Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Avoid spending like there's no tomorrow

By Tony Makin - posted Thursday, 2 April 2020


The Morrison government’s fiscal policy response to the COVID19 crisis directed toward keeping business afloat to minimize short term unemployment has in principle been both necessary and timely.  However, questions arise about whether the fiscal response is too expansive, is the right form, and whether generous cash handouts should have been included. 

Comparing the COVID19 Crisis and the GFC

The last major out-of-cycle bout of fiscal activism was the Rudd government’s response to the Global Financial Crisis. What’s happening now therefore invites comparison with that earlier episode and historic Depressions. 

Advertisement

Although the GFC and COVID19 crisis can both be termed external shocks, they have been transmitted quite differently.  The 2008-10 GFC was an external financial shock similar to the Asian financial crisis of the late 1990s which impacted on the real sector of the Australian economy via financial sector meltdowns abroad. 

Back then, foreign banks, stock markets and commodity prices collapsed, as did the Australian dollar, which always acts as an automatic insulator for the Australian economy during external financial crisis by boosting the external competitiveness of exporting industries and of industries competing with imports.

The COVID19 crisis in contrast is an externally sourced health disaster which has prompted necessary preventative measures by governments that, in turn, have severely curtailed economic activity and driven up unemployment.  Stock markets have reacted accordingly by plummeting, and continue to gyrate daily according to investors’ perceptions of how long the health crisis and government restrictions on economic activity will last.

Keynesian Stimulus Spending

The English economist John Maynard Keynes most famously advocated fiscal stimulus in the form of increased spending on infrastructure (then called ‘public works’) during the Great Depression of the 1930s, a result of a stock market and banking system collapse.  However, the academic jury is still out on how effective it was.  Some argue that the uncertainty it created for business actually prolonged the Depression, at the same time as economies turned in on themselves and became highly protectionist.

The 2008-09 GFC fiscal response was ‘stimulus’ of the Keynesian kind. Yet there is copious academic evidence to suggest fiscal stimulus fails in open economies like Australia, especially over the medium to longer term, due to the inevitable macroeconomic costs it imposes. 

Advertisement

These costs arise through a stronger exchange rate if government spending is relatively higher than abroad.  The higher public debt adds to uncertainty and means retaining, or increasing, income and company taxes which stymies future investment and productivity.

Cash Handouts Were Ill Advised

To characterise the bulk of the federal government’s business-oriented fiscal response Keynesian and similar in nature to the Keynesian fiscal response to the GFC is misleading.  There is a big difference between Keynesian advocacy of direct government spending and cash handouts to boost aggregate demand in the economy, and business tax relief measures to counter a government mandated aggregate supply collapse.

  1. Pages:
  2. Page 1
  3. 2
  4. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

8 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Tony Makin is professor of economics at the Gold Coast campus of Griffith University and author of Global Imbalances, Exchange Rates and Stabilization Policy recently published by Palgrave Macmillan. He is also an the academic advisory board of the Australian Institute for Progress.

Other articles by this Author

All articles by Tony Makin

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 8 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy