Keynesians Have Shot Their Only Bolt -- How Will They Spend Their Way Through The Next Crisis?
Governments have spent so much, to so little effect, to try to stimulate the current economy, I wonder where they will find the resources to spend more the next time? Because you can be sure that despite the fact that we are likely near the top of a weak cycle, no one is paying back what was spent in the last recession or proposing to reduce central bank balance sheets.
This is a couple of years old, but tells the story pretty well:
The financial crisis that began in late 2007, with its mix of liquidity crunch, decreased tax revenues, huge economic stimulus programs, recapitalizations of banks and so on and so forth, led to a dramatic increase in the public debt for most advanced economies. Public debt as a percent of GDP in OECD countries as a whole went from hovering around 70% throughout the 1990s to almost 110% in 2012. It is now projected to grow to 112.5% of GDP by 2014, possibly rising even higher in the following years. This trend is visible not only in countries with a history of debt problems - such as Japan, Italy, Belgium and Greece - but also in countries where it was relatively low before the crisis - such as the US, UK, France, Portugal and Ireland.
So over a third of the debt that has been built up in all of history by Western nations was added in just a few years from 2007-2012. At the same time, the central banks of these countries were adding to their balance sheets like crazy, essentially printing money in addition to this deficit spending. In the US, the Fed's balance sheet as a percent of GDP hovered around 6% until the second half of 2008. That had tripled to over 18% in 2012 (source). At the same time, European central bank assets grew from about 7% to over 16% of GDP.
James Taranto has a regular feature named after a reporter named Fox Butterfield. The feature takes statements such as "Despite Mary getting a PhD in Peruvian gender studies from Harvard, she has struggled to find a job" and argues that the "despite" should be replaced by "because".
This is certainly true of the statement that "despite record stimulus and Fed balance sheet expansion, the economy has remained sluggish". That "despite" should be "because of". The government continues to distort the allocation of capital and wonders why investment is sluggish and tends towards bubbles in certain assets. Japan has stimulated for 25 years to absurd levels of debt and has gotten 25 years of sluggishness in return.
All this reminds me of a story in one of my favorite business books, "Barbarians at the Gate." Back in the day, tobacco companies had a practice of jamming inventory into the channel just ahead of the semi-annual price increase. They called this "loading." The channel liked it because they got cheap product to sell at the new higher prices. The tobacco companies liked it because it boosted quarterly revenues at the end of the quarter. But that boost only happens once. To show growth the next quarter, one must load even more. Over time, they were jamming huge amounts of inventory into the channel. I have never been a smoker, but apparently freshness is an issue with cigarettes and they can go stale. Eventually, the company was loading so much their sales started to drop because everyone was buying stale cigarettes.
In find this a powerful metaphor for government interventions in the economy today.
Postscript: I will give another example. In Arizona, we are on a July-June fiscal year. Years ago, some government yahoo had the bright idea to close a budget hole by passing a law that all businesses had to pre-pay their estimate of sales taxes due in July a month earlier in June. For that one glorious year, politicians had 13 months of revenue to spend rather than 12.
But to set things aright the next year, they would have to live with just 11 months of revenue. No way they were going to do that! So they did the pull-forward thing again to get a full 12 months. And they have done it every year since. It has become an institution. All this costs a ton of money to process, as the state must essentially process a 13th return each year, presumably paying overtime and temp costs to do it. All for the benefit of one year where they got the use of one month of revenue early, we have been stuck with higher state operating costs forever.
