Posted by: graemebird | February 15, 2009

Sinclairs Submission

Its too bad we don’t have it on tape. Because he’s rather better and more strident in audio then he comes across in writing.  As you may know I posted an article complaining that he was blood-sucker-centrals loyal-opposition on account of his failure to attack this multiplier rubbish root and branch. Well despite getting this technical matter entirely wrong I think you’ll agree it appears to be a pretty good performance.


Prof. Davidson—Thank you for this opportunity to address you on the stimulus package. Given the short time, I will jump straight to the recommendations that I have come to. Having had a look at it, I recommend that the stimulus package in its current format be rejected by the Senate. In my opinion, the package does not contain enough stimulus relative to the spending that it contains, and the spending that it does contain is of poor quality. This kind of stimulus package has a very poor track record of success, and economically we cannot really expect it to succeed.
The other thing that I want to emphasise is that the government is not doing nothing, if you will forgive the double negative. The Reserve Bank has lowered interest rates quite substantially over the last while and the automatic stabilisers will kick in as unemployment starts rising, tax receipts start falling and welfare payments are being made. So there is no urgent need to rush a package of this magnitude through the parliament at this time. That does not mean that the government should not be doing anything at all; but, in my opinion, it should not be doing this.
In terms of some principles as to what should be done, I think fiscal policy should always be prudent and conservative. That means that, on average, governments should balance budgets and have lower taxes and that public finance should be used sparingly, if at all. I think that Ken Henry’s three principles of participation, productivity and population are very important when considering public policy issues and so should be borne in mind. Also, at a Melbourne dinner a couple of months ago Glenn Stevens said, ‘A good project last year is probably still a good project, and a bad project last year is still a bad project.’ So the economic conditions should not determine the desirability of projects, and certainly ‘shovel ready’ has never been an appropriate criterion for spending.
To the extent that the government wishes to pursue an activist fiscal policy, I recommend that it should be targeting tax cuts. There are a number of different tax cut proposals which could be considered. For example, the government could consider reinstating the aspirational tax cuts that were promised at the last election; a GST holiday; and/or a payroll tax relief package, which is my first choice. Both the payroll tax relief package and a GST holiday would result in the Commonwealth government having to compensate states and territories for lost income. This actually has a couple of advantages, which I will run through, especially in terms of the payroll tax liability.
Payroll tax constitutes a tax on employment. Everybody is speaking at the moment about maintaining high levels of employment—which I think is probably quite important—so taxing employment in the current environment certainly seems counterproductive. It reduces incentives to re-employ workers when the economy recovers. Payroll tax is a regressive tax which impacts more highly on low-income earners than it does on high-income earners, so reducing it would actually have good equity outcomes as well. Also, reducing payroll tax would not be as expensive as it sounds. For example, when somebody loses their job they stop paying income tax and they start receiving unemployment benefits. But if they kept their job as a result of the payroll tax being abolished they would continue to pay income tax and would not be receiving unemployment benefits, so the expense would probably be somewhat less than the $15 billion or $16 billion which it sounds like costing upfront. My proposal would also temporarily stabilise the finance of state and territory governments during the crisis, because they are highly reliant on payroll tax receipts. As people lose their jobs, so those governments’ revenues would decline quite substantially.
Part of the problem is that not all Australian firms are liable for payroll tax relief. If you think of something we can do for those types of firms, that is where the notion of, say, a GST holiday would become quite important. My idea is, rather than reducing the GST rate and then raising it again at some point in the future, to have a payment holiday whereby firms do not have to pay over revenue that they have received as GST to the tax office. They could either keep the revenue if they wished or they could lower their prices by 10 per cent if they wished. Either way, this would give an effective injection of cash into those types of firms. This type of policy could be used in addition to a payroll tax holiday or, conversely, could be used for only those firms who are not eligible for payroll tax relief. This is the sort of thing that would pump money into firms, maintaining their profitability and maintaining employment.
My objection to the proposed policies is, first of all, that spending multipliers tend to be low. The government is relying upon the fact that spending would actually generate activity in the economy. This, however, is not consistent with empirical economic research into the size of multipliers, as opposed to theoretical research which seems to suggest that the multipliers are quite high. I think it is very important to recognise this dichotomy between the theoretical expectations and the empirical results.
Professor Gregory Mankiw of Harvard University, who is the author of one of the world’s leading economic textbooks, a former chairman of the economic advisers to the American President George W Bush and a New Keynesian economist, compared the size of the multipliers in an article in the New York Times last month, where he reports on research by Professor Valerie Ramey of San Diego university and Christina and David Romer of Berkeley university, looking at the size of these multipliers. Christina is currently the Chairman of the Council of Economic Advisers to President Obama. In that research, Christina Romer and her husband find that tax cut multipliers are a size of about three, and Professor Ramey finds that spending multipliers are about 1.4, which means that the tax multipliers are actually almost twice the size of the spending multipliers. So, if you wanted to have a fiscal impact on the economy, you would be considering tax cuts and not spending increases. Professor Mankiw, who, as I say, is a New Keynesian economist, has actually written on his blog that we should not be intellectually bound by the textbook Keynesian model.
The federal government is planning on a substantial amount of spending in its stimulus package, and it does not do very much, if anything at all, on tax cuts. In an article published in Thursday’s Financial Review, Michael Knox makes the argument that, because of the nature of the government’s social expenditure as opposed to economic expenditure, multipliers for this stimulus package are going to be even lower than normally would be the case. So I think it is quite important to realise that this particular package has got a very low ‘bang for buck’—and there are certainly a substantial amount of bucks involved in the project.
Professor John Cochrane of the University of Chicago has made an argument about stimulus packages, simply saying: ‘Do we honestly believe that people are not spending enough money and do we honestly believe that the government should then force people to spend more money?’
CHAIR—You have one minute remaining.
Prof. Davidson—Thank you. If you look at the bottom of page 4, I make the argument: do we believe that Australians have not been borrowing and spending enough on alcohol, pokies and tobacco and that there are not enough plasma televisions around? Rather than wasting money on those sorts of things, we should be looking at things which add to employment, which will stimulate the economy over a substantial period of time. Overall, all the economic analysis does seem to suggest that tax multipliers are far greater than spending multipliers and that tax cuts are going to have a far greater ‘bang for buck’ in the economy than is the spending proposed in the stimulus package. The other thing I would like to say is that economists seem to overestimate the benefits of fiscal policy by and large.
CHAIR—Could you wrap it up please, Professor.
Prof. Davidson—Thank you very much.
CHAIR—That is the first time anyone has listened to me all day! Thank you very much, Professor, for being a witness and for your submission.
Prof. Davidson—Thank you very much for your time.”

RATHER GOOD ISN’T IT?  But why can he not learn the material and be free of this multiplier crapola for all time. Is he  fairweather friend of the goodess liberty? Or is he just using her?

Lets see if Amy Whitehouse can stand in for the Goddess:



  1. Here’s a another salutary tale for you Graeme.

    In 1995, McArthur Wheeler walked into two Pittsburgh banks
    and robbed them in broad daylight, with no visible attempt at
    disguise. He was arrested later that night, less than an hour after
    videotapes of him taken from surveillance cameras were broadcast
    on the 11 o’clock news. When police later showed him the surveillance
    tapes, Mr. Wheeler stared in incredulity. “But I wore the
    juice,” he mumbled. Apparently, Mr. Wheeler was under the
    impression that rubbing one’s face with lemon juice rendered it
    invisible to videotape cameras.

    I bring the unfortunate affairs of Mr. Wheeler to your attention to make
    three points. The first two are noncontroversial. First, in many
    domains in life, success and satisfaction depend on knowledge,
    wisdom, or savvy in knowing which rules to follow and which
    strategies to pursue. This is true not only for committing crimes,
    but also for many tasks in the social and intellectual domains, such
    as promoting effective leadership, raising children, constructing a
    solid logical argument, or designing a rigorous psychological
    study. Second, people differ widely in the knowledge and strategies
    they apply with varying levels of success. Some of the knowledge and
    theories that people apply to their actions are sound and meet with
    favorable results. Others, like the lemon juice hypothesis of
    McArthur Wheeler, are imperfect at best and wrong-headed, incompetent,
    or dysfunctional at worst.

    Perhaps more controversial is the third point. When people are incompetent in
    the strategies they adopt to achieve success and satisfaction, they
    suffer a dual burden: Not only do they reach erroneous conclusions
    and make unfortunate choices, but their incompetence robs them of
    the ability to realize it. Instead, like Mr. Wheeler, they are left with
    the mistaken impression that they are doing just fine. As Charles Darwin sagely noted over a century ago,
    “ignorance more frequently begets confidence than does knowledge”.

    Stop using the lemon juice Graeme!

  2. Thats a stupid story Sinclair. And when all is said and done you need to get serious and learn the material.

    The multiplier is crap. And its only support for the multiplier in the economics profession that could have lead to the 42 billion dollar wrecking-ball.

    You don’t have the Wheeler defense I aint giving it to you. I’m just trying to be fair by attesting that you come across better in live performance.

    Get it together because we have a civilisation to save.

  3. “this going to sound terrible but in the scheme of things is this really such a big deal. a lot of people died but it seems to me that these events will be pretty rare.”

    You idiot scrooge. Environmentalists and leftists are setting us up for the kill in all areas. In the US they wage a jihad against missile-defense. Here the same sort of mentality prevented us even trying to get the Raptor. They set these Victorians up for the kill and on the internet are currently demanding that they be able to continue doing so.

    They are setting the entire human race up for an un-rivalled mass-eradication with obstructions to energy-production. And they still get in the way of DDT-use and manufacture.

    If you let them kill they will continue killing.

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