Thursday, February 14, 2013
Rainy Day Economics
I generally agree with Paul Krugman's Keynesian economics. One part of the theory holds that, in times of recession, government should get capital moving again by spending on works projects - getting money back into the economy. The theory is that it's okay for government to borrow the money because spending can be cut and the debt repaid out of tax revenues after the economy recovers.
It's a very good theory - for the 20th century. It's not clear that it remains valid in the 21st. The theory is all fine, in theory, but it's based on a critical assumption that was reasonable in the past but may be far less certain in the future - the recovery. For this theory to work, recession must be followed by a strong, growth-fueled recovery that allows government cutbacks and generates increased government revenues to pay back the recessionary borrowings.
What happens if there is no strong recovery? America now seems trapped in a bubble economy, the legacy of its flight from manufacturing into a FIRE (finance, insurance, real estate) economy. Remember the "savings and loan" bubble, the dot.com bubble, the housing and mortgage bubble that led to today's new housing bubble and the companion energy or carbon bubble? How will America realize a strong, economic recovery out of that?
As Kevin Phillips discussed in his book, "American Theocracy", countries that shift from relatively robust manufacturing to fragile FIRE economies have increasingly poor outcomes in recovering from recessions. That makes the post-recessionary Keynesian model of cutbacks and deficit reduction ever harder to achieve.
The Pharoahs had the right idea. So did Paul Martin. The Pharoahs protected their reign against the unrest typical from famine by building grain silos and keeping them full. They employed Rainy Day economics. Paul Martin went from putting the federal budget back on an even keel and eliminating the deficit to building up the federal treasury, again Rainy Day economics.
Along came Steve Harper with his dank ideology and he proclaimed the nation's security blanket a misappropriation of taxpayer property that he proceeded to squander by GST cuts. So successful was Harper at de-funding our federal government that, when he got overtaken by the 2008 fiscal meltdown that he tellingly didn't see coming, he had to go to the markets to borrow money for a stimulus budget. Now Harper continues to run deficits in hope of a future strong recovery even as he imposes austerity measures to dim the prospects of that recovery.
If we do get out of Harper's mess and our economy recovers enough to clean up our federal debt we shouldn't pass up the chance to reinstate Paul Martin's prudent approach, Rainy Day economics. It's the other half to making Keynesian economics work.