Stimulus, the road to serfdom

Policy-makers around the world are debating whether to implement a round of stimulus spending to combat high unemployment and weak growth rates. A contempt for data is always bad policy. A look at the available data shows increases in government spending from 2007 to 2010 and subsequent changes in growth rates.

“The four nations: Estonia, Ireland, The Slovak Republic and Finland, with the biggest Stimulus Programmes had the steepest decline in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).” (The Wall Street Journal, Aug 6, 2012). Yet the debate rages between those who favour economic stimulus as a cure for a frail economy and those who forcibly argue that it is precisely the stimulus which is the cause!

Frequently, the justification for getting stimulus money—apart from the large percentage which will automatically go into higher wage demand by powerful union leaders, accompanied by the customary fall in productivity (a cultural requisite in Trinidad); is the absence of work or income, such as companies that fail, like Clico; or all those in the State sector: Petrotrin, T&TEC, WASA, E-technologies, National Flour Mill, etc, who are cushioned by billions in annual subsidies—a kind of economic pension scheme. Guaranteed!

Simply put, governments taxing people more who work and then transferring that money to State loss-makers—a kind of reverse racing pool—where money is only transferred from losers to winners—is a sure recipe for less work, falling output and increase unemployment. In spite of this, the notion that additional spending is “stimulus”, and less spending equals “austerity”, dies hard. Seldom does anyone think where the money—stimulus—comes from.

Politicians, seeking a disposable initiative to generate headlines, in a nation with an attention-deficit syndrome, wrongly believe additional government spending adds to aggregate demand. Accurately put, all government spending comes with a deficit—double-entry book-keeping with a vengeance. All government spending does come with debits; every additional government dollar spent is an additional dollar taken from the taxpayer! All “stimulus” money equals, on a dollar-for dollar basis, every minute of every day, a depressant imposed on those who have to pay for these transfers, plus the billions in annual interest payments.

“In many countries, an economic downturn, no matter how it’s caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.”( Professor Arthur Laffer, Wall Street Journal, A13, Aug 6th, 2012.)

Professor Robert Barro, Paul M Warburg Professor of Economics at Harvard University said “large spending plans should be undertaken only if they can be justified financially on their own merits. Any other spending plan end up costing the country more than the initial outlay, as interest on the debt has to be paid and the deficit cleared. In the long-run you have to pay for it. The medium and long-run effect is definitely negative. Eventually taxes are going to be higher—another negative effect.” (Daily Telegraph, London, 06-07-2011).

Stimulus spending in the US:
The Stimulus Package was a repeated grasping for an economic silver bullet, with other peoples’ money. It was a singular act of economic slumming; a collaborative delusion. Finally, “The Feds weighed in against any more action:”I am very dubious. There are diminishing returns to these actions”, said Charles Plosser, President of the Federal Reserve of Philadelphia, supported by Johnathan Wright, a John Hopkins Economist. (the Wall Street Journal, August 17, 2012.)  

Japan’s attempt “to “Jump-start” the economy through deficit spending have fallen flat.” (The Economist, Aug 19, 2012.) “Christina Romer, Head of the Obama’s Council of Economic Advisers, admitted she was optimistic”. She “said my biggest regret was that we didn’t do more. We needed a second stimulus”! (Grabell Michael “Money Well Spent? p 190, 2012, NY.) The Alcoholic always ask for just another drink! Ms Romer resigned and returned to academia.

Adjusted for inflation, the Stimulus package cost more than the Iraq War, The Louisiana Purchase, The Manhattan Project (“The Making of the Atomic Bomb”, Richard Rhodes, 1986, 884pp.) and the Marshall Plan for the post-war rebuilding of war-ravaged Europe. (See Grabell, p 190). Currently, there are over 23,000,000 unemployed in the United States—a rate of over 8% for 42 consecutive months!

Brazil’s Stimulus package of $66,000,000,000 “faced with its Byzantine state bureaucracy could run the projects into the sand.” (Financial Times, Aug 17, 2012). The Civil service bureaucracy in Trinidad is diseased! All the Government’s data on inflation, GDP, etc are wrong! (IMF Country Report No 11/73, Mar 2011) No organisation could function efficiently with erroneous data; wrong perhaps for a generation! In this way, governments become the Problem; not the solution. “Permanent Secretaries are delinquent. They are not doing their jobs,” as the Public Service Commission reported. (Trinidad Guardian, 27/3/2012).

Fighting the cure tarp:
Obama’s Troubled Asset Relief Programme—the stimulus—as recorded above—and the inflationary actions of the Federal Reserve were all superficial. Governments can slow the fall in housing prices. So it was done. TARP could keep people in the homes, by delaying foreclosure; and thus making homeowners even poorer; that too was done. Fannie Mae and Freddie Mac increased subsidies, thus keeping demand higher than they would have been.

The Federal Housing Authority in subsidising motgagees to the point where people were putting down zero per cent deposits—this applied upward pressure on house prices, further slowing the fall—a part of the Disease! (See Schiff Peter, “The Real Crash” 2012, St Martins Press, NY)

But falling house prices are part of the Cure! Inflated prices are the disease! Along the same lines, the Government kept interest rates low, which contributed to the disease. High interest rates are part of the cure! It rewards and encourages savings; reduces inflation, as there is less money chasing fewer goods; encourages falling prices and wages, are all part of the cure!  

In a depression, falling prices are a rare boom! They are saving graces for the unemployed and a protection for their depleted savings. Yet, the Government did everything it could to prevent prices falling—which would increase purchasing power and increase the value of the currency. In other words, the market was trying to cure the economy, and the Government won’t let it—at a cost of $3,000,000,000,000 (three trillion) increase in the National Debt in under four years!

Government spending is the opposite of Investment: Tarouba ($1,700,000,000), and counting; ISCOTT ($TT 6,500,000,000, at current prices) The Blimp; two international Conferences, $30,000,000 on the unbuilt church at Guanapo. Billions to Trinidad Cement, where subsidies have hardened into an annual hand-out; billions to WASA: “The most inefficient and corrupt organisation in South America.” (The economist, 2008). $11,000,000 for taxi fares at UTT! The Water Taxis, Billions to dysfunctional state enterprises, etc.

It actually destroys wealth, by allocating severely scarce resources to unproductive sectors of the economy. It is a major stimulus to Inflation, but does not create any additional “spending”! The magic impact of new money stimulus has no impact on the production of goods and services, or resource allocation or income distribution—income is never distributed; it is earned!

None of the variables will be altered as a result of the additional money. It will have an impact on prices; as it affects all prices simultaneously, and to the same extent—every conceivable statistical average of prices will go up by the same extent. (see “Paper Money Collapse”, Detlev Schlichter, 2012, John Wiley, p 87.)

Consequently, these massive stimulus, sold to the public, as a near-term correction of GDP is false. By obstructing the market from liquidating these misallocation of capital, and correcting the mispricing of assets, created an illusion of normality. It distorted market signals and further encouraged the accumulation of imbalances.

Dr Errol Mathura

Canada