Money is being thrown at the economy but there is little discussion of what it needs to do. As we are back in a traditional macroeconomics world with the real possibility of a liquidity trap, we know that the money has to encourage expenditure on real stuff. Saving alone will not cut it. That means consumption and investment. Both are currently a problem due to diminished expectations.
So in terms of what the Rudd government is doing how is it stacking up on stimulating the right stuff. The transfer to pensioners does not appear to count. It is mainly to cushion the shock of reduced wealth in our privatised social security world. That means it will go straight back into those savings.
The money given to local governments is better. It has to be spent and spent quickly. It also had to be spent on new stuff that wasn’t budgeted for. Of course, it is hard to perfectly enforce this but this is as closed to forced consumption/investment as you are going to get.
We can also spend money on infrastructure but we have to do that quickly. That is a hard ask and can lead to really expensive bad decisions. Money spent re-tooling for the coming emissions trading scheme may be a better option.
On the tax side, income tax cuts and corporate tax cuts won’t cut it. These will be mostly saved. However, a temporary cut to the GST would be better. Temporary changes to the GST impact on consumption more than saving and in particular on consumption of durables. Durables are precisely the goods whose purchases are being deferred. So it would hit all the right places. Indeed, I suggested the reverse earlier this year when our worry was inflation.
[Update: and that is precisely what the UK has done].