Shifting sands

In what was a banner week for the many serial inflationists and fans of Big Government out there, equity markets largely reversed the declines of the previous period on the hope for – what else? – yet more pump priming. Adding their vote of approval, fixed income players have also pushed junk and EM yields to new lows and touched new, post-Mario depths in BTP/Bono-Bund spreads.

On the fiscal front, much heart has been taken at EU Commission President Barroso’s assertion that the time has come to move beyond an exclusive reliance on ‘austerity’ and to begin to focus on encouraging growth. Indeed, such was the frenzy of press speculation whipped up on this account – not least by the bien pensant Guardian newspaper as part of its campaign to effect a change in British policy – that the EU’s official website quickly published a full transcript of Barroso’s remarks under the revealing title of “What President Barroso actually said” [our emphasis].

Needless to say, this was far less radical than anything whipped up by the journalists – the crux being that it was mainly matter of paying lip service to the ongoing need to trim debts and deficits, while calling for a range of largely unspecified microeconomic reforms and, as such, representing more of an exercise in expectations management than the signal of a clear break with the line being toed across the Rhine.

In the circumstances, however, the wilful desire to over-interpret (if not actively misinterpret) the message was far too powerful to resist, especially in the wake of the academic catfight going on over the state of Reinhardt and Rogoff’s Excel skills.

For those who have real lives to lead, the briefest of synopses of this spat will suffice and, indeed, it is only introduced here to illustrate the heedless Flucht nach Vorne mentality of the Krugmanites, ever eager as they are to peddle the line that the only reason stimulus has ‘failed’ is because there has been nowhere near enough of it, that the violation of both the principles of accounting and the tenets of good housekeeping on the part of the Provider State has somehow been too timid.

Loosely, R&R wrote a paper which suggested that high government debt is detrimental to growth but managed to overweight one particular input from little old New Zealand at the dawn of their sample. A caricature of the paper’s results had meanwhile been employed to argue that growth would evaporate the minute a 90% debt/GDP ratio was reached, but not an iota before. Since this, naturally, was being put about with as much conviction as would be accorded a cross between Holy Writ and Newton’s Third Law of Motion, the Left instantly seized upon the revelation of R&R’s faux pas to claim that the collapse of this particular straw man somehow ‘proved’ that all attempts at public economy were therefore misplaced and that Leviathan should return with renewed vigour to the fulfilment of its sacred duty to collectivise as much of the market as possible.

What larks, Pip, are to be had when positivists and macromancers fall out over their flawed pursuit of what Mises called ‘scientism’ – viz., the pretence affected by most of the mainstream that economics can be made into a simulacrum of physics or fluid mechanics! 

But, as a focus of this war of the scholastics, the whole debt issue surely misses the crucial point that debt only swells in a polity where not only is government over large to begin with, but where it is serially profligate – i.e., where the political class persists in spending more than it dares ask its electors to contribute to the fulfilment of its whims.

Given that this diverts resources away from hard-budget, dispersed-knowledge, voluntarily-contracted endeavours (hence ones which must, over time, at the very least pay their way) and into the crony-ridden, cost-plus, soft budget quagmire of top-down, fatal conceit compulsion – every one of its endless stream of programmes a would-be Great Leap Forward – can it really be a matter of dispute that existence of a high debt level should be taken as convincing evidence of a country where the petty tyrants in office and the host of public drones which they employ have enjoyed far too much sway for far too long and so have clogged up the machinery of wealth creation with a plethora of regulations, a nest of subsidies, a tangle of vested interests, and a legacy of malinvested capital every bit poisonous as that left behind by a private sector credit bubble (itself a plague which can only be transmitted by means of a pervasive state interference in the free market)?

As Thomas Gordon wrote long ago in Discourse X of his 1753 publication, “The Works of Tacitus with Political Discourses” :-

Wars beget great Armies; Armies beget great Taxes; heavy Taxes waste and impoverish the Country

Just substitute ‘Welfare’ for ‘Wars’ and ‘Public employees’ for ‘Armies’ and the argument remains in full 260 years later.

And, since you ask, evidence of real ‘austerity’ remains elusive. Government revenues, it is true, fell – for obvious reasons – in Greece, Spain, Portugal, and Ireland in the five years after 2007, but they were still up an average of 7.2% across the Eurozone as a whole. Expenditures, meanwhile, have continued to expand, rising an average of 15%. Only Ireland has here managed to record a decrease and that of a paltry 1%. Debt has, needless to say, climbed ever upward to reach a Eurozone-wide level of 118% of non-government GDP (we prefer to measure the obligation shouldered by the Ants alone, not by them and the Grasshoppers who prey upon them). Debt/pGDP itself has climbed by an astonishing median 30% in that same quinquennium.

Now it may well be that the rise in debt during this sorry period is a consequence, rather than a cause, of the growth slowdown, but the reason for the crisis which entrained this slump nonetheless lies in the too great accumulation of debt during the boom years. That much of the offending mountain of unpayable claims was initially a private sector folly is hardly to the point: what we have always maintained is that the blank refusal to renegotiate or liquidate that debt at the earliest possible stage, instead of engaging upon an obstinate course of macroeconomic Micawberism, is why the crisis has generated a grinding depression which shows few signs of being alleviated almost five dreary years after the event.

If nothing else, today’s debt stands as a testimony to economic incomprehension and political stupidity on a tremendous scale. But then again, since we are supposed to be drawing all of our lessons from what the Americans did in the 1930s, it is no surprise that we, too, have managed to perpetuate our misery, as did the monetary cranks and bureaucratic meddlers of FDR’s crackpot Brain Trust, way back then.