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The myth
that President Bush’s deficits rescued the American economy from
recession has taken root among some conservative economic commentators. (Of
course, if you are a hardcore Democrat then Republican economic policies are
always awful). This is a typical Keynesian response by people who should damn
well know better.
A deficit
is incurred when spending exceeds revenue. For the household this usually
means getting into debt. Governments, however, are privileged: they can, and
do, use central banks to create the additional money. So when someone argues
that the deficit is driving the American economy they are really saying that
monetary expansion is stimulating output. These same people do not seem to
realise that a simple increase in output, i.e., a reduction in idle capacity,
is not the same as an increase in economic growth.
From
January to December 2000 M1 (currency, deposits and travellers cheques) fell
by 1 per cent. For the years 2001, 2002, 2003 and 2004 M1 grew at 9.6 per
cent, 4.7 per cent, 8 per cent and 8 per cent respectively. This was
accomplished by the Fed driving interest rates below their market clearing
rates thereby expanding the credit component of M1. (This is precisely what Bernanke is trying to do right now).
However,
this monetary expansion was accompanied by tax cuts, particularly to capital
gains. I think it is indisputable that the cuts promoted investment*. Any
economist will tell you that if you decrease the cost of manufacturing any
product you will increase the supply. (Computers are a graphic example of this
self-evident truth). What tax cuts did was to reduce the cost of investing
which, surprise, surprise, then increased the amount of investment.
Credit
expansion is no substitute for savings, even when it involves the phenomenon
of forced savings (See Friedrich von Hayek, Prices and Production,
Pub. Augustus M. Kelley 1967). An expanding money
supply works its magic by raising the value of the product relative to the
costs of production. To suggest this process can bring about a sustainable
expansion in the production structure is laughable.
We can now
see that deficits can only expand 'demand' by increasing the money supply. (I
am not talking about the confusion between expanding the capital structure
and using inflation to release “withheld capacity”. On this topic
see William Harold Hutt, The Keynesian Episode:
A Reassessment, LibertyPress, 1979).
On the
other hand, tax cuts expand real demand by raising investment. Nevertheless,
Irwin M. Stelzer argued that "the economy
… is hardly in need of further fiscal stimulus" (The Daily
Standard, Do Deficits Matter?,
15 February 2005). The sort of "fiscal stimulus" that Mr Stelzer and other economic commentators were talking
about amounts to nothing but monetary expansion. In other words: inflation.
So-called
"fiscal policy" is a dangerous Keynesian fraud that generates
inflation, causes balance-of-payments problems, distorts the pattern of
production and triggers the boom-bust cycle. A genuine fiscal policy would be
one that cut taxes and regulations to bring about balanced economic
growth. By balanced I mean growth that is not distorted by clusters of
inflation-created malinvestments.
*Democrats
now argue that tax cuts damage an economy but tax increases stimulate it. We
now have the nauseating spectacle of the uber-rich Buffet
making the malicious asserton that smacking capital
gains with a massive tax increase would not have a detrimental effect on
capital accumulation by savaging investment.
Note: Austrian
school of economics definition of the money supply.
Currency
outside U.S. Treasury, Federal Reserve Banks and the vaults of depository
institutions.
Demand
deposits at commercial banks and foreign-related institutions other than
those due to depository institutions, the U.S. government and foreign banks
and official institutions, less cash items in the process of collection and
Federal Reserve float.
NOW
(negotiable order of withdrawal) and ATS (automatic transfer service)
balances at commercial banks, U.S.
branches and agencies of foreign banks, and Edge Act corporations.
NOW
balances at thrifts, credit union share draft balances, and demand deposits
at thrifts.
AMS
definition therefore equals cash plus demand deposits
with commercial banks and thrift institutions plus saving deposits plus
government deposits with banks and the central bank.
M1 is
clearly close to the Austrian definition even though it includes travellers cheques.
Gerard
Jackson
Brookesnews.com
Gerard
Jackson is Brookesnews Economics
Editor
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