What’s a Rudd?

Spend, spend, spend till your voters take the T-bills away

According to a recent poll, over half of Americans think the stimulus monies there were wasted. That’s in the United States. Meantime in Canada the government, a minority Conservative one be it noted, has had the efficacy of its stimulus spending called into serious question.

Start with Canada. A study by the Fraser Institute there entitled ‘Did Government Stimulus Fuel Economic Growth in Canada?’ found that the government’s deficit-financed $47 billion Economic Action Plan had next to no effect at all as far as helping the economy’s recovery.

Needless to say, this seriously annoyed the Canadian Prime Minister and his Finance Minister, who have been claiming that the government’s deficits have boosted the economy. In fact both men criticised the Fraser report as “ideologically motivated”. This is a bit odd as the ideology in question is supposed to be one the Prime Minister and his Tory Party share, but leave that aside.

The gist of the sceptics’ position is that all these claims about the worth of stimulus spending are based on an untenable reliance on ‘multipliers’. Put in more down to earth terms, defenders of stimulus spending (no doubt after throwing around the word ‘Keynesian’ with a sort of reckless abandon) assume that government spending produces more knock on economic activity, in fact a lot more such activity, than spending by you or me or anyone else. They claim, in other words, that government spending multiplies the bang you get for your buck. Hmmm.

The two authors of the Fraser report also note that the International Monetary Fund has recently concluded, after having looked at stimulus programs in wealthy and developing economies, that the average effect of discretionary fiscal policy “does not provide strong evidence of countercyclical effects”.

Meantime in the US, the Obama administration continues to argue that its massive spending was the key to economic recovery, such as it has been at any rate. But again, this is far from obvious. Indeed a number of economists are now claiming that government spending there actually exerted a tiny net drag on growth. The multipliers didn’t multiply, in other words. They just increased the deficit.

In fact late last year a Harvard University professor looked at the stimulus programs in Canada, the US, and other wealthy countries from 1970 to 2007 and found that government spending was generally unsuccessful. Tax cuts were a far better bet to increase economic growth. In fact, this Harvard professor concluded that “a one percentage point higher increase in the current [government] spending to GDP ratio is associated with a 0.75 percentage point lower growth”.

At the very least all of us non-economists seem to have plausible grounds for doubting that lots of stimulus spending saved the economy in the US, Canada, or here in Australia for that matter. (The United Kingdom seems to be such a basket case that it hardly seems fair to include them in any comparison. And with any luck by the time you read this Mr. Brown will have been put out of his, and our, misery by the voters.)

My main point, though, is that should that sort of scepticism about the stimulus start seeping into the Australian body politic, Mr. Rudd and his government are going to be in trouble. Right now his poll results are far from terrific. But there’s still a lingering sense amongst voters that even with the big stimulus, this won’t be yet another left-wing government that can’t control its spending. That’s why the budget has been packaged as an austere one, whatever you think about the likelihood of a resources super tax actually coming to pass.

You see what’s on the line right now, in my view, is credibility. Mr. Rudd sold himself as a safe pair of hands. He was the self-proclaimed economic conservative. He wouldn’t rack up the big deficits that led to high inflation and higher interest rates. He wouldn’t scare business and jack up taxes.

The problem, however, is that most of Mr. Rudd’s mooted initiatives either have involved spend, spend, spend – think of home insulation, building school gyms, a mooted carbon trading scheme that looked like a big tax and spend program – or they have collapsed. (Think of the groundwork that was laid for an unwanted, and terrible, statutory bill of rights.)

We’ve been left with a big tax hit on cigarettes and an even bigger campaign against the mining companies, with the latter of these being inherently politically dangerous not least because these companies invest so much in Australia.  And many may well wonder why mining companies, that actually employ Aussies on great salaries and produce real wealth, are being singled out for far harsher tax treatment than banks.

At any rate, Mr. Rudd now cannot afford to lose the voters’ trust in his government’s economic competence. Too many other trends are pointing the wrong way, not least his own personal unpopularity and lack of ‘likeability’. That’s why I think he needs to get the whole stimulus episode, and all the related guff about neo-liberal market failures, behind him as quickly as possible.

If he isn’t a safe pair of economic hands, what is Mr. Rudd? Not a question I think our Prime Minister wants the voters mulling over later this year.