An alternative to popular faith
Listen to Richard Koo’s tape at http://www.ritholtz.com/blog/2009/11/richard-koo-great-recessions-lessons-learned-from-japan/comment-page-1/#comment-233008. He says some of what I have been saying for the past 15 years. Federal deficit spending is absolutely, positively necessary for economic growth.
I hope our government leaders listen to him, though I doubt they will. They sure haven’t listened to me. The reason: The debt hawks have the nation worried, because they equate federal debt with personal debt. So you hear that your grandchildren will have to pay the debt, and large deficits cause inflation, and surpluses are more prudent than deficits — none of which are true.
So, we struggle with trying to provide universal health care, which the government can and should provide, while debt fear negatively impacts the physical and financial health of millions.
Deficit spending grows the economy and can provide health care, too — and it never needs to be paid back. Never. But Congress, the President and most of the economists simply don’t get it. They don’t even look at our economic history, which repeatedly shows long-term deficit spending is necessary for long-term economic growth.
Rodger Malcolm Mitchell
5 thoughts on “-Richard Koo–If you don’t believe me, believe him”
Why has Japanese GDP gone nowhere in twenty years despite all the govt spending?
Japan’s GDP in 1990 was about $3 trillion (in U.S. dollars). Today, twenty years later, it is about $4.9 trillion, an average annual increase of 2.5%. What would their GDP have been had the Japanese government spent less?
I haven’t done much research regarding Japan, whose economic situation is different from ours. But I do know this about the U.S.: All seven U.S. recessions in the 40 years following the end of the gold standard, have come on the heels of reduced deficit growth, and all seven recoveries have come during increased deficit growth. Meanwhile, federal tax rates have declined.
What does this mean? It means increased deficit growth stimulates and reduced deficit growth depresses. It also means the debt hawks’ repeated statements that deficits are “unsustainable,” will be “paid for by our children and grandchildren,” “divert resources from the private sector” or “hinder private saving and spending” simply are not true. In fact, the reverse is true.
Unfortunately, the debt hawks are so convinced of their position, they feel no need to look at data, but instead rely on what their intuition tells them should be true. You can read more about this in many of the other posts on this site, and at http://www.rodgermitchell.com
Rodger Malcolm Mitchell
An example of what piling up debt does for an economy. This from Mish’s blog:
John Mauldin: Some readers wrote this week telling me I am far too worried about a rising government deficit. Right now we are at roughly 42% of debt to GDP. In 1989, at the start of the lost decades, Japan had a debt-to-GDP ratio of 51%. Now it is at 178%, and the world has not come to an end for them. In fact, they are running massive government deficits today and plan to do so for a long time. Why, I am asked, can’t we be like Japan?
In 1989, private Japanese debt (businesses and consumers) was at a debt-to-GDP ratio of 212%. Now it is at 110%. And the total of both government and private debt is roughly the same (within 5%) of where it was 20 years ago. Along with running large trade surpluses, private debt has been exchanged for government debt. Savings have fallen from the mid-teens to about 2% today, as the country is rapidly aging and now using its savings to live on. And how much has all that government spending helped the country?
John Mauldin Quoting Hoisington: For all intents and purposes, Japan has had no growth for almost two decades. Their nominal GDP is where it was 17 years ago, and the number of employed people is at 20-years-ago levels. An aging population has masked their unemployment problems, as older citizens retire. Their savings went to government debt. Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent.
Rather than creating an overly-long post, let me focus on this: “Taxes were raised numerous times. Since government deficit spending has no long-term multiplier effect, growth has been nonexistent.
Obviously, raising taxes “numerous times” has a negative effect on an economy. That clearly was a bad move, presumably brought on by the debt hawks’ mistaken belief deficits should be minimized.
More important is your comment about “long-term multiplier effect.” The context indicate you believe this multiplier effect is beneficial. However, it begs two questions:
1. When the federal government deficit spends, the money goes into the private sector, which first deposits the money in banks. How does this not result in a multiplier effect?
2. To say the multiplier effect benefits the economy is to say additional money benefits the economy. How then does federal deficit spending not add money to the economy and not benefit the economy?
Rodger Malcolm Mitchell
To answer your questions, when the consumer is tapped out and business is afraid to borrow, there is no multiplier effect and this is exactly what is going on with the economy at the present time. Richard Koo describes this process in his book. He calls for the government to simply spend more money.