IMF hoses Depressionberg Unstimulus

Not directly but implicitly. From the IMF:

Governments around the world are taking extraordinary measures to respond to the COVID-19 crisis. While maintaining the focus on addressing the health emergency and providing lifelines for households and businesses, governments need to prepare economies for the transition to the post-COVID-19 world—including by helping people get back to work.

Public investment has a central role to play. Our new Fiscal Monitorshows that increasing public investment in advanced and emerging market economies could help revive economic activity from the sharpest and deepest global economic collapse in contemporary history. It could also create millions of jobs directly in the short term and millions more indirectly over a longer period. Increasing public investment by 1 percent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 percent, private investment by 10 percent, and employment by 1.2 percent if investments are of high quality and if existing public and private debt burdens do not weaken the response of the private sector to the stimulus.

In this edition of our Fiscal Monitor, we discuss why more public investment is needed, what the potential impact of public investment may be on growth and jobs, and how governments can make sure investment supports the recovery.

The case for scaling up investment

Even before the pandemic, global investment had been weak for over a decade, despite crumbling roads and bridges in some advanced economies and massive infrastructure needs for transportation, clean water, sanitation, and more in most emerging and developing economies. Investment is now urgently required in sectors critical to controlling the pandemic, such as health care, schools, safe buildings, safe transportation, and digital infrastructure.

Low interest rates globally also signal that the time is right to invest. Savings are plenty, the private sector is in waiting mode, and many people are unemployed and able to take up jobs created through public investment. Private investment is depressed, owing to acute uncertainty on the future of the pandemic and the economic outlook. Thus, in many countries, the time is now to undertake high quality public investment, in priority projects. It can be done by borrowing at low cost.

Public investment can play a central role in the recovery, with the potential to generate, directly, between 2 and 8 jobs for every million dollars spent on traditional infrastructure, and between 5 and 14 jobs for every million spent on research and development, green electricity, and efficient buildings.

But investment projects can take time to implement. To ensure that investment creates jobs right now—when they are needed the most—countries should ramp up infrastructure maintenance, where safe. Now is also the time to start reviewing and restarting promising projects that were delayed because of the crisis, speeding up projects in the pipeline to bring them to fruition within the next two years, and planning for new projects aligned with the postcrisis priorities.

Striking the right balance

For some countries, however, borrowing to invest will be difficult because financing conditions are tight. Even so, a gradual scaling-up of public investment financed by borrowing could pay off, as long as rollover risks (risks associated with the refinancing of debt) and interest rates do not increase too much and governments choose investment projects wisely. Countries may also need to reallocate spending or raise additional revenue for priority investments.

Poorer countries—especially in the context of the Sustainable Development Goals 2030—will need grant support from the international community. Investing in adaptation to climate change is critical, especially in countries susceptible to floods and droughts. Official aid has been available, but the $10 billion allocated in 2018 falls short of the $25 billion of investment required annually in low-income economies, according to IMF staff estimates.

Maintaining the quality of investment projects is essential. We find, for example, that the cost of an individual project can increase by as much as 10 to 15 percent just because it is undertaken in a period when investment is particularly high. Cost increases tend to be higher and project delays are longer if projects are approved and undertaken when public investment is significantly scaled up, our analysis shows. Fast increases in public investment also carry the risk of facilitating corruption. Likewise, improving the governance of project selection and management is crucial, because there is scope to improve the efficiency of infrastructure by one third on average (as shown in a book recently published by the IMF: Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment).

Catalyzing private investment

We also discuss how, in this unique crisis, public investment could boost growth enough to trigger additional private sector job creation.

We analyze whether the effect of additional public spending on GDP (the “fiscal multiplier”) could be muted because some jobs cannot be performed safely during the pandemic and because firms will exit the crisis with less financial capacity to invest.

However, during this time of high uncertainty, public investment can boost private investors’ confidence in the recovery and induce them to invest too, in part because it signals the government’s commitment to sustainable growth. Public investment projects can also stimulate private investment more directly. For example, investments in digital communications, electrification, or transportation infrastructure allows new businesses to emerge. Likewise, our results show that investments in healthcare and other social services are associated with sizable increases in private investment at the one-year horizon.

In sum, public investment is a powerful element of the stimulus packages to limit the economic fallout from the pandemic. Even as countries continue to save lives and livelihoods, they can lay the foundation for a more resilient economy by investing in job-rich, highly productive, and greener activities.

In short, to catalyse private investment, the number one stated goal of the Morrison Government budget, you don’t ask a shot-to-pieces private sector to do it. The Government invests to stabilise sentiment and give certainty then the private sector rides in the coat tails.

This is macroeconomic policymaking 101 which, clearly, Treasurer Josh Depressionberg was too busy playing tennis to attend.

David Llewellyn-Smith
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Comments

  1. The problem with this kind of fiscal stimulus i.e. ‘investment in infrastructure’ is that is narrowly targeted. In other words if you are a major engineering firm, you (and the associated employees) will likely benefit, ditto construction firms, materials suppliers and so on.

    But what about the rest of us – trickle down? A few crumbs for the plebs (maybe).

    This kind of stimulus is little more than a form of corporate welfare. But, of course, it adds straight to GDP so the economy is made to look way more healthy than it really is.

    • But those employees will buy coffees and bacon and egg rolls, new hiluxes and investment properties…

      the trickle down approach at work.

      • If I’d known back in the day (when I was choosing a career) how it was all going to work, I’d have chosen very differently, because right now I don’t stand to benefit from any of this stimulus BS, corporate welfare or otherwise.

  2. Would a temporary UBI be a good solution that is gradually wound down over time as a demand driven recovery takes hold and generates enough spending as an incentive for free enterprise to take root again (thereby creating jobs)? Then tax it back when we have the economy back on its feet. This would be trickle up stimulus and trickle back tax.

    I get that it’s very hard to take back any sort of UBI once it’s in place but the LNP had no trouble reducing the dole back to an unliveable amount (and way too soon).

    • We have a huge range of poorly targeted welfare programs, each with their own poorly targeted range of criteria. Maybe a UBI will help to reform this.

      1) Remove the tax free threshold, pay everyone a UBI based on a reasonably acceptable amount.
      2) Abolish welfare as we know it. no unemployment, no aged pension, no disability….
      3) Get rid of Family tax benefit and other similar “Non welfare” welfare programs…

      I cant see the LNP doing it as they like to manipulate the various welfare programs to make political statements and swing voters…

        • kierans777MEMBER

          Nothing wrong with franking credits. Franking credit cash rebates on the other hand are a complete rort. On Q&A last night Albo gave the thumbs up to those wealthy boomers paying negative income tax (assuming they’ve got any excess franking credits at the moment).

          Same with mentioning the obvious elephant in the room whenever someone tries to cry about the “youth paying back the debt” being the $43B in super tax concessions. How about we get rid of those?

      • 1) Remove the tax free threshold, pay everyone a UBI based on a reasonably acceptable amount.
        2) Abolish welfare as we know it. no unemployment, no aged pension, no disability….
        3) Get rid of Family tax benefit and other similar “Non welfare” welfare programs…

        What locale is your “reasonably acceptable amount” defined by ? The middle of Sydney ? Rockhampton ? Alice Springs ? Is it “reasonable” for a retiree homeowner, someone who is disabled or chronically ill, a young single parent renting with a couple of kids ?

        Even ignoring the other glaring problems with a UBI, the simplest and most fundamental aspect of setting a “reasonable amount” is nearly impossible.

        Whenever you think “UBI” to yourself, you need to step back and ask “do I really mean fixing the social security system?”. Because one of these is providing appropriate support to people who need it, and the other one is the final stage of privatised Government masquerading as the former.

        Until we are living in something like a Star Trek society, a UBI is a terrible idea.

        • The same problem exists in the welfare system as it is. $500 a week buys you bugger all in Sydney but a fair bit in Alice Springs….

          If UBI isn’t about social security them what is it about?

          Regardless I used the term reasonable amount as I am unable to determine what’s reasonable. I have a fairly substantial income and don’t know what the minimum I would require to live as I have not needed to live that way for decades. If I can’t do that for myself then how could I presume to do it for anyone else.

          • The same problem exists in the welfare system as it is. $500 a week buys you bugger all in Sydney but a fair bit in Alice Springs….

            Yes. But a welfare system can, and should, have the capabilities in place to deal with obvious differences like localised cost of living, family situations, etc.

            The problem with complexity in the welfare system is not that it exists, because it’s addressing complex situations. The problem with complexity in the welfare system is that it largely exists to make welfare hard to access and to denigrate and demoralise those who need it, with barely a brief nod towards addressing the complex situations.

            If UBI isn’t about social security them what is it about?

            Privatisation of everything and shifting power away from the people.

            Extending the various catastrophes like aged care, childcare, toll roads, etc, etc, to everything else it hasn’t already consumed based on the moronic idea that the private sector always does it better. A UBI is a gateway to taking every single public asset, service and good, and selling it to the private sector with a promise that the “UBI” will provide people with enough money to buy/rent those things back.

            Regardless I used the term reasonable amount as I am unable to determine what’s reasonable. I have a fairly substantial income and don’t know what the minimum I would require to live as I have not needed to live that way for decades. If I can’t do that for myself then how could I presume to do it for anyone else.

            That’s the point. A “reasonable amount” varies dramatically by location and situation. It cannot be “Universal”. The fundamental concept is broken. It is an example of “for every complex situation, there is a solution that is obvious, simple and wrong”.

    • Jumping jack flash

      “Would a temporary UBI be a good solution that is gradually wound down over time”

      As far as I am concerned a UBI is equivalent to an interest rate cut in a debt economy like our New Economy, where everyone desperately requires and constantly chases larger and larger piles of debt.

      So yes a UBI would work very well, but once put in place it could never be wound back, only increased, because the money provided by the UBI would quickly be attached to a portion of debt service, where it would be effectively locked in.

      It is equivalent to interest rates. You can’t have a “temporary” cut to interest rates.
      They can’t raise interest rates ever again (at least not for 30 years after they dole out the last stack of debt) because people are maxed out on debt at the current low level of interest rates so to raise them would cause absolute disaster.

      of course if the banks refuse to acknowledge UBI money as real income then that wouldn’t be the case. It’d be a bit hypocritical of them to do that though because we all consider their fake debt money as being real money.

  3. The Government invests to stabilise sentiment and give certainty

    It’s much more direct and important than that. The role of government is to buy stuff when nobody else is. This induces the private sector to invest which creates employment which lifts demand … and the cycle continues.

    You’re right to say it’s Economics 101. But the establishment tossed those textbooks out decades ago.

  4. Jumping jack flash

    “…you don’t ask a shot-to-pieces private sector to do it…”

    This!
    Private sector chases the easy money. There is no easy money except for debt spending and wage theft.
    For anything novel, such as actually producing useful things, skillfully, and selling them for a profit to the rest of the world, the government needs to step in.

    Don’t just take my word for it. This strategy is proven to work to pull nations out of depressions. Just don’t spend on military and then elect an insane dictator…

    Actually, we’re getting very close to the point where insane dictators would look pretty good compared to the dross we have to choose from to lead us, not just here in Australia, and that’s really very scary.