Friday, February 20, 2009

Fiscal stimulus package:How effective can it be ? (I)

These days of economic crisis, Governments have become the only source of expenditures. Consumers and firms alike, are evaluating its future prospects based on their markets behavior expectations , concerning employment, production and inventory respectively. Government looks like it is above those concerns, because it does not face such a constraint for its actions , other than politics one .From time to time ,it get the evaluation of voters. Thus ,it becomes more a matter of political judgment , the way Government should behave in time of crisis .Economic theory provide the necessary tools to understand the economic implication of this political judgment ,which by no means solve the issue of effectiveness of government expenditure.
Keynesian macroeconomics worked out these model of political foundation for Government expenditures, with the multiplier concept which refers to the expected effect that an increase in government expenditures would have on aggregate output. Free of transaction cost and inefficiencies , such expenditures would increase product by a certain magnitude depending on the level of saving. At its basic approach ,it refers to consumer saving . The lower the consumer saving ,the higher the impact of government expenditures. Based on this approach ,most of Governments world wide, have implemented fiscal stimulus package to overcome the current global economic recession with different characteristics and magnitudes as a percentages of GDP. Just to have a perspective ,with the parenthesis indicating the magnitude as a percentage of GDP, the list of stimulus package start with China (15% ),USA (5,8%),Italy (4,3%),Germany (3,1%), Chile (2,8%),Canada (2,0%),Japan(2,0%).(Source
An important issue deals with the effectiveness of Government expenditure ,and the requirements for a strong impact on aggregate demand. Leaving aside for the moment ,the transaction cost (bureaucracy),and the issue which it deals with conflict arising between manager and the public organization owner(government ),concerning the implementation of the program, we focus on the design variables:
1.- While an economic crisis goes along, at the bottom of it, income goes down so it does consumption and , because of precautionary behavior saving goes up, therefore the impact of government expenditure, might be less than expected. It also follows that tax cuts are helpful, while it goes quickly to the markets expenditure flows.
2.- From a short run perspective ,Infrastructure expenditure are on top on the list, because it goes direct to markets expenditures flows. On the long run perspective , education and health care expenditure programs, have a positive effect on productivity ,helping to keep under control future inflationary pressures.
3.- The timing upon which government expenditure is implemented do matter. On this regards, either, It goes ahead of the market or, it goes behind of the markets. The most effective Government expenditure programs, are the ones on the first group ,because it acts before the precautionary behavior takes a stronger stand among consumers and firms. Therefore, It is not just about the magnitude of resources involved.