|
In "On Borrowed Time," Barron's columnist
Randall Forsyth further undermines the notion that persistent
public profligacy can solve our problems:
Heavy debt
loads slow the U.S. economy now and pose threat to the future.
Can a stimulant
become a depressant? As with alcohol, government borrowing and spending
initially can give a boost, but later becomes a drag. America has hit the
downside of that progression.
So says Lacy H.
Hunt, chief economist of Hoisington Investment Management (whose eponymous
head, Van R. Hoisington, recently was interviewed in the print edition of
Barron's.) The deficits that had aimed to stave off a rerun of the Great
Depression after the 2008 financial crisis now are having a depressing effect
on the U.S. economy, Hunt contends.
Many mainstream
"analysts" would argue otherwise. In their view, even though the
economy has yet to recover in any meaningful sense of the word, it's only a
matter of time before the torrent of debt-financed pump-priming
yields the intended results. Moreover, some would undoubtedly
claim that the twitches of activity we've seen in the auto sector, for
example, and in other areas of the economy are a sign that Keynesianism
is working. Unfortunately, those views don't quite square with
reality. In fact, writes Forsyth,
the
opposite is happening. The multiplier from government spending is no better
than zero, Hunt says on the basis of econometric evidence. If the economy is
"shocked" with a deficit, gross domestic product will get a lift
for three-to-five quarters. After 12 quarters, however, the original stimulus
is spent, literally and figuratively. But the debt that was incurred to
finance the spending remains, and has to be repaid, with interest. That
requires a shift of assets from the private sector to the public sector.
Japan provides
an example of this process. That nation's government debt has expanded during
its "lost decades" to 200% of GDP from 50%. Meanwhile, nominal GDP
in yen terms is basically unchanged. In other words, Japan's debt has
quadrupled but has nothing to show for it -- except higher interest costs,
which has to come out of the private sector.
Hunt cites the
now-familiar conclusion that debt-to-GDP ratios over 90% retard growth from
economists Kenneth Rogoff and Carmen Reinhart,
authors of the popular This Time is Different: Eight Centuries of Financial
Folly, who also presented that conclusion in a 2010 National Bureau of
Economic Research working paper, Growth in the Time of Debt.
Hunt also
points to an even more exhaustive study on the effects of debt from Stephen
G. Cecchetti, M. S Mohanty
and Fabrizio Zampolli
from the Bank for International Settlements, presented at the Federal
Reserve's Jackson Hole confab last year, The Real Effects of Debt , which takes into account the retarding effect of
not only government but also corporate and household debt. Those imply
"that the debt problems facing advanced economies are even worse than we
thought," especially when unfunded future liabilities in the form of
promises given by governments in retirement and medical benefits are counted.
Of course, if
ivory-tower instilled dogma suggests something different, it's OK to ignore
reality -- right?
Michael J. Panzner
|
