Government Spending
I've just been on Wat Tyler's very interesting 'burning our money' website, which takes a very tough line on government spending and it has made me think. Mostly, I have been thinking about whether there is a serious choice between Keynesianism or letting a depression happen.
The last time that a Depression took hold, in the early 1930s, the American New Deal, which institutionalised Keynesianism in the United States, set the standard for most of the rest of the twentieth century.
There were good, and not always rational reasons for this. As with Hjalmar Schacht's mefo-bill reflation for Hitler, at the same time, the New Deal was seen as saving large numbers of citizens not just from economic humiliation but starvation.
Serious scholars of the New deal have also pointed out how many quasi-revolutionary groups were around in the USA in the Depression too. These ranged across the populism of the likes of Eugene Talmadge, the organised quasi-fascism of Huey Long's Share Our Wealth Programme, to the real fascism of the silver shirts. Bonus marchers, radical socialists, and the Communist Party of the USA also threatened to turn the USA, in city and heartland, into a version of Weimar Germany. The New Deal sent these groups away.
However, there have always been people who claim that the problem with Herbert Hoover was not that he was wrong inprinciple, simply that he could not adapt his presentation and redirect some of his spending to reassure people.
A school exists in economics that suggests, for instance, that the proper response to recession is to cut spending overall. This allows for three things. It allows for bad businesses, which are inefficient or which rip off their customers, to go to the wall. A depression then becomes a liquidation-based correction.
Secondly, for such economists, depressions such as (I suppose, though they don't say) those of 1837, 1873, the 'Eisenhower recession', or 1980-83, depressions 'disinflate' an economy. Without government interference, depressions in this model raise interest rates and restrict credit, and result in the collapse of spending so that any mismatch that has accumulated between the production of money and the actual value of output is adjusted.
The third effect of depression therefore, in this model, is to make money more expensive and to return govenments to the straight and narrow by forcing them to pay back their borrowing and closing off the possibility of borrowing more.
Opposed to this school were the Keynesians of various iterations, who thought that governments should stabilise and reverse depressions by injecting cash into the economy, whose value would then be multiplied, and taking it out again through taxes when times were good.
Keynesianism was instituted by the New Deal. Though many have claimed over the past thirty five years or so that it was dropped by 1973, a quick look at the figures suggests that it was not. Spending plans were institutionalised, such as the Social Security programme in the USA, that were not cut back or put on a sustainable footing in good times. Welfare schemes were instituted and then built upon, along with government spending on education, roads, and defence, over the thirty years until 1936, in good times and bad, that were simply not paid for with taxes but with inflated money.
This has now left the USA with a national debt of almost ten trillion, increasing by 1.74 billion dollars per day. The American budget deficit, heading into a bad recession is now hovering around half a trillion dollars.
It is difficult to calculate what Barack Obama's spending plans are, though he is nominally pledged to a balanced budget. Some analysts believe that a McCain adminsitration would see a US budget with over half a trillion dollar-deficits, and a twelve-trillion debt, before the end of a first presidential term, assuming McCain stayed alive for four years.
These are death-spiral figures of the sort that one would have seen at the fall of Rome, to some. However, there are silver linings for the USA in the present world crisis. The USA still has a manufacturing industry. If the dollar declines and oil supply at viable prices is even more restricted, global trade will fall. Without having to give in to the siren of protectionism, the USA will therefore make more of its own goods, outsource less, and employ more of its own people.
This is whistling in the graveyard, really. America is in for deep trouble, and is going to have to either slash spending or raise taxes. It may well be that an Obama administration, enjoying fantastic and unpredicted growth, boosts tax revenues at the same time as a sober and serious congress cuts spending (and I do mean this ironically) rescues the USA from its troubles.
It is far more likely that the next president is going to be handed a wooden spoon and a pot of horrible and told to look good stirring. In that crisis will be an opportunity; but it may be that everything goes dead wrong in the kitchen. But the cauldron will not be able to accomodate tax cuts, vital improvements to infrastructure, wars and social security payments. More than one of those things are heading for the drains.
I could well be, therefore, that serious people, protected just in time by their investments and by the endowments of their universities and foundations or their government pension plans, begin to make the argument for letting a depression happen.
At least the USA can try and adapt. There is a silver lining for it. Ireland, which adopted spending-slashing measures last week is clearly pursuing a different course. As a small country, it will probably be successful, but at a human cost. Cute mice thrown down mineshafts survive, after all, because kinetic forces aren't so great when you don't weigh much. But the UK is going over a cliff.
I've just been on Wat Tyler's very interesting 'burning our money' website, which takes a very tough line on government spending and it has made me think. Mostly, I have been thinking about whether there is a serious choice between Keynesianism or letting a depression happen.
The last time that a Depression took hold, in the early 1930s, the American New Deal, which institutionalised Keynesianism in the United States, set the standard for most of the rest of the twentieth century.
There were good, and not always rational reasons for this. As with Hjalmar Schacht's mefo-bill reflation for Hitler, at the same time, the New Deal was seen as saving large numbers of citizens not just from economic humiliation but starvation.
Serious scholars of the New deal have also pointed out how many quasi-revolutionary groups were around in the USA in the Depression too. These ranged across the populism of the likes of Eugene Talmadge, the organised quasi-fascism of Huey Long's Share Our Wealth Programme, to the real fascism of the silver shirts. Bonus marchers, radical socialists, and the Communist Party of the USA also threatened to turn the USA, in city and heartland, into a version of Weimar Germany. The New Deal sent these groups away.
However, there have always been people who claim that the problem with Herbert Hoover was not that he was wrong inprinciple, simply that he could not adapt his presentation and redirect some of his spending to reassure people.
A school exists in economics that suggests, for instance, that the proper response to recession is to cut spending overall. This allows for three things. It allows for bad businesses, which are inefficient or which rip off their customers, to go to the wall. A depression then becomes a liquidation-based correction.
Secondly, for such economists, depressions such as (I suppose, though they don't say) those of 1837, 1873, the 'Eisenhower recession', or 1980-83, depressions 'disinflate' an economy. Without government interference, depressions in this model raise interest rates and restrict credit, and result in the collapse of spending so that any mismatch that has accumulated between the production of money and the actual value of output is adjusted.
The third effect of depression therefore, in this model, is to make money more expensive and to return govenments to the straight and narrow by forcing them to pay back their borrowing and closing off the possibility of borrowing more.
Opposed to this school were the Keynesians of various iterations, who thought that governments should stabilise and reverse depressions by injecting cash into the economy, whose value would then be multiplied, and taking it out again through taxes when times were good.
Keynesianism was instituted by the New Deal. Though many have claimed over the past thirty five years or so that it was dropped by 1973, a quick look at the figures suggests that it was not. Spending plans were institutionalised, such as the Social Security programme in the USA, that were not cut back or put on a sustainable footing in good times. Welfare schemes were instituted and then built upon, along with government spending on education, roads, and defence, over the thirty years until 1936, in good times and bad, that were simply not paid for with taxes but with inflated money.
This has now left the USA with a national debt of almost ten trillion, increasing by 1.74 billion dollars per day. The American budget deficit, heading into a bad recession is now hovering around half a trillion dollars.
It is difficult to calculate what Barack Obama's spending plans are, though he is nominally pledged to a balanced budget. Some analysts believe that a McCain adminsitration would see a US budget with over half a trillion dollar-deficits, and a twelve-trillion debt, before the end of a first presidential term, assuming McCain stayed alive for four years.
These are death-spiral figures of the sort that one would have seen at the fall of Rome, to some. However, there are silver linings for the USA in the present world crisis. The USA still has a manufacturing industry. If the dollar declines and oil supply at viable prices is even more restricted, global trade will fall. Without having to give in to the siren of protectionism, the USA will therefore make more of its own goods, outsource less, and employ more of its own people.
This is whistling in the graveyard, really. America is in for deep trouble, and is going to have to either slash spending or raise taxes. It may well be that an Obama administration, enjoying fantastic and unpredicted growth, boosts tax revenues at the same time as a sober and serious congress cuts spending (and I do mean this ironically) rescues the USA from its troubles.
It is far more likely that the next president is going to be handed a wooden spoon and a pot of horrible and told to look good stirring. In that crisis will be an opportunity; but it may be that everything goes dead wrong in the kitchen. But the cauldron will not be able to accomodate tax cuts, vital improvements to infrastructure, wars and social security payments. More than one of those things are heading for the drains.
I could well be, therefore, that serious people, protected just in time by their investments and by the endowments of their universities and foundations or their government pension plans, begin to make the argument for letting a depression happen.
At least the USA can try and adapt. There is a silver lining for it. Ireland, which adopted spending-slashing measures last week is clearly pursuing a different course. As a small country, it will probably be successful, but at a human cost. Cute mice thrown down mineshafts survive, after all, because kinetic forces aren't so great when you don't weigh much. But the UK is going over a cliff.
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