The policy of ‘stimulus’ through government spending is, if that is possible, even more absurd. Government spending does not add anything to the economy that wasn’t there before. No new resources are being added. What the government spends it has to take from the private sector. If the government taxes the private sector, that is self-evident. If the government borrows the money it taps into the existing pool of savings, taking money that would otherwise have gone to private sector borrowers, such as corporations. Remember that what is being saved does not drop out of the economy. In order for the saver to receive any interest income or dividends the money has to be invested with someone. Even more troubling is the fact that government spending is now predominantly or fully funded by the central banks and their printing presses – either directly or indirectly via the banking sector. This is now the case in the United States, in Britain, in Japan and in the Eurozone. Not only does this policy increase overall debt-levels and the system’s dependence on ever more money creation, but it also increases – via artificially low rates – the very dislocations that were the cause of the downturn in the first place.In the FT, Luke Johnson reminds us that "The dismal science is bereft of good ideas":
All that fiscal policy ever does is replace the private control over society’s resources with governmental control over those resources. By running deficits and accumulating debt the state obtains more control over resource employment than it already obtains via taxation. Forget the childish New Deal myth – no country has ever furthered its economic wellbeing by handing control of its resources to the state bureaucracy.
No doubt most economists believe that policymakers, financiers and entrepreneurs should listen better to their forecasts and ideas. Yet where were the widespread predictions of the credit crisis? How many called the US housing bust correctly? Armies of brilliant economists were paid magnificent salaries by all the banks that almost destroyed the west. Did none of these geniuses warn their master? Instead, they produced flawed models that encouraged stupidity. Most impressive business managers ignore the volumes of statistics churned out by economists: they know that what matters is not how the market in general is doing, but if your customers are happy and your margins are sufficient.Meanwhile, back at the Cobden Centre, John Phelan writes
The joke about Harry Truman asking to see a one armed economist so that they couldn’t say “But on the other hand” has lasted because it is true. How true was proved again this weekend when a group of ‘esteemed’ economists wrote a letter attacking George Osborne’s deficit reduction plan. Sure enough, another group of esteemed economists were soon on hand to defend George Osborne’s deficit reduction plan. What’s a Chancellor to do?Phelan reckons that a double-dip is coming whether we like it or not:
You could try, as the Keynesians suggest, using the government to step in as borrower and spender of last resort. This might work in the short term, allowing Ed Balls to trumpet “When Labour left office last spring the economy was strengthening with growth of 1.1 per cent in the second quarter of 2010” but if you throw £150 billion of borrowed money at an economy you are bound to see some result. And it is suicidal in the long term especially in a country like Britain where the government had already been borrowing for years before the recession hit.
You could try, as the Bank of England and Federal Reserve have, fixing interest rates ever lower in order to keep this flood of cheap credit flowing. But this is simply to encourage borrowing to continue at the previous, unsustainable rate. Again, in the short term this may have some output effect but quite soon, already in the case of Britain, you are going to run into inflationary pressures again.
Either way, the use of fiscal policy, to replace private borrowing with government borrowing, and monetary policy, making it cheaper for everyone to continue borrowing, are wasted efforts. They cannot transform enterprises that rely on an inflationary credit environment into ones that will survive under natural conditions. Those enterprises will cease.
The alternative is to take a deep breath and go for a V shaped path, a deep but short recession. Of course, this guarantees the dreaded ‘double dip’ but given that the inevitable rise in interest rates makes this dead cert anyway it might be better for Osborne if it happened now rather than nearer to the election, as turnaround time between now and 2015 is disappearing all the time.