This is how the stimulus worked. First there was a very panic-stricken world economy that was under the impression that the Great Depression was about to descend upon us once again.
Second, there were Treasury forecasts that said unemployment could go to 8-10% if immediate action was not taken. It was this forecast that added to the sense of urgency that things had to be done now if not sooner.
Third, we had measures taken both here, in the US and elsewhere to quieten money markets through a series of very expensive but entirely necessary measures to bring stability into the financial system. In Australia the main measure was to guarantee deposits in the trading banks.
Fourth, there was a massive increase in spending. In Australia the figure normally used for the stimulus is $43 billion – equivalent to four percent of GDP. Since the consensus figure on jobs “saved” is 70,000, this comes to around $600,000 a job. To give the Government the benefit of the doubt, let us assume the number of those saved jobs was 100,000. This brings the cost per job saved down to $430,000. Want to double the number of jobs saved to the very implausible 200,000? Then the cost comes down to the still absurd figure of over $200,000 for each job saved.
But whatever the expense, the point of the stimulus was to shorten the downturn and hasten the return to strong rates of growth and low unemployment more rapidly than any other way that might be taken. We prop up the economy for a short period until it regains its strength and then allow our normal growth to resume from where it had left off.
The number of ways that such an approach is purely wrong would be much too difficult to catalogue in this brief comment. But the fact that economic growth has slowed, and non-farm growth was actually negative during the September quarter might indicate something is not quite going to plan.
The stimulus was always a matter of making sure that the data came out OK rather than actually generating a recovery of any worth. The fantastic negative consequences of the GFC as prognosticated by Treasury turned out to be wildly pessimistic so that, in the end, when unemployment rose from just under four percent to just under six percent it looked better than the forecasts that had existed a few months before.
But it should not be forgotten that we did have a recession in every imaginable way except the official way, which required two consecutive quarters of falling GDP. Spending the equivalent of four percent of GDP on a stimulus will have that effect on the numbers even if it was spent on useless nonsense, as much if not most of it was. There is, in fact, no way to demonstrate any dollar of public spending is actually productive. Digging and refilling holes shows up in the accounts as a contribution to value adding activity.
The September quarter National Accounts therefore need to be looked at in the context of a wearing off of the stimulus as the economy tries to find its way into a proper recovery. The data that matter were the figures on private sector investment which fell in trend terms during the quarter by -0.2% and rose a meagre 0.8% across the year.
Over on the public sector side, however, public sector investment rose during the quarter by 0.3% but across the year went up by 24.2%. The appearance of recovery has occurred because of public spending. That few of us outside the public service actually feel the benefit of a supposedly growing level of output is just the way it is.
To complete the picture, government consumption has risen by 4.0% over the year while for the private sector it has gone up by 3.0%. That buying has outrun production is further reflected in the data on exports and imports, with imports having risen by 13.4% over the year in contrast to the far lesser increase in exports of 5.4%.
Outside the mining industry, there is little indication that private sector growth independent of government spending has as yet resumed. There is no real sense that we are on a self-sustaining road to higher employment and higher real incomes.
Recovery is recovery of the private sector which is precisely what has not yet happened. Even if you think there is a role for useless public spending in the midst of some economic crisis, ultimately growth must be founded on an upturn in private sector activity.
Achieving this kind of outcome is what the government must now attend to if we are not to sink into a sea of debt. The flat retail sales figures, which are the first sets of data we have for the December quarter and for which the latest figures came out the day after the National Accounts, add to the sense that recovery has not yet gathered momentum.