The fiscal stimulus

MacDoctor has an excellent response to the analysis done on Pundit over the $9 billion fiscal stimulus. Tim Watkin on Pundit says most of the stimulus is “old money” not new.

MacDoctor reponds:

Tim gets understandably offended by the fact that fully half of the fiscal stimulus is new spending already earmarked by Labour, including, amusingly enough, the purchase of Kiwirail.

I should point out that Tim’s problem is due to the fact that he is interpreting the words Fiscal Stimulus in the very socialist fashion used by Rudd, Brown and Obama – all died-in-the-wool Tax-and-Spend socialists. Fiscal Stimulus in this sense of the word means “Invent large sums of money from nowhere, then spend it like there’s no tomorrow”.

Bill’s answer is straight from Treasury – who are about as socialist as Roger Douglas. To them, Fiscal Stimulus means “amount of extra money being put into the economy” – nothing more, nothing less. Labour’s committed spending counts towards a fiscal stimulus just as much as National’s new spending. This is normal accounting practice and is not some strange plot by National to impress the media.

There is a big difference between “spending” and “stimulus”.

Tim’s objection to the inclusion of Labour’s extra spending appears to rest on the groounds that it occurred well before the economic crisis. This is meaningless in terms of the stimulatory effect it will have on the economy. Had it not been for the economic crisis and fact that New Zealand was moving in to a recession, Labour’s spending may well have kept inflation above the 5% mark, so stimulatory was it. The economy does not care where the spending was approved by Labour or National, it will still react to it in definable ways.

Tim also seems to object to the inclusion of spending on schools and roads on the understanding that these were already approved by Labour, but just moved forward. It seems to have escaped him that that is exactly what is required – an increase in current expenditure rather than later spending. Almost certainly, Labour would be doing the same thing, if it was still in power.

Those from the left want “extra” spending because that is what the left believe in – higher taxes and more government spending. But that is not the only way to increase the fiscal stimulus and bringing spending foward is, as MD says, an excelletn way to do that.

We are going to face a horrendous deficit and debt problem for at least a decade. If the Government is playing smart by having a large stimulus, without incurring ongoing expenditure that we have to borrow to pay for, good on it.

Having said all that, there is a fundamental mistaken assumption that Tim and the guys at Tumeke! and the Standard have made. It has also been made by the media and by Messrs. Rudd, Obama and Brown. It is the assumption that it is the amount of money being spent that is important. This is entirely false. It is actually how and where the money is spent that is vital.

Rudd has injected money directly into peoples pockets. This is a very popular move, but one that provides only a very short lived stimulus. Obama has huge swathes of useless “pork” in his package. Brown appears obsessed with owning banks.

Key, on the other hand, is spending frugally and carefully in the places he thinks he will do the most good for the economy in the long run. He has little money to play with (thanks, in large part, to Labour) and is making the best use of it he can. Arguing about the actual size of the stimulus is like arguing about the colour of the bus that is about to run you down.

I can only say I agree,