The Growing Chorus for Fiscal Stimulus

Central bankers and monetary adherents the world over are united in the common grouse that fiscal policy is lacking.  Grander programs of direct stimulation are needed, they grumble.  Monetary policy alone won’t cut the mustard, they gripe.

 

1-global debtGlobal debt-to-GDP ratios (excl. financial debt). Obviously, it is not enough. More debt is needed, so we may “stimulate” ourselves back to prosperity.

 

Hardly a week goes by where the monetary side of the house isn’t heaving grievances at the fiscal side of the house.  The government spenders aren’t doing their part to boost the GDP, proclaim the money printers.  Greater outlays and ‘structural reforms’ are needed to spur aggregate demand, they moan.

For example, last month, just prior to the G20 gala, the Organization for Economic Cooperation and Development (OECD) asserted that “Getting back to healthy and inclusive growth calls for urgent policy response, drawing on monetary, fiscal, and structural policies working together.”

The OECD report also stated that “The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation.”

 

4295203312_1ec36291bc_bThe Chateau de la Muette in Paris – this magnificent building that once housed members of France’s nobility nowadays ironically serves as the headquarters of the socialistic central planning bureaucracy known as the OECD. This parasitic carbuncle is high up on the list of globalist institutions that must be considered an extreme threat to economic freedom and progress.

Photo via oecd.org

 

Several weeks later, on March 10, European Central Bank President Mario Draghi offered a similar refrain.  At the ECB press conference Draghi remarked that “all [Eurozone] countries should strive for a more growth-friendly composition of fiscal policies.

Then, wouldn’t you know it, former Fed Chairman Ben Bernanke also added his alto vocals to the chorus.  Last week, in his Brookings Institution blog, he wrote:

 

“There are signs that monetary policy in the United States and other industrial countries is reaching its limits, which makes it even more important that the collective response to a slowdown involve other policies—particularly fiscal policy.”

 

Self-Financing Deficits

Fiscal policy and structural reforms, if you were unclear on this point, is policy parlance for greater deficit spending.  This, in short, means using credit cards to fund government expenditures.

According to the central bankers, their issuance of cheap credit keeps getting log-jammed at commercial banks.  They want the government to unclog the jam. They want greater deficit spending to pump money into the economy via road and bridge projects, bullet trains, football coliseums, and vast concrete waterways.

If that doesn’t cut it, outright helicopter money drops, such as direct checks to the public from the Treasury, would be the prescribed fix. The logic behind the calls for fiscal stimulus is quite simple.  By borrowing from the future, and spending today, the government should be able to boost GDP growth.  Of course, this also increases public debt levels.

But don’t worry say the economic planners – echoing Dick Cheney – deficits don’t matter.  You can have your cake and you can eat it too.  A sustainable lift in growth, claim the experts, would also allow governments to benefit from higher tax revenues.  What’s more, these higher tax revenues will then be used to reduce deficits and debt.

Do you see how this unclever logic works?  Somehow, the deficits would be self-financing.  Somehow, the government will be able to spend its way to economic prosperity.

 

Deficit Spending is Not the Answer

Indeed, this sounds like a great policy strategy…if only it were true.  Unfortunately, there aren’t any examples we are aware of where increases in government debt have produced an economic boom that allowed the government to grow its way out of debt.  The debt never goes away; rather, it accumulates and is ultimately repudiated through default or inflation.

Still the mad monetary policy zealots believe more deficit spending will make the economy whole again.  They claim government spending has been too austere.  Yet the idea that fiscal policy has been lacking is absurd.

Here in the United States the national debt has topped $19 trillion.  That’s about double what the debt was 10-years ago.  For the 2016 fiscal year alone, the projected deficit is $616 billion.  While this is down from the trillion dollar annual deficits run between 2009 and 2012, at 3.3 percent of estimated GDP, it is hardly austere.

 

2-Federal DebtbergThe federal debtberg. Ronald Reagan’s deficits were once considered obscene. Soon one will need a microscope to even see them on this chart. Of course, deficits don’t matter – until they do – click to enlarge.

 

Similarly, many nations of the European Union are running deficits that are extremely reckless.  For instance, the stability growth pact rules of the EU require countries to limit their deficit spending to 3 percent of GDP.  According to Bloomberg, five of the 28 EU countries are expected to violate this rule this year and three more will be right at the threshold.

Certainly, this is down from the 22 counties in violation in 2010.  But, nonetheless, deficit spending is still running rampant.  Just ask Japan.  Their 2016 deficit is 6 percent of GDP.

The point is, central bankers are eager to share the blame for their failed policies.  Calls for greater deficit spending ate thought to help distract from their ineptitude. Nonetheless, it is complete gibberish…deficit spending is not the answer.

What happened to sound money, balanced budgets, paying as you go, and saving for a rainy day? These sensible ideas went out of style three generations ago.  We suspect they will make a comeback at some point…whether the economic planners want them to or not.

 

Charts by RBS/BIS, St. Louis Fed

 

Chart and image captions by PT

 

M N. Gordon is the editor and publisher of the Economic Prism.

 

 
 

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3 Responses to “Deficit Spending is Not the Answer”

  • HitTheFan:

    Oh dear.
    Woods is some kind of MMT- Marxist hybrid.
    The level of debt simply aren’t high enough, we must need another….$100 trillion, yes, a nice round number.
    That’ll sort matters out, even better if govt is dishing it out too, they know best after all, they can make everything nice, fluffy and fair.
    First troll I’ve read on Acting Man.
    Wonder how long he’ll last.

    • woodsbp:

      HTD – I rarely reply to comments such as your’s – other than to acknowledge them. Your comments are so noted.

      So, “How long will I last?” A while yet I reckon. I actually enjoy reading the principle commentaries here – even if I disagree with the manner in which they critique some issues, or they contain intemperate language, or they make derogatory comments about living or deceased persons. They’re, well – different.

      Cheers.

  • woodsbp:

    “Deficit Spending is Not the Answer.” Depends on what your question is.

    What might be your proposals for state spending (of tax revenues) that would provide a pay-as-you-go outcome? And it should be noted that government ministers do not authorize budget spends – unless someones are whinging at them, with begging bowls outstretched – like, “Please minister, give us some more!” So who are those someones then? Big business probably tops the list of government sponsored financial boondoggles – by a long shot. And what amount of potential tax revenue is forgone in all those various subsidies, write-offs and other tax avoidance wheezes?

    Pay-as-you-go state spending will only succeed if a country consistently exports more (in value) than it imports. It always has another country’s surplus to fund its spending. We know that this is a problem.

    Consider that a government gifts 100 units of its currency – then how much of this will be spend in-country, and how much will be spent out-country? Can you assume that no consumption expenditures will leak away on imports? I doubt it. Or be side-tracked into savings accounts? Probably. Can you assume that each individual consumer’s Marginal Propensity to Consume is 1.00? I doubt it; though the less well-off do exhibit higher MPC than the wealthy. Such disparities (in population and consumption) have significant consequences for overall consumption expenditures. Basically, if you peg the incomes of the majority – you automatically peg your aggregate economic activity, hence your tax revenues. Zero economic rates-of-growth are a very nasty matter indeed.

    In modern, globalized economies the only way to achieve “positive” economic rates-of-growth is to borrow (either internally or externally) and/or to create fiat credit (and continually roll-up the debt). [And its not the helicopter – its the computer keyboard.] There is no other way, or at least none that I am aware of that would be acceptable to any stripe of politician, red, green, blue, yellow – or whatever colour you prefer yourself.

    Your dart throwing appears to be quite good – you’re hitting the Bullseye OK: its just the wrong target!

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