There has been a fair bit of criticism of Kevin Rudd’s stimulus package for the Australian people. Many believe that handing money to people and asking them to spend it is not the best use of this money. I think this scheme actually has a lot of indirect advantages. It’s an elegant way to tackle several issues.
First off, we have to take a look at what the problem actually is. It is a common misconception to view the current economic problem as a single entity. It is in fact two separate but related problems. The first one is the Global Economic Crisis and this has to do with liquidity. Finanacial institutions aren’t lending money to each other as freely as they did before over fears that they may not get that money (and the interest) back. Stemming from this is the recession that has to do with businesses and the general public reducing their spending due to uncertainty in their financial future.
The above two problems are related but still separate. You won’t fix one by fixing the other and vice versa. What this means is that the previous approaches to handling recessions won’t be as effective. The typical approach of putting money into infrastrucutre (roads, buildings, schools, hospitals etc) will only solve part of the problem and so it won’t be very successful (in itself, in combination with other efforts it could work but we won’t go into that now).
So the current Australian government took another approach. They decided to give money directly to the Australian citizens. Now at first this seems too simple to work too short sighted to be of any benefit. However it is quite an elegant solution with many benefits.
The first criticism was that due to the recession many people won’t spend the money. They’ll instead save it for a rainy day. This is a fairly obvious outcome to predict and it actually has benefits. Assuming that a certain number of people spend this money, and a certain number save it, and it’s not too skewed one way or the other, which it doesn’t appear to be, then this is actually a step towards solving both of the problems mentioned above. Money spent will stimulate the economy. Money saved will bolster our financial institutions helping to restore confidence and start the moolah flowing again. It’s also not unreasonable to expect that that money will be spent at some point, so long term it is still going to help the general economy.
The next criticism was that many people who do spend will spend on overseas manufactured products, specifically Asian. And there has been a big push to get people to spend on Australian made products. Now again, we can expect some people to take the advice and buy Australian, and this will be good for the economy, however a large amount will still spend on plasma tv’s, stereo’s etc that were made over in Asia. This is not a bad thing though. Australia is currently in a situation where a large amount of it’s exports are raw materials to Asia. As a result we have suffered due to their slowdown. If we buy more of their products, they will have a requirement to build more and buy more of our raw materials as a result. So we still benefit.
A nice side benefit of this is that many people are looking at buying new televisions. This coincides nicely with the fact that Australia is nearing the point of moving fully to digital television broadcast. It can potentially help reduce a problem that several other countries have had to deal with in the switch in terms of not cutting off a sizeable chunk of the population.
Lastly, it’s not requiring any government intervention in terms of regulations. There is a general opinion tha twe got ourselves into this mess due to people acting unscrupulously and that there should have been regulations in place to prevent it. A typical reaction is to apply regulations in the hope of preventing a future occurence. However the fear is that we go too far in our efforts (driven by our fears and current climate) and end up creating a situation where too many regulations create the same effect of reducing liquidity. Solutions that keep the free flowing nature of the system are desirable in the long term.
The stimulus package is not an overall solution to the problems we are facing, it was never meant to be. However it is a much better step on the path to recovery than a lot of people give it credit for. Will it have the intended affect? We’ll find out shortly. Was it the best use of the money? I guess we’ll never know.