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.
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.”
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, is policy parlance for greater deficit spending. This, in short, means using credit cards to fund government expenditures.
According to the central bankers, their issuances of cheap credit keep getting log jammed at the 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 colosseums, 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 up GDP growth. Of course, this also increases public debt levels.
But don’t worry say the economic planners – and 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 would 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 would 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 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.
Similarly, many nations of the European Union are running deficits that are highly 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 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’ll make a comeback at some point…whether the economic planners want them to or not.
Sincerely,
MN Gordon
for Economic Prism
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