In praise of stimulus

August 16, 2010


Joseph Stiglitz, a Nobel Prize winning economist, has noted that when the global financial crisis (GFC) hit in 2008, Australia was one of the few countries to avoid the recession that hit most other developed economies.

“Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country. He realised it was important to act early, with money that would be spent quickly….Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries.”

Stiglitz goes on to claim that critics of this stimulus package, who argue that the stimulus money was not spent as well as it should have been and that government deficits and debt increased, have got it wrong. “While the focus for the moment is on public-sector waste, that waste pales in comparison to the waste of resources resulting from a malfunctioning private financial sector, which in America already amounts to trillions of dollars.”   And Australia’s deficit as a percentage of GDP and gross national debt are much smaller than in the US and many other developed countries and thus much easier to correct over the coming years.

Stiglitz also touches on the issues of the mining tax and environmental policy as they relate to the longer-term Australian economy.  The use of stimulus to avoid a long and deep recession; the appropriate taxation of mineral resource that are effectively owned by the country at large and not just single companies; and the environmental legacy left behind to future generations are all matters, at least in part, of economic efficiency, and policies dealing with these areas are thus of critical economic concern.

  1. How was Australia’s response to the GFC “Keynesian” and why does the author argue that it was effective?
  2. Why does the author argue that “waste” in Australia’s stimulus program was relatively unimportant economically?
  3. What is “deficit fetishism” and how is this concept meant to refute the notion of “Real Business Cycles” as described in Chapter 11?
  4. How does the mining tax and environmental policy relate to macroeconomics, as opposed to microeconomics?

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