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Federal

Sep 8, 2009

Rudd's stimulus package is far from perfect

Our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government, and not simply due to recent governmental quick fixes, writes Sinclair Davidson.

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Kevin Rudd said yesterday that without the government’s stimulus package that the unemployment rate would have gone through the roof.

This is good politics as we can never really know what would have happened. We’ll certainly be hearing that line a lot over the next several months — especially if unemployment does not rise to the forecast 8.5 percent that the government was expecting at the last budget.

Much has been made of Treasury minutes leaked last week; especially the view that withdrawing the stimulus package now would lead to greater unemployment. So not only has the stimulus package prevented an unemployment catastrophe but it continues to do so. The government can point to the ‘scoreboard” for confirmation of this story. In fact Mr Rudd told us yesterday that US unemployment is now 9.7 percent and Canadian unemployment is 8.7 percent.

But what Mr Rudd didn’t say yesterday is that the Canadian stimulus package (4.1 percent of 2008 GDP) is almost as large as the Australian package (4.6 percent of 2008 GDP) and the US package is larger at 5.6 percent of 2008 GDP. In other words the favourable employment outcomes here in Australia cannot only be due to the stimulus package.

An OECD report published last week (3 September) indicates that unemployment has not risen much at all across 29 economies. Some economies like Spain has seen a massive increase in unemployment as has the US and Canada. The increase here in Australia is the eleventh highest out of 29 countries. So we’re not quite in the top third but 60 percent of OECD economies have experienced a lower increase in unemployment than did Australia. To be sure they were starting from a higher base than we were, but many OECD economies routinely experience higher rates of unemployment than do the US, Canada and Australia.

To claim that our low rate of unemployment points to the success of the stimulus package ignores the experience in other OECD economies. Many of those economies have experienced massive declines in GDP growth and have experienced (so-called) technical recessions, yet the increase in unemployment has not been that large.

In the graph below I have plotted the increase in the unemployment rate (relative to 2007) and the size of the stimulus (as a percentage of 2008 GDP) — Australia is the large red dot. The data are all collected from the OECD.

As can be seen the increase in unemployment is much less than the size of the stimulus package would suggest. If our unemployment rate had grown in line with average OECD expectations, the unemployment rate would be 7.9 percent but still less than the budget forecast of 8.5 percent.

So it is not clear that stimulus spending has saved Australian unemployment from going through the roof. It is far more likely that our resilient economy has fared well due to 25 years of economic reform beginning with the Hawke government and is not simply due to governmental quick fixes.

To believe that the stimulus has brought about the excellent economic performance Australian is currently enjoying would be to believe that the Rudd government had developed the perfect stimulus package. We know, however, that the package was put together hurriedly and that the implementation has been poor.

Let’s rather give credit where it is due.

Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior Fellow at the Institute of Public Affairs.

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9 comments

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9 thoughts on “Rudd’s stimulus package is far from perfect

  1. evidently

    Sinclair Davidson and his Logical Traps for the great Unwashed

    This appears to be a popular thing among the pundits of puffery (BK’s term) at the moment, the non-sequitur.

    Rudd believes without the stimulus there would be higher unemployment, as you say Sinclair-

    “Kevin Rudd said yesterday that without the government’s stimulus package that the unemployment rate would have gone through the roof.”

    ….but you scale it up to… please excuse the re-cutting of your sentence to make my point clearer

    “the stimulus has brought about the excellent economic performance Australian is currently enjoying”

    … “and to believe that, would be to believe that the Rudd government had developed the perfect stimulus package”

    You are guilty of logical fallacies such as, denying the antecedent (If p then q. ; Not-p. ; Therefore, Not-q.), Strawman (caricaturing an opposing view that is easy to refute) and false dilemma (reducing the argument to two choices – eg Rudd has done everything, or somebody else has done everything) See Nesbitt & Ross “Human Inference” 1980 for more of your fallacious stylings.

    “Let’s rather give credit where it is due”, yes but not judge the last 25 years as all creditable.

    As for this, you will find in Mr Rudd’s recent writings and interviews a lucid account of the role of the reforms pre-Howard and Costello.

    We are on to you.

  2. Matt C

    Professor Davidson ignores the fact that all stimulii were not created equal.

    Even if we hold the size of the stimulus equal (measured as a proportion of GDP), the impact of two stimulus programs may be very different by virtue of their composition. For example, in the United States, much stimulus has been filtered through several layers of Government (from the federal government, to the state, to the local), leading to implementation lag and increased overheads. More funds have also been delivered in the form of tax cuts that deliver small but repeated increases in consumers’ incomes. Perhaps the ‘big bang’ of the $900 cheques really were more effective than the same amount of money dispensed through a small cut in the fortnightly tax bill.

  3. RaymondChurch

    Methinks the good Professor sups with Malcolm the Mad, they obviously read the same literature.

  4. AR

    Imagine if the election losing NoChoices laws, proudly proclaimed by their perpetrators to be designed to give us an amerikan employment regime coz, with virtually no job security, there was (allegedly) lower unemployment rate. Now despite/because of such joys the US u/e rate is the highest in living memory getting on for twice ours.
    Rather as the other claim that “interest rates will always be lower under Lib than Lab” is self deluded garbage.

  5. evidently

    Ray,AR and Matt,
    Are you with me here, I feel so annoyed about my tax dollars co- funding EFTSL that the Professor is so comfortably consuming while gnawing at the hand that feeds him that I wonder at the need for the ‘professings’ of an academic that is so mono-cultured that colludes with the IPA. I’m so over this whittering from fancy pants gentry wannabee’s, I am flogged raw by the warm lettuce of Sinclair’s infinite oneness with the dogmatic adherents to the society of the self, I am hereforth struck dumb. Dumb stricken and hostaged to mediocrity.

  6. RaymondChurch

    What really gets me is my sub is being used by Crikey to use one eyed right wing liberals obviously pushing the party line and making out he is a friend of the nation. He is not, he is a friend of all that this country threw out in November 2007. He doesnt have the spine to say so, even though, obvious as it is. A turd on his taste buds for evermore, should be a reminder of Howard till the old wank drops off the perch. He hurt many segments of Australian Society over 12 years and we have to read the burblings of one of his apostles in Davidson. Crikey sometimes does nothing for its subscribers by employing such fools.

  7. simmobc

    typical one sided ALP aggressive crap posted here… look at the figures, look at the stats, look at reality – stop disguising the simple with exagerrated wordology which is trying to disguise lava as rain.

    I am a swinging voter and I am not convinced that the stimulus package is responsible for our result and I am certainly not convinced that the ALP needs to spend the entire stimulus package.

    The comments I see on here makes me think whether history, that is, the economic history of ALP governments, repeating itself all over again. Why is the ALP always a short term government, especially since WW2????????? perhaps, its Howard fault????????

  8. Sean Carmody

    It seems that the IMF have a different view on the efficacy of the stimulus: http://bilbo.economicoutlook.net/blog/?p=4831

  9. Matt C

    I like the Crikey has Prof Davidson and David Flint and assorted other right-of-centre commentators with whom I don’t agree. I subscribe to Crikey for that diversity of opinion, not to hear my own views reflected back to me.

    What I don’t like is the fact that Davidson implicitly assumes that stimulii differ only in their size as a proportion of GDP, and the actual mode of dispensation matters little. Strange, we were hearing very different things from the Right a few short months ago (remember the ‘permanent income hypothesis’)?

    SimmoBC, I have “looked at the figures”, and indeed the “stats”.

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