So crazy it just might work
This evening I was out with a friend and since we are both without doubt consumed solely by the most cerebral of matters, the conversation soon turned to prat-level debate of the economic stimulus package and how it could, or should work.
First discussed was the idea of helidrop payments (i.e. the mooted $950 wads that most Australians now believe they're going to get when Rudd's government passes the stimulus bill) taking the form of vouchers, to (in the words of one radio soundbite) "ensure they get spent".
I pooh-poohed the reasoning behind this idea, because I don't see how a voucher really does to any great extent ensure the money gets spent, assuming it includes a sufficiently broad range of possible uses that any Australian will be guaranteed to be able to use it at all.
After all, if I already have $950 at my disposal to spend on life necessities like groceries and fuel, I can simply save that money and use the vouchers to pay for groceries / fuel / some other good I would've purchased instead. So allowing a moderate level of intelligence to the average Aussie taxpayer, vouchers only constrain economic activity if they can't be spent on things people would ordinarily buy anyway, which would rather limit their possibilities.
I've also heard the idea that it's better to give money to the poor than to the rich because "the poor have to spend it". This seems to forget that in Australia in 2009, a rather large chunk of any money arriving in the hands of a poor person passes rather swiftly to those of a rich person in the form of exorbitant rent. A rich person who will then use the money to offset their suddenly less fashionable debt burden.
We then moved on to the idea of using the compulsory superannuation rate as a fiscal lever. A few weeks ago a group of economists suggested that temporarily cutting the superannuation rate from 9% to 6%, and then gradually lifting the rate by 1% per annum to 12% as "the economy recovers" (love how that assumption is so certain even in these "unprecedented" times). The immediate benefit to employers would be required to be transmitted to employees as pay rises. Effectively, everyone in the nation gets a 3% pay hike.
Like the helidrop payment, the proposal puts more money into the economy immediately, pushing on the great decaying-orbit-of-payments merry-go-round of a thriving late capitalist economy. I couldn't see the downside relative to the proposal that is actually on the table, but then I've never really thought much about macroeconomics.
At Core Economics, a similar line of thought led to the comment that"It would be harder to reduce the Super Guarantee requirements (temporarily or otherwise) than you imagine.
Many people have a 9% super requirement enshrined in their industrial instrument (EBA, AWA, ITEA, Award, etc) ... It would be administratively complex and create much confusion."
This does seem like a reasonably practical objection to the idea. Trevor Cook found another few on his Crikey blog, saying more or less that "f**king with super destroys our fiscal discipline and makes consumers fear!". That I found less convincing.
My recent reading on the absolute basics of the Keynesian Thing in mixed economies as it applies to this sort of stimulus is that it works as follows:
Lastly, again at Core Economics, Mark Crosby wondered whether a global recession demands a collapse in the value of the USD, counteracting the "run to safety" of around August through October last year, when currency traders suddenly fled back to the greenback? This blog post struck me as a classic example of an economist not knowing whether to be a historian or a scientist. He refuses to predict the relative movement of the AUD and the USD, even though he has an ostensibly plausible theory. I'm not sure economists should be allowed to get away with "I don't know" or "I'm sticking with my random walk" as commentary. If they genuinely don't know, they're useless. If they do know something they're willing to bet on, they should say it and explain their reasoning. Otherwise they should accept that the patterns of economics are only interpretable retrospectively, instead of implying they can foresee the future while referring mainly to things that happened in the past (which more than likely were also not predicted in advance).
I'd be very interested to hear people's opinions on this subject, and their corrections of my economic misconceptions. Looking it up in my gut, I'm not worried about the amount of the Rudd stimulus (a lot of which is tied to infrastructure spending and not these helidrop style instant shock payments anyway), but I do wonder why there hasn't been a considered rebuttal of ideas like the super one from the Federal Government. Surely with this much money in play they can afford to spend a few more days on proper consultation and explanation.
First discussed was the idea of helidrop payments (i.e. the mooted $950 wads that most Australians now believe they're going to get when Rudd's government passes the stimulus bill) taking the form of vouchers, to (in the words of one radio soundbite) "ensure they get spent".
I pooh-poohed the reasoning behind this idea, because I don't see how a voucher really does to any great extent ensure the money gets spent, assuming it includes a sufficiently broad range of possible uses that any Australian will be guaranteed to be able to use it at all.
After all, if I already have $950 at my disposal to spend on life necessities like groceries and fuel, I can simply save that money and use the vouchers to pay for groceries / fuel / some other good I would've purchased instead. So allowing a moderate level of intelligence to the average Aussie taxpayer, vouchers only constrain economic activity if they can't be spent on things people would ordinarily buy anyway, which would rather limit their possibilities.
I've also heard the idea that it's better to give money to the poor than to the rich because "the poor have to spend it". This seems to forget that in Australia in 2009, a rather large chunk of any money arriving in the hands of a poor person passes rather swiftly to those of a rich person in the form of exorbitant rent. A rich person who will then use the money to offset their suddenly less fashionable debt burden.
We then moved on to the idea of using the compulsory superannuation rate as a fiscal lever. A few weeks ago a group of economists suggested that temporarily cutting the superannuation rate from 9% to 6%, and then gradually lifting the rate by 1% per annum to 12% as "the economy recovers" (love how that assumption is so certain even in these "unprecedented" times). The immediate benefit to employers would be required to be transmitted to employees as pay rises. Effectively, everyone in the nation gets a 3% pay hike.
Like the helidrop payment, the proposal puts more money into the economy immediately, pushing on the great decaying-orbit-of-payments merry-go-round of a thriving late capitalist economy. I couldn't see the downside relative to the proposal that is actually on the table, but then I've never really thought much about macroeconomics.
At Core Economics, a similar line of thought led to the comment that"It would be harder to reduce the Super Guarantee requirements (temporarily or otherwise) than you imagine.
Many people have a 9% super requirement enshrined in their industrial instrument (EBA, AWA, ITEA, Award, etc) ... It would be administratively complex and create much confusion."
This does seem like a reasonably practical objection to the idea. Trevor Cook found another few on his Crikey blog, saying more or less that "f**king with super destroys our fiscal discipline and makes consumers fear!". That I found less convincing.
My recent reading on the absolute basics of the Keynesian Thing in mixed economies as it applies to this sort of stimulus is that it works as follows:
- The economy moves in cycles (boom, bust, boom ...)
- When the cycle is up, the private sector sees a great return in investing in all sorts of things, so they splash the cash and the economy goes gangbusters
- When the wheel turns, suddenly most investments look bad and the private sector takes its cash off the table. Here, the noble State steps in and greases the wheels of the economy by taking on the risks the private sector will not, and continuing to invest.
Lastly, again at Core Economics, Mark Crosby wondered whether a global recession demands a collapse in the value of the USD, counteracting the "run to safety" of around August through October last year, when currency traders suddenly fled back to the greenback? This blog post struck me as a classic example of an economist not knowing whether to be a historian or a scientist. He refuses to predict the relative movement of the AUD and the USD, even though he has an ostensibly plausible theory. I'm not sure economists should be allowed to get away with "I don't know" or "I'm sticking with my random walk" as commentary. If they genuinely don't know, they're useless. If they do know something they're willing to bet on, they should say it and explain their reasoning. Otherwise they should accept that the patterns of economics are only interpretable retrospectively, instead of implying they can foresee the future while referring mainly to things that happened in the past (which more than likely were also not predicted in advance).
I'd be very interested to hear people's opinions on this subject, and their corrections of my economic misconceptions. Looking it up in my gut, I'm not worried about the amount of the Rudd stimulus (a lot of which is tied to infrastructure spending and not these helidrop style instant shock payments anyway), but I do wonder why there hasn't been a considered rebuttal of ideas like the super one from the Federal Government. Surely with this much money in play they can afford to spend a few more days on proper consultation and explanation.