Message to Bill English…

I have a message to Bill English from Calvin Coolidge:

As U.S. President in the boom years of 1923 to ‘28, “Silent Cal” was a fan of balanced budgets. Not so Bill English. As even Russel Norman was heard to say yesterday, “here is the reality of Bill English’s tenure as Finance Minister: he does know how to borrow…”:

You might say…

(Russel, of course, would prefer a government that prints.  But that’s another story.)

Anyway, a lot of the so-called learned commentary yesterday about Bill English’s failed surplus was very revealing, being as so much of was a discussion of the alleged “tensions” between the government need to cut spending, and the alleged negative effects on economic growth of cutting spending.  Virtually to a man and a mainstream woman, the commentariat opined that the economy needs government spending to thrive, and cutting spending back would throttle it.

There are certainly some alleged economists who need throttling. It’s as if a balanced budget were a “balance” between sucking the country dry and allowing it to progress – with the blood-sucking actually reviving the corpse instead of draining it of all life.

“Silent Cal” would be appalled.

This problem of utter economic ignorance is crystallised in the mainstream word “austerity.” “Old fashioned ‘living within your means’ has somehow been re-labelled as ‘austerity,’” says Vern Gowdie at the Daily Reckoning. “This is an indication of how far we have drifted away from common sense.”

Politicians lack the ‘male equipment’ to make the really tough calls on spending cuts. Society has become so pampered it doesn’t recognise the party is over and refuses to countenance any cut backs. Politicians therefore look for creative ways to dig deeper into our pockets to extract more tax dollars —aimed invariably at ‘the rich’. Who are ‘the rich’? Anyone with more money than the person asking the question. ‘Everyone else must pay except me’ is the unspoken creed.
    The problem with higher taxes is they never raise the revenues the treasury boffins predict. People become creative and reorganise their affairs to minimise or even skirt the new tax regime.
    The budget dilemma we are seeing in Australia [and New Zealand] is being played out across the developed world — too many promises and not enough money.
    Budget deficits are locked in for years to come.
    The problem is Western countries all have different levels of existing public debt (as a percentage of GDP) — Japan around 240%, US 100%, France 95%, NZ 36%, Australia 30%.
    To finance deficits, these economies have been printing money and buying government bonds, or making money available to investment banks to then channel back into the bond market.
    There simply aren’t enough dollars, yen, euros, or renminbi to fund these deficits without printing more. This is madness, yet no one seems to notice. If they do, they don’t seem to care.
    Perhaps this is because the system has not yet succumbed to economic gravity. So we keep up the illusion.

The illusion is maintained by the economic nonsense that government spending boosts the economic system. The economic nonsense is maintained by the simple fact that economists’ measure of economic health, GDP, is defined to include government spending. So the more of it you have, the more alleged growth you are alleged to have. Or as Robert Murphy puts it, the stimulus simply boosters assume their conclusions.

With such flawed measurements, with such blatant economic error built in – with the error-mongers themselves in charge of the economic system -- is it any wonder the economic world is in such dire straits? When there is such a fundamental flaw in such a “"fundamental issue.

The problem with these ostensibly scientific and empirical measurements is that GDP itself is defined to include government spending. As they teach in any introductory macro class, the expenditure-based formula for GDP is

GDP = C + I + G + NX,

where C and I are private consumption and net investment, G is government spending, and NX is net exports (gross exports minus gross imports).
    Now we see the problem. Even if we set aside the serious theoretical and practical difficulties with the aggregation necessary to estimate these figures, we are still stuck with the fact that the above formula is an accounting tautology, not an economic theory. Yes, other things equal, an increase in government spending G on the right-hand side will make GDP on the left-hand side increase dollar for dollar. The whole argument, however, centres on whether other things will remain equal.  [And it ignores how little “I,” how little actual productive investment, is actually measured!]
    For example, in a depressed economy with excess capacity, the typical Keynesian will say that an increase in G will cause private consumption and investment to increase also, so that a dollar of extra government spending will cause GDP to rise by more than a dollar — the famous Keynesian multiplier.
    In contrast, the typical Austrian or Chicago-school economist will say that an increase in G will tend to make private-sector spending fall by a greater amount, so that a dollar of extra government spending will cause GDP to fall. (We could get the confident support of free-market economists for this conclusion if we stipulate that the extra government spending is financed through higher taxes, which destroy more private after-tax income than they raise in extra revenue.)
     Moreover, even if “total GDP” rises somewhat because of an increase in government spending, that wouldn’t be a good thing, because $10 million spent by politicians is not nearly as likely to channel resources to valuable uses as $10 million spent by private investors.
    After this discussion, we can see why pretty charts … showcasing government spending’s “contribution to GDP growth” quarter by quarter don’t really mean anything. It’s the same for the ex post “empirical” analyses that concluded that the Obama stimulus package “saved or created” such-and-such million jobs. The underlying models that generate these estimates assume a Keynesian world, and thus cannot test whether the Keynesian model is correct.
    The critical yet missing piece of information in these analyses is the counterfactual, to know what the size of the economy and level of employment would have been in the alternate universe where government spending had taken a different course.

We can however look at cases in which govt spending shot up because economists said it would “stimulate,” and when govt spending was held back, despite economists bewailing its lack. Such cases are the U.S. “stimulus,” and the U.S. sequester.

From a naïve, “let the facts speak for themselves” perspective, the Obama stimulus package clearly hurt the economy. Remember that unemployment shot up higher with the stimulus than the Obama team warned people would occur without the stimulus.
    The exact opposite happened with the so-called sequester. For example, the firm Macroeconomic Advisers, using a Keynesian model, predicted that the spending cuts would knock 1.3 percentage points off of second quarter 2013 growth, and 0.6 percentage points off of third quarter 2013 growth. Here’s what really happened:

It’s the mirror image of the Keynesians’ stimulus blunder. The economy grew faster with the sequester than the Keynesians said would occur without the “drag” of the spending cuts. ..

So, Bill, if you want to ever deliver a budget surplus, how about delivering some real spending cuts.

And don’t let those advisers of yours tell you it will be bad for us.