|
We're
starting to hear more talk about "stimulus." I put
"stimulus" in quotes, following my usual practice of placing a
latex barrier around other people's ideas, so nobody gets infected. Just the
word, "stimulus," carries certain assumptions and expectations
which are often flawed from the beginning. It implies that the economy is
sort of lagging around due to its own difficulties, and that the government
is an independent savior, an economic paramedic or something like that.
Smells like more metaphor economics. Very often, the problems are caused by
the government itself, through taxes, regulation or mismanagement of the
currency. Also, it tends to lead to certain short-term "solutions"
that rarely achieve anything at all except to distract policymaker's
attention during the time that it takes to devise a plan, pass it through the
legislative process, implement it, and wait and see what the results are.
There's 12 or 18 months right there, during which the government could have
been thinking about real solutions, but instead is distracted by
"stimulus." Then, when the "stimulus" is deemed to have
been somewhat ineffective, what comes next? Usually, more
"stimulus." In this way, months stretch into years, and perhaps years
into decades. The Japanese government has been so fascinated by
"stimulus" over the years that they still haven't figured out that
they helped blow up the property sector themselves with huge tax increases in
the early 1990s. Maybe they should do something about that hmmmm? (I have
some hope for the new prime minister, Taro Aso, because Aso is indeed the one
and only upper-rank Japanese politician I know of that correctly identified
the huge tax hikes as a major contributor to the collapse of the property
market in Japan -- the short-term capital gains tax rate on property went to
90% for several years, if I recall -- and recommended returning to the
successful property tax system of the 1980s.)
I was
just watching an interview with Paul Krugman (unfortunately no link) where he
said that yes, the government needs to spend some money quickly on
"stimulus." However, he cautioned against any sort of long-term,
complicated plan -- like investment in rail infrastructure perhaps? -- that
would take a long time to work out the details and implement. We need the
"stimulus" right now! Also, the stimulators typically want things
that are sort of self-contained. If all you're looking for is a pop in the
next quarter's GDP, you don't want to get involved in a multi-year investment
project. This is all a recipe for something that accomplishes absolutely
zero. It's a movie I've seen before. Over time, they may even conclude that
it makes the most sense to just mail out some checks in the mail, again,
which would have roughly the same effect as the last round of checks in the
mail. (I didn't notice anything. Did you?) After a few years, we might
discover that all those repeated "stimulus" efforts added up to
jack squat, and another half-trillion to a trillion in extra debt (could be
more at this rate), when we could have had a nice rail system instead.
The
other sort of "stimulus" typically recommended at this time is
monetary tomfoolery, normally the "interest rate cut." I've
mentioned that these "interest rate cuts" don't really accomplish
anything that the market economy wouldn't do by its own self in an
environment of recession, except perhaps to devalue the currency. A currency
devaluation can produce "stimulus" for a short while --
unfortunately, it really works, which is why it is still popular over these
thousands of years -- but it tends to lead to long-term impairment and
decline. You can't devalue yourself to prosperity, but you can devalue
yourself to a six-month economic lift.
You
could also try cutting taxes. If the tax cut was meaningful, it might help
bring the economy out of the recession. Certainly there are many examples of
this, such as Margaret Thatcher's big tax cuts at the beginning of the 1980s.
It not only helped resolve the recession of the time, it helped bring Britain
out of an economic funk that it had been in since the huge tax hikes of the
First World War.
However,
it is somehow inherent in the ideology of "stimulus" that we do not
do anything that has any meaningful long-term effects, like tax reform, or
investment in a rail system. (I'm using a rail system as my personal example
of a government spending plan of some value, but you can insert your own.) It
is practically an ideology of waste, from first principles. Politicians are
not exactly unhappy with this arrangement, as it gives them plenty of
opportunity to "stimulate" their political allies, with maybe a
little stimulus of their offshore bank accounts thrown in.
Some
countries, such as in Eastern Europe, are now having currency problems. As
members of the eurozone, they should have pegged their currencies to the euro
using currency boards. Alas, for various political reasons this was not done.
Now, they are suffering the effects of monetary mismanagement in addition to
whatever other problems they may have. Obviously, what these countries need
is not "stimulus" but competent government policy, especially
currency management. Instead, they're getting the IMF, which is typically
when things go from bad to worse in these matters. I wish I had a couple
months just to investigate the IMF's new round of activities. They may have
learned a few things over the last decade -- their "economic Death
Star" reputation is rather embarassing -- but, I'm guessing, not very
much. These governments could still peg their currencies to the euro,
tomorrow, with currency boards. That would help solve the problem there.
The
private economy, in my estimation, is somewhat unresponsive to government
influence except through the avenues of tax and monetary policy. Thus, when
the government is called on to "do something", it basically has a
choice of a) cutting taxes, or b) devaluing the currency, or c) a bunch of
stuff that is mostly irrelevant. (I support some welfare-directed activities.
They can be meaningful from the standpoint of welfare, but not very
meaningful in terms of the economy.) I would take the one that creates a
long-term benefit (tax cuts) rather than long-term decline (currency
devaluation), even if both arguably provide some sort of improvement in the short
term. The government might have had a role in oversight of the banking system
in prior years, and who knows maybe that would have helped to avoid the
present situation, but that chance has certainly passed by now. Since a
reorganization of the financial industry, and related regulation, is likely
in coming years, maybe I'll talk about that in the near future.
* * *
Higher
spending, higher taxes: Barney Frank explains what is
probably conventional wisdom among Democrats at this time:
http://www.youtube.com/watch?v=u1Mazjm_A5k
"I
think that at this point, there needs to be a focus on an immediate increase
in spending, and I think this is a time when deficit fear has to take a
second seat. I do think this is a time for a very important dose of
Keynesianism. I believe later on, there should be tax increases. Speaking
personally, I think there are some very rich people out there whom we can tax
at a point down the road, and recover some of this money."
One of
the thing that Keynes can be credited for is the notion that deficits should
be ignored during recession. Deficits tend to emerge naturally, as revenues
decline. But, also, often in a recession there is a call for welfare-type
distributions, and the government can genuinely help a lot of people out by
meeting some basic needs. This tends to mean even larger deficits. The idea
that deficits are bad
is what led conservative politicians to enact huge tax hikes in the early
1930s, which created vastly larger problems.
As it
is, though, Barney Frank's idea is virtually identical to Herbert Hoover's:
public works "stimulus" spending and, a couple years later, big tax
hikes. And, actually, Roosevelt did much the same thing, which is why the
Depression dragged on through the decade.
People
never learn.
(Actually,
there is some talk that Obama is going to put a lid on his party's tax-hiking
enthusiasm, reasoning that it would not be such a good thing to do in a
recession. So, maybe someone really did learn something.)
Thus
far, the economic problems have been largely a matter of financial system
weakness, and an end to a bubble-like credit binge, especially among
consumers. Those problems remain largely unresolved. However, it looks like
we will now add more problems in 2009, tax hikes and monetary instability,
namely inflation. Roosevelt also devalued the dollar in 1933, but repegged it
to gold, keeping things relatively sound. It is hard to say what the outcome
of Ben Bernanke's silliness will be. He obviously thinks that Roosevelt's
devaluation was too little, too late. A total blowout is certainly possible.
The
thing that really blows a market economy to flinders is the combination of
inflation and price controls. When the controlled selling price is less than
the cost of production, production ceases. The only remaining economy is the
black market economy. The combination of hyperinflation and price controls
will crush an economy down to dust. It is now on the horizon as a possible
future, although still unlikely on balance.
* * *
Thank
you readers! Would you believe that the October 2008
website stats are 18 times higher than October 2006? Maybe that is more a
reflection of October 2006's tiny base than anything. But, it is nice to see
that there is interest in these sorts of issues.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
|
|