They can’t say they weren’t warned: contrarian voices have been saying for years that the modern day alchemists in the central banks would not succeed in their experiment to conjure up growth from the money press. Rates can’t get much lower, there are few assets left to buy. What’s next? Last week saw calls from OECD and the Economist for fiscal stimulus measures and structural reform to supplement or replace an obviously out-of-ammo CB community. The Economist casually notes how ‘governments find it notoriously hard to deploy effective stimulus… Governments tend to choose projects that make a political splash but have little underlying logic. That is in part why decades of capital spending in Japan have not done more to boost the economy.’ That’s why… that’s exactly why it’s not a good idea! So why do you recommend it? The suggestion that the solution to underinvestment in eg. infrastructure is more investment in infrastructure is obviously right. The suggestion that a bunch of bureaucrats would be able to identify areas of underinvestment and appraise the costs and benefits of individual projects is equally as obviously wrong. We are at the descent into pure Keynesian multiplier insanity. Sadly there are still plenty of believers, like Paul Krugman, who hopes for war or alien invasions to help us out.
Japan is the obvious case study, where fiscal measures have indeed been employed next to insanely aggressive monetary experiments. Has it worked? Nah, but that’s apparently no reason to assume it won’t work if implemented elsewhere. It just has to be done smarter and bolder, they say. Fiscal prudence is dangerous. The economy is not a household. Your spending is my income.
But spending on what? Austrian economics tells us that spending that does not meet actual consumer demand is wasteful and leads to bad resource allocation (or malinvestment). An economy that has built up malinvestment during a period of artificial monetary expansion and is now struggling with unemployment, low productivity, house price collapse, excess borrowing, needs… an alien invasion??? My spending may be your income, but if I pay you to tear my house down and burn my car, I fail to see how we both become better off by that particular transaction.
The confusion is between spending and wealth creation. Wealth is created by resources being augmented and something more valuable being produced. And only a free market can determine if value has been added. That’s the price mechanism, which encourages productive use of resources. It is completely absent from any public investment.
It is clear that the Keynesian logic is tempting to the political establishment, who can be ‘forced’ by circumstances to lavish spending on voters. That’s probably why the thinking is so entrenched in pluralist democracies. It is a shame they do not teach Austrian economics in school. People like Krugman should attend economics classes, not teach them…