How to stimulate the economy

Written By: - Date published: 12:00 pm, November 11th, 2008 - 9 comments
Categories: economy, wages, welfare - Tags:

During the debate over the economic stimulus package in the US earlier this year, Moody’s produced a model that shows which stimulus options result in the most increase in GDP per dollar of government spending/tax reduction.

I’ve highlighted the three options that are relevant to NZ (the Bush tax cuts are remarkably similar to the National plan – minor changes for low incomes, large open-ended cuts for the wealthy):

The results are clear and they make sense. If you want to stimulate the economy, giving more money to those who already have lots won’t do the trick. Instead, boost the incomes for low-income people and they will spend that money in their communities, stimulating growth and invest in infrastructure, which not only improves the framework for growth but provides jobs, raising incomes, which in turn creates more demand and more jobs.

If the National/ACT Government is serious about stimulating growth, they won’t cut the top tax rate. Instead, they will put that money in infrastructure and benefits.

9 comments on “How to stimulate the economy ”

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  1. gomango 1
    11 November 2008 at 12:17 pm

    A couple of major points:

    You make no allowance for the many structural differences between the US and NZ economies. Particularly relevant for the boost unemployment insurance argument

    Draw up a table of the Bush tax cuts compared to NZ. Not remotely similar in effect.

    No argument on the infrastructure view. You can call investment in infrasturcuture an investment in business productivity if you like.

  2. Phil 2
    11 November 2008 at 12:22 pm

    The initial fiscal stimulus of the Bush Tax-Cut is not included in the table you’ve posted – this analysis is only for the impact of making the cut permanent, after the fact.

  3. gomango 3
    11 November 2008 at 12:41 pm

    and, don’t trust moodys……..

    they used to give sub-prime rmbs backed cdo’s investment grade ratings and invented the concept of a super senior rating………

    Thats a weak joke. They are actually very good on things they know how to do – economics, corporate ratings.

  4. djp 4
    11 November 2008 at 1:26 pm


    the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

    – Economics in One Lesson by HENRY HAZLITT

    Sure spending money in the short term will create an increase in GDP (short term). But that sounds like the wrong thing to do in a financial crisis.

    “I am about to go bankrupt but if I spend my last few dollars at the supermarket my cuboard will be fill for the next week, whoopie!”

  5. insider 5
    11 November 2008 at 2:26 pm

    “You can call investment in infrasturcuture an investment in business productivity if you like.”

    Way too simplistic. NZ has some very salient examples of infrastructure investment that were far from productive. We have many examples of overinvestment in capacity which have taken decades to get close to that capacity. There are plenty of examples going on still – fibre to the home, Waikato expressway, rail investment, grid investment.

  6. djp 6
    11 November 2008 at 2:48 pm

    I agree with that insider, bureaucrats get way too exited about spending public money on things they “think” are a good idea.

    Kiwirail being an obvious example

  7. randal 7
    11 November 2008 at 2:52 pm

    the best way to spend money in the localities is provide people with jobs so that at the end there is something to show for it
    Johnny Keys is not going to seel Kiwibank or ACC
    as soon as he realises that they are HIS funds so to speak then he will clutch them tighter than MIchael Cullen did. hehehehehe
    the thing is what is going to do ?
    I can think of investment projects that will beign to pay off within the first year but I am justa n idiot from the boondocks
    what could I possibly know?
    you can guarantee the lampreys will get hold of him and start sucking before
    anything I have to say will ever be considered
    ther is only so much pie and only ever will be so much pie so its first in and first served and I’m guessing we will get the same old crap

  8. gomango 8
    11 November 2008 at 3:17 pm

    randal:

    “ther is only so much pie and only ever will be so much pie ”

    What? You’ve never opened an economics book (or an english grammar book) have you? And don’t be so negative, the public tit under National won’t be dramatically different to the public tit under Labour for the vast bulk of the population.

    insider:

    I didn’t make any claims as to the quality of govt spending…… just the intent. Your argument (quite sensible btw) leads to the conclusion that private investment is generally more effective than public. I think we can all agree that to be generally though not exclusively true.

  9. Pascal's bookie 9
    11 November 2008 at 9:29 pm

    Labour had a few political problems during it’s time in power due to the fact that Cullen was paying down debt and setting up the Cullen fund while other countries engaged in a taxcutspolloozza.

    This government is going to be competing with other nation’s stimulus packages while trying to cap government spending and running a razor gang. Good luck with that.