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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 Published and distributed by the Crawford School of Economics and Government, The Australian National University