Stimulus Packages

There are some interesting debates happening on various stimulus packages around the world. Take this AAP article on Kevin Rudd’s:

ECONOMISTS have raised concerns the Federal Government’s cash handouts to millions of people will be blown on pokies and plasma televisions.

The Government wants to give payments of up to $950 to individuals as part of its $42 billion economic rescue package….

Reserve Bank board member Warwick McKibbin called for the payments to be scrapped.

“A cash payment … only has the potential to temporarily stimulate demand and has no long-run benefits to the economy,” Professor McKibbin told the inquiry last night.

He said it would be better to bring forward tax cuts or temporarily cut the GST.

So what will the money go on. remember this is a one off payment, not a permament change in income:

Sinclair Davidson, professor of economics at RMIT, slammed the handouts.

“Do we believe that Australians have not been borrowing and spending enough on alcohol, pokies and tobacco, and that there aren’t enough plasma televisions around?” he asked the inquiry.

Then we look at the polls in the US on the Obama package:

In a CNN/Opinion Research poll, 54% of respondents said they favor the stimulus plan that the Senate is expected to pass on Tuesday. And 64% said they felt the bill would help the economy recover. …

But 55% of respondents said that even the less expensive Senate plan would cost too much in spending and tax cuts, according to the survey. In addition, 30% think it’s just the right amount of money and 13% said the government needs to spend even more.

The amount of pork in the Obama package is huge, and it is interesting that already most Americans say the package is too large.

Then back home Rob Hosking at NBR argues not to go too large:

Today’s infrastructure announcements from the government should provide a welcome boost for the economy, even though the $500 million spend is hardly earth shattering.

But too much stimulus – and it is not difficult to have too much – and ministers risk an inflationary surge and large interest rate hikes just as they head into the next election. …

Hosking continues:

There is already a fair surge of stimulation working its way through the New Zealand economy.

On the monetary side, the Reserve Bank has more than halved interest rates over the past six months and will continue cutting for until April or maybe even June.

The official cash rate was 8.25% just over six months ago: it is now 3.5% and likely to go to 2%.

It is very important to remember interest rate changes have a lag effect of 12 to 18 months before they fully work their way through the economic system.

That is a key point. Many of the effects are delayed and you risk having all this stuff kick in as the recession is ending, resulting in inflation.