Posts Tagged ‘Open-economy macroeconomics’

Treasury’s non-modelling of the stimulus

February 1, 2013 Comments off

Late last year I published an article with Agenda (the public policy journal of ANU) that critiqued the Treasury “modelling” (sic) of the Rudd government stimulus that followed the global financial crisis. It is an article that I started writing a long time ago, but sat in the “to do” pile for too long.

My main point was that the Treasury approach was hopelessly inadequate, a point that is abundantly clear to any economist who glances at their attempt, and has been readily admitted by some Treasury friends. As I wrote in the article:

“The biggest problem with the Treasury model is that because it misunderstands the issue of international crowding out, it drastically underestimates the impact on net exports. In addition, it entirely ignores the issues of domestic crowding out, monetary policy responses, and the costs of repaying the debt. While its estimate for the private savings response to the stimulus is at the low end of the range, this is the least of the problems.

“The ignorance of open-economy macroeconomics suggests that Treasury has neglected much of the advances made in macroeconomics over recent decades, and its strange assumptions on domestic crowding out and private savings response show that it has forgotten much of its own research. As Harvard economics professor Robert Barro said in 2009 when the US was debating its own stimulus policies, ‘The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936’ (Barro 2009).”

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Why the stimulus was bad policy

January 19, 2010 Comments off

There is a general perception that the economic stimulus package was good public policy and saved the Australian economy from recession. It wasn’t, and it didn’t.

Most of the economic commentary in Australia has been fairly simplistic. The standard story goes that the economy was heading for recession, so the government spent lots of money, and that made the economy stronger so we avoided recession. This is the line repeated by the Rudd government and some of the media.

But this story is wrong on several levels.

First, in any meaningful sense Australia did go into recession, and by some accounts we still are in recession. The government is quite right to claim that total GDP growth has remained mostly positive: for the last five quarters it has been +0.1%, -0.9%, +0.5%, +0.6%, +0.2%, with a total of +0.5%. However, the more useful measure of wellbeing is GDP per person, and that measures has been mostly negative: for the last five quarters it has been -0.4%, -1.4%, 0%, 0%, -0.4% with a total of -2.2%.

In short, since the GFC started Australians have become on average 2.2% poorer.

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