Across the globe, central bankers and proponents of monetary policy frequently lament the perceived inadequacies of fiscal policy. They argue that governments need to implement larger and more direct stimulus programs. Merely relying on monetary strategies, they assert, is not sufficient.
It seems that virtually every week, discussions between the monetary and fiscal authorities grow increasingly critical. The money creators argue that government spending is not contributing enough to bolster GDP. They call for increased expenditures and significant structural reforms to stimulate overall demand.
Not long ago, before the G20 summit, the Organization for Economic Cooperation and Development (OECD) stated that a return to robust and inclusive economic growth necessitates an urgent policy response, which includes coordinated actions in monetary, fiscal, and structural realms. Additionally, the OECD report emphasized that “the need for structural reforms, paired with supportive demand policies, is vital for sustainable productivity increases and job creation.”
Weeks later, on March 10, Mario Draghi, President of the European Central Bank, echoed these sentiments. During an ECB press conference, he emphasized that “all Eurozone nations should aim for a more growth-oriented set of fiscal policies.”
Moreover, former Federal Reserve Chairman Ben Bernanke also lent his voice to the discussion. In a recent blog post for the Brookings Institution, he noted that “evidence suggests that monetary policy in the U.S. and other advanced economies is nearing its limits, making it increasingly essential for the response to an economic slowdown to include other measures—particularly fiscal policy.”
Self-Financing Deficits
In economic discussions, fiscal policy and structural reforms often refer to increased deficit spending. Essentially, this means relying on borrowed funds to support government initiatives.
Central bankers contend that their provision of low-cost credit is becoming stuck in commercial banks, leading them to advocate for the government to aid in alleviating this issue. They urge more deficit spending to inject funds into the economy through infrastructure projects, public transport systems, and other major initiatives. If those measures fail to yield the desired results, they suggest more direct interventions, such as distributing money directly to the public.
The rationale behind advocating for fiscal stimulus is fairly straightforward: by borrowing against future revenues to spend today, the government can drive economic growth. However, this approach inevitably leads to elevated public debt levels.
But economists, along with policymakers, reassure us—unlike what Dick Cheney has famously stated—deficits don’t truly matter. According to them, it is possible to enjoy economic benefits without repercussions. They argue that significant growth would subsequently yield increased tax revenues, providing governments with the means to alleviate deficits and decrease debt.
Does this reasoning seem flawed to you? The logic posits that deficits will somehow finance themselves, allowing the government to purchase its path to prosperity.
Deficit Spending is Not the Answer
This strategy might appear appealing, but the reality is far less promising. We have yet to witness instances in which expanded government debt has fostered an economic boom, effectively allowing governments to escape their debt burdens. In fact, debt tends to accumulate, eventually leading to repudiation through either default or inflation.
Despite this, many remain convinced that increased deficit spending can reinvigorate the economy. They believe that the government’s fiscal approach has been excessively cautious. However, to claim that fiscal policy is inadequate is to overlook the facts.
In the United States, the national debt has surpassed $19 trillion—approximately double what it was a decade ago. For the 2016 fiscal year, the projected deficit is set at $616 billion. While this figure has decreased from the annual deficits exceeding a trillion dollars between 2009 and 2012, at 3.3% of estimated GDP, it hardly qualifies as frugal.
In the European Union, numerous nations are also engaging in alarmingly reckless deficit spending practices. The EU’s stability growth pact stipulates that countries should maintain their deficits within 3% of GDP. According to Bloomberg, five out of 28 EU nations are anticipated to breach this guideline this year, with three more on the cusp of doing the same.
This marks a reduction from a staggering 22 countries violating the rule in 2010. Nevertheless, excessive deficit spending continues. Take Japan, for example, where its 2016 deficit is projected to reach 6% of GDP.
The underlying issue is that central bankers are eager to shift the blame for their unsuccessful policies. Their calls for heightened deficit spending serve as a convenient distraction from their shortcomings. Regardless, this mindset is fundamentally flawed; deficit spending is not a viable solution.
Where have the principles of sound money, balanced budgets, living within one’s means, and saving for future needs gone?
Such prudent ideas fell out of vogue three generations ago. However, we suspect that they will eventually resurface, regardless of the preferences of the economic planners.
Sincerely,
MN Gordon
for Economic Prism
Return from Deficit Spending is Not the Answer to Economic Prism
