Dr Leigh found “clear evidence” the money wasn’t evenly directed to regions that needed it. Electorates held by Liberal and National MPs got more funding than those held by Labor.

By using the poorly funded but economically-similar Labor electorates as controls he was able to work out what the big licks of money directed to National and Liberal electorates actually did.

His finding: a 10 per cent increase in stimulus spending in an electorate creases an extra 26 to 78 jobs. The cost per job amounts to $10,000 to $31,000 over a three year period.

“That’s not that expensive,” Dr Leigh told The Age. “At times when the economy is depressed such as during the global financial crisis you would expect the effect to be bigger.”

“As far as I know we are the first to use this method. It has gone through the peer-review process in an internationally recognised journal, so I think it can withstand criticism.”

Published in today's Age


Email from Christine Neill:

If you want to know whether in some particular instance government spending can reduce unemployment, you've got to worry about the fact that an increase in unemployment often causes government spending to increase (eg welfare spending, etc). So if you just look at correlations in the raw data, you will often find that higher government spending is associated with higher unemployment. In econometrics terms, there's an endogeneity problem. There are all sorts of techniques used to get around that problem in the macroeconometric literature (policy experiment case studies (wars studies), vector autoregressions, or various calibration-type techniques). All are somewhat contentious. A typical microeconometric approach is to find an instrumental variable - in this case, something that is correlated with a change in government spending, but that is not itself likely correlated with a change in unemployment. Here, we used politics. Previously, Andrew Leigh had found that electorates with (then government) National/Liberal reps got more spending in the Roads to Recovery program. We find that those electorates also had a bigger drop in unemployment than other electorates, suggesting that the higher spending in an electorate via Roads to Recovery led to lower unemployment in that electorate. While you can't extrapolate from this to overall fiscal policy effects (including because you wouldn't expect any crowding out via higher interest rates, which is a concern with national-level fiscal policies), it is interesting that in even a very small jurisdiction government funded local infrastructure spending seems to be sticky, and to increase local employment.

There are a couple of other recent papers that try to take the same basic econometric approach: Nakamura and Steinsson: "Fiscal Stimulus in a Monetary Union: Evidence from US Regions" (uses military buildups in particular regions); and perhaps more interestingly: Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-Experiment (this one is somewhat closer in spirit to our paper). They both have fairly similar findings, of quite large effects of government spending at the local level.



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