Τρίτη, 14 Σεπτεμβρίου 2010

When Did Deficit Spending Ever Lead to Actual Growth?

Paul Krugman once again defends an instance of deficit spending with the same excuse: it could have been worse. That's the same excuse used for FDR's policies, which failed to curb unemployment during the Great Depression - this time, it's Japan: almost twenty years of deficit spending have yet to produce any tangible results. But, then, it could have been worse, writes Krugman.

There is a reason deficit spending (which is not the same as a deficit produced solely by cutting taxes), combined with government intervention, does not work. In its extreme, socialism, a price system, as a mechanism for communicating information, does not exist, as Ludwig von Mises famously stated. Underlying this statement is the empirical observation that men (or women) manifest their wishes, needs, and priorities, through voluntary exchange. Centralized bureaucracies cannot substitute this information, much less the individuals' own prioritization of their desires. Stimulus spending, which supposedly covers needs that a market will not recognize, is bogus. Taxation (or borrowing, which will inevitably lead to taxation in the long run) drains the market of its resources and redistributes them against the wishes of the citizenry. This means that any initial appearance of growth cannot last, since the government-mandated products or services prove undesirable, cost-ineffective, and, eventually, unsustainable - and the business that produces these products or provides these services will have to fold, leaving its employees unemployed, its providers unable to recover their money, etc. In the meanwhile, many entitlements may have been established, burdening government finances for years to come. How can, then, sustainable growth come out of a planned (more or less) economy?

5 σχόλια:

  1. αθανασιε

    η δυνατοτητα η συνολικη ζητηση στην οικονομια να μην ειναι αρκετη και να εχουμε ανουσια ανεργια και υποαξιοποιηση πορων ειναι υπαρκτη και την εχει δειξει εδω και καπου 80 χρονια ο Κεϋνς. Σε τετοιες συνθηκες οι κυβερνητικες δαπανες (με ελλειμματα παντα!) μπορουν να φερουν επανορθωση μιας καλυτερης ισορροπιας. Το ζητημα ειναι οταν η οικονομια παει καλα να κανεις το αναποδο, να εχεις δηλαδη πλεονασματα, κατι που η Ελλαδα αμελησε εγκληματικα να κανει.

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  2. For the benefit of the millions of our readers out there, who don't read Greek, here is a rough translation of S G's comment:

    Keynes has established, as far back as 80 years ago, that it is plausible that total demand in the economy be not enough, leading to meaningless unemployment and under-utilization of resources. Under circumstances like these, government expenditure (which is bound to lead to deficits!) may lead to the correction towards a better equilibrium. The issue is that, when the economy is doing well, you should do the opposite, i.e. have surpluses, which Greece criminally failed to do.

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  3. @ S G

    I really appreciate your comment (please correct me, if I mistranslated it). Of course, the basic Keynesian tenet is for the government to spend (or restrain itself) against the tide. And, correct me if I'm wrong, but I think that can be inferred from your comment, deficit spending, according to its proponents, is only a temporary measure, used to jump-start the economy and then let the virtuous circle initiated by the increased demand lead to continued growth. However, the example typically given as a success story in deficit spending is FDR's Great Depression policies - and I do not find it very convincing. On the other hand, both Reagan and Thatcher combated stagflation (successfully, I dare say) by restraining money supply, either by elevated interest rates or by raising taxes in the midst of a recession. Moreover, I am sure you will recognize all the dangers inherent in government spending - the opportunities for corruption, for example - which should be weighed against the potential benefits of any governmental intervention.

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  4. only slight mistranslation, or misunderstanding: I am saying government spending should lead to deficits if it is to have an effect on aggregate demand, and hence growth.

    Now, extra spending need not be in the form of extra hiring for the public sector or private sector subsidies. It can just be higher unemployment benefits or just lower taxes!

    Reagan (or Thatcher) did not do much against inflation, the Central Banks did. Having a reasonable monetary policy is not incompatible with an anticyclical fiscal policy, as far as I know.

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  5. Thank you very much for the clarification. By deficit spending I was referring (perhaps erroneously) only to the government actually spending more money, rather than taxing less. Needless to mention that I agree with your closing sentence.

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