The problem with having popularly elected politicians determining economic policy is that, in economic terms, they generally do a pretty bad job of it. Consider the stimulus policies put in place by the Rudd government since the onset of the global financial crisis: from the tragic insulation policy to the first home vendor’s grant (which led to property being vastly more unaffordable for young Australians) to the school infrastructure debacle — not much seems to have gone right. (It should be said that it is also doubtful a Liberal government would have done much differently).

It is with a sort of perverse irony that the federal government yesterday announced that a further $14 million will be spent to investigate school building overruns and waste. That the government is spending money to work out why it overspent money is a sobering thought. It is also an example of why Keynesian policies benefit those handing out the money and the small section of the population receiving the gift — everyone else, especially future generations who probably won’t be voting in 2010 are left to pick up the tab.

The Rudd government is also going to have to start thinking about what to do to further bolster house prices as the residential property bubble shows signs of wobbling. As widely predicted, the ending of the boosted first home owner’s grant has led to a dramatic slowdown in first home purchases. The Financial Review reported today that the number of first home buyers in February was 22% lower than the June 2009 peak.

Effectively, what the boosted grant did was simply “bring forward” demand. Instead of buying a house in 2010, young couples used the grant to fund a deposit and buy property in 2009. This led to a temporary spike in demand and caused median property prices in capital cities to jump by more than 10% in a year. Despite the first home buyer segment now waning, the grant created an irrational fear of a property shortage and has led to local investors utilising negative gearing and overseas buyers continuing to force up the prices of property.

Any apparent shortage should have been borne out in higher rentals. However, that has not occurred, indicating that the shortage is one part hype, two parts fiction. Further, even if there is a shortage occurring (which is probably only true in certain pockets of the major cities), the market will work to correct the imbalance. Already, the government is taking steps to reduce immigration, while the coalition last week announced that it would slash all types of temporary immigration (if it got the chance).

Not only do many hastily arranged government economic policies not help the economy, they will often cause specific harm. Many of the first home owner’s lured into the market by the promise of free money (FHOG) and artificially low (emergency level) interest rates are already struggling. The AFR last week reported a survey by mortgage broker Loan Market revealed that more than 40% of Australians spend half their monthly income repaying debts. While that figure seems unusually high, the Fujitsu Consulting/JP Morgan mortgage stress report for February indicated that around 581,000 Australian households were suffering a degree of “mortgage pain”, while the average loan size in Australia has increased by 40% to $300,000 since 2005.

The Fujitsu report also provided some interesting facts. While the “disadvantaged fringe” are the largest “stressed” group — more than 40% of stressed households are deemed to be either “suburban mainstream” or “young growing family”. Even more surprising was the revelation that 4.6% of “exclusive professionals” were under either “mild” or “severe” stress (with the most commonly cited cause being “poor investment performance”).

There is no doubt popular spending policies improve leaders’ standings in the eyes of voters — however, that isn’t necessarily a good thing.