November 3, 2008
We’re starting to hear more talk about “stimulus.” I put “stimulus” in quotes, following my usual practice of placing a latex barrier around other people’s ideas, so nobody gets infected. Just the word, “stimulus,” carries certain assumptions and expectations which are often flawed from the beginning. It implies that the economy is sort of lagging around due to its own difficulties, and that the government is an independent savior, an economic paramedic or something like that. Smells like more metaphor economics. Very often, the problems are caused by the government itself, through taxes, regulation or mismanagement of the currency. Also, it tends to lead to certain short-term “solutions” that rarely achieve anything at all except to distract policymaker’s attention during the time that it takes to devise a plan, pass it through the legislative process, implement it, and wait and see what the results are. There’s 12 or 18 months right there, during which the government could have been thinking about real solutions, but instead is distracted by “stimulus.” Then, when the “stimulus” is deemed to have been somewhat ineffective, what comes next? Usually, more “stimulus.” In this way, months stretch into years, and perhaps years into decades. The Japanese government has been so fascinated by “stimulus” over the years that they still haven’t figured out that they helped blow up the property sector themselves with huge tax increases in the early 1990s. Maybe they should do something about that hmmmm? (I have some hope for the new prime minister, Taro Aso, because Aso is indeed the one and only upper-rank Japanese politician I know of that correctly identified the huge tax hikes as a major contributor to the collapse of the property market in Japan — the short-term capital gains tax rate on property went to 90% for several years, if I recall — and recommended returning to the successful property tax system of the 1980s.)
I was just watching an interview with Paul Krugman (unfortunately no link) where he said that yes, the government needs to spend some money quickly on “stimulus.” However, he cautioned against any sort of long-term, complicated plan — like investment in rail infrastructure perhaps? — that would take a long time to work out the details and implement. We need the “stimulus” right now! Also, the stimulators typically want things that are sort of self-contained. If all you’re looking for is a pop in the next quarter’s GDP, you don’t want to get involved in a multi-year investment project. This is all a recipe for something that accomplishes absolutely zero. It’s a movie I’ve seen before. Over time, they may even conclude that it makes the most sense to just mail out some checks in the mail, again, which would have roughly the same effect as the last round of checks in the mail. (I didn’t notice anything. Did you?) After a few years, we might discover that all those repeated “stimulus” efforts added up to jack squat, and another half-trillion to a trillion in extra debt (could be more at this rate), when we could have had a nice rail system instead.
The other sort of “stimulus” typically recommended at this time is monetary tomfoolery, normally the “interest rate cut.” I’ve mentioned that these “interest rate cuts” don’t really accomplish anything that the market economy wouldn’t do by its own self in an environment of recession, except perhaps to devalue the currency. A currency devaluation can produce “stimulus” for a short while — unfortunately, it really works, which is why it is still popular over these thousands of years — but it tends to lead to long-term impairment and decline. You can’t devalue yourself to prosperity, but you can devalue yourself to a six-month economic lift.
You could also try cutting taxes. If the tax cut was meaningful, it might help bring the economy out of the recession. Certainly there are many examples of this, such as Margaret Thatcher’s big tax cuts at the beginning of the 1980s. It not only helped resolve the recession of the time, it helped bring Britain out of an economic funk that it had been in since the huge tax hikes of the First World War.
However, it is somehow inherent in the ideology of “stimulus” that we do not do anything that has any meaningful long-term effects, like tax reform, or investment in a rail system. (I’m using a rail system as my personal example of a government spending plan of some value, but you can insert your own.) It is practically an ideology of waste, from first principles. Politicians are not exactly unhappy with this arrangement, as it gives them plenty of opportunity to “stimulate” their political allies, with maybe a little stimulus of their offshore bank accounts thrown in.
Some countries, such as in Eastern Europe, are now having currency problems. As members of the eurozone, they should have pegged their currencies to the euro using currency boards. Alas, for various political reasons this was not done. Now, they are suffering the effects of monetary mismanagement in addition to whatever other problems they may have. Obviously, what these countries need is not “stimulus” but competent government policy, especially currency management. Instead, they’re getting the IMF, which is typically when things go from bad to worse in these matters. I wish I had a couple months just to investigate the IMF’s new round of activities. They may have learned a few things over the last decade — their “economic Death Star” reputation is rather embarassing — but, I’m guessing, not very much. These governments could still peg their currencies to the euro, tomorrow, with currency boards. That would help solve the problem there.
The private economy, in my estimation, is somewhat unresponsive to government influence except through the avenues of tax and monetary policy. Thus, when the government is called on to “do something”, it basically has a choice of a) cutting taxes, or b) devaluing the currency, or c) a bunch of stuff that is mostly irrelevant. (I support some welfare-directed activities. They can be meaningful from the standpoint of welfare, but not very meaningful in terms of the economy.) I would take the one that creates a long-term benefit (tax cuts) rather than long-term decline (currency devaluation), even if both arguably provide some sort of improvement in the short term. The government might have had a role in oversight of the banking system in prior years, and who knows maybe that would have helped to avoid the present situation, but that chance has certainly passed by now. Since a reorganization of the financial industry, and related regulation, is likely in coming years, maybe I’ll talk about that in the near future.
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Higher spending, higher taxes: Barney Frank explains what is probably conventional wisdom among Democrats at this time:
“I think that at this point, there needs to be a focus on an immediate increase in spending, and I think this is a time when deficit fear has to take a second seat. I do think this is a time for a very important dose of Keynesianism. I believe later on, there should be tax increases. Speaking personally, I think there are some very rich people out there whom we can tax at a point down the road, and recover some of this money.”
One of the thing that Keynes can be credited for is the notion that deficits should be ignored during recession. Deficits tend to emerge naturally, as revenues decline. But, also, often in a recession there is a call for welfare-type distributions, and the government can genuinely help a lot of people out by meeting some basic needs. This tends to mean even larger deficits. The idea that deficits are bad is what led conservative politicians to enact huge tax hikes in the early 1930s, which created vastly larger problems.
As it is, though, Barney Frank’s idea is virtually identical to Herbert Hoover’s: public works “stimulus” spending and, a couple years later, big tax hikes. And, actually, Roosevelt did much the same thing, which is why the Depression dragged on through the decade.
People never learn.
(Actually, there is some talk that Obama is going to put a lid on his party’s tax-hiking enthusiasm, reasoning that it would not be such a good thing to do in a recession. So, maybe someone really did learn something.)
Thus far, the economic problems have been largely a matter of financial system weakness, and an end to a bubble-like credit binge, especially among consumers. Those problems remain largely unresolved. However, it looks like we will now add more problems in 2009, tax hikes and monetary instability, namely inflation. Roosevelt also devalued the dollar in 1933, but repegged it to gold, keeping things relatively sound. It is hard to say what the outcome of Ben Bernanke’s silliness will be. He obviously thinks that Roosevelt’s devaluation was too little, too late. A total blowout is certainly possible.
The thing that really blows a market economy to flinders is the combination of inflation and price controls. When the controlled selling price is less than the cost of production, production ceases. The only remaining economy is the black market economy. The combination of hyperinflation and price controls will crush an economy down to dust. It is now on the horizon as a possible future, although still unlikely on balance.
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Thank you readers! Would you believe that the October 2008 website stats are 18 times higher than October 2006? Maybe that is more a reflection of October 2006’s tiny base than anything. But, it is nice to see that there is interest in these sorts of issues.