Austerity v. Growth

The War over Austerity v. Growth

Austerity vs Growth

Austerity vs Growth

Should governments focus on borrowing less to finance their spending — or rather focus on spending even more, to promote economic activity, giving debt reduction a lower priority? This is the austerity versus growth argument that divides economists into two increasingly vocal opposing camps offering policymakers conflicting advice.

This is a key issue of economic policy. It’s critically important to get it right if buoyancy is to be restored to the world economy

The advocates of austerity say fiscal stimulus programmes produce short-term highs that deliver no long-term boost to economic growth. They divert attention from the fundamental structural reforms that are necessary. That is the lesson of history – just look at the experience of Japan over the past two decades, where massive stimulus plans have failed to produce annual real growth averaging much above 1 per cent.

Opponents argue that the main cause of the explosion in public debt is recession/low growth. Stimulate government spending, borrowing even more to do so, and growth will come through. Failure to do so and you end up with low growth and even greater public debt. They also cite the experience of Japan over the past two decades, but draw an opposite conclusion. They say its massive stimulus plans succeeded in preventing a depression and even managed to produce some positive growth.

It seems to me that both camps are wrong.

The problem with fiscal stimulus plans isn’t that they won’t work – the problem is that they are so badly designed that they cannot work. Their focus is on handouts to politically-favoured interests, so much of the stimulus is wasted.

Their most obvious deficiency is that they don’t deliver the massive tax cuts and bonfire of red tape that would trigger a growth revolution in the small and midsized private business sectors, which are well-known to be the most important job creation, innovation and output expansion machine.

There is huge opposition to such liberalizing reforms.

The chattering classes hate the prospect of those whom they largely despise, entrepreneurs, making big profits at the “expense” of the public.

Big business hates any advantages being given to small and midsized companies that would offset their own privileged access to political influence, subsidies, protectionism and advantageous legal structures.

Politicians and bureaucrats hate the idea of anything that diverts power and money from their control and make-work procedures.

I am not alone in advocating enterprise-focused, job-creating stimulus – the kind that governments give lip-service to and tinker with, but fail to implement convincingly.

In Europe, says the FT’s Gideon Rachman, the scope for “reforms that will encourage private-sector job creation” is “enormous.” In France, for example, taxes on labour are very high. If they were cut across the board, such a cut would pay for itself through creating jobs.

Red tape is so ridiculous that an entrepreneur was reported in the New York Times as saying that getting permission to start an Internet business in Greece involved an odyssey of paperwork that culminated in an official demand for a stool sample!

Aggressive promotion of small/midsized private business would be the most productive component of a broader policy of stimulating demand by putting spending power into the hands of those most likely to turn it to good use… not official agencies or private-sector zombies.

One outrageous suggestion from an American financial heavyweight, Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation, is that the US central bank, instead of providing abundant, nearly-free money to “big banks and hedge funds” that they have been using it to make enormous profits, could rather allow each American household to borrow $10 million from the Fed at zero interest.

“The more conservative among us can take that money and buy ten-year Treasury bonds. At the current 2 per cent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy ten-year Greek debt at 21 per cent, for an annual income of $2.1 million.

CopyRight – OnTarget 2012 by Martin Spring