Yesterday the Prime Minister said something like: “The world economy is totally buggered, but here’s a few bucks for some of you and we’re going to pay for a whole lot of school rooms to give a few of you something to do.”
Well, OK, what he said in his address to the nation was: “We now face a global economic recession — with a massive impact on jobs right across the world.”
And then: “The policy of this government is to act and to act decisively.”
Note that, having watched the government act and act decisively in the morning, the Reserve Bank still went ahead with the 1% rate cut that it was planning for the afternoon.
That’s because yesterday’s fiscal stimulus package was a political announcement, not an economic one — it will make almost no difference to the economy.
Surveys indicate that about a third of the pre-Christmas handouts were spent.
The bloodcurdling tone of yesterday’s presentation from the PM should ensure that much less of this one is spent, especially since further evidence of the collapse in the global economy in the December quarter has now emerged and the sharemarket has weakened further in January (at an annual rate, as the Americans would say, of 99.6% — that is, 8.3% since 7 January).
The various infrastructure bits and pieces — insulation, schoolrooms, 350 road blackspot upgrades, 200 sets of boom gates, $650 million on road maintenance, “urgent maintenance” on 2500 vacant social houses, 20,000 new vacant social houses — is all excellent work, announcement-wise.
“Give me a list!” the PM would have barked on Sunday to bleary, shuffling staffers. “I need a list. Of stuff.”
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He will now despatch a group of harried federal public servants, their ties and hair askew (the ones who couldn’t hide in the toilet quickly enough), around the nation with chequebooks to try to cajole state and local governments to agree to do, or just agree not to block, the work.
Will it all happen? Wrong question. No one is going to check. The announcement was the thing.
And the problem with the announcement was that it will exacerbate the ‘paradox of thrift’.
This is a term invented by John Maynard Keynes in the 1930s to describe what happens if everybody saves more and spends less. Saving is good at an individual level, but if everybody does it, national output falls, unemployment rises and income falls, so that an increase in the savings rate actually results in lower savings.
That’s why it’s a paradox, because saving can reduce both income and savings.
In this case, we might call it the ‘paradox of stimulus’. To justify spending $42.5 billion, plus $10.4 billion last year, even though tax revenue has fallen $115 billion over four years and the budget is already in deficit, the government must scare the bejesus out of everyone.
This ensures the stimulus does not work because the fear it creates produces its own contraction, thus outweighing the effect of the money. And the money isn’t enough anyway.
That’s because companies, faced with similar declines in revenues, are cutting costs and reducing debt. Households are doing the same.
Governments everywhere are doing the opposite because their constituents are workers rather than the owners of capital, and it’s more important for their survival to not be blamed than to remain financially solvent, and because they can: governments’ ability to tax their citizens produces a lower cost of debt and a greater capacity to borrow.
But no matter how much spending governments do and debt they take on, the crisis will not end until the owners of capital and consumers start taking risks again.
Maybe, as Andrew Forrest of Fortescue implicitly asserted yesterday, that will happen within a few months. Certainly HE’S raring to go.
But this is, and remains, a credit crisis characterised by a general collapse of the willingness to take risk.
Banks are not lending, businesses are not investing and consumers are not spending, and government simply cannot replace them.