Correction:
Commonwealth direct stimulus spending peaked 2009-10, not 2007-08

Hi again Rhian,

Thanks for this response, and for your diligence and persistence here.

Sorry for the delay getting back to you this time, Rhian. I’m hoping to replicate Creina Day’s calculations when I get the chance. Because it’s an intriguing approach. Not just for Australia, but for the other nations China imports from as well.

"Did it work anywhere else" is a pertinent question.

This may be some time away. So some brief questions immediately arising:

You note that “Prices fell sharply in the March quarter (2009), hence the drop in nominal exports was an increase in real terms.”

So what would have been the results of Day’s method had prices not dropped? Same result?

Re: “Your ‘Keynesian intervention’ did not add 4.6% to GDP in a single quarter. In fact, the Commonwealth’s stimulus package direct spending peaked in 2009-10.”

Correct.

This seems to be the schedule: $10.4 billion in October 2008 and another $4.7 billion to December 2008’s nation building package. A further $41.5 billion allocated to infrastructure and jobs in February 2009 and, finally, $22.5 billion in the 2009 budget.

So by the end of 2010 Australia had spent more than 10% of its 2007 GDP – $79.1 billion all up.

Does that sound right, Rhian?

If so, what would you estimate to have been the contribution of that stimulus to GDP growth in the 1st quarter, 2nd quarter and 3rd quarter of 2009?

How does that compare with the 1.2% added by exports to China in the March quarter, and with the 0.7% added in the June quarter?

Regarding, “The ABS employment data show that WA’s employment rose 5.7% in the year to December 2008 but fell 1.2% in the year to December 2009. Neither number looks plausible to me.”

What would you suggest are more realistic numbers?

Finally, is there some irony, do you think, Rhian, in asserting that strong direct Keynesian stimulus had little or no impact in Australia; what saved the economy from recession was exports to China – enabled by China’s strong direct Keynesian stimulus?

Thanks, Rhian.

Cheers,

Alan

Hi Alan

Re Day’s estimates
If prices hadn’t dropped, then the value of exports to China would have increased by much more, but assuming the volume of exports didn’t change, Day’s calculation would not be affected. Because she is looking at “real” growth, only the volumes count. If the volumes had dropped, of course, the story would be different – but they didn’t.

Re stimulus

The effect of the stimulus packages on GDP is not straightforward, even on a straight growth accounting method (adding expenditure but not taking account of multipliers, crowding out etc).

Firstly, a large proportion of the payments to households were saved not spent, so they made no direct contribution to GDP. Even Andrew Leigh, (an economist and Labor MP) estimates that less than half of households spent the money they got. Rebuilding savings might be a fine thing, but it does not stimulate the economy.

Secondly, the direct spending, particularly the capital elements, took time to take effect. A lot of it was not delivered on schedule, and the investment project may have begun in 2009 but can take a couple of years or more to complete. So the stimulus was spread beyond 2008 and 2009, when it was most needed. And, Governments are masters are announcing spending they were going to do anyway.

We can get direct estimates of the contribution of Commonwealth Government spending to growth from the ABS. The data are percentage point contributions to real, seasonally adjusted GDP growth:

Commonwealth consumption spending actually fell in real terms in the March quarter 2009, detracting 0.2 percentage points from GDP growth. Investment spending was flat. Both consumption and investment fell in the June quarter.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Jun%202013?OpenDocument (Table 2, series A2298900T, A2303994W, A2304000J)

Re Employment
It’s had to give a better estimate as no-one else does the data collection. For a rough estimate I’d take an average growth rate between when the sample size was cut and when it was restored. That’s an annualised growth rate of 1.7% in the 18 months to December 2009 on seasonally adjusted data – below long-term trend of 2.9%, but positive

Re Keynsian “irony”
Not at all. Even the most hardened monetarist would accept that, if a government spends a lot of money during a short period, it will boost GDP for that period. The differences with Keynsians revolve around multipliers, crowding out effects, exchange rate effects, etc all of which unfold over a number of quarters