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You Can't Have Too Much Stimulus

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John Robertson

Both in the USA and in Australia, there is conjecture about how much stimulus is enough. Economists have not given our politicians completely clear instructions on how to proceed.

Politicians in Australia and the USA could legitimately feel like the nuclear power station workers in the Saturday Night Live skit first aired in the mid-1980s featuring television personality Ed Asner as the retiring manager of a nuclear reactor.

At his farewell, the character played by Asner is asked whether he has any departing advice after his two decades managing the reactor. He replies with authority but ambiguously that "you cannot put too much water in a nuclear reactor".

The next scene is of his former colleagues in the midst of a reactor emergency arguing over how much water to put into the machine. Someone asks: what would Ed do? The answer comes quickly: he told us that "you can't put too much water in a nuclear reactor".

We do not see in the skit how they interpreted the advice. However, the third and final scene shows Asner on a beach in his retirement with his wife and, on the horizon, a huge mushroom-shaped cloud. Asner laments, "I told them you can't put too much water in a nuclear reactor".

Economic analysis is similarly ambiguous in its policy lessons about how much stimulus is appropriate under the current circumstances.

There are two critical aspects to our current economic predicament which cannot be adequately factored into our economic modelling. One is technology and the extent to which it has changed market response times within a very short period. The other is the extent to which linkages among economies from China to Iceland have synchronised national economic activity rendering national policymakers less influential.

This makes it harder to fully understand whether markets and the real economy are going to snap back quickly from the gloom prevailing in the past few months or whether there is likely to be lingering recession-like conditions for many years.

If we are in for a Japanese-style post bubble economic adjustment, all of the foreshadowed stimulus packages might prove inadequate. They might offer the economic equivalent of a short-lived sugar high but nothing more.

If, on the other hand, economic adjustments in a technologically dominated globalized economy are becoming faster, we might have become far too pessimistic about prospective conditions, making the currently contemplated set of stimulus policies too potent for what is needed.

Prime Minister Rudd, like US President Obama, has fully embraced the need for more immediate government spending to compensate for the business and household spending shortfall.

Government ministers are arguing that we are in the midst of such a potentially catastrophic set of circumstances that a very large stimulus package can be justified with little regard to adverse future consequences. For them, worrying about future funding, for example, is a luxury since we might not have a viable economic system if we do not act emphatically now.

Others, however, remain worried about the future funding burden and seek a balance between current spending and future debt servicing obligations. This is the tack taken by the Turnbull opposition and Republicans in the U.S. Congress.

This latter, more cautious approach also places more emphasis on policies, including the provision of public infrastructure, which stimulate private sector profitability and investment spending. Some in this group also argue that most of the advanced economies have to face up to adjustments which, in the short term, must impose costs on their respective communities to force the changes in behavior necessary for a more stable and sustainable long-term economic environment.

Both sides of the debate have a basis in sound economic principles and both Prime Minister Rudd and Opposition Leader Turnbull are echoing the Saturday Night Live catchline: you can't put too much stimulus into the Australian economy.

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