Larvatus Prodeo

While the government isn’t committing to anything, there’s speculation that another “stimulus package” is in the works. If so, how should that stimulus be delivered?

Malcolm Turnbull – in the context of another incoherent ramble on the economy – wants tax cuts. However, from what I’ve read, there’s a fair bit of evidence to suggest tax cuts are not the best option for economic stimulus. A similar debate is playing out in the American context – see this post; the guts of the story seems to be that “countercyclical” tax cuts don’t provide as much of a “multiplier effect” as government spending, as a lot of people just save the money when they’re feeling uncertain about their job. There’s also infrastructure spending, which is in vogue everywhere, including Japan, but there’s limits to how much can be efficiently spent on infrastructure in a hurry. And then, of course, there’s welfare spending, which the government sprinkled on politically convenient groups last time around.

If there is to be more dollops of cash ladeled around, I’d hope that some of the welfare might go towards the unemployed and possibly students, two groups who do it hard, will spend the money they receive, and haven’t got a cent of extra money so far. But there must be other forms of government spending that could help provide an economic stimulus and would offer long-term benefits. Environmental incentives are one that’s been widely proposed. But there are plenty of other possibilities. In my own area, one that comes to mind is an increase in postgraduate scholarships and ARC grant funding (obviously, I have a direct interest in such). The machinery to hand out the money already exists. An increase in unemployment means that postgraduate study and research become more attractive options than they might otherwise have been, meaning that there should be more suitable and interested candidates than in the past. And investments in education have a pretty decent long-term return.

So what other options are there out there?