Continuing the theme of Friday's post, here is a New York Times editorial from Paul Krugman which basically lays out the lefty Narrative that debt financed government spending - the stimulus - is what ends recessions and prevents depressions.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.He's wrong. The great depression was not ended by the vast construction projects of the New Deal any more than Japan's lost decade was ended by the spending spree which now sees Government debt at over 200% of GDP. THe USA didn't leave its depression until WW2 and Japan has not yet ended hers. The UK, which withdrew from the Gold Standard and kept spending under control had a much easier Great depression than the US, despite losing many export markets to isolationism, tarrifs and economic nationalism.
By contrast, in countries where the "stimulus" is withdrawn, spending is slashed and eventually, taxes are cut, you see a more rapid and vigorous return to growth. Examples include the UK in the 1980s or Sweden and Canada in the 1990s. The economic boom we enjoyed in the 80's and 90's was a result of what Krugman calls the "Old-time religion of sound money", and the bust we're enduring now is a result the debt that started to build up in responce to lax monetary controls, over-low interest rates leading to unrestrained private and public profligacy during the Noughties.
Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.Which is just nonsense. Ireland, whose economy is turning the corner following 2 poor years, is in the same ball park as Spain and Portugal. Neither Ireland nor Spain are having problems getting bonds away - at similar spreads over German debt, but Ireland is a much smaller and less diversified economy than Spain, which would account for a their slightly higher spread - and (thanks, Slugger) Irish yields are improving faster than Spain's. Greece is Bankrupt with yield spreads twice that of Spain, Portugal or Ireland. Both Spain and Ireland are cutting deficits, so to pretend that a slightly lower yield spread is evidence for the success of a Keynsian demand boost in Spain compared to Ireland smacks of looking for evidence to support the answer he'd already arrived at.
Paul Krugman is a Nobel Prize-winning economist, so I don't want to call him an idiot, but nowhere has expansionary fiscal policy ended recession or pulled an economy out of depression. Until the lefties (and in this context that means ANYONE who favours an expansionary fiscal policy) point to one, I will stick to my "Old Time Religion" of sound money. It's track record, though imperfect is sounder than that of fiscal profligacy. And recession so caused is likely to be shorter than that resulting from runaway inflation or a debt crisis caused by a Government which thought it could undo the economic cycle.
The problem is with the Government stimulus argument is that it gives left-wing governments an excuse to feather-bed their clients in the name of fiscal expansion. If you overspend for a decade, there has to be a reckoning. Managing the economic cycle is all very good in theory, but how about the practice? Unless you can point to a concrete example of a recession ending as a result of Government expansion, then I would rather not Bankrupt my children, thanks. In seeking to control the Animal Spirits, you're just less self aware than Canute. The economic cycle is as amenable to Man's control as the tide.