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Treasury’s non-modelling of the stimulus

February 1, 2013 Comments off

Late last year I published an article with Agenda (the public policy journal of ANU) that critiqued the Treasury “modelling” (sic) of the Rudd government stimulus that followed the global financial crisis. It is an article that I started writing a long time ago, but sat in the “to do” pile for too long.

My main point was that the Treasury approach was hopelessly inadequate, a point that is abundantly clear to any economist who glances at their attempt, and has been readily admitted by some Treasury friends. As I wrote in the article:

“The biggest problem with the Treasury model is that because it misunderstands the issue of international crowding out, it drastically underestimates the impact on net exports. In addition, it entirely ignores the issues of domestic crowding out, monetary policy responses, and the costs of repaying the debt. While its estimate for the private savings response to the stimulus is at the low end of the range, this is the least of the problems.

“The ignorance of open-economy macroeconomics suggests that Treasury has neglected much of the advances made in macroeconomics over recent decades, and its strange assumptions on domestic crowding out and private savings response show that it has forgotten much of its own research. As Harvard economics professor Robert Barro said in 2009 when the US was debating its own stimulus policies, ‘The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936’ (Barro 2009).”

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