29 September 2010

On Deficit Spending and Austerity

At the meetings of G20 finance ministers following the 2008 crash, there was unanimity about the urgency of all national governments continuing to spend - spending consumers were unable and businesses unwilling to do - to prop up the global economy.

A little over a year later, several countries (and notably the wealthiest - UK, Germany, USA, France) are curtailing this spending and looking to austerity  measures to balance the books. Although the recession is clearly not over and the recovery if any has been jobless (in North America), we are being told by conservative governments from Ottawa to Berlin that government deficits and debt are out of control, and that we are stealing from our grandchildren. 

This recent poll by Metro of citizens in 22 countries shows that in these wealthy countries, a majority now oppose continued stimulus spending. Of course, a majority is not always right, and this speaks much more to the success of lobbying and propaganda efforts than it does to the merits of continued spending versus austerity. The question is not what a majority believe but what is right, and in this case the question is whether the G20 finance ministers were unanimously wrong just one year ago when they demanded global stimulus spending by governments everywhere.

First, we must cast aside the bias that deficit spending is theft from future generations. It's not: it's an investment in something that we cannot afford to purchase outright today. It's a bad investment if invested in the citizens' frivolous enjoyment or in activities that render no net benefit to society (say by incurring it to fund tax cuts for the rich or wars of aggression. It's a good investment if it generates returns on the investment for the citizenry (like the electrical grid or air traffic control or public education or health or water and sanitation etc etc). 

Not all debt is bad: debt that generates returns greater than the investment and carrying costs are profitable and desirable.

Historically, it's informative to recall that the 'theft from our grandchildren' argument was a popular one for those resisting labour and industry reform under FDR, as well as in the Oil Shock/Reaganomics period. The evidence that hard times continued under austerity and were alleviated with Keynesian stimulus notwithstanding, the facts are clear that in spite of dire projections of eternal penury for our issue, in both of these cases the deficits and debt were rapidly dealt with when economic growth was restored. 

I'm confident if we invested today in things like a smart and green energy system, efficient and affordable electric cars, and batteries (as examples only) we would recover our investments quite quickly. I'm confident also that if we don't make such investments we will be left behind as purchasers of other people's F-35s and wind turbines (which would be bad and good investment decisions, respectively, but certainly not theft).

Finally, it's important to recall that businesses and people take on debt as a matter of course, to buy houses or cars or plant and equipment or new technologies or whatever they need to invest in now that will return more benefit than the sum of the future payments. To describe government held debt as 'theft' from future generations basically suggests that governments, unlike the individuals that form and create them and unlike the corporations they in turn have created by law, cannot take on debt and are fundamentally unable to make long-term investment decisions. There is no philosophical reason to support that view, and many practical reasons to oppose it.

The recession is not over. Property values have not returned. Many are homeless, while many homes are empty and abandoned. Many are jobless, more are underemployed. Consumers are manifestly incapable of sustaining spending - it was their unsustainable spending that got them where they are. And in spite of the bank bailouts (not the stimulus, the bailouts), which were intended to provide macroeconomic liquidity, individual banks are making the microeconomic decision to hold on to their cash. Interest rates are already historically low and have been for some time - monetary policy can offer us no relief. Continued spending by governments is the only reasonable prospect for a speedy recovery.

Let us ignore the voices who will take any opportunity to cry for less government. They are frequently wrong, though even a broken clock is right twice a day. Let us instead look for responsible government to do not only what it must - continue to fight recession through stimulus spending - but also what it should - incur that debt in the pursuit of wise investments that will return a bounty, not a mortgage, to our grandchildren.


Post a Comment

Links to this post:

Create a Link

<< Home