Beep! Beep! Get Out of The Way Malcolm

Does anyone really have the right answers for dealing with this crisis? Is doing something better than doing nothing? I think so, pull out all stops to reduce the impact of the inevitable decline in private sector growth is a good start, in my opinion. I’m just hoping we’re not in a full-blown recession when a package gets passed.

Take for example the latest figures out of the US:

The US unemployment rate reached the highest level since 1992 and payrolls tumbled in January, with millions more likely to lose their jobs before a stimulus and emergency-lending programs temper the US economy’s freefall.

The jobless rate rose to 7.6% from 7.2% in December, the Labor Department said Friday in Washington. Payrolls fell by 598,000, the biggest monthly decline since December 1974. Losses spanned almost all industries, from construction and manufacturing to retailing, trucking, media and finance.

“We are in the middle of a very severe, a violent, collapse in activity and it could go on for months,” James Galbraith, an economics professor at the University of Texas in Austin, said in an interview with Bloomberg Television. The report will likely diminish objections “that somehow the president’s recovery plan is too large and should be trimmed back.”

Ross Gittins makes a strong argument for timely action” Stimulus is Three T’s and sympathy”:

…like most of the economists, I don’t doubt the recession would be a lot worse without the various stimulus packages.

In preparing this week’s package, the Government has sought to comply with the Three-Ts rule of fiscal stimulus: measures should be timely, targeted and temporary.

The timely principle says governments should apply their stimulus as early in the downturn as possible. Because things tend to snowball (economists would say multiply) in a downturn – with my cutback in spending reducing your income and thus prompting you to cut back, so reducing my income – the notion is that the earlier you act, the less things unravel. A stitch in time …

Similarly, the targeted principle says the stimulus should go to those people or on those purposes most likely to get the money spent quickly. This favours governments spending the money themselves so that, at least in the first round of the money’s flow around our circular economy, all the money is spent on consumption or investment.

This explains the support for spending the stimulus on capital works (now grandly named “infrastructure”). Trouble is, major capital works programs such as expressways, bridges and railways can take years to plan and get approvals for.

Almost 70 per cent ($29 billion) of the $42 billion is going on capital works projects. But Swan has tried to ensure the money is spent quickly by targeting it towards lots of quite small building projects.

Half the money is going on repairing and adding new facilities to every school in the country. The rest is going on fixing black spots on the roads, building boom gates at level crossings and building 20,000 new social housing and Defence Force homes, with about $3 billion going on a small business investment incentive.

All these projects are worth doing in their own right, they should be easy to get going and they should give a boost to employment in the small businesses that dominate the building industry.

The remaining 30 per cent ($13 billion) is going on cash bonuses – transfer payments – of up to $950 to most taxpayers, parents of school children, single-income families, some students and farmers. Many households will get multiple dollops of $950.

The way to think of this is as a once-only, lump-sum tax cut. Whereas ordinary tax cuts are doled out at a few dollars a week, this one comes in an upfront lump.

Another difference is that low- and middle-income families will get a lot more (and high-income families a lot less) than had the tax cuts already planned for July this year and next merely been brought forward.

Clearly, Swan’s approach scores well on timeliness and reasonably on targeting, although this time the cash bonuses are going to many middle-income families who’ll be more inclined to save them than would poorer people.

Malcolm Turnbull’s argument that people would be more inclined to spend a “permanent” tax cut than a once-off bonus – based on the economists’ “permanent income hypothesis” – isn’t a strong one empirically.

Finally, the temporary principle says everything you do must be a once-off (even if spread over a few years) so that it leaves no impediment to getting the budget back into surplus once the economy is well clear of recession. Swan gets full marks on that bit.

Over to You

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