Academic journal article Agenda: A Journal of Policy Analysis and Reform

Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States

Academic journal article Agenda: A Journal of Policy Analysis and Reform

Stimulating Savings: An Analysis of Cash Handouts in Australia and the United States

Article excerpt

Abstract

At the onset of the Global Financial Crisis governments around the world implemented fiscal stimulus packages. A key component of many of these packages was aimed at stimulating consumer spending. In Australia and the United States, for example, households received one-off cash payments. We assess the changes in the macroeconomic levels of consumption and savings of both countries coinciding with the timing of the household bonuses using an econometric time series method known as seemingly unrelated time-series equations. The results suggest that the one-off cash bonuses did not stimulate consumption. On the contrary, the evidence suggests savings was stimulated.

(ProQuest: ... denotes formulae omitted.)

Introduction

The Global Financial Crisis (GFC) began in mid-2007, peaking in 2009. In that time a massive economic dislocation occurred around the world, but largely centred on North America and Western Europe. The causes and consequences of the GFC will be debated for decades. In this paper we examine the fiscal response to the GFC in two economies; Australia and the United States. In contrast to typical approaches we provide a unique comparison; namely the effectiveness of fiscal policy under different prevailing economic conditions.

It is important to appreciate that although these economies are based on the same economic principles, their size and economic character prior to the GFC differ considerably. Australia is a small open economy whereas the US is the largest open economy in the world. Further, their economic experience during the GFC differs considerably. Specifically, the United States was severely impacted by the crisis, millions of individuals lost their jobs and old and venerated financial institutions were swept away into insolvency. By contrast, Australia weathered the storm reasonably well; not even experiencing two consecutive quarters of negative GDP growth.

The fiscal responses in each economy were similar. Indeed, the Australian government response was predicated on the US experience during the GFC and previous US recessions. Both the Australian government and the US government undertook a series of cash handouts to households (often described as tax refunds), various tax cuts, and spending programs in the hope of maintaining economic activity. The objective, in the language of policymakers, was to substitute public demand for collapsing private demand. In this paper we focus on the cash handouts that occurred in Australia and the US during the GFC. Australian policymakers, for example, had the explicit objective of getting 'the money into the pockets of people who would take it straight to the shops' (Taylor and Uren 2010: 77). This policy, however, appears to the inconsistent with the permanent income hypothesis where a temporary increase in disposable income should have no impact on consumption (Hall 1978).

The Australian experience would suggest that the fiscal interventions were successful. The Economic Security Strategy paid a total of A$8.7 billion to households in December 2008, while the Nation Building and Jobs Plan delivered an additional A$12 billion to households over March, April and May 2009. The Australian economy avoided two consecutive quarters of negative GDP growth (the local, if somewhat unscientific, definition of a recession). Unemployment did not rise anywhere near the forecast levels (with or without the stimulus packages), whereas in the US unemployment rose beyond forecast levels even with the stimulus packages.

By contrast, the US experience would seem to suggest that the fiscal intervention was unsuccessful. The 2008 Economic Stimulus Act2 saw US$168 billion in tax refunds and the 2009 American Recovery and Reinvestment Act saw an additional US$288 billion in tax cuts to business and families (households). Given the deep and prolonged recession in the US and the high levels of unemployment, it seems fair to say the US fiscal policy response to the GFC failed. …

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