Bill Mitchell — Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place

Saving, like taxation, is demand leakage. If most of a fiscal stimulus package leaks to saving, then the effect is minimal because the multiplier is too low to make a significant difference. The danger here is concluding that fiscal stimulus therefore is ineffective. 

On February 7, 2020, the Reserve Bank of Australia’s Governor, Philip Lowe appeared before the Federal House of Representatives Standing Committee on Economics to discuss the – Reserve Bank of Australia Annual Report 2019 – which is a bi-annual event where the Parliament scrutinises the activities of the unelected and largely unaccountable central bank. The – Transcript – of the session makes interesting reading. The discussion highlighted how mainstream economists fail to understand the nature of the monetary system. Last year, the Federal government introduced a fiscal stimulus (tax cut) as a bribe in the May election campaign. But economic growth continued to slow, in the face of flat real wages growth and an overall fiscal contraction (despite the tax cuts). The tax cuts didn’t stimulate private spending growth and mainstream economists then claim this proves that fiscal policy is ineffective, and by implication, that Modern Monetary Theory (MMT) is a load of nonsense. The problem is that the tax cuts were used by households to reduce the precarious debt levels that have been building up as they try to maintain spending growth in the face of fiscal drag and flat real wages growth. All that this episode tells us is that the government really should have introduced a much larger fiscal stimulus in the first place to help the balance sheet restructuring effort and provide net growth stimulus....

Bill Mitchell – billy blog
Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia