|
"Austerity"
and "Stimulus" tend to go hand-in-hand during times of economic
difficulty. They are the ketchup and mustard of bad recession policy --
despite being almost diametrically opposite actions. I put
"austerity" in quotes again because there is a whole sort of
narrative or set of behaviors that go along with the idea.
November 3, 2008: "Stimulus"
"Austerity"
usually means tax hikes and spending cuts. We're seeing it at the state level
in a big way, with California now adding a "temporary" (yeah,
right) 1.5% sales tax surcharge, bringing Los Angeles to 10.25% apparently.
New York wants to raise property taxes by 7%. At the Federal level, tax hikes
and spending increases seem the order of the day.
Governments
today are rife with waste. A big problem today is at the state and municipal
levels, where policemen, firement, teachers etc. have been gradually
ratcheting up their salaries and benefits to absurd levels. I'm hearing
stories of policemen getting $150K+, and retirement at 20 years (could be
mid-40s) with 90% pay. And full-boat medical of course. Unfortunately, the
only way to get out of these kinds of committments is through bankruptcy, which
is messy. Messy but perhaps necessary unless these giveaways are crammed down
through some other means, like inflation or some separate negotiation.
Eventually the call comes down to trim the school budget. Do they toss
overboard some useless administrators at $175K a head (maybe more including
all benefits)? Of course not. Instead, they eliminate the budget for pencils.
Then, for want of $275 of pencils, the education system grinds to a halt.
Then the parents get together and have a Bake Sale to raise $275 for pencils.
Everyone then, with grim pride, congratulates themselves on coming together
and making sacrifices to get through the crisis -- for the kids, of course.
After all, if you call it "austerity" is has to look like austerity.
(Baby Boomers are very into the way things look.)
The proverbial tightened belt. Unfortunately, all the images associated with
"austerity" are negative. You could call it "refocusing"
or something like that -- refocusing tax revenue on meaningful things instead
of various forms of waste -- and maybe people would then expect some sort of
better, less wasteful outcome, that could well be better than what we had
before, and cost less too.
The
same thing can happen at every government level. On the Federal level, for
example, some small but effective and worthwhile program, like wetlands
restoration, or food bank support, or scholarships for inner-city kids, gets
eliminated (with all sorts of negative consequences), saving $17 million,
while the military and the banks continue to get every penny they ask for.
The politicians know that the public is incapable of distinguishing between
$17 million and $850 billion, although one is 50,000 times larger than the
other. The disappearance of the food-bank support budget looks like austerity,
while you could cut the defense budget by 50%, and toss a few coins to the
food bank budget (which probably needs it during a recession), and the
overall result would be something like the opposite of austerity. A little
more plenty.
The
point is, "austerity" has a tendency to produce meaningless, small
displays of penny-pinching, while doing little to address the real problems.
This is a matter of politics of course, and we live in a time when
politicians seem totally incapable of anything but stuffing their pockets and
defending their turf. It was not always this way, in history, though this is
probably the norm. It seems empires spend a lot more time declining than they
do rising.
The
other aspect of "austerity" is of course tax hikes, which are always
painted as a sort of moral imperative. The government propoganda machine
works overtime on this one, since it makes fleecing the flock so much easier.
There is no moral imperative to finance government waste and policemen's
cushy retirements in a recession, when people really need the money for their
own use instead. I've said enough about raising taxes in a recession that
more detail really isn't necessary here. Since the spending cuts are
typically not very effective (meaning that they don't actually reduce
spending much), that puts more pressure on politicians to hike taxes.
A
recession is as good a time as any to eliminate the ever-present government
waste. If you're going to cut spending, do it in size, and do it in a way
that makes sense on a "micro" level as well as a "macro"
one. In other words, eliminate stuff that should have been eliminated even in
the boom times, but wasn't for political reasons. I'm certain that the State
of California could eliminate 20% of its spending with no particular ill
effects.
So,
spending cuts and tax cuts, or, at very least, spending cuts and no tax
hikes.
The
result of "austerity", either the spending cuts or the tax hikes,
tends to be an even weaker economy. The effects of the spending cuts are
normally rather short-lived, while the effects of the tax hikes persist until
taxes are lowered again.
The
weaker economy leads to calls for "stimulus." "Stimulus"
-- it's always the same word, never "economic re-energization" or
something like that -- usually means abject waste in big-dollar scale. Can
you sense how a big tax reform could be "economic re-energization,"
but, for subtle rhetorical reasons, seems completely inappropriate for
"stimulus"? It should be obvious that "stimulus" is the complete
opposite of "austerity," at least as far as spending is concerned.
People then end up with no pencils in the schools, while workmen busily
construct bridges to nowhere in the countryside. And higher taxes, of course.
"Stimulus" tends to be followed by tax hikes -- a pattern that John
Stuart Mill complained about over 175 years ago.
December 17, 2006: John Stuart Mill on
Public Works Spending
Thus,
while "austerity" and "stimulus" are basically
contradictory, they seem to have tax hikes in common. Then, while
"austerity" and "stimulus" are either cancelling each
other out or leading to tax hikes, governments reach for currency devaluation
to help bail them out of the mess. Thus, we end up with a result contradictory
to my basic principle of good economic management:
Low
Taxes, Stable Money
If
you're going to cut government spending, and this is usually a good idea,
then do it right: get in there and reduce the budget by a good 30% or so.
Concentrate the slashing on the real waste -- everybody on the inside knows
exactly what it is -- rather than the small but important little items that
tend to get sacrificed like virgins tossed in the volcano, as politicians aim
to put on a show to the public about how serious they are getting about
penny-pinching while protecting their own pig troughs. I would pair it with
some tax cuts, which tend to be much more re-energizing than the various
"stimulus" suggestions proposed. And, if you are going to spend
some big bucks, do it on something important and useful and meaningful (I
always suggest a decent rail system here), rather than on total waste. It
seems the Chinese government is going more towards this direction, with a
combination of tax cuts and big spending projects. I would prefer they tend
more towards the tax cuts (or tax reform) and less towards the spending, but
it is not a bad approach overall.
September 14, 2008: Depression Economics
At
least China will end up with a decent rail system at the end of this mess.
For some reason, it doesn't bother Americans that China should have a decent rail system,
but the United States
does not. China, people -- China! But then, Romans probably thought they were
da bomb too all the way up until they were shining the shoes of barbarians in
the streets of Rome.
* * *
Obama:
Thank Goodness. Obama brings with him the Democratic
Party, with all of its various problems and bad habits. Nevertheless, he is
about the best possible solution that could be produced with the political
system we have today. Keep your eye out for Lincolnesque elements.
Newsweek: Obama and the Echoes of Lincoln
Los Angeles Times: Obama's Lincoln Moment
Of
course, Lincoln also fought a Civil War, devalued the currency, imposed the
United States' first income tax, and did a number of other things which were
rather messy, in a historical sense. Southerners hate Northerners' incessant
idolization of Lincoln.
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.
|
|