Saturday, 27 February 2010

Och ai Hamish.

As I pointed out yesterday, two defective articles appeared on Feb 24th by normally reliable U.K. economics commentators, Martin Wolf and Hamish McRae. I dealt with the former yesterday. Now for Hamish.

He starts well: “Stand by for a double dip, and a double dip lead by America”. Agreed.

Hamish’s reason is simply that various forms of stimulus are coming to an end in the U.S. He doesn’t identify the reason, which is that Congress has allowed a finite amount of stimulus, but is balking at any more. Reason is that Congressmen think government accounts work like household accounts: the books must balance in the long run, and all that nonsense.

The books haven’t balanced for the last century in the U.S., nor anywhere else. This has not proved a long term problem.

In his concluding paragraphs, Hamish claims:

I know it seems ridiculous that if governments can rescue banks and central banks can pump in so much money that they turn around house prices, that they cannot also ensure that the recovery is solid and sustained. But they can't.

We are this spring seeing the limits of government power, and we are seeing it in the US, here in Britain, in Europe, everywhere. You can pile in additional demand for an economy for a while. That has happened right around the world and it has been successful. But you cannot follow those policies indefinitely, and if you try you reach a tipping point where your actions start to have perverse effects. I suppose that is where Greece is now.

False logic. There is a world of difference between government borrowing AS A SUBSTITUTE FOR TAX which is what Greece has done over the years and the various stimulatory measures which governments can take to escape a recession (which may or may not include increased government debt).

Certainly one of the popular alleged ways of escaping a recession is Keynsian “borrow and spend”. But this is a daft policy, as I point out here.

Or as the German academic Claude Hillinger puts it (p.3).

An aspect of the crisis discussions that has irritated me the most is the implicit, or explicit claim that there is no alternative to governmental borrowing to finance the deficits incurred for stabilization purposes. It baffles me how such nonsense can be so universally accepted. Of course, there is a much better alternative: to finance the deficits with fresh money.

Of course, as I pointed out yesterday, producing “fresh money” involves a nominal increase in the government borrowing. But as I also explained yesterday this form of borrowing is really nothing of the sort.

In short, assuming the recession is dealt with by additional “fresh money”, borrowing (unlike the situation in Greece) is not an obstacle.

This is not to say there are no obstacles. There is an obvious obstacle to “fresh money” or “money printing” at some stage: inflation. (Plus where a relatively small country with its own currency wants to attempt more reflation than other countries, there is the possibility of its currency losing value too quickly relative to other currencies. But this is not really relevant here because Hamish is considering “countries” not an individual country).

Conclusion: government debt is not an obstacle to further stimulation.

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