Peer reviewed analysis from world leading experts

Priming the economy: short term versus long term

Reading Time: 3 mins

In Brief

The latest IMF report on the world economic outlook paints a very disturbing picture. World merchandise trade is down 45% (yes, that’s forty-five per cent!) on an annual basis in the last quarter. Nothing like this has happened since the Great Depression of the 1930s. Indeed, the winner of the Nobel Prize in Economics in 2008, Paul Krugman, noted that the current state of affairs looks like the beginnings of the second Great Depression.

Australia is lagging behind the recessions in all the world's major advanced economies (US, Canada, UK, Germany, Japan, etc.) but it will likely arrive in 2009/10 as the value of our exports drop sharply, especially as the effects of a decline in global world trade get worse, as they surely will.

It is against this background that the Australian government has made clear its willingness to use spending and budget deficits to 'prime' the economy to preserve jobs and to lessen the impacts of the recession that will surely arrive in Australia in 2009. There was already a $10 billion plus stimulus package in December 2008. Following the successful passage of the latest fiscal stimulus package on 13 February 2009 there will shortly be another $12 billion or so in cash payments in the pockets of Australians very shortly. 

Share

  • A
  • A
  • A

Share

  • A
  • A
  • A

At this moment, it is important that governments be reminded that it is not just how much money is spent or how fast it is spent, but on what the money is spent that will determine the long-term payoff from Keynesian priming of the economy. If we must spend the funds on priming the economy then let’s spend it on projects that will give current and future Australians a long-run return on the investment (which does not include one-off cash payments). Such spending must go beyond simply increasing short-run consumer spending and business confidence. In other words, priming the economy should generate ‘win-win’ spending that helps prime the economy in the short run but also generates long-term benefits. 

The Great Depression provides good examples of ‘national projects’ that western governments implemented to help address the problems of unemployment and poverty. Some of these projects have paid enormous dividends over the decades and long after the need to prime the economy.

For example, the subsidies provided by the US Soil Conservation Service to farmers played an important role in effectively dealing with the problem of soil erosion in the Western Plains of the US that led to the Dust Bowl. It was exacerbated by drought but caused by the actions of farmers on fragile soils. By helping farmers to address the problem (promoting and subsidising fallow fields and wind barriers) in a co-ordinated way the US government was able to invest in its farming future and has reaped the benefits

Australia today faces its own ‘Dust Bowl’ in the form of a water crisis in the Lower Murray. Large parts of the environment in the Murray-Darling Basin, the ‘bread basket’ of Australia, are in desperate straits and many irrigators are struggling to stay in business.  As we spend to prime the economy isn’t there an absolute need to address this on-going national crisis? 

The revised Fiscal Stimulus Package passed on 13 February does include $500 million brought forwarded over the next four years to accelerate the buybacks of water entitlements to increase environmental flows as well as $200 million in grants to local municipalities.  This is an important step forward but the magnitude of the problem requires much more.

In a submission to the Australian Senate in September 2008 the Wentworth Group of Concerned Scientists argued that with climate change current water diversions in the Basin will likely need to be reduced by 40% to ensure a sustainable farming future and a sustainable environment. This will require upwards of $4-5 billion in extra funding in the coming years but would generate long-term benefits for all Australians. A national vision for Australia’s future should make such spending a priority. 

Quentin Grafton is Professor of Economics at the Crawford School of Economics and Government and Editor, Australian Journal of Agricultural and Resource Economics and Co-Chair ANU Water Initiative.

One response to “Priming the economy: short term versus long term”

  1. Caution on Speed as well as on Level of Stimulus Speeding

    Excellent to remind governments that “it is not just how much money is spent or how fast it is spent, but on what the money is spent that will determine the long-term payoff.”

    However, drawing lessons from the Great Depression is dubious. Despite all the rhetoric about the US New Deal, economists have known since Cary Brown’s 1956 AER article that fiscal policy had trivial impact in stimulating the economy until the USA prepared for war. The most economically successful western economy in the 1930s was Hitler’s Germany, and again the fiscal stimulus was military spending. These are not good models for Australia.

    The soil conservation subsidies are a nice example of good policy, and public spending on Australia’s water crisis is surely justified. If we know what the best policies would be, then public spending should be accelerated.

    However, the “If” is important, and we should not hide the dilemma between spending to stimulate demand and spending for long-term growth. A stimulus requires speed, but large long-lasting projects require care. The lagged onset of serious recession in Australia gives the government some breathing space compared to the US or UK, and this should be used to identify valuable infrastructure projects, but there is no substitute to open debate and serious analysis of alternatives before taxpayers’ dollars are actuallly spent.

    At the state level, a current debate in SA is between building a new sports stadium and a new hospital. The leading newspaper advocates speed in embarking on the stadium. Such a construction project would stimulate the economy short-term and provide a tangible outcome, but if the consequence is a foregone hospital then a quick decision and the ensuing Keynesian boost may not be in the public interest.

Support Quality Analysis

Donate
The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (https://www.eastasiaforum.org)

Copyright ©2024 East Asia Forum. All rights reserved.