Yet another op-ed piece (by a member of the President's Economic Recovery Advisory Board, no less!) at the New York Times calls for more money to be poured from the government to the economy to stimulate it. The same false analogies are drawn with the Great Depression and the need to boost demand and create new jobs is invoked. But how cannot all these people, trained in the '70s, when demand-side economics was the undisputed orthodoxy, see that any sort of artificial boost to demand cannot go on for long? Or that an ever-increasing deficit cannot be sustainable?
Paul Volcker, who is also an advisor to the current President, kept interest rates very high in the first couple of years of President Reagan's administration, in order to keep the money flow low and combat inflation. For some time unemployment was skyrocketing - and the economy actually contracted. 1982 and 1983 were dark years for many people. And the change which came about in mid-to late 1983 and was sustained until 2000, essentially, was such, that in the 1984 presidential campaign Reagan could plausibly claim that it was morning again in America.
What was the effect of Volcker's policies? That with money supply and demand kept low, the market indicated what the real needs of the consumers were. It drove, essentially, businesses to sound investments. Moreover, the businesses that survived the contraction proved that they had sound financial footing. They could be trusted to extend credit to by banks and other businesses, they were trustworthy. It became much easier to expand one's business, hence to create more jobs; since these jobs were in companies that were creditworthy, any temporarily adverse financial climate would not jeopardize most of them. Employees knew that they could count on their employer continuing to do business - and that provided them essentially much more job security than any regulation or state intervention. Workers could plan for the future, buy a house on a mortgage (which could be repaid) and actually increase demand, which is in essence what the prevailing economists of the '70s wanted to accomplish through shortcuts.
What happens if there is another stimulus package? Money will be spent on things (I can't even call them goods or services) that nobody needs - which only the government, in its "wisdom", considers not important, but somehow defensible as having some sort of usage. Ms. Tyson, in the op-ed mentioned above, proposes that the money be spent on infrastructure (railroads, highways, etc.). There is something the government could actually do to improve infrastructure, without spending its own (= i.e. the taxpayers', lest we forget that) money: seek private financing in these projects - issue bonds, to be repaid by the people using the infrastructure, by tolls or by a percentage of the tickets in the new railways, which might be constructed (when talking about the federal government, this applies only to interstate highways or railroads - otherwise, it is for the States themselves). The global market will assess the feasibility of these projects on its own and if the (state or federal) government can attract capital and the bond issue is covered, so much the better. If the federal government insists on another stimulus package, then once again a match for pork between Senators and Representatives will ensue, businesses or academics or other individuals with political connections will usurp the taxpayers' money and the artificial increase in demand will only be sustainable, after an initial hike, by another stimulus package.
No comments:
Post a Comment