Dealing with crisis Down Under

THE Great Recession of 2008 reached the farthest corners of the earth.
In Australia, they refer to it as the GFC – the global financial crisis.
Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.
He realised that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.
So, the first part of the stimulus was cash grants, followed by investments which would take longer to put into place.
Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries.
Ironically, attention was focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created.
Of course, we should strive to ensure money is spent as productively as possible, but humans, and human institutions, are fallible, and there are costs to ensuring that money is well spent.
To put it in economics jargon, efficiency requires equating the marginal cost associated with allocation (both in acquiring information about the relative benefits of different projects and in monitoring investments) with the marginal benefits.
In a nutshell, it is wasteful to spend too much money preventing waste. 
While the focus for the moment is on public sector waste, that waste pales in comparison to the waste of resources resulting from a malfunctioning private financial sector which, in the US, already amounts to trillions of dollars.
Likewise, the waste from not fully utilising society’s resources – the inevitable consequence of not having had such a quick and strong stimulus – exceeds that of the public sector by an order of magnitude.
For an American, there is a certain amusement in Australian worries about the deficit and debt: their deficit as a percentage of GDP is less than half that of the US; their gross national debt is less than a third.
Deficit fetishism never makes sense – national debt is only one side of a country’s balance sheet.
Cutting back on high-return investments (like education, infrastructure, and technology), just to reduce the deficit, is truly foolish, but especially so in the case of a country like Australia whose debt is so low.
Indeed, if one is concerned with a country’s long-run debt, as one should be, such deficit fetishism is particularly silly since the higher growth, resulting from these public investments, will generate more tax revenues.
There is another irony: some of the same Australians, who have criticised the deficits, have also criticised proposals to increase taxes on mines.
Australia is lucky to have a rich endowment of natural resources, including iron ore. These resources are part of the country’s patrimony. They belong to all the people.
Yet, in all countries, mining companies try to get these resources for free – or for as
little as possible.
Of course, mining companies need to get a fair return on their investments. But the iron ore companies have gotten a windfall gain as iron ore prices have soared (nearly doubling since 2007).
The increased profits are not a result of their mining prowess, but of China’s huge demand for steel.
There is no reason that mining companies should reap this reward for themselves. They should share the bonanza of higher prices with Australia’s citizens, and an appropriately designed mining tax is one way of ensuring that outcome.
This money should be set aside in a special fund, to be used for investment.
The country will inevitably become poorer as it depletes its natural resources, unless the value of its human and physical capital increases. – Project Syndicate
nJoseph E. Stiglitz is university professor at Columbia university and a Nobel laureate in economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese and Spanish.