Columnist at The Globe and Mail Says Governments Should Spend More, Not Less

Eric Reguly is out with another typical Keynesian analysis of the European debt crisis in today’s edition of The Globe and Mail.

He suggests that debt-ridden governments should be spending more, not less:

Britain’s response to the downgrade threat was, of course, to treat Fitch as a god to be worshipped and obeyed; there will be no let-up on the austerity measures. “This is a salutary reminder as to why Britain needs to deal with the enormous debts and deficits we inherited, why we have got to stick to those plans,” said the Treasury’s chief secretary, Danny Alexander.

The problem is that the British economy contracted in the fourth quarter. Vigorous austerity could easily push it into recession, which would, in turn, demand more austerity as rising unemployment and lower tax income make a mockery of budget deficit targets. Repeat in Italy, Spain, Portugal, Ireland and Greece, even France, where flat growth or contraction is being reinforced by aggressive austerity.

If governments are not spending, the slack has to be taken up by the private sector. But deleveraging means that the private sector in many countries isn’t spending either. Trying to unload your debt when your economy is in the tank can reinforce the financial and economic crisis, not eliminate it.

Keynesian journalists like Eric Reguly view austerity – a reduction in government spending – as a measure that exacerbates deficits. It is assumed that less government spending will decrease aggregate spending thereby causing a recession. The decreased income tax revenue wrought by the recession is combined with increased government spending on social welfare programs. Voila! The deficit has worsened.

But notice how he doesn’t consider where the governments’ spending money came from in the first place. Let’s consider this in more detail:

  1. Taxes: if it came from the private sector via taxation, the money may now be spent by the private sector – this does not cause a recession.
  2. Borrowing: if the government borrowed it, the money may now be lent to producers or consumers, or spent instead – this does not cause a recession
  3. Inflation: if the central bank created the money out of thin air, the money may be lent to someone other than the government – this does not cause a recession
Economic analysis must pay heed to that which is unseen. To paraphrase Winston Churchill: Eric Reguly’s notion of taxing or borrowing your way to prosperity is akin to standing in a bucket and attempting to lift yourself up by the handle. If he proposes that governments inflate their way to prosperity through money-printing, then he is advocating the same delusional ‘something for nothing’ policy that has caused the debt crisis in the first place.

 

 

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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