Aside from programming, photography, audio geekery and parenting, I'm also a closet economist. And, at least on paper, a semi-qualified one too - I double majored in Finance and Economics in my (to date, unused) Commerce degree from ANU.
There's much of talk going on around the world about the various stimulus packages proposed and being implemented by various governments and I'm going to add to the discussion with my take on the proposed Australian package.
A lot of commentary has focused on the value of running a deficit budget in economic down times, however little real discussion about how that deficit should be spent. In general there are two main reasons to borrow money: to substitute future spending for current spending, or to invest in order to increase future income. Both are valid in various circumstances, but businesses almost always use substitution borrowing to cover short term liquidity issues, allowing them to deal with unsynchronised incomings and outgoings. For example, if their accounts are paid monthly, but they pay their employees fortnightly, a business may borrow short term to cover that gap. It would be very rare for a business to borrow long term for any spending that will not increase future productivity.
There's a good reason that Fiscal policy (that is, tax and governement spending) has been an unpopular way to moderate economic growth over the past 30+ years. It's because, in an open or closed economy, the money that governments spend has to come from somewhere, be it taxes or borrowing. This essentially reallocates funds, it does not cause any net increase in spending. Lets expand that by looking at the current stimulus package.
The Australian government has (quite sensibly) spent any surplus funds it had available, and the rest of the budgeted surplus (or more) has been eaten away by the fall in economic growth.This means that the government will need to borrow to fund its $42billion stimulus package. The government has a policy of borrowing domestically in order to avoid public foreign debit. In a small economy like ours, with limited investment funds, this crowds out private borrowers who are forced to borrow from foreign sources. So in effect, there will be an expected $42billion increase in private foreign debt.
At this stage you may be thinking - so what? Doesn't that equate to a $42billion injection into the local economy? Well, yes, but there are side-effects. That $42b would have been invested elsewhere in the world, had the government not borrowed it. In a global economy this is simply a redistribution - there is no net increase in global spending. That money may have been borrowed in other countries and invested in their future productivity, increasing their ability to buy our exports. So if this redistribution is to be effective globally the way the government spends the money needs to be at least as effective as the spending that would have happened via market mechanisms.
If the government were simply investing in infrastructure, education, health etc - future productivity enhancers - then from a selfish perspective it may well be better to have that money redistributed from foreign to local investment. Even if the funds are not allocated as efficiently as on the open market, one would hope that the investments would lead to an increase the country's future productivity. It could be argued that we would see more benefit from this than via our export buyers' increased future buying power, as they surely import from various countries. So investing borrowing may lead to a less effective global outcome, but should at least be domestically beneficial.
However, the cash handout component has no such benefit. I've seen it described as a massive personal loan, and that is a very useful way to look at it. It has no impact on increasing our future production potential, and is simply long term substitution borrowing. This almost certainly is a less efficient allocation than would have occured in an open market. We are in essence taking money that would have been used by other countries to invest in future productivity, and spending it frivolously.
The argument for the cash handout is on the surface similar to that for investment borrowing - that it's better for us if the spending occurs domestically, even if it is globally a poor choice. If the money were to be used internationally for similar frivolous spending then the argument would hold. But I personally think that given global consumer confidence levels this is unlikely. It is much more likely that the investment funds would go to private or government sponsored infrastructure investment, helping the global economy recover.
If there's one thing that every pundit agrees on, it is that this a global situation. For that reason I see it as socially and economically irresponsible to reduce the ability for international agencies to increase future productivity in order to very temporarily prop up the local economy.
Even from a purely selfish point of view, the cash bonus is iffy. Investment borrowing is done with the hope that the productivity increase will more than cover the repayment of the loan. The cash bonus provides no way to increase our productivity, and hence we are left with a future debt and no increased capacity to service it. Barring any external event, this has to lead to some combination of increased taxes and reduced government spending.
One of the most enjoyable and frustrating aspects of economics, particularly macro, is that it is not an exact science. If you think I've got the wrong end of the economic stick or have missed a vital part of the analysis, I'd love to hear from you.
Addendum: With the devasting destruction caused by the Victorian bushfires, the idea of cash handout becomes even less palatable. That money could be much better used to help rebuild the communities have have been destroyed. This money can enter the economy very quickly: there are hundreds of people without homes that need long term temporary accomodation, clothes and other household items. In the medium term entire towns need to be rebuilt from scratch. Not only is this the only socially acceptable outcome, it is also likely to be more economically sensible than handing out cash to boost consumer spending.