It’s the Economy Stupid

Will a stimulus package work? To answer this all we need to do is look around the world and at a bit of history, oh and the stock market.

A good example is Japan, they tried to spend their way out of a downturn and their economy has been down for ten years, worse unemployment became a factor in Japan, something never seen before. They also tried the infrastructure idea, that failed as well.

In general smaller governments are better than bigger ones. If you see a government trying to grow then you can be fairly sure that the economy is not getting any better. Governments seem to think that they are better at things than the private sector so they take on more and more ‘responsibilities’ and grow government by creating new groups to handle new things. Given that a government is always worse and less efficient than the private sector version, if it has controls, then any new business that the government takes on is an automatic area of failure.

A tax cut is not the same as a tax rebate no matter what the government tries to tell you. The latter is like a cheque from the government and it does not stimulate the economy because it is like taking $950 from one pocket and putting it into another pocket. Tax cuts work better because people see it as a long term real thing that they can plan around.

A debt becomes a deficit when a government keeps borrowing. This ultimately requires a tax increase to cover it and to cover the spending. Debt and deficits are but a symptom of the disease, i.e. that the government is borrowing and spending.

Look at France, Germany and Italy. These all have unemployment rates much higher than the US or Australia but we being told that we are getting into terrible areas, that need stimulation and protection from the government. The cost is that a greater amount of your pay will have to go to the government to pay for all of this. Worse any payout you get from the government will cost you more than that, by some multiple, down the road.

Public Choice Theory tells us that as a government grows, liberties drop. A stimulus is done for the government, i.e., to get re-elected and to allow the formation of new departments which is really just a power transfer.

The question becomes “how many jobs are created by the $40b? Some estimates put it at about one job per $250,000, well above the average wage. Our government tells us that other jobs are “preserved” and that these also count. Another question to ask is “what would the economy look like without the stimulus.” Anecdotal evidence says that we are no better off after the last $10b and history and other countries tell us that we will be in the same place after the $42b.

How will we even know that it is working? One indicator is what did the stock markets do after the stimulus was passed. They went down, so the market is not confident that it will do anything. Down the track we can look at growth rates. Again looking at the smaller governments of say HK, they are doing OK at 5% but France is hovering around 2% and falling. People spend money a lot better than the government does. The government does not work for a profit, or efficiency and it takes loans that would not be feasible in the business world.

Bottom line, those advising Rudd and Swan are not rocket scientists, they don’t even seem to be all that good at basic economic principles.