A bonanza of fool’s gold

PMC-ZacharyKarabell-500x500Dr Zachary Karabell, a well-known investment advisor, author and commentator, reminds us, in an article in Foreign Affairs, that “Most Americans learned in school that the New Deal, President Franklin Delano Roosevelt’s sweeping response to the Great Depression, was a turning point in U.S. history. For 90 years, the progressive projects and reforms collected under its rubric defined the role that government could play in society and the manner in which government spending could be used to combat economic crises. The New Deal set the standard for big government intervention …[but] … Then came the pandemic of 2020 … [and] … In the past few weeks, the U.S. Congress and Federal Reserve have moved to inject more than $6 trillion into the U.S. economy. European governments and the European Central Bank are spending and lending trillions more. Norway, Italy, France, and the United Kingdom are directly subsidizing private payrolls. All together, these efforts will amount to at least $10 trillion, or a quarter of annual economic activity in the United States and Europe. Asian states including China, Japan, and South Korea are undertaking similar efforts at equivalent scale.” Canada is, of course, also spending on those same scales.

He then makes what I think is an absolutely vital point: “Governments, in other words, are spending as if there will be zero economic output between now and sometime this summer,” he says, and “In the coming months, the bonanza of public spending will blur the lines, never clear to begin with, between the public and private sectors and transfer a large portion of the global economy onto government balance sheets. This level of spending has no precedent in history—not even close. Not in war. Not in peacetime. Not ever.” World leaders, some of whom I trust …

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… and others who I think are fools are worse …

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… are taking unprecedented actions. “No one can say for certain if such efforts can save the U.S., European, or global economies,” Dr Karabell says, “but there is reason to think they might. Either way, on the other side of this crisis, the supposed laws of government spending and lending will need to be rewritten from scratch.

Zachary Karabell provides a brief history lesson: “On May 28, 1934, the British 220px-Keynes_1933economist John Maynard Keynes met with President Roosevelt at the White House. With the New Deal in full bloom and Roosevelt embracing a level of government spending and intervention in the economy that was then unprecedented in peacetime, one might have expected Keynes to commend the U.S. president for putting into practice Keynes’s own recommendations for how to escape a deep depression. Instead, the economist told Roosevelt, genially and respectfully, that he hadn’t done enough …[and] … A few days later, Keynes wrote an op-ed in The New York Times arguing that in order to lift the United States out of the crevasse of the Great Depression, the Screen Shot 2020-04-18 at 08.12.51government would have to dramatically increase spending and allow for higher deficits. But that was a bridge too far even for Roosevelt, whose administration was already doing more than any previous administration to prop up demand, create jobs, and restore confidence in the economy. For the next five years, spending levels remained roughly the same, totaling roughly $700 billion in today’s dollars for the whole period. And while the New Screen Shot 2020-03-19 at 09.13.31Deal kept the slump from getting worse, it never quite restored growth and prosperity to pre-Depression levels.” The same sort of thing was done, albeit a bit more cautiously, in Canada by the Mackenzie-King government. In fact, the military barracks, in Kingston, (Vimy Barracks) where I spent several years, (like ones in Calgary (Currie Barracks) and Trenton, ON) were built, as public works projects under King’s direction.

Later government spending programs, some of them outside the United States, were just as ambitious and sometimes more so,” Dr Karabell says, and “In the aftermath of World War II, the United Kingdom created a national health-care system. Nordic countries followed the United Kingdom’s example, and eventually the rest of Europe did, too. Europe also invested in extensive public education and housing programs, partly to heal the ravages of war and partly to hold the tide of communism at bay. In the United States, President Lyndon Johnson’s Great Society programs sought to raise the standard of living of all Americans in the 1960s. These programs cost trillions of dollars, but … [unlike today] … they were phased in slowly over the course of decades … [then] … In the 1980s, many Western countries began to reduce government intervention in the economy. Starting with President Ronald Reagan, successive U.S. administrations attempted to cut back spending on entitlements. British Prime Minister Margaret Thatcher did the same in the United Kingdom. Even so, the belief in stimulus spending during economic crises endured. During the financial crisis of 2008–9, the U.S. government bailed out the banking, insurance, and auto industries at a cost of nearly $800 billion. Soon after, it authorized a stimulus package of similar size. European governments, hamstrung by German insistence on fiscal austerity and a European Central Bank with less power than the Federal Reserve, moved slower and spent less. The initial European Union bailout in 2008 amounted to less than $300 billion, though that figure grew over time with various central bank actions and moves by individual countries to shore up their economies.

He says that “Critics have pointed to the ambiguous results of each bout of public spending and argued that such interventions damage long-term economic health. Most economists agree that the New Deal restored public confidence and at least partially stabilized an economy in free fall, but there is considerable debate about whether it succeeded in lifting the economy out of the doldrums. The programs of the Great Society were even more controversial. They gave rise to ardent free-market views, first espoused by the University of Chicago economist Milton Friedman, that government spending dragged the economy down and that the market was best left to itself. Many conservatives have blamed Europe’s publicly funded safety net for dampening growth, productivity, and innovation. And the stimulus spending in 2008 and 2009 has been equally if not more controversial, with many free-market economists assailing what they saw as excessive and unnecessary government spending as one reason for the slow pace of the eventual recovery.” I am inclined to agree with Milton Friedman. Government spending, even on defence, is, generally, unproductive. I’m not arguing for no government nor for the privatization of defence, but I do think that people have, ever since the Great Depression, turned, more and more to government as the first resort rather than as the last one. But recent polling suggests that the vast majority of Canadian disagree ~ Justin Trudeau’s approvals are higher than they have been since June of 2017. But what has he done? Nothing, except announce more and more and more spending.

Do we need to rewrite the rules?

I think not. I suspect that, even though some experts predict a severe (far worse than 2008) but quite short recession, 2020’s spending will come home to roost, in 2021 and 2022 and pyritebeyond, and we will find that we ~ not just Canada ~ have spent ourseves into a fiscal mess that will require real austerity to clean up. The “bonanza of public spending” that Dr Karabell described is going to turn out to have left us with nothing but worthless “fool’s gold.” But we, and our children and grandchildren will be saddled with real debt that must be paid off using our hard-earned dollars.




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