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APEC Economies
NEWSLETTER
ISSN 1441-063X
Vol. 13 No. 11 December 2009
Research Focus
Ambulance Economics
Max Corden*
‘Ambulance economics’ is about dealing
GDP or where debt is, in any case, likely to
have applied such policies, and lessons will be
with the immediate dangers of the global
rise owing to the ageing of the population
learnt. Ideally, fiscal stimulus programs should
crisis, above all, ensuring that a crisis in the
and to increased medical expenditures (such
be ‘timely, temporary and targeted’ (to quote
world financial system does not turn into a
as Japan).
an important International Monetary Fund
Great Depression. Here Keynesian-style fiscal
It was pointed out at the conference that
paper). In addition, they should be efficient.
stimuli applied in many countries, above
there may be offsetting gains for the future,
With regard to ‘targeting’, benefits should
all the United States and China, have been
so that, on balance, a fiscal stimulus that
preferably go to people who are likely to spend
crucial. The world economy has had a heart
avoids a depression currently may actually
their gains — and spend them quickly — rather
attack, the financial system being its heart.
have a net benefit for the country, even
than just saving them. Saving is less likely
There is much discussion about what were the
for the later periods when the crisis is over.
when the recipients are ‘liquidity constrained’,
causes of this crisis, how it can be prevented
Three such gains are the following. First,
that is, they cannot easily borrow, and so will
in the future, and why it was not foreseen.
with greater incomes currently — relative
spend all that they receive. Poorer people
Ambulance Economics is about the immediate,
to the incomes of a deep recession or
are more likely to be constrained in this way,
urgent, temporary rescue process. The current
even depression in the absence of stimulus
so that a bias in giving or lending funds to
crisis has required immediate Keynesian fiscal
policies — there will be extra savings which
such people fits in with the usual income
expansion policies. The ambulance, in effect,
later can finance the extra taxes that have
distribution aims.
has rescued the patient, at least temporarily.
to be paid owing to the higher public
Arguably, increased spending by governments
This article summarises a paper presented at a
debt. Second, if the fiscal stimulus involves
or by the private sector on investment, rather
recent conference at the Australian National
public infrastructure investment, this will
than consumption, may be preferable, since
University on ‘Trade and Industry in the Asia
have benefits for the future provided it
it would benefit the future and contribute
Pacific: History, Trends and Prospects’ which
is reasonably efficient. Third, by avoiding
to offsetting the adverse effects of future
discussed many issues concerning fiscal
the increased unemployment that a deep
increases in taxation that will be required.
stimuli.
recession would have produced, the stimulus
There are inevitable trade-offs. In particular,
It is often argued that, while fiscal stimulus
will avoid a loss of work experience, which
investment in infrastructure may be desirable
policies may yield a current benefit through
would have reduced the quality of the labour
because it has long-term benefits if it is
raising aggregate demand and hence output,
force when the crisis is over.
efficient. But it may take time to plan and
and thus current consumption, such policies
Fiscal stimuli introduced in emergency
then to complete, and do so efficiently. Thus
impose a cost on future taxpayers owing to
situations (hence the ‘ambulance’) have
it may not meet the immediate ‘ambulance’
the increased public debt that results. This
practical problems. In the next years much
needs. The fiscal stimuli should be temporary:
is particularly important for countries that
research will probably be done analysing
when the crisis ends, it may be necessary to
already have high public debt relative to their
the experiences of many countries that
reduce spending again to avoid inflation.
The Crawford School of Economics and Government
ANU College of Asia and the Pacific
http://www.crawford.anu.edu.au
Hence permanent tax reductions are not
or spending increases owing to a recession,
for stimulus. But they may not immediately
suitable. On the other hand, the benefits of
without changes in tax rates or other
increase aggregate demand, as the other forms
temporary tax cuts are more likely to be saved
arrangements, such as unemployment benefit
of fiscal stimulus are meant to do.
than those of permanent tax cuts.
rates or conditions, being changed. Such
To conclude, the policies discussed and
Many arguments have been advanced against
stabilisers operate automatically without
analysed in the conference paper aim to deal
fiscal stimulus policies, and seven such
any government policy changes. The most
with the serious consequences of the financial
arguments are analysed in detail in the
important cases here are declines in income
crisis for the economy as a whole. In American
paper. One of them is the so-called ‘Ricardian
and corporation tax revenues, and increases
terms, the aim is to minimise the adverse
equivalence’ theory. Since fiscal deficits are
in the costs of unemployment benefits, all
effects of a Wall Street crisis on Main Street.
likely to lead to higher taxation in the future
resulting from a recession. If the resultant
Here, it seems, something has been learnt
(to repay eventually the increased public
deficits are to be stimulating in their effects
from the experience of the Great Depression,
debt resulting from fiscal deficits) far-sighted
— thus moderating a recession — the deficits
thanks, above all to the speedy application by
private consumers will save more, and this
must actually be financed, and therefore the
many countries, especially the United States,
will offset the stimulus effects of reduced
automatic stabilisers must be debt creating.
of short-term Keynesian policies. While in
taxation or greater government spending.
If the deficits are not financed — so that
2009 unemployment has certainly increased,
However, evidence from the United States and
(for example) tax rates have to be increased
notably in the United States, there has not
from Japan does not support this argument
to avoid increased budget deficits — the
been another Great Depression. This favourable
Policies that involve increased government
so-called stabilisers will not actually help to
‘ambulance’ effect is distinct from other issues
expenditures, tax cuts or hand-outs to the
stabilise the economy.
that require much more discussion, analysis
private sector, and thus increased public debt,
Finally, government finance has been
and research, namely what the fundamental
can actually take three forms.
provided to rescue or assist banks and others
causes of the crisis have been, and how such
First, there are discretionary stimuli, of which
in the financial sector. This will certainly
a crisis can be prevented, or its likelihood
investment in infrastructure is an important
increase the public debt, and is usually
reduced, in the future, possibly as a result of
example. These involve explicit and detailed
designed to revive the financial sector by
improved regulations of the financial sector.
government decisions, and either higher
improving the balance sheets of banks and
government expenditures or reductions in
other financial institutions. Such measures
*Emeritus Professor of International
taxation, possibly temporary, or ‘hand-outs’
— usually politically unpopular — deal with
Economics, Johns Hopkins University;
of various kinds.
the direct cause of the crisis. If such policies
Professorial Fellow, Department of Economics,
Second, there are the automatic stabilisers.
are effective, they would shorten the length
University of Melbourne.
In this case government revenue declines
of the crisis and thus the eventual need
Events
Announcement
2 December Stern, Climate Policy
and Saving Rates Kathryn Smith, This
seminar is presented by Crawford
School of Economics and Government
and the Environmental Economic
Research Hub.
12.30 -1.30pm Seminar room 1, Second
Floor, Crawford Building
Tonga will also be presented, as well as
a panel discussion on the PACER Plus
trade reform. A program for the update
is available at: http://peb.anu.edu.au/
outreach/australia.php
9.00am – 3.45pm Haydon Allen Tank,
Building 23, ANU Campus
RSVP (acceptances only) to: Hannah
McInnes, Ph: (02) 6125 5559
[email protected]
8 December The 2009 PNG and Pacific
Update. Presentations will include
constitutional and electoral reform
in the Pacific, the seasonal workers’
program, and challenges to aid in
the Pacific. An economic survey of
18 December Global Food Crisis, Mr
D. R. Kaarthikeyan, South Asia Research
Centre seminar co-sponsored by the
Crawford School.
2.00 – 4.00pm Seminar room A, HC
Coombs Building 9, ANU Campus
APEC Economies newsletter mailing
list enquiries:
Professor Tom Kompas has been
appointed Director of the Crawford
School of Economics and Government at
The Australian National University with
immediate effect. Professor Kompas is
also the founding Director of the new
Australian Centre for Biosecurity and
Environmental Economics at the ANU.
Australia-Japan Research Centre
T: 61 2 6125 3780
F: 61 2 6125 0767
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