Stimulus targeted well but there will still be a cost

Thanks to the Coalition’s $18bn stimulus package, it’s almost certain the economy will avoid a “recession” — two consecutive quarters of economic contraction.

The first three months of the year are a write-off, it seems, but the government is poised to inject $11bn, the equivalent of just over 2 per cent of quarterly GDP between the end of March and July 1, via the pockets of welfare recipients and small businesses.

Another $7bn will flow in the next 12 months. For the economy to still contract amid that deluge of cash, on top of strong population growth, it would have to be very sick indeed.

What matters, though, are jobs, incomes and the wealth of individuals, which have a weak relationship with gross domestic product — the statistic used to define a recession.

Goodhart’s law says when a statistic becomes a measure, it ceases to be a good measure. And that’s the case with GDP — everything becomes about the figures.

Who could blame the government for wanting to avoid a “recession”, or for failing to resist the clamour “to do something” amid what appears to be the start of the biggest economic challenge since the financial crisis a decade ago.

As far as stimulus goes, the six measures proposed are temporary, targeted and proportionate. And they’ll be delivered through existing payments and tax office infrastructure, avoiding the ham-fisted implementation that blighted the Rudd government’s 2009 stimulus.

Laudably, the government has resisted providing cash grants to buy houses.

But that doesn’t mean that pump-priming, borrowing funds (mainly from overseas) and giving handouts is economically wise.

“The whole package smacks of hydraulic Keynesianism: you pump money in and suddenly there’s more jobs. But economies don’t work like that,” said Tony Makin from Griffith University, who has studied the efficacy of stimulus for years.

The economy is complex.

“There’s a lot of evidence spending multipliers (how much extra spending handouts induce) are zero,” he said.

Another saying in economics is there’s no such thing as a free lunch. The extra debt, having been frittered on consumption, has no asset to match it and will have to be paid for through higher taxation.

The stimulus will do nothing to wrench the economy from its structural torpor, either. Wages and productivity growth will remain weak, amid excessive taxation and regulation.

Obama aide Rahm Emanuel once quipped “Never waste a crisis”. It’s a pity the stimulus hasn’t included structural reforms that might have improved the efficiency of the economy and boost activity.