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Stimulating

Written By: - Date published: 2:25 pm, November 14th, 2008 - 48 comments
Categories: economy - Tags:

One of the things I like about being left wing is how often the best moral decision is also the best economic decision.

Take economic stimulus for example. In a recession it’s the most vulnerable such as beneficiaries, low paid workers and youth that are hit worst because they are the ones least likely to have any financial backstop. The good thing is the best way to ameliorate the effects of a recession on society as a whole is to help these people out.

If the recession is likely to be short-term then it’s possible to moderate it by increasing consumer spending and the best way to do that is to make sure that those at the bottom have more money to spend because it is those at the bottom that are more likely to spend in their local economy. It’s also those at the bottom that are more likely to need that money because they won’t have budgetary capacity they can cut.

But you can’t shop your way out of a long term recession. When things are looking like they are going to be bad for a while you need to make sure that the money you are using to stimulate the economy is more tightly targeted. The money still needs to go to the lower income brackets but it needs to do so in a more controlled way. One of the best ways is by bringing infrastructure forward and increase investment in it. Anther way is to tie receipt of this money to education and training. This ensures that the money that you are using to flatten the recession can be fed through the economy in a more controlled way using jobs and training allowances. That also means you’re building productive capacity so full advantage can be taken of the next boom.

Of course the other option is to provide say 80% of your tax package to say the top 30% of earners and hope for some trickle down. But faced with a long recession these earners tend to use the money to pay down their debt or just put it in the bank in case they need it later on. That’s about as stimulating as a Peter Dunne speech and, when it comes at the opportunity cost of jobs and income for the most vulnerable New Zealanders, it’s about as moral as the way he operates.

48 comments on “Stimulating”

  1. Ianmac 1

    Isn’t the evidence that the Trickle Down Theory just makes the income gap between Rich and Poor greater?

  2. Chris G 2

    Interesting post IB, A good read.

    Back to work Chris.

  3. Rex Widerstrom 3

    Depends on the infrastructure in which you choose to invest. And while I’m all for education and training, that’s a very long term solution.

    And one fraught with risks, as the ground can shift much faster than training can adapt and people can unlearn and re-learn the skills the economy needs. Just a few months ago the miners were desperate for staff and paying lunatic wages, distorting the rest of the Australian economy. People couldn’t get through mining courses and off to Queensland and WA fast enough. Dishwashers on mine sites were earning more than professionals in the cities.

    Now suddenly market darling Fortescue Mining has plunged from $13.15 (July 2008) to $1.88, the other miners are suffering big hits, and all are slowing production, postponing opening new projects, and generally digging in (pardon the pun) for a rough time.

    And the TV ads are already running which urge young people to forget all that mining nonsense and train for a job in IT.

    Surely the part of the formula you’ve omitted is measures aimed at encouraging business to behave in various ways that will have long-term economic benefit: investing in R&D so we eventually have more things to sell, say. Marketing those things offshore. And so on.

    While direct assistance to low income earners is vital to ensure they survive the downturn (and you’re right, handing money to those on higher incomes won’t work), it’s only productive activity that will turn it round in the long run. And that means business.

  4. Chris G 4

    Rex,

    Perhaps he ommitted investment in R&D because the post suggests possible paths the Nats will take… Now we know their bone headed disregard of the R&D credit seems that part of the formula is now not possible!

  5. Pascal's bookie 5

    I got leaked the Treas advice to the incoming govt. It’s a shocker. 1984 through the looking glass peeps. TINA’s back and she’s pissed. Nothing for it, they reckon, but to nationalise the means of production and exchange. The bankers have been making out like bandits with more traditional, though extraordinary, responses in the States, so our treas says don’t trust ’em.

    Hold on to your hats. See ya’s on the barricade.

  6. IrishBill 6

    I missed out R&D because this was a quick post off the top of my head but I agree about business needing to be pushed to do it (and NZ businesses have a dreadful R&D record).

  7. gingercrush 7

    http://election08.scoop.co.nz/gordon-campbell-on-the-new-breed-of-conservatives/

    Once again excellent article written by Gordon Campbell. Good read and I think does add to Irishbill’s topic.

  8. keith 8

    I work for an export company that spent ~$50K preparing for the R&D tax credit; quite a chunk of change for a small-medium sized business. This was, of course, completely wasted when National announced they were scrapping the program. What was amusing was the attitude of our National party supporting manager who didn’t seem too bothered; I doubt his reaction would have been the same if Labour had made the same announcement…

  9. Pascal’s Bookie: Any chance an OIA request will winkle that out into the public domain?

  10. randal 10

    trickle down just means you can slyly piddle on people without exhibiting all the equipment and hosing them down

  11. Pascal's bookie 11

    Any chance an OIA request will winkle that out into the public domain?

    Nah mate, bit too sensitive. A careful reading of that scoop article ginger points to makes me think I’m not the only one in the know.

    “Yes, that would be the Prime Minister-elect, John Key. Big Government is here to stay, so get used to it.

    ENDS”

    Indeed Gordon, indeed.

  12. Ianmac 12

    Elsewhere there was talk of teaching/learning “how to think” rather than just accumulating knowledge.
    One of the major Educational Goals is to learn that knowledge and skills are transient. Specific skills learnt at school now will be out of date tomorrow.
    So learning how to think, lateral thinking, connectivity of previous experience, adjusting to change etc will be vital for this challenging time. How can that be done when the accent seems to be testing that which is really mostly just recall?
    Does the business need an obedient workforce or a flatter level problem solving, inclusive workforce?

  13. Quoth the Raven 13

    The thing about R&D and the Fast forward fund is that a really large proportion of our economy is baed in agriculture. Investment into agriculture, biotechnology etc is where our money should be going because that is where it will be most effective. Not bloody broadband internet and tunnels….

  14. I’m looking at all this thinking it’s a bit odd that the only way to avoid recession is to keep our unsustainable and ultimately destructive global economy at top speed wrecking the climate, water and soil, by maintaining consumption via wealth transfers to everyone caught short so they can consume ever more of what we can’t produce sustainably.

    No way could we EVER think of doing anything differently or better. If we come close, the reactionaries step in and undo what little has been attempted.

    There is madness there…….a civilisation in denial. Very human and ultimately futile.

    Reality will win again. Always does.

  15. the sprout 15

    “often the best moral decision is also the best economic decision”

    IB, this happy coincidence is partly attributable to the fact that morally just decisions do not incur enforcement costs in the same way that morally unjust decision do. Unjust decisions need to be backed by costly policing and coersion for people to comply, while just ones are complied with voluntarily.

  16. Chess Player 16

    Ianmac,

    “Does the business need an obedient workforce or a flatter level problem solving, inclusive workforce?”

    It depends whether you have a large, monopolistic business, and you want to fend off competitors, or a smaller business that you want to grow rapidly through innovation.

    Interesting correlation between business and politicall parties on this too. There are definitely two quite different types of political party out there under MMP, and I’d say the supporters of each type a quite similair to the two types of employees you mention.

    The larger businesses/political parties tend to prefer dogma, while the smaller tend to be more flexible and open to options.

  17. Daveski 17

    But you can’t shop your way out of a long term recession

    Perhaps I’ve missed something but isn’t the fact that people stop shopping a classic cause of a recession?? More accurately, if demand decreases, manufacturing will decrease and hence you have a downturn if not a recession.

    I understand well enough that shopping isn’t going to save the economy (although my wife does her bit!). I agree that infrastructure spending is a priority but education and training is a long term and more risky approach.

  18. gomango 18

    Look, it’s very easy to bag the decision by the Nats – which they signposted well BEFORE the election to get rid of the R&D fund. Truth is, it was poorly designed and inefficient. For instance, at my organisation (local branch of a foreign bank) we had quickly devised a way to capture tax benefits without doing anything vastly different to what we do now – just recharacterising expenditure already made by the bank and creating a new business unit in NZ. No new staff, no new expenditure, lower taxes.

    The fact National cancelled something which at first blush looks like corporate welfare ought to tell you something about how well the scheme would have worked. the jury is obviously still out, but it seems clear to me that Key wants to run Govt as a technocrat rather than an idealogue.

  19. Billy 19

    What happened to the Standard week?

    [lprent: An interesting question. I’ll ask. But it has been a hard week]

  20. randal 20

    what happened to the 25 jobs at agresearch?

    and what happened to crime
    all of a sudden its gone
    POOF
    that was handy

  21. keith 21

    The fact National cancelled something which at first blush looks like corporate welfare ought to tell you something about how well the scheme would have worked.

    gomango–it was corporate welfare but they couldn’t afford that plus the tax cuts, their decision had nothing to do with suspected efficacy of the the R&D tax cut.

  22. Ag 22

    Given the mass slow-motion financial trainwreck currently in progress, tax cuts or stimulus payments just seem like painting over the rust on your car. It just sets us up for a bigger crash down the road. Both are faith based policies.

    Frankly, I don’t think that any of them, including most professional economists, have much of a clue about what to do. The Emperor appears to have no clothes.

  23. Ianmac 23

    gomango: Are you telling us that your bank cheated in order to get a tax-credit? Surely not! Banks wouldn’t cheat would they?
    I guess that means that not one business would not cheat. I mean is there a business or two out there who would genuinely attempt to develop R&D. I guess not. Too greedy. I am naive.

  24. gomango,

    it seems clear to me that Key wants to run Govt as a technocrat rather than an idealogue.

    Let’s hope this wishlist item at very least supercedes the S.Korean endeavor. The likes of Park and Choi are originals even you would have to admit.

  25. vto 25

    IrishBill, it’s just plain ludicrous to suggest that those at the ‘bottom’ are the most affected by downturns. The most affected are those with a lot as they go from lots to nothing. To suggest that those with nothing that go down to more nothing are more greatly affected is just plain dumb.

    But I do agree that it is the great swathe of humanity and its daily activities that is the ‘economy’ and that anything to keep that mass’s momentum massive will assist with that general economy.

  26. tsmithfield 26

    If tax cuts are saved rather than spent, there is more liquidity for banks. This means there is more funds available to be lent out, increasing liquidity in the community as a whole.

    So, saving tax cuts can also be beneficial.

  27. Pascal's bookie 27

    smithie, the liquidity thing isn’t working out too well in the US, the banks aren’t lending.

    vto, you’re right, poor people don’t lose millions, but rich people tend not to lose their jobs, houses, marriages and health. Should we call it a wash, or think about it like humans? good to see you back BTW.

  28. tsmithfield: Tax cuts saved? LOL!

    NZ can’t has saving.

    Has never don’t. LOL Taxes!!!!

  29. gomango 29

    No. No question of cheating. Every business that would get the tax credit would meet the (loosely written) criteria. No lies or cheating necessary – it was just a badly designed subsidy. And most of the corporate sector would have happily jumped on board and was preparing to do so. $700 million gets spent and very little true R&D to show for it. Companies that rely on R&D do it anyway – yes, make life easier for them but don’t allow everyone else to jump on board as well. And Keith – you may be right on the cost of tax cuts but I distinctly recall Nats saying they were canning it precisely because it was a bad policy. Irrespective, National won the sales job. Keith – you also accidentally cut to the core question. Those on the right AND pro-business like tax cuts for corporates because it reduces the need for complicated tax subsidy schemes and reduces the incentive to game the system. I don’t want to debate whether thats right or wrong because essentially there are different irreconcilable viewpoints that will never meet on that question.

    And I don’t think the Korean examples are that relevant. Key is neither corrupt nor taking payoffs from his chaebol masters to retain domestic monopolies.. Better examples are some of the newly emergent ex soviet satellites – the baltic states etc. Though I’m no expert and haven’t really looked closely at them – happy to defer to someone more knowledgeable.

    I think the real point I am making is that critics of “Key – the secret agenda, the far right sleeper etc” are falling into the same trap as Labours strategists who went with a fundamentally negative campaign ” You can’t trust Key”. Well turns out people do – at least so far. It didn’t resonate with the wider population then and new attacks on his character wont either – on the evidence so far he seems intent on playing the inclusive pragmatist. Policy arguments maybe more fertile ground – but essentially National have a free ride on the economy for some considerable time as Labour have clearly said the problems are all imported – somewhat true – but we also had plenty of domestic causes. We were blowing up in the finance company sector and had close to the most overpriced residential property in the OECD market long before the US hit the wall.

  30. Lew 30

    tsmithfield: But not as beneficial as spending them back into the economy, and that’s the point – marginal gains make a big difference when things are really tight.

    L

  31. vto 31

    cheers P’s B, been boondox festering. Missed all the recent election action. Re the post, I have to mildly disagree. It is all relative isn’t it? Just like poverty and wealth themselves. By way of example.. it is easy to dismiss, but stockbrokers who throw themselves out of tall buildings when things go kaput I think illustrate the very dramatic effect downturns have on those who have built something up over perhaps many decades only to see it frizzle in the sun.

    Easy to side with the ‘poor’ versus the ‘rich’ on this but putting aside their relative positions the richer can suffer far more than the poor at times like this.

    Also, I see other threads above.. the difference between labour and the nats was keenly illustrated by English when he said that people are free to spend their money (he was talking tax cuts) as they see fit – either spend it he said, or save it or use it to pay down debt. Cullen clearly does not do this – he would force it to be spent in ways he deems fit, because people cannot be trusted with themselves.

    The stark difference between the two outlooks was lit up right there. Brilliant, but missed by many.

  32. Bill 32

    Forget any common sense by whatever theory. Creeping corporatism is sneaking on up.

    Party coverage was much of a muchness, but how much blunted a more pro societal message and how much elevated an abstract pro business message….. as good.

    Em. That the media is itself is essentially a corporation? Impact? How impartial? Opinions shaped how much by individual reporters and how much by ‘the line’ which promotes and encourages orthodoxy and sidelines dissidence?

    How much info by which to form an intelligent opinion?

    Corporatism was synonymous with Mussolini and it quickly devolved to fascism under Hitler. Both folkies heroes by the leading publications of the day.

    Can you wait for these days?

  33. randal 33

    no vto
    that is not true
    you are putting it as an either or argument
    all or nothing
    the labour plan was and still is and will not be deviated from by national is to have a national fund
    or funds
    and to have them owned here by and for new zealanders
    any mad national voodoo economics plan plan will founder on reality
    there is no room to farm the funds
    and they know it
    andtoo many experts now
    all going to work on the problem
    expect some results
    nats might chuck around a few bucks here and there but they got to keep a firm hand on proceedings
    no wight wing wonk
    or pounce
    tighten your seat belts
    the crunch is coming andnothing National does will avert it
    a year
    and the experts are raring to go next year
    so expect big economic news
    back to the crunch
    short and sharp but deep enough to bite
    time to get smart
    do other things
    perhaps
    size up the new world

  34. Chris G 34

    vto,

    Your mad. What are you basing this on?

    “IrishBill, it’s just plain ludicrous to suggest that those at the ‘bottom’ are the most affected by downturns. The most affected are those with a lot as they go from lots to nothing. To suggest that those with nothing that go down to more nothing are more greatly affected is just plain dumb.”

    Have you looked at any articles that might suggest contrary to your speculation?
    If you cant be bothered looking (surely not!) heres some

    http://www.nytimes.com/2008/11/09/us/09young.html?hp

    http://ann.sagepub.com/cgi/content/abstract/456/1/88

  35. keith 35

    vto said – IrishBill, it’s just plain ludicrous to suggest that those at the ‘bottom’ are the most affected by downturns. The most affected are those with a lot as they go from lots to nothing. To suggest that those with nothing that go down to more nothing are more greatly affected is just plain dumb.

    vto: so you’d rather be on the edge of destitution at the beginning of a recession than very wealthy?

  36. Pascal's bookie 36

    A good time to be in the boondocks. wise man.

    It’s not that I’m without sympathy for the losses of the rich, and if we are are going to talk about jumping bankers we can also talk about the dustbowl dirt farmers where suicide was also a growth area. Reading about this time around, the Wall st bankers don’t seem to be suffering, making out like bandits more like.

    The way I look at is that given there is only so much support the state can give, they should give it where it is most needed. The rich are better positioned to not starve at the extreme end, and should have been better prepared in any case. There is an absolute non relative amount of things people need to get by that is the same for both the rich and the poor. The poor are in danger of that in a way the rich are not. The wealthy tend not to be faced with the decision or reality of having to cut back on meals for their children.

    Re the English quote, while there is a wisdom of crowds, there is also a madness, and they only come to their senses one by one. Sometimes the collective decisions that make perfect sense for each individual, collectively add up to a stalled economy. At that point the government needs to act, which means it needs to have the money. There really is no free lunch.

    I disagree with you about what goes on inside Cullen’s head, and I’m sure you agree that guessing motivations is a muggs game. I suspect it’s not about a lack of trust in what individuals do, but about a recognition of what markets do when things go crazy. He’s an economic historian after all, not a market dealer 😉

  37. Matt 37

    Left-wing moral superiority over support to the poor is a myth. The fact is that right wing religious conservatives have been supporting the poor for centuries.

  38. Chris G 38

    Piss, I put out a quick response to vto’s absurd speculation that the rich suffer worse than the poor in a downturn.

    Ill try and re link to a small selection of the many articles that suggest contrary to your speculation… the poor suffer worse from downturn/recession:

    http://www.nytimes.com/2008/11/09/us/09young.html?hp

    http://www.rockymountainnews.com/news/2008/nov/08/homeless-working-poor-felt-recession-first/

    http://www.boston.com/news/world/asia/articles/2008/10/30/japans_working_poor_at_risk_as_recession_hits/

    I might add vto, that that is probably one of the worst calls I have ever read here.

  39. Pascal's bookie 39

    Thanks for the links Chris, here is Joseph Stiglitz writing in the WaPo about what he thinks Obama should do.

  40. vto 40

    Chris G, it is simple logic.

    If man A goes from $100mullion down to say $100 then the effect is greater than man B who goes from say $110 down to $100.

    It really is very simple.

    And often always forgotten – but who cares about the rich pricks ay. Stuff them. Off with their heads!

  41. Quoth the Raven 41

    vto – But how many of them acutally go down from $100 million to $100. I’ll give you hint two words fuck and all. If a poor person loses a significant portion of his income then he may well be on the breadline if a rich man does then he may well be unable to afford the 2009 model car he wanted…

  42. Pascal's bookie 42

    A is not rich. He is a poor prick and would benefit from a stimulus package aimed at the poor. Are you suggesting that A should get more help than B? Why? He sounds like a bad risk compared to the frugal Mr B who has lost relatively little!

  43. Carol 43

    Thanks for that link Pascal’s Bookie. Unfortunately there are signs that those with most power internationally are working to maintain the same old system that caused the financial crisis, even thought they are giving the impression that they are working towards a new approach that would be fairier to all.

    See this article:

    http://www.guardian.co.uk/commentisfree/2008/nov/13/economy-taxandspending

    Sleight of mouth

    In public, the [UK] government is calling for greater regulation of the financial markets. In private, it’s pushing for the exact opposite

    John Hilary

    And it looks like Obama is already taking a line that will make it hard to change to a better system internationally:

    http://www.guardian.co.uk/commentisfree/2008/nov/14/obama-white-house-wall-street

    Ditch the smooth transition. The people voted for change

    Instead of accepting the corrupted bail-out and reassuring Wall Street, Obama’s team must start doing the hard stuff now

    Naomi Klein

    The more details emerge, the clearer it becomes that Washington’s handling of the Wall Street bail-out is not merely incompetent: it is borderline criminal.

    At home Citizen Key is keen to be take a centrist position and play the role of a consensus-maker, consulting with groups in various positions on the political spectrum. OTOH, he seems very keen to get overseas to meet with Bush and Brown, who are working to ensure the international rules remain the same old neoliberal ones. This would make it easier for Key to follow that neoliberal line at home in the future.

  44. Ianmac 44

    Spare a thought for Mr Key! Assuming that he does not have $50mil in cash then his stake, if in shares/bonds might be at risk. Why he might crash and burn to say $40 mil.
    By the way. The hardworking businessman has put his all into building up his little business. Risk/debt/courage. How much does he respect a bloke who made his dough by wheeling and dealing in other people’s money? “My Hero?”
    VTO: You seem to measure loss as a material thing. Mortals like me see loss as loss of health, friends, basic food needs, marriage.
    If the Rich in a downturn measure loss as a loss of material things only, then I guess they lost more much earlier without even knowing. (Think of Owen Glenn. The doco on him a few weeks ago painted him to me, as a sad lonely figure surrounded by bought people and wallowing in wealth.)

  45. rave 45

    .Look at that man Hawkins of Equiticorp who John Key said he didnt illegally help buy NZ Steel in 1987 the day before the crash, putting him in jail (Hawkins that is) and now where is he?
    Not on the dole.

  46. Lew 46

    vto: I like examples, they can be constructed to make any point you like.

    What about Jill, who goes from $1,000,000 down to $100,000 as compared to Jack, who goes from 100,000 down to $10,000? Both have had their income reduce by 90%, and the erstwhile millionaire Jill has lost ten times more than Jack in absolute dollar terms. But Jill’s still able to pay rent, feed her family, drive a car, etc – perhaps she has to move out of Beachhaven, sell the Lexus, and so on, but she’ll get by. Jack, on the other hand, having lost far less, is now financially incapable of anything – dependent on others for food, shelter, and the welfare of his family. So tell me: who has actually lost more?

    The ultimate point is that these matters aren’t simple, and applying simplistic `common sense’ measures to them makes this more clear, not less clear as you seem to think.

    L

  47. Pascal's bookie 47

    Carol, Yeah. Reform won’t be easy, or enivitable. I’ve no doubt that there will be pushback against any attempts at reform, though I think it’s a little too early to writing off Obama just yet 😉

    I’m reminded of a quote from President Johnson speaking to activists about the civil rights act; “You convinced me, now go out and make me do it.”

    Obama and other leaders will certainly face resistance to reform from those who have benefited from the current structural framework, that’s to be expected. I don’t think there is anything malicious about that. Part of that resistance will come in the form of people trying to limit his options by talking about steady hands, or no need for panicked action, or any number of other things that entrenched power bases talk about. There will be rumours of who he will appoint, and who it would not be acceptable to appoint, (with whom it’s not acceptable to left unspoken). I’ll wait to hear from the guy himself before getting my disappointment on.

    There are some things that lead me to think he will not be co-opted quite so easily as say Hillary Clinton may have.

    Firstly, Obama actually did run a campaign based on a huge grassroots money-raising and organising platform. He doesn’t have the option of turning that progressive machine off. If that machine feels betrayed it may turn on him something fierce.

    Secondly, by virtue of that machine, he is not captured by the entrenched power base to the same extent as other candidates. He can use that grassroots machine to agitate in the way the Johnson quote implies. Clinton ran with the support of the Washington democratic moneyed elite and he beat her. He owes them nothing, they need him for whatever influence he chooses to give them.

    Thirdly, he at least appears to be serious about reforming the lobbying clusterfeck, or at least marginalising it. That grassroots powerbase helps here again.

    He has got a lot on his plate and some things will get prioritised over others. I’d like to see investigations around the torture, the partisan corruption of the Justice dept and all sorts of things like that. These more political fights will suck up oxygen, but that actually makes room for reform. Obama needn’t be involved in these fights, they should be handled by State, Justice and Congress, leaving the white house for economic reform. If the GOP is fighting on many fronts it means you can get more wins.

    It’s easy to think that the bastards can’t be beat, but while it’s been a while, America does have a tradition of ball busting liberal reformers.

    I’m not expecting jeebus, but I’m not writing the skinny, black, funny named guy off yet. I’m yet to see him even take a hit, and I’ve seen no concrete evidence, yet, that he’s been bullshitting about wanting change.

  48. Carol 48

    Well, I hope you’re right, PB. But Obama also took a lot of big money too, directly and indirectly eg from people associated with Washington Lobbyists:

    http://www.sourcewatch.org/index.php?title=Barack_Obama/Campaign_Financing#Contributions_from_PACs

    I remember watching Bill Clinton’s 1st presidential campaign (on CNN when I was living in London). He had the same message of hope and change as Obama. So, I’m a little jaded by such messages right now. The Clinton’s were every bit as idealistic, and liberal as Obama, in their younger days. They all have moved towards the center as they got closer to US center of power.

    But it is different times, the financial crisis will hopefully make people more wary and critical and willing to agitate for change.

    I still feel that Hillary has a lot of idealism too, but the Clinton’s learned how to negotiate with the centres of power. Either they compromised, or they couldn’t do anything. Sad really.

    There’s also a lot of people from Bill Clinton’s old presidential team on Obama’s team

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