The “go hard, go early, go households” advice given to government last year is starting to look a little sick. Serious doubts are being raised about the stimulus spending spree of last year and early this year.

The Australian economy has proven to be remarkably resilient — this is no accident and has nothing to do with us being “the lucky country”.

Australians enjoy a strong robust economy because of a generation of hard-fought and hard-won economic reform.

Last year the government was very keen not to be seen to be “doing nothing”. Anyone who had the temerity to criticise the stimulus packages was pilloried as advocating a “do nothing strategy”.

Unfortunately this argument proved to be very powerful. But as I told the Senate Inquiry into the stimulus package on February 9 this year, “The government is not ‘doing nothing'”.

By that stage the Reserve Bank had lowered interest rates and to the extent that unemployment had increased, welfare payments would have been increasing too. So monetary policy had responded and the so-called “automatic stabilisers” had responded too.

We shouldn’t also forget that the exchange rate had depreciated. The forex rate acts as a shock absorber to the economy. That is one of the functions of a floating exchange rate — the Hawke Government’s greatest and most important reform.

This all raises the question of why the government and its advisors over-reacted to the international crisis. One easy explanation is that Treasury, in particular, is still shell-shocked from the experience of the early 1990s. That is the last time that Australia actually experienced a recession. Bryan Caplan of George Mason University has argued that decision makers have systematic biases in their thinking.

These biases are at work in the current government’s approach to economic policy.

Pessimistic bias is the tendency to over-estimate the severity of economic problems. The idea that the Global Financial Crisis is similar to the Great Depression is simply nonsense. Australian unemployment in the 1930s peaked at over 25%. Unemployment is now at levels not seen since the early 2000s. The “collapse” in forecast revenue, that so spooked the government, returned us to levels not seen since 2006. This bias re-enforced the anti-market bias that already affected the government and we saw arguments from the Prime Minister about the evils and failures of market mechanisms. Ultimately this then fed into one of the oldest of economic biases — make work schemes.

The problem with the government’s stimulus package is that it creates a series of make-work schemes. Make work, any work is never a good economic policy. The cash hand-outs largely transformed private debt into public debt — whether or not it did actually boost retail sales is an open question. But it is the other spending that will create difficulties going forward. To be sure, having better sheds or another gym or school halls is great for the kids, but what is the additional economic benefit from having these things? This type of expenditure is better managed, financed and undertaken at the local level and not by the federal government.

The government argued that the stimulus package was intended to save jobs. That may well be an admirable goal. But why then stimulate the construction industry? Were the unemployed bankers and brokers and lawyers expected to get jobs building school halls? If the government wanted to protect jobs in the expected downturn, they should have bought out the State payroll tax. This may well have saved some, but not all, jobs lost over the past six months or so. That would have been “doing something” but it might not have been “seen to be doing something”.

Of course the government will claim that it was their policies that have resulted in the Australian economy doing so well. Yet, the US had a huge stimulus package and then entered into recession, while the French have hardly had a stimulus package and also entered, and have now exited, recession. The reality of the economic situation is far more messy than official sound bites would have us believe.

Sinclair Davidson is professor at the School of Economics, Finance and Marketing and a senior fellow at the Institute of Public Affairs.