Wednesday, October 15, 2014

Austerity? What Austerity?

The Paul Krugmans of the world keep telling us that the global slowdown is due to "austerity," meaning government spending cuts and tax increases.

Only one problem, writes Brian Westbury in The Wall Street Journal.  In Europe governments are spending more of GDP than they did at the height of the Crash of 2008.
Euro area government spending was 49.8% in 2013 versus 46.7% in 2006... France spent 57.1% of GDP in 2013 versus 56.7% in 2009, at the peak of the crisis.
Then there's quantitative easing.
The Fed's monetary base (currency in circulation and reserve balances) has grown 28.8% per year since QE started... But M2 [the actual money that you and I use], the measure Milton Friedman told us to watch, has grown just 6.7% this year. 
Then there's Janet Yellen, Chairwoman of the Federal Reserve Board. In 2008, as president of the San Francisco Fed, she argued that
As Japan found during its quantitative easing program, increasing the size of the monetary base above levels needed to provide ample liquidity to the banking system had no discernible economic effects. 
So why would the doughty Janet be following this policy that she rejected in 2008? The truth is, according to Reinhart and Rogoff in This Time is Different, it takes about ten years to recover from a full scale financial meltdown like the Crash of 2008.  All the froth about "austerity" and quantitative easing misses the point. After a big crash we are all poorer than we were and we all need to get to work to repair the damage to our fortunes.

In my view the purpose of quantitative easing and zero interest rates are to keep the federal government's interest rate expense down. If you go to usfederalbudget.us's interest page you will see that if you bump interest rates up to 5% then the federal government has to pay nearly $1 trillion a year in net interest instead of the $250 billion right now. That would add $750 billion to the annual deficit, and would require the government to start implementing spending cuts.

Look. The whole point of Keynesianism is that the modern welfare-state government keeps getting itself in a jam. Its supporters naturally demand a continuance of their accustomed handouts, as regime supporters have done since the dawn of time, and the government obliges. It must oblige until the Mongols sweep into Northern China from the Asian steppe, because no ruling class can survive the rebellion of its supporters. Keynesianism was developed to provide an intellectual shine to this bankrupt policy.

In just this one thing we see the bankruptcy of the welfare-state paradigm. It must chain the whole economy to the needs of its supporters. In the case of the Obama Democrats this means wholesale financial repression on the mom-and-pop savers in order to keep the entitlements and the crony capitalist handouts going.

The one thing the Obama Democrats cannot countenance is reform, to reverse the "ratchet" of increased government spending on their supporters.

This cannot end well.

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