Stimulus Plans initially create an image for the public that the Government is actually "doing something" to improve the economy. More informed people, however, dismiss such acts as simple "illusion" created by the Government and nothing else. They also dismiss as this as a waste of taxpayer's money, and are afraid of future problems in Government treasury caused by debts.
I want to focus my post on "public works", and little on handing out cash to the public. My opinion is that public works are a good idea, because it creates jobs. Although this will have bad impact on government wealth, it will have a positive effect on individual's well-being.
“You need projects with good jobs that will last through a bad economy.”
I think the major problem with the way Japan handled its stimulus plans was that little thought was placed upon its long-term benefits and creating lasting jobs. The blame should not only be pushed upon the stimulus packages themselves, but should be recognised that, through proper plans, stimulus packages can have a long-time benefits in the long-term.
One of the notable collapses caused by excessive lending is the IMF crisis in South Korea, where the nation's credit ranking was downgraded to a state where conglomerates ("chaebols", as Koreans call them) could no longer access external finances and forced to be bankrupted.
This situation can be avoided by vigorous risk-assessment prior to Government investment, and ensuring that money is spent in safe investments. One recommendation would be improving public transport system, which would benefit the society and create jobs for workers with little qualifications.
Other possible solution can also be achieved through cutting costs. To give examples, the Internet Censorship plan is costing millions of dollars. It will slow down internet, which will limit business efficiency, and is facing large criticism. Halting this project now would save money for more urgent issues. Another one is the Myki Card System, which is hardly proving to be necessary, yet costing taxpayers billions of dollars. This program could be postponed, and the fund could be diverted to more resourceful uses such as reducing ticket prices which will be more welcomed by the commuters.
I think the problem with just handing out cash, is that the Government loses control of the economy. People may save the sum for the future, which is detrimental to the economy as the cash movement is not increasing. They may spend too much on foreign goods, which would do little to improve the local economy. Protectionism is not a welcome solution here, as this would adversely affect on Australian exports as well. They may also spend it all at once, which would suddenly spike the economy and then slump back down which would depress market confidence. Spending may also be too focused on a particular industry, for example Gambling, which would mean that other business areas will suffer due to constant revenues with inflated currency. The problem I am addressing here is that handing out lump sums of cash to the public is not an ideal solution as people generally do not spend sudden money carefully nor do they consider the national prosperity more than their financial security.
Having said such, I cannot comment on how effective Obama's and Rudd's stimulus plans are going to be. Since the general consensus seems to be that Obama is an intelligent economist, I can almost deduct that the millions of dollars in his plan will be well spent towards saving the American, and consequently Global economy.
Here's a general article I wrote on why spending money on public works doesn't stimulate the economy.
I think it's a nice response to the part where you fear that the "Government loses control of the economy". When you question the efficiency of government spending, I suggest the answer is to let the government lose control of it (less taxation and spending, in general), because people are more responsible with the money they earn (they have self-interest guiding them). This doesn't mean I'm in favour of bailouts and tax returns that go beyond deficits, however!
But anyway, here's the article:
A common misconception is that increases in government spending will stimulate the economy. The logic offered to support this argument often describes how government spending will end up being paid as income to either business owners or workers, who will then spend a portion of that extra income, which will then become somebody else's income and so on, causing the money to cycle through the economy, and create a multiplier effect and hence creating wealth and stimulating the economy. There is nothing wrong with this logic, but it doesn't quite justify public spending.
It's easy to see the multiplier effect in action as the government injects dollars into an economy. Our companies will make more sales, which encourages higher production schedules, encouraging employers to create more jobs. As a result, there will be higher levels of GDP and lower levels of unemployment. So what is there to complain about? There are hidden costs. Consider: where did that money come from?
It came from taxpayers. Taxpayers who would have used the money according to their own preferences and needs, directing the market to produce the goods and services that are the highest priority to these taxpayers. Additionally, these private spending patterns would cycle through the economy, like with government spending, creating the same benefits that government spending would. The difference, however, is that the economic activity spurred by private spending will signal the market to produce the goods and services that people actually need, rather than on what the government spends on behalf of the people.
Think about two possible ways that money can be spent:
1. Your money can be spent on yourself.
2. Someone else's money can be spent on someone else.
The first option is like most typical private spending habits. You spend your own money on yourself. Since you are spending your own money, you take care of how much you spend, keeping consideration of your limited resources. Additionally, since you are spending the money on yourself, you make sure you get goods and services that are important to you. Overall, this type of spending prevents waste, and guides the market to produce the goods and services that are important to society.
The second option is like most government expenditures. Someone else's money is being used on someone else. It's not your money (mainly), so you don't really care about how much you spend, and it's not being spent on you (mainly), so you don't really care what it's spent on either. This type of spending encourages waste, and haphazardly directs the market to produce goods and services that may not be beneficial to society.
So when government spends, it forgoes the opportunity of the far more efficient type of spending: private spending. Government spending joins the list of the many other "beneficial" programs where government intervenes, and unlocks steep hidden costs as an unintended consequence. It's not easy to envision the loss of government spending, as it improves GDP and lowers unemployment. However, private spending does it better, and by spending through the public treasury, we sacrifice the better option.
Respond here:
http://www.facebook.com/note.php?note_id=45948797421&1&index=1I won't check this, most likely. PM me if you really want me to see it.
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