Does fiscal stimulus work?
OCCASIONAL PAPER | Edmund Kirkcaldy We have been told that ‘you don’t need a PhD in economics’ to understand why fiscal stimulus packages increase economic activity. Senior government ministers, the Treasury, a host of business economists, and a legion of journalists – amongst others – seem to treat it as so obvious that it does not even require an explanation. Where an explanation is offered, it tends to be simplistic in nature. Here is one explanation (‘everything you wanted to know’) from the Sunday Age earlier this year:Economic growth is normally driven by a combination of consumption spending, investment, exports and government spending. But … three of the four fuel pipes feeding the growth engine are blocked. This leaves the … [government] with the herculean task of keeping the economic engine whirring. That’s exactly what the … [government] has been doing, with a net $71 billion worth of new spending … While Australians don’t need a PhD to understand, American supporter
