Does economic stimulus work in a financial crisis?
Recessions, pandemic, unemployment and financial crisis they're all quite challenging scenarios with one thing in common, Money. But does throwing more money at a money problem actually work and is it a method that should be adopted?
I have a few differing views on the topic and there is no real right or wrong answer but rather right or wrong approaches and from where I sit in Australia over the past 13 years I've been able to witness two different approaches and thus far only one has really worked which was a focus on distributing funds to people.
I do however note that the second approach applied which provided financial support to businesses and utilise them as a distribution point for welfare hasn't had enough time to evaluate the full effects. There have been a large report on significant issues arising from its approach.
Bit of Background
In 2008 the Global Financial Crisis brought on by housing crisis in America in shape of inflationary bubble loans the effects were global. As debt bubbles burst due to unaffordable debt taken on by people and mass unemployment hit.
Image source In Australia then Prime Minister Kevin Rudd developed a plan to inject money directly into people's pockets in way of economic stimulus packages. It was highly debated in parliament and it was an approach not used anywhere else in the globe at the time. The primary focus was business bail outs to keep companies afloat.
In the end the policy passed at a reduced rate of $AUD950 per person with extras for families and other categories. I was sceptical but loves the $1900 combined my partner and I received it helped us pay the bills and buy a much needed couch, Aussie made of course.
Despite being highly controversial and people thinking that 25 million people were going to spend $950 on drugs and sex they didn't and it saved the country from recession as reported in the Australian Financial Review
This resulted in many more nations following Australia's lead and rolling out their own version providing financial relief to people.
Pandemic Relief
Fast forward to 2020 and the global Pandemic brought on by COVID and we have the conservative pro neo liberals at the helm led by current Prime Minister Scott Morrison whom were opposes of the original iteration of the stimulus package.
Their current iteration of stimulus was the complete opposite to what was done before and required businesses to apply and then receive payments to subsidies wages which would then be passed onto the workers. You can watch a quick video about it Here
Sounds great in theory but was already clunky and involved too many moving parts. What was supposed to be rort proof because businesses are honest and don't lie was a significant portion of incidents were businesses either applied and received the payment didn't pass it onto staff, charged administrative fees, only provided part payments, didn't even bother applying, applied for more then the amount of staff they actually had.
It also resulted in not being enough and state governments had to pick up the slack and provide stimulus to businesses. Costing each state billions of dollars.
In my opinion the entire operation was costly, slow and inadequate compared to just throwing $950 at everyone. Once you start putting in tiers, assessments, requirements all that increases costs for no good reason. Spending $10,000 to every dollar provided is costly and not worth it.
Yet still, people complained that money would be spent on drugs.
From the 2008 and 2020 crises it is easy to see that the best form of financial injection is directly to people. It's cheaper, effective and works well to support businesses. As we reside in a capitalist society in some times it is better to let the market decide and when they do wealth is evenly distributed and everyone does alot better.
What are your thoughts? Do you think a pro business or a pro person model should be adopted for future economic development and support.
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