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Open letter on stimulus

August 16th, 2010

Over Fifty Australian Economists Agree Fiscal Stimulus Prevented A Major Recession

Nobel Laureate Professor Joseph Stiglitz has stated publicly that the Australian Fiscal Stimulus was a well designed package that saved the Australian economy from a major recession that has hit almost all the other OECD economies. He argued that the Australian package was a model for other economies facing similar problems.

The attached letter was signed by over fifty academic economists. Several other academics and economists supported this view about the Fiscal Stimulus Package that prevented the Australian economy from a deep recession and prevented a massive increase in unemployment.

The Australian economy has come out of the Global Financial Crisis in surprisingly good shape thanks to this Stimulus Package.

The Australian unemployment rate is amongst the lowest of any of the OECD economies.

Unlike the US and Europe, we are not facing the possibility of a double dip recession.

The current level of government debt (the lowest in the OECD economies) is due to tax revenues falling during a slow-down in the economy, whilst social security payments increase. Most of the increase in the debt would have happened independently of the increased government expenditures associated with the Stimulus Package.

The Stimulus Package has led to an increase in infrastructure investment that would help the long-term development of the Australian Economy.

Labor’s Stimulus Package, 2010

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  1. Jim Rose
    August 16th, 2010 at 20:27 | #1

    The PM who was the driving force behind that fiscal package so lauded in the open letter is no longer in the saddle. Rudd totally dominated the direction of his government.

    How can there be any assurance that there will be the same macroeconomic stewardship by the pretenders and opportunists that deposed Rudd?

    A leading ALP criticism of the mad monk by Rudd’s assassins is as fiscal conservatives. The mad monk is said to spending a promised $1 billion a day.

    Was not the aim of the open letter to stop the election of a fiscal conservative?

    Gillard specifically identified herself as a fiscal conservative at the start of the campaign and as someone who runs a hard ruler over any spending proposal that goes before cabinet. The real Julia opposed key parts of the lauded fiscal package such as the multibillion dollar payment to pensioners.

    Who are the fiscal conservatives in the current campaign?

    The criterion should be who will be more willing to use fiscal policy as a stablisation tool in the future. Its most recent champion was slain by the dragons in one night 2 months ago!

  2. matt
    August 16th, 2010 at 21:26 | #2

    @Jim Rose

    Nice use of overly emotive language Jim. Your fact-opinion and fact-inference confusion raised a giggle, but the quality of the post means I’m going to ignore it. Surely you can do better.

  3. Jim Rose
    August 16th, 2010 at 21:37 | #3

    Leaders matters!

    • Would Beazley have won in 2007?
    • Would the Liberals have done better if Howard retired before 2007?
    • Would Labour stand a better chance now if Rudd was still PM?
    • Would a president Obama be interchangeable with a president Hilary?

    Leaders are deposed to set new political directions, which are the reasons given by the real Julia for deposing Kevin07.

  4. observa
    August 16th, 2010 at 22:02 | #4

    As I understand it the overall stimulus figure was $42bill, near enough to the full price of an NBN superhighway for us all. That raises in my mind the obvious question as to why a moving forward Labor Govt didn’t seize the moment, enter into emergency talks with Telstra to buy their network as they did recently and roll out their brilliant ‘Snowy Scheme’ NBN for us all? After all it was a national scheme to spread the stimulus around very broadly and even involve our Future Fund in such productive and necessary infrastructure. The added bonus would have been a surprise 1GB/sec for so many by now.

    I must say I didn’t hear a peep out of the 55 economists at the time about that sort of stimulus, but perhaps they’d like to comment here on Westpac’s letter to borrowers today that their mortgages are to rise by 0.25% as of Oct10, due to a combination of the rising cost of market funds and the RBA’s official hike in April/May.

  5. JB
    August 16th, 2010 at 22:05 | #5

    Prof, glad to see your support for the stimulus package. In my view it was money well spent. The cost of increased income support payments (and reduction of income tax) arising from an increase in unemployment of 200,000 would probably have been a couple of per cent of GDP. I was working in government in 1990-91 when the Hawke government tried to address the recession, and they took too long. The social cost was massive (and we now have a bloated population on disability support as a consequence), and the Working Nation package in 1994 was too late. We are a mixed economy, and the largest player in the economy – the federal government – can play a big role in handling the major shocks to the economy.

  6. Alice
    August 16th, 2010 at 22:26 | #6

    Glad to see the support of the fifty economists here, many very senior, on the need for the fiscal stimulus, post GFC. It is as much about getting the truth of the matter out there – our recovery relative to many other OECD countries. Australia took action quickly. Yes it does reflect well on the the labor governments efforts at that time and they do deserve to be praised.

    JR – your less than humble, as usual, commentary pales into insignificance. The Coalition have shown themselves to have only one policy for all economic seasons – that is to hoard as much of our taxes as they can and spend as little of it as they can on infrastructure. We are just fortunate that the surplus impounded in the future fund did not lose too much in the GFC although I feel I may be yet to hear the full facts on that.

  7. matt
    August 16th, 2010 at 22:34 | #7

    @Jim Rose

    Wow. You’re like a walking sound-bite. It seems you can’t do better. Good luck with that. I’ll not bog PrQ’s comments section down with inane chit chat, hopefully you won’t either.

  8. matt
    August 16th, 2010 at 22:40 | #8

    I wouldn’t say the coalition hoard as much revenue as they can. Therr are a lot of votes that can be bought and infrastructure investment for some sectors of the economy was “booming”.

    If I recall correctly this is not the first time a collection of respected economists have performed this sort of action (the letter). I might be cynical but I doubt if this is going to get any significant coverage in widely viewed media.

  9. August 16th, 2010 at 22:47 | #9

    “Over Fifty Australian Economists Agree…”.

    If that isn’t an argument from authority, I’ve never heard one. (JQ once accused me of making one, in relation to naval matters, even though I linked to the supporting material and sources so they could be checked or questions emailed to them; it’s the merely saying that there are supports with nothing else that makes an argument from authority.)

    The best economists’ letter of this sort I ever came across was in the newspapers many years ago, when Britain was about to join the (then) EEC. First there was a letter signed by many economists saying that they thought joining was a very bad idea, and then a day later there was another letter signed by many economists saying that they thought joining was a very good idea (or that may have the first letter – I don’t recall precisely). Finally, on the third day, there appeared the letter I really liked: a letter signed by many economists saying that they hadn’t the faintest idea whether joining was a good idea or not.

    Under the circumstances I do not place much weight on the authority of letters signed by economists, with nothing else to substantiate them. It would be quite another thing if they were to take us through whatever led them to their conclusions, but as it is…

  10. Jim Rose
    August 16th, 2010 at 22:51 | #10

    The best way to evaluate arguments about fiscal policy is to rely on literature dated before 2007 so there are no biases to win favour with willing audiences.

    If you are to use fiscal policy, the long and variable lags argument applies.

    These lags are longest and most variable for infrastructure spending. Also, as infrastructure spending is more likely to have public benefits, it is more likely to be a substitute for private spending, and thereby crowd private spending out.

    It is curious that people point to outliers that favour their cases. Japan had a dozen or so fiscal stimuli and did not quickly motor out of their long recession.

  11. Alice
    August 16th, 2010 at 22:55 | #11

    I disagree P M. the letter speaks for itself and takes us through the essence of what led to their agreement and signatures. If you want more detail you need to seek the research. I doubt whether Joseph Stiglitz would have come to the positive conslusion he did about the effectiveness of Australia’s response on intuition alone…..it is up to the informed to inform themselves and not ask to be led through reams of data in a blog?

  12. August 16th, 2010 at 22:57 | #12


    Well if you had listened to PM tonight …

  13. Jim Rose
    August 16th, 2010 at 22:58 | #13

    great example.

    open letters on macroeconomic policy raraly bring to the surfacce the great divisions among economists.

    there are at least seven schools of macroeconomic thought, and in their day, these schools agreed on little on the major and even minor issues. getting agreement on the causes of inflation would be a struggle.

  14. Alice
    August 16th, 2010 at 22:59 | #14

    @Jim Rose
    Sorry JR – its such a sound and honest and important letter and Im so relieved to see all the signatures in agreement, not even you can engage (or is that enrage…?) me this time!

  15. Jim Rose
    August 16th, 2010 at 23:06 | #15


    progressives are often the first to inquire into someone’s background to see who they took money from vested interests.

    Stiglitz coauthored a paper in 2002 titled, Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard. This stated that “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.” The study was commissioned by Fannie Mae.

    Stiglitz today is an outspoken critic of Fannie Mae and Freddie Mac risk-taking. According to Stiglitz, GSE risk-taking was a predictable consequence of the structure of the GSEs and their financial structure and compensation schedules.

    It is good to see stiglitz adjusts his position in the light of new learning about crony Capitalism

  16. August 16th, 2010 at 23:19 | #16

    Alice :
    @P.M.Lawrence …If you want more detail you need to seek the research… it is up to the informed to inform themselves and not ask to be led through reams of data in a blog?

    That’s missing the point. Those who do that research are not getting their answers from letters like that, and contrariwise letters like that do not provide starting points for research of that sort. So, letters like that are arguments from authority. I have formed my own views from my own paying attention (particularly to the questions of timing I have seen raised); whether I am mistaken or not, a list of signatories does nothing to reinforce my views or dissuade me from them.

  17. August 16th, 2010 at 23:21 | #17

    @Jim Rose

    Which is rather the point – that any single letter of that sort isn’t really evidence or really argument.

  18. August 16th, 2010 at 23:47 | #18

    How many of the 51 work in macro? I know old John Neville does but he is retired. Of the rest I wonder how many signed this not because they had good reasons for believing it is true but simply as an attempt to support Labor. Did Labor head office initiate this?

    These kinds of public cheersquad statements seem to me quite inappropriate. They confuse the issues of having a political viewpoint and professional responsibility. There was groveling in the post to Joe Stiglitz who is a great economist but hardly an expert on Australia. But there is a broader type of insinuation that the Australian public should grovel to a group of experts many of whom have no expertise to make these sorts of judgements.

  19. Michael of Summer Hill
    August 16th, 2010 at 23:59 | #19

    PM Lawrence, I have to disagree with you for reasons many of the undersigned are not your johnny come lately graduates but well established academics who reached their pinnacle after years of dedicated hard work.

  20. zoot
    August 17th, 2010 at 00:37 | #20

    I await the letter from 50 Economists explaining how the Fiscal Stimulus Package didn’t prevent a major recession.

  21. August 17th, 2010 at 00:38 | #21

    Jim Rose, dude, like man, jeeze, Japan? (Splutter, splutter.) Like, really not comparable to Australia. Oh how badly we wanted Japan to have a stimulus like what Australia done recently, but it never happened. Oh how the deflation ground in Japan, like teeth in meth addict’s mouth. Would have given someone else’s right arm for some real inflation in Japan. Instead the country ended up stuck to its guts in 100 yen stores and two for one hamburgers with cash greater than the GDP of most countries stuffed under peoples’ futons, while the official figures showed a whopping and one percent inflation that the officials seemed to be proud of.

  22. August 17th, 2010 at 02:31 | #22

    I can’t let this pass without my traditional protest against the biased version of history being peddled by the economics profession, who notoriously “predict nine out of the past five recessions” (Samuelson).

    This latest statement by economists continues the revision of history which has erased the contribution of Howard-Costello to the good management of the AUS economy over the noughties. It was the L/NP’s useful factoral, financial and fiscal policies that bequeathed a strong economy to ALP, who then played the good cards they were dealt in a competent fashion.

    How many of these economists predicted a recession in any case? My sense was that Pr Q was fairly bearish 2008-09, although as usual he hedged his bets.

    In OCT 2008, prior to the enactment of the fiscal stimulus, I correctly predicted that “a recession was odd-off”. This was because I could see the underlying state of the AUS economy and fiduciary was sound, largely due to more than a decade of prudent management of the economy by Treasury/RBA under the guidance of Costello/Macfarlane.

    The post-modernist financial crisis starts in financial industry and then moves to real industry, the exact opposite of modernist financial crises. AUS banks banks did not suffer any great National Financial Crisis (NFC) after Lehman’s went belly up in mid-2008 and the GFC hit the rest of the OECD. Quite the opposite, in late 2008 they enjoyed a general upgrade in their global rankings.

    This was mainly due to Howard’s phenomenal immigration-driven demand for housing putting a rock solid floor under property prices. No sub-prime fire sales therefore loans continued to perform and mortgages remained bluechip. Everywhere you looked there were Asian students being “packed to the rafters” in residential investment properties – THAT was what kept Aussie realty above water.

    But so many economists preached “housing bubble” – including me in the early to mid-noughties – that they missed the reality on the street. I must admit that even I was shocked by the spectacular housing price increases in 2009-10, I thought property would at best (higher-bound) trade sideways for a year or so or at worst (lower-bound) drop by up to 10%. No way did I see 10%-20% price increases, which was clearly two years pent-up demand from 2007-09 being released in one year.

    Added to Howard-Costello’s “factoral” stimulus (student demand for housing) was Macfarlane’s financial stimulus which started in MAR 2008, when the RBA started to cut interest rates, the cash rate being around 7% at the time. By JAN 2009, when the stimulus started to kick in, the cash rate was down to around 3%. That 4% interest rate cut on one trillion dollars mortgage debt alone injected around $40 billion cash into borrowers pockets over latter part of 2008 – much more timely than the fiscal stimulus.

    And lets not forget that Costello did manage to put the budget back-into-black for most of the noughties. This bequeathed Swan a huge fiscal war chest which the government was able to use in financing its infrastructure spending.

    So I would give at least two-thirds the credit for AUS’s good performance in the post-GFC period to Howard-Costello-Macafarlane, rather than Rudd-Swan-Stephens. But all the history of that period has been carefully flushed down the memory hole by media-academia, who tend to be myopic when not out-right biased against the L/NP.

    And Joe Hockey is simply out of his depth in economics and unable to sell the L/NP’s fairly admirable economic crediential.

  23. Jim Rose
    August 17th, 2010 at 06:08 | #23

    @Ronald Brak
    Japan is a good example because it is supposed to be a liquidity trap, as the USA is said to be by I think Krugman, so fiscal policy should be especially potent. It was not.

  24. Jarvo
    August 17th, 2010 at 06:26 | #24

    John et al,

    With reference to your statement that
    “The current level of government debt (the lowest in the OECD economies) is due to tax revenues falling during a slow-down in the economy, whilst social security payments increase. Most of the increase in the debt would have happened independently of the increased government expenditures associated with the Stimulus Package.”,
    can someone please explain to me just how the Libs can state in their ads that “Julia Gillard is borrowing $100 million a day? Where does that number come from?

  25. August 17th, 2010 at 07:13 | #25


    AIUI it’s a simple mathematical division (by day) of the projected budget deficit. It’s what happens when retail politics goes to a bar and spikes the drink being had by orthodox economics, hops into bed with it and produces a child in circumstances where economics can’t later attest to what happened.

  26. Hermit
    August 17th, 2010 at 08:16 | #26

    I would like to see a dissection of what ‘saved’ Australia in terms of stimulus/mineral exports/low debt and other possible factors. As in 50% stimulus, 40% exports, 10% other for example. It’s hard not to notice that Australia exports huge amounts of coal and iron ore to Asia while the US and UK don’t. A follow on question is that if China and India demand less of Australia’s resources will more stimulus fill the gap.

  27. Alice
    August 17th, 2010 at 08:33 | #27

    HC says “But there is a broader type of insinuation that the Australian public should grovel to a group of experts”

    part of the problem with the Coalition HC is that in recent years they have poo pooed many experts….and dont listen to them. Sort of “we know better than the experts” attitude.

    The result of this is that the Coalition has lost credibility on many serious issues…not the least of which is “the economy”.

  28. Alice
    August 17th, 2010 at 08:58 | #28

    Oh and someone here was so tragically right. Fifty of our eminent Australian economists sign an open letter and how did that go in the media?

    Well I count barely 8 seconds on the ABC news with the emphasis on “most of the economists are academics and some are from the union movement.” Interesting.

    I didnt expect it to make Murodch news. I knew it would be first on the suppression of information list. I didnt expect it to get slotted in between the latest 14 year old singing prodigy who won the breaktrhrough award in the United States on channel nine.

    But ABC?? Not even a read of the actual contents of the letter. I find it pretty pathetic that an important Australian letter actually signed by 50 of our Australian economists cant slug it out for an airing with a 14 year old child singing wonder from the United States and c an only raise 8 seconds on the ABC.

    How many signatures would they like before it becomes news? 100? 1000? 5000?

    Or does Australian news get decided as inferior to international gossip, by one or two CEOS, a couple of non economic editors and a handful of program managers.

    What are the media thinking? This is not a political letter. Its a letter about sound economic policy – something the Coalition doesnt understand because they have made a career out of dismissing experts in many fields (not just economics).

    I know. I know. The media wants us to go back to our love affair with masterchef, fill in our monopoly competition coupons and not think at all.

    The media is part of the problem of why our politicians arent up to scratch.

  29. August 17th, 2010 at 09:01 | #29

    Alice, Could you list from the letter, the experts in macroeconomics? The people who have studied the evidence and drawn the macroeconomic conclusions outlined in the letter. Or is it just – the economy didn’t go into a recession and Labor spent a lot so obviously the policy worked. Or even weaker – we back Labor so lets give them a leg up on this one.

    Warwick McKibbin isn’t on the list – he is an expert who has studied the evidence and who would not agree with these claims.

  30. Uncle Milton
    August 17th, 2010 at 09:16 | #30

    Harry, if you are going to play the CV game, John Nevile is Australia’s pre-eminent expert on fiscal policy, much more distinguished in the field than his former student Warwick McKibbin.

    I do question though why Steve Keen signed the letter. I thought he was on the record as opposing debt financed fiscal policy.

  31. Jim Rose
    August 17th, 2010 at 09:24 | #31

    Battles of the open letters are common.

    Response rates and margins of error are always useful on surveys of opinion such as how many of those asked responded at all, and how many agreed to sign.

    The background of the signers and non-signers is useful too.

    There are extensive surveys of the economic profession on their policy views and politics as compared to the general public. There is a survey by Fred argy of the Canberra branch of the economic society too.

    In the USA, voters register as democrats, republicans and independents. There is a recent study by Ben Klein of the party registration of tenure-track faculty at 11 California universities showing the academia is over-represented by progressive registered voters compared to the general public but the one-party campus conjecture does not extend to all institutions or all departments

  32. Fran Barlow
    August 17th, 2010 at 09:28 | #32

    @Uncle Milton

    Steve Keen is a neo-keynesian so why wouldn’t he? He was against housing bonus payments, IIRC.

  33. paul walter
    August 17th, 2010 at 09:29 | #33

    First, the open letter seems to have utterly terrorised Jim Rose, et al.
    Second, Keen’s approach to wastage would definitely have him on the list. Even if he may have unfolding long term debates on aspects of economy and pol economy afoot with other economists, on this question, he has assented.
    It indicates that while he may have his own ideas framed in his own way, including for future remedy, he has assented to the initial diagnosis and treatment regime.
    Three, the list includes largely NSW academics; I wager a quick trawl would find many other qualified people across the country also willing to sign; think of Fred Argy, et al

  34. August 17th, 2010 at 11:06 | #34

    The Blowfly is happy to see so many qualified economists arguing over this subject. It is music to his funny little ears.
    Undoubtedly the Coalition, if it had control of the levers during the GFC would’ve been subject to basically the same bureaucratic advice that Labor was. Sure a good Treasury honcho would’ve knocked some of the corners off tailoring it to “coalition philosophy’ —-whatever that is!.
    But no-one seems to have dragged out of Abbott & Co what they would’ve done differently and when they would’ve done it.
    And with all those economic models around someone would be able to evaluate how their ‘plans’ would’ve worked out.
    The Blowfly believes that Costello would still be smiling about the fact that he was able to avoid the GFC by losing Government.
    We should give credit where credit is due.
    The Coalition’s policies and economic management helped us to weather the storm because they had paid off debt rather that invest in much needed infrastructure during their time in office.
    This made it easier for the new government to handle the storm.
    but the Coalition would’ve handled the GFC in basically the same fashion.
    In this Abbott is hypocritical—-and demonstrates he a typical politician!
    So the way The Blowfly sees it is that we could’ve had our infrastructure upgraded by the Coalition and be on our knees after the GFC because of the debt OR be in the situation we are in now.
    Which would the Australian people prefer?
    As the actress said to the Bishop: “Gee, that’s a hard one!”
    We are where we are unfortunately and looking for some vision about how we improve the lot of our residents.
    The only piece of vision appears to be the NBN.
    Could there be more?

  35. Uncle Milton
    August 17th, 2010 at 11:22 | #35

    @Fran Barlow

    I am sure he wrote that since the problem was created by too much debt, it can’t be fixed by a policy that creates more debt.

  36. jquiggin
    August 17th, 2010 at 11:32 | #36

    Harry, as I’ve argued in Zombie Economics, the last thirty years of macro theory have proved to be something of a dead end. So, I don’t think you need to be a macro specialist to endorse the standard, and well-tested conclusion of Keynesian macro, that fiscal policy can provide an effective stimulus under the appropriate conditions. And the judgement of virtually all the experts who had to actually make the decisions (Treasury departments, G20, IMF etc) was that the conditions were appropriate.

  37. Uncle Milton
    August 17th, 2010 at 12:00 | #37


    Angus Deaton, in his Letter from America (published in the newsletter of the Royal Economic Society) provides an interesting anecdote about modern macro. He asked one of his colleagues who was teaching first year graduate macro, after the first class, what the students were like. Very good, replied the colleague. Why? Because they knew the conditions under which the infinite integral of discounted consumption utility converged.

  38. August 17th, 2010 at 12:24 | #39

    The crisis was unusual since it took the economy into a new sample space. No-one knew what was happening – international capital markets misjudged the fate of the Australian economy by punishing the Aussi dollar for example. The Labor government comes along and spends a lot of money. It could do this safely because we had no debt, almost no unemployment and no inflation. The situation in China proves much better than expected and Australia’s terms of trade continue to improve.

    And, according to the letter, the expansionary fiscal actions of the Labor government are assumed to be responsible for Australia not dipping into recession? Maybe, but its a big call and others disagree. Or at least point to the other factors I mention.

    Uncle Milton, I certainly didn’t intend to slight John Nevile who wisdom I have listened to over the years. Or for that matter to John Quiggin or Steve Dowrick. But I’ll stick with the tenor of my remark. The list was short on people working in macroeconomics.

  39. Uncle Milton
    August 17th, 2010 at 12:58 | #40


    Harry, you have to parse the letter. It doesn’t say that fiscal policy alone stopped the economy going into recession. It says government’s “co-ordinated policies” did. That could also include financial policies like the bank guarantees, which didn’t involve spending any money, as it turned out, but which were very important in enabling the banks to continue their daily borrowings from banks overseas.

    It might also include monetary policy, though it would be incorrect (in my view) to count this as part of the government’s policies (given the operational independence of the RBA) but it is part of government policy.

    Since one of the signatories hosts this blog, why not ask him?

  40. Sparkie
    August 17th, 2010 at 14:36 | #41

    because the NBN required highly specialised skills that are not sitting around idly. Rolling this out rapidly (very unlikely to be doable anyway) would not have helped the building and retail industries which employ large numbers of lower skilled workers. Rushing the NBN would have just pushed up the cost of the project, and the salaries of high-paid technical, project and management staff…

  41. Fran Barlow
    August 17th, 2010 at 15:41 | #42

    I notice Telstra shares dipping to historic lows recently. One of the fun things the government could do, perhaps if the shares fell below $2, would be to reacquire the shares and therewith, majority ownership. They could then do the structural separation and the NBN stuff they wanted a lot more neatly, and of course if they offered at that point to reacquire the rest, the government would have made a profit on the deal.

  42. Jim Birch
    August 17th, 2010 at 16:04 | #43

    @Jack Strocchi

    This latest statement by economists continues the revision of history which has erased the contribution of Howard-Costello to the good management of the AUS economy over the noughties.

    Aren’t you missing the point? There’s lots of other factors you could include. You might also include the Deng Xiaoping’s economic revolution in China that lead to Australia’s mineral boom in a recent economic history of Australia, but that’s not the nature or purpose of this document.

    What is actually important is (1) that an appropriate stimulus occurred, (2) it worked, (3) it is seen to have worked, and, (4) the strategy is reused when it is appropriate. If you hadn’t noticed, the Liberal Party is currently running a campaign that claims, variously, that the stimulus was unnecessary, or too big, or contrary to good government, or various other things along those lines. While this may be oppositionism and/or ideological blather, and quite possibly, they would actually have done more-or-less the same thing if they were in government, there is actually a significant risk that the facts about the stimulus get lost in tribal mythologies and the option of a stimulus is lost in future. As I read it, this is exactly what has happened in the US: real economic analysis is pretty well subverted by ideology.

    AFAICS that’s why the economists made the statement. The sort of people who trust the statements of qualified surgeons, aircraft designers, and civil engineers in their field of expertise will absorb this statement; ideologues, nut jobs, and people who imagine they know more than experts on all subjects will respond as per usual. Hopefully there is more of the former so that next time a stimulus is needed it isn’t prevented by accumulated misinformation.

    (Don’t become an upmarket Jim Rose.)

  43. shayne
    August 17th, 2010 at 16:28 | #44

    “Rushing the NBN would have just pushed up the cost of the project, and the salaries of high-paid technical, project and management staff…”

    Speaking as a highly paid technical staffer myself, I’m not exactly seeing a downside expressed in this statement :P

  44. Chris Warren
    August 17th, 2010 at 16:32 | #45

    I thought the letter of 50 was necessary, useful and timely.

    If someone like Jim Rose is going to pretend that”open letters on macroeconomic policy rarely bring out great divisions among economists” then I am sure the opposite is the case.

    As others have mentioned there was a great division among economists about Britain entering the (then) EEC, brought out but not resolved, in open letters.

    Tony Makin’s efforts in response also show how a division has been brought out.

    If another tribe of economists manage to get their email system working – we may yet see another letter, from the other side.

    Of course all our capitalistic Keynsians are jumping for joy at the moment, and as their letter states;

    The increase in Australian unemployment and deficits has been trivial ‘in comparison’.

    Why this loose thread? What happens if capitalism requires another stimulus, and another stimulus, and another? What happens if unemployment continually ratchets up? What happens if debt continually ratchets up?

    The fact that these macroeconomic ratchets may be, ‘less by comparison’ (with other regimes), becomes irrelevant.

    If you can only have capitalism if you inject stimulus, and increase unemployment and debt, then capitalism is the real problem.

    I will await the next open letter when (if) our economists tackle the Henry Reviews tragic proposal to cut company tax. This is an even greater threat to Australian society.

  45. CM
    August 17th, 2010 at 17:05 | #46
  46. CM
    August 17th, 2010 at 18:15 | #47

    CM, all they’re proposing to do is to give a tax concession ($150m p.a.) to companies that borrow money to fund infrastructure that would have been built anyway – powerlines, water and sewerage treatment, etc.

  47. SJ
    August 17th, 2010 at 18:43 | #48

    Well, that was confusing. That was me replying to CM. I assume the stuff-up was mine, and not the software’s.

  48. Alice
    August 17th, 2010 at 18:50 | #49

    @Fran Barlow
    You mean those Telstra shares that were sold as a great investment for the Mums and Dads of Australia – now dipping to historic lows in prices.

    Well surprise, surprise – I know Murdoch made money on the roll out and you cant tell me the government didnt make money on flogging Telstra to the Mums and Dads of Australia.

    Looks like the Mums and Dads got ripped off badly to me.

  49. Alice
    August 17th, 2010 at 18:55 | #50

    The names on the list HC are very well known in the economics profession…not to you perhaps, so I suggest you do your own CV trawling. Im not here to fill in gaps in your knowledge and as I see above you have one name who you think might not agree to this letter. Is that all??

  50. August 17th, 2010 at 18:55 | #51

    Michael of Summer Hill :
    PM Lawrence, I have to disagree with you for reasons many of the undersigned are not your johnny come lately graduates but well established academics who reached their pinnacle after years of dedicated hard work.

    I think you’re missing the point. Claiming that they really know what they are talking about and that therefore their letter should carry weight – that’s not disproving it’s an argument from authority, that’s just what an argument from authority is. I would only ever accept something like that provisionally, for lack of time and other resources to establish the matter more soundly, but I would never accept it as definitive proof unless and until it was backed up like that.

  51. Alice
    August 17th, 2010 at 19:14 | #52

    To Chris,

    I only have one objection to this letter – the comment on the unemployment rate. It does ignore the much higher youth unemployment rate – so its not looking at demographic breakdown. Al is not well in the land of our youth. The unemployment rate for 15 to 19 year olds is horrendous at 16%. I have grave concerns that both sides are ignoring the burden youth currently carries with much higher tertiary education costs than any in the 1980s and 1970s carried, giving them a debt burden in their youth on graduation (when they should be free to be entrepreneurial – they dont need debt induced risk aversion – add to that the need to save for a high housing price and I feel we may be locking out an enire generation from true self sustainability).

    In addition the unemployment figures for youth are a blatant fudge. They cant get unemployment benefits unless they sign up to training. Doing so takes them right out of the unemployment figures.

    So how high really is youth unemployment?

    On another unemployment fudge…how high is the rate of casualisation and contract workers? The morlocks of the labour force still not counted as unemployed but living on one or two casual gigs a week.

    Dont forget also those people genuinely unemployed who have to run through all their savings until they only have $3000 left. Until they run down to this level they arent in the unemployment numbers either. It wasnt always this way but we seemed to become obsessed with treating the unemployed harshly and ignoring the myriad of ways the rich avoid tax. Is that Labors fault? Somehow I think we can go straight back to the prior Coalition for these harsh attitudes.

    Yes welfare cheats are irksome… but relative to wealthy tax cheats using tax havens in absolute dollar terms I will bet here welfare cheats are a drop in the ocean. Most people simply dont realise that.

    Unemployment is a number no one can trust. How did this happen in Australia?

  52. Michael of Summer Hill
    August 17th, 2010 at 19:47 | #53

    PM Lawrence, academics like Frank Stilwell are stalwarts and well known for their economic thoughts. What Australia needs is a live public debate between the various economic schools of thought on the above topic rather than politicians just rambling on. Maybe that will clear the air a bit.

  53. Alice
    August 17th, 2010 at 22:02 | #54

    Anyway – for what its worth (its weight it gold for telling the truth)….
    this letter is all over the internet and the papers are now scrambling to catch up. So they werent ignoring it. They were only hoping to ignore it…in favour of a 14 year old boy singing wonder from Hollywood or maybe Angelina Jolies latest domestic with Brad. That sort of news is really cheap when its downloaded digitally.

    Its clear if you want real news you have to go to the internet. It seems Murdochs newpapermen dont get out of bed early enough these days to actually get the news fast enough (plus the paper is shrinking – badly – with reworded re runs like fox news). Maybe they need to hire some internet blog reader info miners to stay on top of their game?

    All those paper editors and journos out there must be worried about how long they will have their jobs. Gee and I thought they missed it. No – just slow.

  54. paul walter
    August 17th, 2010 at 23:51 | #55

    Business Latteline reports the Reserve Bank gave labor an “unexpected”(not verbatim)bonus with predictions of a healthy future for the economy. Meanwhile, small business says it wants Emerson in cabinet, but you wonder if this would not bring those in government who are more corporatist into conflict with someone who could represent small business quite effectively in cabinet.

  55. Tony G
    August 18th, 2010 at 00:25 | #56

    “Over Fifty Australian Economists Agree Fiscal Stimulus Prevented A Major Recession”

    Whoopdee do, it would be easy to find another 50 who don’t, no one takes economists seriously any way.

  56. Alice
    August 18th, 2010 at 08:57 | #57

    @Tony G
    So Tony G – you dont accept the expert economists views, and you dont accept the expert scientists views on global warming, and you dont accept the expert Reserve banks view on the soundness of labor’s policies.

    Thank god you are not running for politics. You would need to surround yourself with idiots for advice.

  57. August 18th, 2010 at 10:02 | #58

    A couple of questions for the author.
    First, are all the signed economists macroeconomists or strong in macroeconomics and policy?
    Second, was the letter based on empirical findings, faith or just ideology?

  58. Jim Rose
    August 18th, 2010 at 10:08 | #59

    an argument from authority.

    do you accept the views of expert economists on the general merits of the market economy?

    if the expert economists thought that global warming was a minor economic problem, or that wealth redistribution was counter-productice, would you demand that others join you in accepting their consensus expert views?

    do you agree with prof. quiggins post of the other day saying that the last 30 years of macroconomics being a bit of a dead-end or something like that. that argument requires a rejection of a professional consensus.

  59. Alice
    August 18th, 2010 at 10:39 | #60

    @Jim Rose
    Jim Rose
    Yes. Yes. Re the last question. Its the “lets leave everything to the markets economists” that have dominated economic policy over the last thirty / or forty years in both universities and in the corridors of power. Its laissez faire economists who have always been the enemy of sound economic policy JR…even before and during the great depression. There are and always have been two schools of thought. You ignore that. Economics can be employed to serve the powerful or it can be employed to serve the welfare of the majority.

    I know which I prefer. The former which should righfully be called “glutton economics” has been dressed up and sold as “lamb economics” and it is not fit for human consumption.

    Its the illegitimate offspring of Milton Friedman, Fama and their followers like Greenspan who have now been proved wrong. They did not moderate and cure the business cycle as they claimed. They basked in delusions of grandeur whilst building the greatest financial mess the world has seen since the great depression and it is not over yet. TheUS economy has been brought to its knees by it. It is not the neo Keynesians who are right.

    It is Keynes who was always right JR….but you keep following your false gods if you prefer. Time will prove all false ideologies wrong.

  60. Alice
    August 18th, 2010 at 10:43 | #61

    @Jim Rose
    Oh and as we speak JR – there is talk of higher taxes on the very rich. You had better get used to the idea.


  61. Jim Rose
    August 18th, 2010 at 10:58 | #62

    Another left-wing conspiracy theory and security blanket to help you sleep!

    Friedman was a wild man in the wings until the collapse of the Keynesian macroeconomics in the 1970s because of empirical failure on a grand scale. New Keynesian economics is a face saving rebranding of the monetarist economics of Friedman in the 1950s to the 1970s. Brad Delong wrote a nice survey about in 1997 titled “The triumph on monetarism?”

    As previously posted, the social democratic bias of the economics profession has been well documented with surveys dating back to 1970s, and most recently using voter registration data in the USA. Even business schools have more democrats than republicans.

    The key papers and references are at http://econfaculty.gmu.edu/klein/ and click on academic policy views survey and academic voter registration survey.

    The studies date back Seymour Martin Lipset and his collaborators from 1972. They found the U.S. social sciences and humanities to be preponderantly Democratic Party in alignment.

    One recent study found the Democratic to Republican ratios were as follows: Economics 3.7 to 1; History 4.1 to 1; Political Science 4.8 to 1; Sociology 47.0 to 1!!

  62. Alice
    August 18th, 2010 at 11:46 | #63

    @Jim Rose
    JR – you should be addressing your diatribes to the GOP in congress in the US. You might get invited to a cocktail party. Even Greenspan is saying the taxes on the rich need to go up. The US is going into debt to support the rich – now there is a real paradox in that….

    US Conservatives dont like debt but they dont mind it as long as the top 2% are looked after at the expense of the bottom 98%. ??

    With policies like this from conservatives (keep the massive tax cuts Bush handed out to the rich while opposing government spending and unemployment benefits and health care and education spending etc etc)…the only economy they are helping is the Swiss economy.

    As for raising “the left wing bias of the economics profession”. Spare us this nonsense JR.

    It was a mantra of the prior coalition government but you forgot to mention “the left wing bias” of charities, of the arts industry, of the public sector employees,….in fact come to think of it…”the left wing bias” of anyone who didnt agree with the prior Coalition government (of which Abbott was at the forefront in the rants).

    You are more than a bit out of date JR. Howard is gone. The people in the end did not like him and he will not be recalled fondly precisely because of the “rich right wing bias” the Coalition and people like you display.

    Time to moderate your rants JR. Even Tony Abbott is trying to hide the sarcasm and the put downs now.

  63. Alice
    August 18th, 2010 at 11:59 | #64

    @Jim Rose
    Re yr comment “One recent study found the Democratic to Republican ratios were as follows: Economics 3.7 to 1; History 4.1 to 1; Political Science 4.8 to 1; Sociology 47.0 to 1!!”

    Are you suggesting democrats are better educated than conservative politicians JR? That is probably correct.

    Im glad some politicians actually do study economics, history and the behaviour of people before they decide on a career in politics.

  64. Jim Birch
    August 18th, 2010 at 12:08 | #65


    I would never accept it as definitive proof unless and until it was backed up like that.

    (Unfortunately) most people don’t understand economics, and never will, so they are reliant on the considered opinions of experts. In the face of uninformed comment – and active disinformation – it is desirable that experts are willing to make definitive statements on matters of importance and this should be applauded.

    The open letter isn’t an argument from authority, because it isn’t an argument at all, it’s a statement. It doesn’t look like an argument and it doesn’t attempt to justify it’s claims. If you are able to personally determine the veracity of the statement for yourself, well and good, but for most people this is just not an option, they rely on the expertise of economists, just like they rely on car mechanics, heart surgeons and aircraft designers.

  65. August 18th, 2010 at 12:55 | #66

    “The attached letter was signed by over fifty academic economists. Several other academics and economists supported this view ”

    So some supported (some part or all?) but didn’t sign? How many who received a request to sign didn’t do either? How many requests were sent?

    Is this statement comparable to the IPCC in terms of consensus, or to the Oregon Petition? Or somewhere in between?

  66. Fran Barlow
    August 18th, 2010 at 13:23 | #67


    Is this statement comparable to the IPCC in terms of consensus,

    No, it’s not. The IPCC summarises the consensus position of the world’s leading working and theoretical scientists with expertise in fields capable of generating inferences about climate and its etiology. It is the combination of applied and theoretical work iterated over the years since the UNFCCC first arose, with each report building upon and updating the corpus of knowledge through the integration of peer-revewed publication. It is almost certainly the most robust, comprehensive and carefully scrutinised corpus of work in human history.

    or to the Oregon Petition?

    Good grief. The Cave Hollows (OISM) fraud, produced by a bunch of religious nutters involved simply assembling lists of people who apprently had some sort of certificate level “scientific” qualification from bodies who in part had paid OISM to accredit them. many of the people were unaware that their name was on the petition, some had died, some didn’t exist and it was even possible to add one’s name via the Internet. It was published at a time when insight into climate change matters was still being refined.

    This letter, as far as we can tell, refers exclusively to people who have standing to comment, and know their names are on it. It does not have the standing of published work in macro-economics, but the underlying principles are not at issue.

    They could of course, be wrong, but then, the question would arise — whom should one turn to if not the economists to design fiscal policy? If one prefers dissenting economists, on what basis should one choose the view of dissenters? If the dissenters’ policy were implemented and the results were poor, who should take responsibility for the failure? If the dissenting economists persisted — alleging that the failure of policy was attibutable to unforeseen factors not going to the heart of the paradigm they espoused, on what basis could one entertain their view, if not that of the consensus?

    In short, unless there are compelling reasons to reject the consensus view or accepting the dissenter’s view would entail no elevation of risk to legitimate interests, is not rejecting the consensus reckless?

    This is not really an argument about absolute truth (for absolute truth one needs religion), but one about the basis on which can create policy, accepting as one must that every policy choice is a kind of risk trade. And if one is going to decide on risk, unless one is onesself an expert and bearing most of the responsibility personally, should one not follow the advice of those best equipped to declare on the matter?

  67. August 18th, 2010 at 14:12 | #68

    Fran, I’m trying to establish if there is a consensus, and if so, how strong it is.

  68. Stephen Riden
    August 18th, 2010 at 14:20 | #69

    @Tony G

    Only 50 signatures – logically speaking, how many were asked and refused to sign?

  69. Jim Rose
    August 18th, 2010 at 15:01 | #70

    No. progessives gravitate to sinecures at universities rather than real jobs.

  70. Fran Barlow
    August 18th, 2010 at 15:07 | #71


    I’m trying to establish if there is a consensus, and if so, how strong it is

    I don’t doubt there is a consensus, given this policy was adopted by the entire OECD. Indeed, the fact that China is now considering easing back on it slightly or has only allowed their currency to appreciate slightly has been cause for considerable concern outside of China.

    China’s and Japan’s and the US stimulus underpinned ours, and ours in a modest way, dovetailed with theirs. I have no doubt that this is the consensus. Indeed there can be little doubt that even Milton Friedman, whose focus was on monetary policy, would have supported stimulus in these circumstances.

    Part of the problem in this discussion is the mapping of concepts wihich in veryday usage are banal and apparently simple — (debt, waste etc) into areas that are far more complex than what attends what individuals do. States (in theory) live forever — and so debt means something different for states than it means for individuals. “Waste” for states comes in a multiplicity of forms, and inevitably, whatever policy one chooses will involve some stuff that is worthwhile for some people over meaningful timeframes and stuff that is not. People not being employed who have marketable skills is wasteful. So is idle equipment. So are children missing out on quality education because it would be cheaper to spend three years building the library or the outdoor shelter than one.

    The question always is — which is most productive and least wasteful — and when one recalls that the object of society is to attend to the needs of people — to import into that calculus a serious value on human well-being, now, and into the future.

  71. Alice
    August 18th, 2010 at 15:49 | #72

    @Jim Rose
    So academic research isnt a real job Jim Rose? Oh dear. What can I say? There are plenty of charlatans who I would trust a lot less working in what you might call a real job.

    What is your definition of a real job Jim Rose? Did Einstein have a real enough job for you? How about Louis Pasteur and…and …and etc you and I both know the list of academic contributors to research and to the advancement mankind could stretch beyond the word limits of this blog.

    You do have a weird definition of what constitutes a real job dont you?

  72. paul walter
    August 18th, 2010 at 15:51 | #73

    Fran, they just won’t read the posts, will they?
    It was explained early that the majority of signatures came from NSW with some from QLD.
    One can only guess at how many other high profile economists could have added their signatures, had time been less pressing, this side of an election, where facts need to be put before the people, some times hurriedly.
    The criticisms come from people who would probably applaud Abbott’s arrogant refusal of costings for the nonsenses he has tried to pass off as “policy”, until after the deadline and with not enough time for the appropriate people to scrutinise them, prior to the day.

  73. paul walter
    August 18th, 2010 at 15:55 | #74

    What Alice said.
    What a silly dismissal of the genuinely hard work that comes of using the mind rather than just the body . I worked harder in a day, at humble undergrad level, than I ever worked physically in a decade in factories and gangs and I am not one averse to doing hard physical work.

  74. Alphonse
    August 19th, 2010 at 10:03 | #75

    Ron Bird had a bit to say. Steve Keen replies, cogently.

  75. Alphonse
    August 19th, 2010 at 10:14 | #76

    @Jim Rose
    “No. progessives gravitate to sinecures at universities rather than real jobs.”

    … whence they visited the GFC upon an unsuspecting real world.

  76. paul walter
    August 19th, 2010 at 10:45 | #77

    Looks like Keen doesn’t take kindly to “rougher than usual treatment”, a pretty rational response, I’d think!
    No, I think an Abbott government would not give working people a thousand bucks and more to sort themselves out with, and it would be an appropriationist government of the flavour of bloody-minded Cameron in Britain.

  77. Jim Rose
    August 19th, 2010 at 10:53 | #78


    progessive intellectuals provide the academic propaganda for the government failures that started, deepened and prolonged the global economic crisis. these government failures ranged from several years of looser monetary policies, government guarantees and the too big to fail mantra.

  78. Jim Rose
    August 19th, 2010 at 15:58 | #79

    A test: I wonder how many signatories of the open letter would disagree with this passage from Keynes’ general theory on how to reduce unemployment in a recession:

    “If the Treasury were to fill old bottles with banknotes, bury them at suitable
    depths in disused coal mines which are then filled up to the surface with
    town rubbish, and leave it to private enterprise [to dig them up again] …
    there need be no more unemployment and … the real income of the
    community, and its capital wealth also, would probably become a great deal
    greater than it actually is.”

  79. Alice
    August 19th, 2010 at 17:34 | #80

    Put the rest of Keynes quote in JR…..or I will do it for you

    “It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. ”

    Indeed it would.

  80. Alice
    August 19th, 2010 at 17:40 | #81

    @Jim Rose
    Oh and JR – maybe you should read some Krugman as well

    “Hate to say this, but he’s (George W Bush) right when he says

    I think actually the spending in the war might help with jobs…because we’re buying equipment, and people are working. I think this economy is down because we built too many houses and the economy’s adjusting.

    In fact, I’d say that the sources of the economy’s expansion from 2003 to 2007 were, in order, the housing bubble, the war, and — very much in third place — tax cuts.

    Of course, we could have gotten just as much or more stimulus by spending $10 billion a month on actually useful stuff– think how much domestic infrastructure could have been built or repaired for the cost of this miserable war.

    But the war was what we got.”

    Give me digging up old bottles filled with banknotes anyday….. than another miserable conservative led war like Iraq.

  81. Jim Rose
    August 19th, 2010 at 18:15 | #82

    be careful for what you wish for.

    A considerable amount of defence spending is founded on dual use R&D and learning by doing. radar and jet engines might be an example. still no justification for war mongering.

  82. Alice
    August 19th, 2010 at 18:24 | #83

    JR says “A considerable amount of defence spending is founded on dual use R&D and learning by doing.”

    I dont know if you saw the ramifications of what depleted uranium has done to Falujah JR…far worse what its doing by way of child deformities and leukaemia rates so before you praise war R n D – some of the R n D just plain outright ugly.

  83. Jim Rose
    August 19th, 2010 at 18:30 | #84

    a good example of a dual use technology: nuclear energy.

    good example of rent-seeking too. nuclear power stations shelter behind regulatory caps on tory liability.

  84. sdfc
    August 19th, 2010 at 19:43 | #85


    Keynes idea about burying bank notes in bottles was and still is an interesting idea. Central bank money creation activities have proven to be extremely inefficient in increasing the money supply while the banking system is in a dysfunctional state.

    It would certainly be a much better means of increasing the money supply than dropping money from helicopters.

    A question for you. Do you think a gold rush in the US would be a good or bad thing for the US economy. If the answer is the former than what is the difference between mining banknotes and mining gold in terms of increasing the money supply?

  85. Jim Rose
    August 19th, 2010 at 20:20 | #86


    On the relative merits of fiscal and monetary policy tools, Robert Lucas explained his support for 2008 U.S. monetary policy actions in an op-ed on December 2008 as follows:

    • There are many ways to stimulate spending, but monetary policy was the most helpful counter-recession action because it was fast and flexible.

    • There is no other way that so much cash could have been put into the system as fast, and if necessary it can be taken out just as quickly.

    • The cash comes in the form of loans. There is no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These were important virtues.

  86. Jim Rose
    August 19th, 2010 at 20:50 | #87

    As to your question, the resource cost of paper money versus commodity money has spawned a large literature.

    The costs of discovering and mining gold puts an upper limit on monetary growth, led to long deflations at the end of the 19th century, and also periods of inflation when there were major ore discoveries and technological improvements in gold extraction.

    Earlier discussions took it for granted that the real resource cost of producing irredeemable paper money was negligible – the cost of paper and printing.

    Experience under irredeemable paper money standards makes it clear that such an assumption, while it may be correct with respect to the direct cost to the government of issuing fiat money, is false for the welfare costs to society as a whole.

    Uncertainty over future monetary policy and associated inflationary biases always tended to persist under government control of paper money. During inflationary times, people tie up real resources that could have been applied for productive activities in hedges against rising prices and searching out investment strategies. Success with Inflation targeting has greatly increased the advantages of paper money.

    Some countries such as Hong Kong and a few other places currently, many places in their colonial days, and arguable Australia from 1920 to 1924 used a currency board to harvest locally the revenue from money creation.

    Typically, currency boards have advantages for small, open economies which would find independent monetary policy difficult to sustain. They can also form a credible commitment to low inflation. A traditional criticism of currency boards is that they impart a deflationary bias to growing economies.

  87. Jim Rose
    August 19th, 2010 at 21:10 | #88

    On “Did Einstein have a real enough job for you?” he was working at the Swiss patent office when he wrote his three great papers in the summer of 1905.

    More generally, all the examples you gave were not social scientists. Is there a progressive or left-wing approach to physics, chemistry, biology and so on?

  88. sdfc
    August 19th, 2010 at 21:14 | #89


    Monetary policy in normal times is effective with of course the famous long and variable lags.

    The problem with this episode is that banking sector money creation activities have been severely inhibited. That monetary policy in the US has lost much of its effectiveness is evidenced by the sustained decline in private sector credit. The cash you talk about is largely sitting as bank reserves at the Fed. Fed action to pump money into the banking system has however gone a long way to preventing a complete financial meltdown.

    That the US fiscal policy has been effective in helping prevent a worse downturn is pretty much beyond doubt. Forming opinions on government intervention based on general equilibrium models in the absence of financial sector instability is bound to lead to incorrect conclusions. The major part of the US fiscal problems stems from running consistent budget deficits for the best part of 50 years.

    Lucas and his ilk are ideological warriors who have commited much of their careers to the premise that fiscal policy is ineffective. To admit that it has been effective would be to trash much of their life’s work, so pardon me if I put little stock in their opinions.

  89. Alice
    August 19th, 2010 at 22:17 | #90

    @Jim Rose
    I think the point being completely missed here is that someone gets paid to dig….its not whats in the bottles that really matters except that it has sufficient value for persons to be employed…like the fiscal stimulus.

  90. Jim Rose
    August 19th, 2010 at 23:22 | #91


    If there is a liquidity trap, as you hint, Auerbach and Obstfeld explored this recently in the American Economic Review in “The Case for Open-Market Purchases in a Liquidity Trap”.

    To the extent that long-term interest rates are positive now or short-term interest rates are expected to be positive in the future, trading money for interest-bearing public debt through open market operations reduces future debt-service requirements.

    A massive monetary expansion during a liquidity trap should improve welfare by reducing the taxes required in the future to service the now much smaller national debt!!!!

    A quantitative easing during a liquidity trap is, in effect, as good as or even better than a lump sum tax. Central banks perhaps should contrive liquidity traps because they can then buy back the public debt because of the unlimited demand for money. People will without limit give up bonds for non-interest bearing cash. If monetary policy is impotent near the zero bound, the Fed should buy trillions of dollars worth in federal bonds and payoff the public debt. This is a logical implication of liquidity traps for an optimal fiscal policy!!!!

    Rhetorical claims that fiscal policy worked is the usual shape shifting.
    1. In Australia, it worked because unemployment rates are back near the natural rate.
    2. In the USA, the situation would have been far worse but for fiscal policy.
    The perfect hypothesis – it is confirmed works not matter if things improve or worsen.

    After reading the annual reports of the Fed in the 1920s and 1930s, Milton Friedman noticed the following pattern:
    “In the years of prosperity, monetary policy is a potent weapon, the skilful handling of which deserves the credit for the favourable course of events; in years of adversity, other forces are the important sources of economic change, monetary policy had little leeway, and only the skilful handling of the exceedingly limited powers available prevented conditions from being even worse”

    two questions: are fiscal expansions potent in small open economies? what is the extent of exchange rate crowding out?

    I also draw your attention to the literature on expansionary fiscal contractions. Examples in addition to the EU in 1980s and 1990s are Australia and NZ in 1931. 25%+ unemployment in 1931 was below double figures by about 1935 after massive fiscal contractions combined with going off the gold standard.

  91. jquiggin
    August 20th, 2010 at 08:16 | #92

    Jim Rose :
    Is there a progressive or left-wing approach to physics, chemistry, biology and so on?

    By default, there is, since the political right is now explicitly anti-science, particularly in the US, but also among their Oz offshoots (eg Miranda Devine). Scientists return the favor, BTW. In the US, they are almost as uniformly hostile to the Republican party as are blacks.

  92. Alice
    August 20th, 2010 at 08:43 | #93

    I was just watching Virginia Trioli this morning interviewing a Coalition mouthpiece (who’s name escapes me because they all sound so similar).

    Virginia ” so you say you want to be back in surplus by 2013? Now assuming you get your surplus what are your big visions for this country?”

    Translate as…what will you spend the surplus on?

    Coalition response “well we believe its up to the individual to make decisions on what they want for the future”

    Translate as – “we are not going to spend the surplus on anything big for the country (except elections and vote buying of marginal seats and our own superannuation and perks and tax cuts for our wealthy mates) – we have no big vision – governments shouldnt have big visions – if you individuals (riff raff) down there on the street want a big vision – pay for it (again) yourselves. Pay taxes to us to be as lazy as all get out, then pay user pays prices to use the infrastructure we should have been building all along”

    No Harbour Bridge. No Snowy Mountains Scheme. No big vision transport initiatives and no vote from me.

    Useless as the old ocker saying goes…..

  93. Michael of Summer Hill
    August 20th, 2010 at 09:16 | #94

    Alice, one reason the Coalition cannot get its act together is that Abbott has lost one trillion dollars.

  94. Jim Rose
    August 20th, 2010 at 10:47 | #95


    So the environmental movement is pro-science. That is:
    • It has always desired to base its conclusions on the best available science?
    • Is always willing to engage in deliberation and compromise to balance environmental protection with other compelling social and economic objectives? and
    • Has always had a willingness to consider alterative regulatory strategies that deliver the policy objective at the lowest cost?
    Progressives respect the rights all to disagree, and progressives never resort to name calling and never to personal attacks to dampen dissent and chill free debate?

    Progressives have an overwhelming commitment to persuasion based on facts, reasoned arguments and anticipated consequences, and welcome debate and disagreement out of the truth that the growth of knowledge comes from repeated challenge and from a minority persuading the majority that its views are mistaken or are incomplete?

    Progressives accept that scientific inquiry assumes that reality is objective and consistent, that we have the capacity to perceive reality accurately, that rational explanations exist for the world around us, and that all scientists can contribute to science and the search for knowledge regardless of race, nationality, class, culture, or gender?

    Progressives reject the notions:
    • that the results of scientific findings do represent any underlying reality, but are the ideology of dominant groups within society? and
    • that science is a belief system that is deeply conservative and conformist, that resists change? This includes the views that science has a bourgeois and/or Eurocentric and/or masculinist world-view.

  95. paul walter
    August 20th, 2010 at 11:03 | #96

    Congratulations, Prof. Quiggin!
    You have succeeded where the rest of us have failed.
    On the first paragraph of Jim Roses reply, that is.
    Need I read the rest?

  96. Jim Rose
    August 20th, 2010 at 11:39 | #97

    @paul walter
    1st para should be “So the environmental movement is pro-science?”

  97. Jim Rose
    August 20th, 2010 at 11:59 | #98

    American faculty, especially in the social sciences and humanities, are overwhelmingly Democratic in affiliation and social-democratic in orientation.

    If ideology plays no role at all in the hard and applied sciences, what are we to make of the 2.5:1 Democratic:Republican ratio in engineering, the 4.1:1 in chemistry, 4.2:1 ratio in physics, 10.7:1 in biology, or the 13.1:1 in neurosciences?

    for more on voter-registration, see Faculty Partisan Affiliations in All Disciplines: A Voter-Registration Study by Christopher F. Cardiff and Daniel B. Klein, Critical Review at http://www.criticalreview.com/2004/pdfs/cardiff_klein.pdf

    According to Schumpeter, intellectuals are unhappy with capitalism because they are not important players in a decentralised free-market system.

    Hayek argues that intellectuals have a professional distaste for what they cannot explain through explicit reasoning. The market process is hard to explain because prices do not come with explanations attached for all the changes summarised across millions of people that the price movement is sumarising and signaling.

  98. Jim Rose
    August 20th, 2010 at 12:52 | #99

    on “Lucas and his ilk are ideological warriors ” Robert Lucas supported Obama.

    Team obama had other Chicago boys – James Heckman.

  99. Fran Barlow
    August 20th, 2010 at 15:02 | #100

    [delete prior in mod'n]


    Though it is interesting to speculate on what would happen if one of those diggers were injured or killed in a tunnelling cave in. I suspect the politics of that would have been a lot worse than with the insulation scheme.

    This is the basic problem here. Almost all human activity entails at least some risk. We humans know and accept this and respond by trying to engage in informed and rational trading of risk and benefit. The insulation scheme, rolled out at the speed that it was with the fairly loose compliance needed to roll this out at the speed wanted, invited a risk of harm that a rigorously controlled pahsed conversion scheme would not have. This latter approach would have got more insulation into rooves with much less rorting, but it is certain that instead of a million installations, we’d have had perhaps 10-12,000, and each of these would probably have cost more to do. Far fewer people would have had jobs.

    Aware of the Keynesian example, as an intellectual exercise, I tried imagining a scheme that would employ people with almost no risk of injury but which yielded a perceived public good for those likely to be under-employed. After some time, I gave up. I began thinking of exercise programs in which people rode fixed bicycles or did lap-swimming which would be a public health benefit but the first obese person who collapses and dies for any reason kills the program.

    In the end, cash splashes are probably as safe as it gets, merely because if someone uses their money to kill themselves drinking or going into gambling debt, it’s harder to blame the government. As a trade-off, I imagined giving out smart-cards to buy “healthy” food at supermarkets or quality shoes or to pay for health expenses or home or car repairs but this would have had had very little employment impact.

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