The fiscal beat up continues …

This morning’s Sydney Morning Herald (September 27, 2009) carried the front-page story $82m ‘wasted’ in stimulus splurge. As it was written by a political correspondent you might expect little coherent economic analysis. Your expectation would be correct. But the article had the predictable response from the deficit-debt-hysteria club and the “shocking revelation” has been interpreted as a testimony against the use of fiscal policy to attenuate major cyclical downturns in aggregate demand. The under-current is that citizenship doesn’t matter and governments should only assist those who live within the geographic boundaries they are sovereign over. All these conclusions are of-course folderol.

The article starts with the statement:

IT WAS designed to stimulate the economy but more than $82 million of the first round of the Federal Government’s stimulus payments went to people living abroad. Centrelink has confirmed 68,812 people living overseas received as much as $1400 each – a total of $82.2 million. The figure is 1.7 per cent of the $4.8 billion the Government handed out to pensioners, self-funded retirees and some single parents in December last year.

To put this in perspective, the stimulus packages announced by the Australian Government since the start of the downturn in the Northern hemisphere amount to around $58.2 billion.

The first announcement was for a $6.2 billion injection in the form of car industry assistance to underpin jobs and provide incentives for the development of environmentally-focused motor vehicles.

Then the government announced its first formal stimulus package which was a $10.4 billion injection aimed at stimulating pre-Xmas spending and was targetted at the elderly, low-age and first-home buyers, cohorts that the government felt would spend the cash quickly and keep aggregate demand growing. The retail sales data shows this plan unambiguously worked.

The second package which covers the 2009-10 period was worth $42 billion and was broken down into $28.8 billion of infrastructure, schools and housing with the remainder being for targetted cash payments to low-income families.

So in that context, quite apart from anything else, the $82 million noted above is about 0.14 of a percentage point of the total package. Headline news material for sure! Not!

The journalist’s point is clear. Waste and Splurge. You really only have to read the headline and all your prejudices about the inefficiencies and waste of government spending will be confirmed.

The goal succeeded. Among those quoted was a senior Opposition politician who tried to enlarge the $82 million into something bigger. Apparently there are around 68,812 persons in the south-western NSW town of Wagga Wagga ans so Tony Abbott was quoted as saying the waste is equivalent to

… a town the size of Wagga Wagga spending all its money overseas … It just shows the economic stimulus was not as well thought out as the Government said … It was too much too soon and some of the money went to people it shouldn’t have.

The journalist claims that the figures of where the money went “will fuel further debate about the targeting of the Government’s package”. If their is further debate about this then it just shows that Australians haven’t much going for them.

Of interest to me was where this international leakage occurred. Apparently:

Italy received the lion’s share of the money with 16,846 people receiving $19.3 million. Greece was the second largest destination for Australian money with 6078 people receiving $7.2 million. New Zealand came third with 5684 people receiving a total of $6.9 million. A further 21 countries had just one person who received a payment, including Cuba, North Korea and Zimbabwe.

Italy and Greece were the first-large Post World War II sources of non-English speaking migrants who were brought here to “build the country”. These early arrivals in the 1950s and 1960s, laboured and constructed a significant amount of the valuable infrastructure that is still providing benefits to our nation. Without these workers the job shortages would have been significant.

The reality is that a lot of those early migrants who took out citizenship went back to their homelands in later life as the gap between the improving standard of living there and the declining standard of living here narrowed. They had done their service to this country however.

And the bias of the journalist is noted when of the 21 countries who had just one person receiving a payment she list the dreaded trio (Cuba, North Korea and Z). She hasn’t realised that international relations have moved on in recent weeks and Iran is the big bad wolf at present.

The money was paid on the basis of tax and pension arrangements. Australia, like most civilised countries have reciprocal pension agreements with other countries and this arrangement actually benefits us. The Minister for Families and Community Services’ office was quoted as saying that:

Australia pays only $517 million in pensions to people overseas but benefits from $1.6 billion in overseas pensions paid to people living here.

So to really work out what the net result of the stimulus packages were you would have to trace all the foreign government payments that came here as a first step. Highlighting the $82 million leaving the shores doesn’t tell us much at all.

But the general point is this. Governments can design their fiscal spending in a multitude of ways depending on what they are trying to achieve. That is the beauty of fiscal policy – it can be targetted. It is also why it is a superior tool to monetary policy which is a blunt policy instrument – it relies on unknown and questionable distributional assumptions, has uncertain temporal horizons and cannot discriminate on a socio-economic or regional basis.

Fiscal policy is direct and if you hand out $x million to people, on the basis of citizenship or pension entitlements (reciprocal or otherwise) then that money will flow to where the people are – within our geographic borders or beyond. The fact is that the $82 million was given to those with a legitimate claim on Australian government benefits – whether the original basis for that claim is reasonable or not.

A more reasoned approach to this topic – to inform the public of these types of institutional arrangements – would have delved into the basis for the reciprocation – When did these agreements begin? Why? Who benefits? What relationship do the beneficiaries have with Australia? etc

That sort of enquiry might have fuelled a public debate which might be reasonable. But then the journo would not have had her front-page headline.

Its a tawdry game and we are all part of it.

The other question is whether stimulus payments to individuals in cash are a good way to introduce an early stimulus. Remember the government’s aim in the pre-Xmas package was to get spending going in December amidst all the gloomy predictions coming from abroad that hell was just a few days away.

They made the decision to target persons with high propensities to consume and realised that some leakage across the geographical border would occur given the “personal” basis of the recipient.

There is a huge debate in economics about whether cash handouts are superior to in-kind transfers. The libertarians always argue that cash handouts are better because individuals know what is best for them. Others (including myself) argue that in some cases in-kind transfers are better if the parents are, to illustrate, alcoholics and addicted to gambling, and will deprive their children of food if given government benefits in cash.

But this debate is about the best way to increase welfare not the best way to boost aggregate demand. While the two goals are interleaved they are also quite separable.

However, this is not to say that I am a big supporter of the design of the fiscal stimulus packages. For example, you might like to read these blogs – 90,000 jobs for 42 billion is a bad strategy … and The Jobs Plan and then? and Why are we so mean to the unemployed? to get a flavour of my criticisms.

My main concerns relate to how the unemployed have been treated by this government in dealing with the crisis. After all, those without jobs and without enough hours of work are the ones who largely bear the brunt of the downturn. They are also the ones who carry the burdon long after the economy has returned to growth.

First, I would not have handed out the $10.4 billion in cash payments and would there avoid the $82 million being transferred abroad. Instead, I would have spent around that much on an unconditional job offer at the federal minimum wage to anyone who wanted to work and couldn’t find a jobs (or enough hours of work). On our estimates that would have wiped out both unemployment (beyond the frictional 2 per cent or so) and underemployment in one policy announcement.

You can read about our research in this regard in the report Creating effective local labour markets: a new framework for regional employment and a summary in this blog.

In other words, the first thing I would have done was to introduce a Job Guarantee. Upon on our estimates this would have generated around 112,000 private sector jobs (at average weekly earnings) and around 450,000 public sector jobs (at the federal minimum wage plus entitlements).

As a result, this initiative would have been around 6.2 times more effective in creating employment than the $42 billion second stimulus package (using the government’s own estimates).

Second, if the government couldn’t come at that, then the first thing I would have done would have been to increase the unemployment benefit payment substantially. All of that person-specific benefit would have been spent and none of it (by definition) would have gone to people living abroad (even though I am not concerned about that aspect of the policy).

The fact that the government didn’t do this is one of the most mean-spirited decisions they have so far taken and reflects on their cynicism.

Conclusion

I guess the media tomorrow (radio and TV) will be interviewing expert X and expert Y about this revelation – that 0.14 of a percentage point of the stimulus packages have gone abroad. Many of these so-called experts will take the view that fiscal policy is wasteful and the government is washing our money down the drain.

But that just shows what a sorry lot we are for accepting this sort of headline and subsequent discussion without question.

I would also note that the private sector has washed a lot of our money down the drain in the last few years.

The reality is that the stimulus packages, while not entirely to my liking (as noted) have saved the economy from the disaster that other countries are living through. They were early and substantial – the exact two ingredients that have helped them achieve their aims.

Their aims were too modest – that is, they allowed for increasing involuntary unemployment, which I consider to be totally unacceptable. But without the packages the Australian economy would look very much worse than it does today.