As noted in prior posts the most recent G8 meeting in Camp David will be remembered as the time the term “deficit spending” was eschewed for the term “growth” by world leaders. Likewise “balancing budgets” has become “austerity.”
Hunter Lewis discusses the insanity of the situation HERE.
As Europe has unraveled EU leaders have begun to panic. With the election of Hollande in France the pols of the Continent sense that a move must be made to save their skins. Sarkozy was shown the door because he was perceived as too much in the camp of “austerity.”
At the core of the debate is whether deficits matter. Our esteemed war VP Dick Cheney is famous for saying that they did not. He and Paul Krugman have a lot in common. In fact Dick Cheney and most of today’s world leaders agree it seems.
These leaders see even more trouble brewing. Sarkozy got housed. Greece is likely to exit the Euro zone soon if it doesn’t burn to the ground first. Interest rates continue to rise across the southern tier of the EU. This recession thing is just no fun. And look over at the Americans—they are just spending away with no (perceived by many) consequences. It is time for some good old fashioned deficit spending, er, I mean “growth.”
Cancer is a growth.
Debt does have consequences even for countries with a reserve currency such as ours. If it didn’t then why don’t we just build a fleet of 10,000 aircraft carriers while paying everyone $1,000,000 a year. Shoot, why stop there? How about $10,000,000 each. And really why make anything at all? No need for aircraft carriers, or pyramids, just send checks! We’ll all be rich I tells ya!
Even Paul Krugman would probably baulk at that. This is interesting because the above is the logical extension of much of his economic case. At what point does Krugman go, “OK we need to stop spending because this is really going to mess up the economy.”
We can assume that it is somewhere between where we are now (God help us that the current state of affairs is the baseline) and sending $10,000,000 checks to everyone every month. But again, where is this point for Krugman and his neo-Keynesian, Cheneyist, brethren? I think the answer to that question would be very interesting.
Keynes argued that government spending should be used to “prime the pump” of the economy. That government spending would spark the engine, after which the economy would be sustainable. (At least this is part of his argument.)
The neo-Keynesians don’t seem to much care about the economy being sustainable without massive infusions of government money. The fatal flaw of Krugman and company as I see it, is that they have no end game. What constitutes success? Is another day without a reversion to the mean a success? I’d be willing to bet that for many it is. But with each day that the economy is propped up the distance between the current ersatz economy and the real economy widens. Sooner or later the façade will crash down and the pain will be felt. But now the economic and political pain will be excruciating, versus merely almost intolerable.
So spend away Europe (and America); I’m sure it will all work out just fine.