Thank you, Rafe, for sending me the October 8 article by Ergas. There is also a new article in todays Australia — http://www.theaustralian.news.com.au/story/0,,24730487-7583,00.html?from=public_rss
I was originally looking for hard evidence – that Kevin Rudd is alleged to have refused support for a major transport project in NSW on the ground that it did not run through any marginal electorates. I see no evidence. The charge has been repeatedly denied by all Labour sides of the fence. Ergas himself argues that that even were that (SMH) report incorrect (which he does not repeat in todays column), there are other strong reasons against a fiscal stimulus.
Ergas clearly has bigger fish to fry. He refers to the failure of the PMs criteria for project selection, which reads more like a bad haiki.
He has no objection to automatic stabilizers but he opposes the use of discretionary spending as a form of short term stimulus.
Ergas argument can be challenged in two stages.
First, is discretionary spending necessary? And secondly, what else can the Government do with the infrastructure money?
On the first question, we must agree to disagree. I find the arguments of Paul Krugman, the Secretary of the Treasury, the Governor of the RBA and most Australian economists all very convincing (on the merits of discretionary spending).
What of the second question – what else should the Government do with the moneys?
1. Private sector infrastructure investment is not readily available at present, except at exorbitant (irrational) prices. The reason is that the financial system is not functioning well at present, because of the failure to regulate the shadow banking system. The banks are alone and very distrusting of other non-bank borrowers.
2. The Government has set up the Infrastructure Council. It has been at work for nearly a full year. Surely, they can deliver some useful items by now ones which might meet the stringent tests (such as rigorous cost-benefit testing of all projects, full disclosure etc) presented by the ALP.
3. You can ofcourse give all the money away by way of a tax reduction, as Ergas notes today. In todays circumstances, a good deal of this money would be wasted (saved) and so prove quite ineffective as a source of short term stimulus. If we want to go down that road, why not give the unemployment recipients a generous increase in the much neglected Newspoll? This can be easily rolled back once the recovery starts.I doubt that the incentives to work and save and the vulnerability to rent-seeking have any bearing on the current problems.