The Dead Weight Cost of the Stimulus

Reddit

Ed Note: The following is an excerpt of testimony submitted by Dr. Kates before the Senate on the stimulus package

On 21 September I provided testimony to the Senate Economics References Committee on the damage done by the government’s “stimulus” package. The submission was broken into five separate sections.

  1. The state of the national economy where it was demonstrated that the Australian economy has been and is in recession. Even using the “technical definition”, the actions of the Government have not prevented the economy from entering recession.
  2. The impossibility of quantifying the effect of the stimulus showing that conclusions based on projections from a Keynesian model cannot be used to demonstrate that the economy would have been worse off had no Keynesian stimulus been applied. To think that a Keynesian model can substantiate any Keynesian claim when the economy continues to flounder is merely circular reasoning and based on no serious evidence.
  3. The harm done by the stimulus which includes:
    • noting that there is no justification for the introduction of a stimulus other than its effects on employment whose effects have been minimal at best
    • the distortions in the structure of production which occur as a result of the stimulus which directs the economy into unproductive activities
    • the loss in real economic growth because the stimulus measures have competed resources way from productive enterprises
    • a loss in long-term economic growth which will depress the rise in real incomes and lower living standards
    • the effect on interest rates which have remained higher than they otherwise would have been and will rise sooner than they otherwise needed to have done
    • the effect on future taxation which will need to rise by prodigious amounts if the debts that have been taken on are to be repaid
    • the potential effect on inflation which may become an important medium-term economic issue as the recovery gathers some momentum.
  4. The fundamental structural flaws in Keynesian economic theory which wrongly argues that increases in public spending and budget deficits are capable of generating economic growth even when the money spent is spent on producing goods whose value is far below their costs of production.
  5. A discussion of the theory of the cycle where it was noted that economies are subject to alternating periods of growth and periods of recession. The panic that greeted the downturn both here and elsewhere were massively disproportionate to the actual dimensions of the problems, even assuming that a stimulus package was the right approach, which it isn’t.

The full submission runs to 27 pages, but I will just note a couple of the specifics raised. The first of these is to point out that the economy has not only been in recession, but using the ABS-preferred trend data, the downturn even matches the definition of a “technical” recession by having contracted in two consecutive quarters.

The movement in the September quarter 2008 was negligible but unquestionably negative. In the December quarter 2008 the fall was somewhat larger but again negative. Thus using even the “technical” definition, on the best measure we have of the movements in GDP, the economy contracted for two consecutive quarters.

But it should not matter whether there were actually two consecutive quarters of falling GDP for us to declare that the Australian economy is in recession. If across a four quarter period, the growth rate has been 0.3%, then the economy is in recession. To pretend otherwise is simply to deny a reality that really cannot be denied.

The phenomenal fall in the level of national saving is also quite disturbing. Savings have diminished to half the level they were at a year before. In the June quarter 2009, there was a fall of one-third in just that period alone.

Moreover, in June 2009, the saving ratio has descended into negative territory, being recorded at -0.4. The notion that the stimulus has been tucked away into additional savings is belied by these figures.

The notion that was always at the core of the Keynesian model, that recessions are due to over-saving, is clearly nonsense. But without that bit of cover for the actions taken, where is the theoretical justification for spending money and deficit finance.

The Keynesian model, for those who have not studied economics, argued that recessions were caused by too much saving relative to the willingness of investors to invest. The Government was then required to make up the difference by increasing its own expenditures to soak those savings up.

The data, however, do not indicate any such problem. If there is a problem, it lies with not enough saving which makes the Government’s pursuit of our accumulated saving through its expenditure package even more difficult to justify. It is not hard to see when one looks at these figures why the RBA is itching to raise rates as soon as possible. It is why rates are rising already with or without the cover provided by the RBA. The potential for an inflationary spiral is not low.

I also pointed out to the Committee that the cost per job saved has been in the vicinity of one and a half million dollars each, based on the assumption that had there been no stimulus, the unemployment rate would have risen to around 6.1% (and here I am giving the stimulus the benefit of the doubt).

But to give you an easy access to the orders of magnitude involved in such immense levels of spending, I will just point out that we have spent $43 billion on the stimulus, for which there is real reason to believe we will not get a single dollar of economic return for the money spent. In times past the words we used to refer to a figures such as 43 billion was to say 43,000 millions. If we have created a net addition of 43,000 jobs for $43,000 million, then each of those additional jobs would have come with a price tag of around $1,000,000 each.

It’s all very well to say that something had to be done. It is something else again to say that we have to spend one million dollars for each additional job saved. It would not have made good economic sense at one tenth the cost, but this is totally beyond reason.

We have poured four percent of our national output into projects that cannot generate in any possible way an increased productivity that allows the debt created to be repaid from the projects themselves. It is all just a dead weight cost.

I will finish with something that was picked up from my testimony by the AAP which I did not even know I had said it until I read it. “The use of Keynesian economics has been on of the great catastrophes for economic theory in the West”. Just how true this is I fear we are all about to find out.

Dr. Steven Kates
for The Daily Reckoning Australia

Dr. Steven Kates

Dr. Steven Kates

Dr. Steve Kates is a Senior Lecturer at the School of Economics, Finance and Marketing, RMIT University. Dr. Kates spent a quarter century as the Chief Economist for the Australian Chamber of Commerce and Industry. Most of his research has been into macroeconomic policy, industrial relations and the history of economic thought. His most extensive area of expertise is in the classical propositions surrounding Say’s Law, on which he has written many papers as well as two books: Say’s Law and the Keynesian Revolution (1998) and Two Hundred Years of Say’s Law (2003) and, with John Cunningham Wood as the general editor, put together a five volume set, Critical Readings on Jean-Baptiste Say. The lead article in the March 2009 issue of Quadrant dealt with “The Dangerous Return of Keynesian Economics” which looks at the importance of Say’s Law in the development of coherent macroeconomic policies.
Dr. Steven Kates

Latest posts by Dr. Steven Kates (see all)

Reddit

Leave a Reply

35 Comments on "The Dead Weight Cost of the Stimulus"

Notify of
avatar
Sort by:   newest | oldest | most voted
Pete
Guest

Very interesting article, thank you.

Curt
Guest

Excellent article. Congress is holding back the job market with low interest rates and controling the labor market with union pay and minimum wage.

Drew Weeks
Guest

Thankyou very much for this article it was enlightening.

rick e
Guest
Great article The savings you mention brings to mind that yesterday Ken Henry mention reviewing tax on interest earned in the bank might not be taxed. He said the reason is that 75% of ozzys use a tax accountant which is higher than the rest of the world. Possibly it could be because the government is sacred that interest rates could cause people to sell there houses and not be able to (spending spree) and pay off there loan? So if interest rates remain low then the Gov might be able to keep savings up by not taxing it, and… Read more »
bargeass
Guest

The official stimulus policy is no more than an official economic corrupting policy – corruption is bad therefore stimulus is bad.
Robbing Peter to pay Paul does not create wealth it just disincentives both the the bludging Paul and the victim Peter. It’s a lose lose policy.

Nick Sinclair
Guest

“We have poured four percent of our national output into projects that cannot generate in any possible way an increased productivity that allows the debt created to be repaid from the projects themselves. It is all just a dead weight cost.”

This is the most interesting point, so can you please quantify this with numbers and projections?

Further, the above task, put forward may be easy, but China and many other countries have done the same thing, would you hold them to the sword also?

charles
Guest

Unbelievable
We have the only western economy to experience positive growth. We have a budget deficit that had to be reduced because economic activity didn’t fall away as much as was expected. We have indebted consumers who need to a job or they go bankrupt; and we see this short of rubbish published.

Michael
Guest

All assertion, with no real evidence or theoretical support.

I don’t necessarily dispute the point of view, but the accompanying case is weak.

Gerry
Guest
Well just another economist to me who has secure employment, produces figures and damm statistics and still believes he is a “scientist” of some description,and that he has all the answers and can treat everyone like a number. No consideration for social costs.The combined stimulus packages (china in particular from our perspective) have bought breating time for many fringe employees with commitments.Maybe that is all it has bought, but time is a big factor in these issues. Families are making adjustments,for what could still (almost certainly)be major issues for all.The adjustments many are making with savings will likely cost other… Read more »
Greg Atkinson
Guest
The reason we have skimmed the global recession so far is mainly because of two simple reasons: 1. We have no large export manufacturing industry. 2. Commodities exports held up relatively well while the annual “high” contract prices were still in place. These contract prices are now being reset much lower and so we have yet to see the full impact of lower volumes AND lower prices. How much of the stimulus money been wasted? Well we will never know since the Government does not worry about such things as ROI, ROE or even bother trying to work out in… Read more »
Bargeass
Guest

The stimulus handouts were designed to stimulate votes for the government of the day. Any other consequence was irrelevant.

Biker Pete, Vancouver, B.C., Canada
Guest
Biker Pete, Vancouver, B.C., Canada
Well, not quite irrelevant, BargeaRsE. Politically, it was a _win_ for Labor. The latest stats show 60% in favour; 32% against (that’s almost half); and 8% undecided. Let’s remember that stimulus funding is _worldwide_. In our view its implementation has been more focussed in Canada than elsewhere, despite some alleged rorting. Greg, while I agree with your two reasons why we’ve ‘skimmed the recession’, to argue that stimulus funding has had little impact ignores the impact on retail sales… and the boost to construction. We wouldn’t bet on 2010 either way. The potential for zero growth remains, but I’d rather… Read more »
John Smith
Guest

Can you put link to the submission.

denko
Guest
The argument here seems to be – as the US rebooted itself under the capital spend of the New Deal while still suffering the great depression – that Australia will today too – preemptively avert economic collapse under a spontaneous government led capital spend; on a scale that somewhat parallels, if not wholly exceeds the spend of the 1930’s. Has Rudd’s Labor pre-empted Chifley’s belated ‘light on the hill’ thoughts – with the new purchase of expensive (Chinese?) rechargeable AAA nickel cadmium batteries, so as to illuminate some hope for a new LED flash-light glow deep inside the deep gyre… Read more »
rick e
Guest

Greg with low interest rates when you buy a house then comes maybe renovations, then new furnishings, upgrade car maybe refinance those credit cards, so it could take maybe 1 to 2 years before this filters threw the economy then we might see savings again and a slow down in spending?

Joe
Guest
Dr. Steve Kates is clearly a man of theory and not of practise. He cites the principle that $43 Billion will have been spent and nay a dollar value asset to our name. This is not the case and his approach to explaining his philosophy makes many omissions to justify his argument. A great deal of the ‘stimulus’ was in nation building. A social program has no basis or merit within a capitalist model. Why should people receive healthcare if they cannot afford it. Why should people have access to quality schooling for their offspring, if they cannot afford to… Read more »
Greg Atkinson
Guest
Biker Pete, I can’t recall saying the stimulus had no impact, what I am saying is it was not the sole reason we avoided a recession and not even the main reason. Sure Gerry Harvey and the other retailers loved the cash handouts and they did help prop up the economy, but did we get value for the billions that were spent? Will the money spent help Australia be more productive in the future? (so that we can pay it all back at some point and the interest) rick e – I think for people that have held onto their… Read more »
Biker Pete, Vancouver, B.C., Canada
Guest
Biker Pete, Vancouver, B.C., Canada
As others have pointed out, Greg, we’ve no way of knowing how much value we got for the money spent. I suspect it has helped keep unemployment figures low, which means a greater tax base. We put our $1800.00 straight into construction, as did several families we know. I’ve no doubt that many primary producers spent their little windfall on equipment… . Canada may have implemented stimulus funding more thoughtfully. It seems apparent that Canada’s focus, for example on boosting tourism, will pay off. Crossing Canada, we’ve seen scores of initiatives which will boost their economy in that way. It… Read more »
Gerry
Guest
So.. a stimulus package is no good. The Governments tax revenue is falling through the floor, due to a world downturn and jobs are being downsized in hours or under threat of being lost. So the Government spends money to support jobs and the economy and keep some multiplier effect in play.Some get a handout, some for infrastructure, some for insulation and future energy savings,some for expansion of port at newcastle etc.As with all programs targeted to the many there is leakage and some loss. The stimulus package is just that… a stimulus. It is not recurrent expenditure locked into… Read more »
Lachlan Scanlan
Guest
I totally disagree with most of the posts above (not yours Greg) The stimulus was a waste. In OZ we consume lots of unecessary junk, prop up miles of unsustainable jobs with debt while forcing our primary producers out of business and building endless brick boxes all over productive land. In SE QLD the my forestry friends tell me that all our softwood plantations will become housing and all the hardwood forests (my workplace…for now) will become national parks. Thank God Greg yes we have our mining sector because if not for that Id hate to think where we’d be… Read more »
Charfcutter
Guest
I was not going to bother but thought I should add my voice to Michael’s. There needs to be something behind the asertions in this article. Where is the consideration in this article of how the different components of the stimulus package affect the economy. Surely we are not expected to believe that the cost/value of the stimulus can be summarised in a bit of doubtful mathematics that writes the whole exercise off as a million dollars to save each job. Where is the consideration of any benefits from the education build out or any of the infrastructure projects. Is… Read more »
tar and feathers
Guest

I concur with article and part 2 from Lachlan: Before the stimulus Aus Govy could not vocationally skill its workforce, provide adequate health care, get its workforce to work on time, or provide affordable housing. The stimulus will not provide any remedy to this ie nothing of substance will result, those dissenting should provide the evidence that we are in recovery, or how a possible recovery will provide long term prosperity…..for all Aus.

Biker Pete, Vancouver, B.C., Canada
Guest
Biker Pete, Vancouver, B.C., Canada
As someone surprised to receive a $900 cheque I thought long and hard about sending it back. I imagine others like Greg, Lachlan, BargeaRsE and T & F returned their cheques without a moment’s hesitation(?) ie., put their money where their mouths are. Stimulus funding is world-wide, fellas. Virtually every western economy has employed it to reduce the impact of the GFC. Yes, I guess it has prevented or delayed gold from doubling, trebling, bubbling; but it has, as Gerry notes above, had some very desirable outcomes, some of them lasting… . Now Lachlan, _honestly_ did you return your $900?… Read more »
Don
Guest

Being an overpaid miner I did not receive my check from Kev :( – I hope you spent it well Biker!

Lachlan Scanlan
Guest

You do keep us on our toes Biker.
Did I send my cheque back? No Biker I did not. Like you I thought about it too a lot. I bought capital items for my business because it seemed the only thing I could do to oppose the wastage around me.
I oppose the use of borrowed capital to maintain activities that are not sustainable. I am concerned about the future for my kids.
Unfortuneately I doubt we’ll see change before suffering causes reality to hit home.

David (Brisvegas)
Guest
I was also surprised to get $900 of my money back from Kruddy and Swanny. The only people more surprised to get the cash were those “Australians” living overseas, and those in jail who don’t have the opportunity to get out much to go shopping. More surprising to me was the fact these idiots gave my hard earned taxes to dead people, and also distributed the money in such a way that most of it will go to overseas businesses and countries. The reduction of official interest rates did more to protect the average Australian than a one-off payment of… Read more »
tar and feathers
Guest
I DID NOT RECEIVE ANY OF THE STIMULUS PACKAGES becuase I am out of the economic loop. I have almost completed my academic trade training in refrigeration and air conditioning and 1st stage of electrical trade training, I was forced out my employment (age) there is no access to the IR law for apprentices….the complexity of victimisation in a system that is clearly unjust I think reflects (one of many examples) the ineptitude of Govt and Aus economy. I was also refused access to the NSW State Govt Continuing Apprenticeship Placement Service (CAPS). Knocking back the stimulus money would effectively… Read more »
Greg Atkinson
Guest
Biker, did I send the cheque back? Of course not, it is taxpayers money and I pay taxes. Since I will be by default paying interest on the money I thought I might as well keep it. Anyway I put the cash in the bank ready for the tax increases to come along which will result in the money being handed back (plus some) or it will be required to pay for higher energy costs when the ETS comes in. In short, it will not be long before some level of government will be looking for the money again. BTW… Read more »
Ross
Guest

Greg, the data in this report is good reading, even if I don’t agree on the currency outcome. Perhaps you could share your thoughts on the Japanese component? http://www.zerohedge.com/article/deep-thoughts-kyle-bass-0 Elsewhere today denninger was making his point on the monetary base being inclusive of available credit and not just M1 etc, and then when I looked at the US moentary base even ignoring available credit I saw the massive peak built in the past 18 months from the fed’s new reserves on the balance sheet.

Don
Guest

Interesting article in the Business Spectator:

http://www.businessspectator.com.au//bs.nsf/Article/RPT-Gulf-in-talks-on-replacing-US-for-oil-Independ-WK3U5?OpenDocument

I wonder if all this talk talk talk will translate into action?

Greg Atkinson
Guest
Ross when we think of the Japanese economy we need to think about all the Japanese corporations that have continued to expand overseas in the last 10 years or so and that these companies tap into the workforces (and resources) of the countries they are located in. Japan is no longer simply powered along just by “Made in Japan” products but rather by “Developed in Japan” products. Also lot of observations in the report are “unusual” to say the least, for example I have never met any Japanese who have a deep cultural desire to lend the Government money! (give… Read more »
Biker Pete, Vancouver, B.C., Canada
Guest
Biker Pete, Vancouver, B.C., Canada
Sorry to learn that a few here missed out. “Being an overpaid miner I did not receive my check from Kev…” Don, 6/10/09. Don, you need to look at your tax structure. You’re paying far too much tax, mate. Good for Oz, but not so good for you… . Mining is bloody hard work… and there’s a limit to our indenture. And talking of indenture, I take the point that we’ve amassed an immense future debt. But seriously, the Libs, when pressed, stated that their debt commitment would have been close to Labor’s. Either way, it was/is gonna hurt. Ultimately… Read more »
Bargeass
Guest

Rudd stimulus rate rises just as the easily conned average Aussie ordered. Now enjoy paying back the $900 welfare cheque 10 times over with more to come. Vote one ‘something for nothing’

norfolk enchants
Guest

So Dr. Kates would like to get back to surplus ASAP, and then get us all to help grow the economy by taking on even more debt again?

That’s *really* worked in the past, as this last recession has shown us.

Bargeass
Guest

The whole stimulus policy is about stimulating the next downturn.To stay in government a socialist party must fool the punters into thinking they are needed.
Handouts anyone?

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au