It appears everyone and their dogs are Keynesians now. They believe the only hope for turning around the global economy is lots of government spending and quick. Spend, spend, and borrow even more, they say.

There’s a frenzy of calls for governments to give handouts to taxpayers and to spend up large to support consumption in slowing or recessed economies. The biggest poster boys for this approach are UK Prime Minister Gordon Brown, US President Barack Obama and Australian Prime Minister Kevin Rudd.

The US Congress is expected to sign off on a pared-down US$780 billion plan this week. It doesn’t have everything Obama wanted, but most of it. Last week Rudd announced a A$42 billion package of spending, including a A$950 cheque for most adults by March.

Then last week our Prime Minister John Key appeared to announce a damp squib of a package aimed at small business. It was “only” costing NZ$480 million and included a grab bag of little tax delays, red-tape reductions and tax redefinitions. It was certainly no blockbuster.

Later this week Key is expected to announce $500 million in new or accelerated spending on various infrastructure projects. Again, it seems like small beer.

Opposition leader Phil Goff seems to be riding a growing wave of comment from people wanting something bigger and more dramatic. Something spectacular like the legendary “up the jumper move” in rugby where one player taps the ball and hands it to one of a big group who then sprint off in various directions to deceive the opponent. It was an Australian innovation, according to this piece of “google knowledge”.

Meanwhile, John Key and Finance Minister Bill English are pursuing something they’re calling a “rolling maul” approach to fiscal stimulus. John Key’s speech last week to announce the small-business package outlined the thinking in detail. The speech is well worth a read to find out why the government is unlikely to go down the “big bang” route.

Key is right to be cautious. We are under threat of credit rating downgrade because the government is about to become a massive foreign borrower again, adding to the already substantial indebtedness racked up by households on housing-fuelled spending sprees over the last five years.

Standard and Poor’s has basically told the government that it has no room to do an “up the jumper” fiscal package or it will be downgraded. It may even be downgraded without one.

The current forecasts are for public debt to GDP projected to explode to 58% of GDP by 2023 from 18% now, assuming no more fiscal stimulus than that already built in by the previous Labour government and in National’s election promises of tax cuts and extra infrastructure spending.

Key inherited a government in the middle of a big spend-up. Our stimulus is already bigger than most other economies’. It’s in the top five in the world as a percentage of GDP.

Key is right to be accelerating infrastructure projects and sticking to the current (and Labour) tax cuts. Choosing a big spend-up now would just increase interest rates, increase debt and slow growth later.

A “rolling maul” is more likely to get us back on track than a spend-up that is blown away by a currency crisis and higher interest rates.

I also have my doubts about whether such Keynesian spend-ups work. The first “go out and spend it” cheque sent to US taxpayers last year failed to stimulate consumer spending for anything longer than a month. Only about a third of the similar Australian handout just before Christmas last year was actually spent in shops. The rest was saved, simply shuffling savings from the public sector to the private sector.

The world gave up such Keynesian-style spend-ups in the 1970s and 1980s because they didn’t work. Even the research from the Depression showed they didn’t work. The real culprits in the Depression were tight monetary policy, a banking system collapse and trade restrictions. Those looking for more modern examples of failed Keynesian programmes should look north to Japan’s decade-long stagnation punctuated by useless government spend-ups that simply left Japan with one of the biggest public-sector debts in the world.

All these spend-ups do is encourage politicians to specify their own boondoggles and projects to make themselves look good. They also appear to the voting public as if the “leaders” are “doing something”. Sometimes doing nothing is better than doing something. There are plenty of automatic stabilisers in the budget to help the economy without extra spending on “bridges to nowhere”. Unemployment benefit payments rise, tax revenues fall and planned infrastructure spending (hopefully the sensible kind) keeps on trucking through.

The best a government can do is prepare the economy to rebound strongly by doing everything it can to boost productivity, to restrain wasteful government spending and to allow the Reserve Bank to keep a stable banking system.

Fundamentally, taxpayers don’t trust them either. Australians saved most of their “spend it now” cheques because they know what’s coming – a long recession that requires greater saving, not more spending. Taxpayers also know not to trust politicians wielding great new plans that their mates have suggested.

Last 5 posts by Bernard Hickey

• Dear John: Please tell us the truth about the economy - we can handle it - February 23rd, 2009
• Kill the glass white elephant in Dunedin with a rates revolt - February 9th, 2009
• Why we should give thanks when Telecom ‘exports’ 250 jobs to Manila - February 4th, 2009
• Freeze public-sector wages and lift the minimum wage - February 2nd, 2009
• Five reasons why Alan Bollard should not have cut the OCR - January 28th, 2009