The economic crisis has, as we’ve been discussing, raised a lot of interest in Keynesian economics, but so far it’s been based more on the obvious bankruptcy of alternatives than on successful examples of Keynesian fiscal stimulus. Although there were some big financial bailouts late last year, few countries engaged in large-scale fiscal stimulus before the first few months of this year (Obama’s package was passed in February, and is only now being implemented, so we can’t expect to see evidence of impacts on GDP until late this year).
Australia went early and hard with a substantial cash handout to households in December 2008, followed by another round of cash stimulus delivered a month or two ago, and then a large-scale infrastructure program. The national accounts for the March quarter (which should include the effects of the first round of stimulus) have just come out, and show growth of 0.4 per cent, compared to a 0.6 per cent contraction in the December 2008 quarter
On the face of it, this is a big success for Keynesian fiscal policy. And, there’s pretty general agreement that, despite some qualifications and plenty of concerns about the future, the prima facie interpretation is the correct one.
The outcome was helped by fortuitous growth in farm exports and by the fact that, since Australia doesn’t have much of a capital goods producing sector, declining investment is largely offset by declining imports of capital goods. But there is general agreement that the outcome would have been much worse without the stimulus.
The longer-term concerns are of two kinds. First, independent of Australia’s policy choices, there are more negative shocks to work their way through the economy. People are losing jobs, and that will translate into lower demand and weaker future growth. And the full impact of the slowdown in Asia hasn’t yet hit our commodity export sector, which has been relying to a fair extent on contracts signed in the good times. These concerns are significant, but don’t affect the argument that fiscal policy has been successful.
The second concern is that we may be buying short term relief at the expense of longer term pain. As regards the purely fiscal stimulus, this concern seems overstated. The government has announced a broadly feasible plan to return the budget to surplus as the economy recovers, though higher taxes will almost certainly be necessary. That presumably means a somewhat slower recovery, but the implied growth path looks a lot better than the one without fiscal stimulus.
The bigger concern relates to the housing market. Australia had as big a bubble as any country and, although prices have come back a bit, the bubble has definitely not burst. The government has used subsidies to prop up the bottom end of the market and these are to be phased out over the rest of this year. Since we never had really bad lending practices, households should be able to absorb a 20 per cent fall in prices reasonably well. But a bigger fall will cause trouble.
Overall, though, this is the first data point of the current crisis, as regards the effectiveness of Keynesian stimulus, and it is definitely a positive one.
fn1. Please ignore silly stuff about two negative quarters constituting an “official” recession. Also, these aren’t annualised in the way that is usually done in reporting US national accounts.