Stimulus:the hidden risk

As we all know, visitors can sometimes reveal deep secrets.

They don’t usually mean to betray their host’s confidence.

They just don’t realise, all too often, just what they have done.

A visiting World Bank economist, Vikram Seth had just such a moment last week.

“In my experience,” Mr Seth told Private Briefing over lunch, “stimulus packages can quickly become pro-cyclical, rather than counter cyclical.”

Like all economists, Mr Nehru talks in riddles, at times.

But his meaning was clear enough, in context, at the time.

(Your correspondent had hardly touched his wine, at that stage).

Mr Nehru was saying that government spending, meant to boost a flagging economy,  all too often actually inflates an already recovering one.

Of course, as Shakespeare put it, this is “a consumation devoutly to be wished,” in the world’s present circumstances.

The US Fed chief, Alan Greenspan, has, of course,  predicted that America’s recession could be over by late this year, or early next year, if that nation’s banks can be fixed by then.

At present, though, Mr Greenspan is as a voice crying in the wilderness.

But Australia’s Treasurer, Wayne Swan, did admit in Parliament, late last week,  that the Federal government’s response to the global economic crisis, which erupted suddenly last September, had been “swift.”

And even the government’s critics admit that it has also been bold.

The main critic, Malcolm Turnbull, has also argued that an approach based on tax cuts would have been much more effective.

But the Prime Minister, Kevin Rudd, disagrees with the Opposition Leader.

Mr Nehru, though, has identified a risk that neither has said much about, at least so far.

The government’s stimulus packages does contain  substantial plans for infrastructure spending.

There has been much talk of many of  these projects being “shovel ready.”

Most, though, are not.

And if the government is still spending heavily even on, perhaps worthwhile, infrastructure projects, like new roads, bridges and rail links, that spending could well, in Mr Nehru’s words, prove to be pro-cyclical.

That is, it might well boost inflation, when the economy is already recovering.

If that happened, the consequences could well be serious.

And we all saw, last September, just how quickly an economy can turn.

Related stories:

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3. Business comes out for the $42 billion stimulus package