Shouldn’t Do It; Couldn’t Do It Anyway

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Paul Krugman, Martin Wolf and the other big spenders are remarkably resilient. And cunning. On their advice, the world’s governments put up as much as 4 years’ worth of the entire planet’s savings to bring about a ‘recovery.’ On the evidence of the last couple of weeks, it didn’t work.

In the world’s leading economy, 8 million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale.

But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an ‘I told you so,’ moment.

In our last installment, Britain and Euroland had just turned towards austerity. Alone among the Western nations, the United States of America pledged to stay the course, continuing its program of counter-cyclical stimulus. Then, last week, the US Senate rejected a measure to extend unemployment benefits. Suddenly, we’re all austerians now.

Krugman was quick to distance himself: “as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.”

‘Spend now; cut later,’ is still his advice. But with so much spending…and so little to show for it…you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in time of private sector retrenching – makes people better off? And even if ‘spend now, cut later’ were good advice, is there any evidence that they can actually do it? None that we know of.

Based on the experience of the ’80s and ’90s, we observed last week that it didn’t seem to matter what governments did or what they said…the markets went about their business. Today, we add a further provocation.

Let us take a look back at the penultimate budget of the Clinton years:

“Eight years ago, our future was at risk,” Bill Clinton congratulated himself on Sept. 27, 2000. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion.”

The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122 billion. This was the third surplus in a quartet…the only surpluses in US budget history after 1972. That year may be significant. Before then, the world did business in dollars backed by gold; if a nation spent too much, its gold would be called away to settle its debt. After that, the US could spend as much as it wanted; the gold parked in Ft. Knox stayed put.

And so the deficits grew year after year like the children of Abraham. But in the ’90s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US. Canada. Sweden. Finland. Europe. The entire OECD. From deficits of about 1% of GDP, budgets improved, with surpluses of about 2% by the end of the ’90s. This seemed to prove that civilized men and women, even in the time of paper money, can get control of their budgets. We already knew they could ‘spend now.’ It was beginning to look like they could ‘cut later’ too.

In June 2000, Clinton administration economists predicted that the surpluses would keep coming, rising to as much as $1 trillion over the next 10 years. But the US economy seems to have gone from Heaven to Hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002 deficits were back. And they were staggering, nearly $3 trillion worth of deficits in 2009 and 2010 alone.

The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. Bill Clinton’s administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in ’94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed.

The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.

So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say ‘I told you so’…and spend the rest of his career in darkness and confirmed delusion.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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10 Comments on "Shouldn’t Do It; Couldn’t Do It Anyway"

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Stillgotshoeson
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You can swap Clinton and Vice President Gore to Prime minister Howard and Treasurer Costello and you have a similiar atory here.. They were in power in the “lucky” time of the huge resource boom, easy cheap credit and massive spending (middle class welfare to keep them in power) It was all starting to turn sour, our rates were rising people were starting to hurt and they were thrown out on their arses. The correction we were supposed to get then has been delayed Global Financial Crisis and it’s stimulus, the problems still remain, the debts are now bigger and… Read more »
Lachlan
Guest

I cant see what the libs could have done Shoes within the self imposed limits they operate in. However the labor crowd deficit spend like I cant believe. At this rate Whitlam doesn’t stand out so much anymore.

Rocket
Guest

Its funny how the mainstream media barely touch on this huge growth in household debt in Australia over the last 15 years. It will be interesting to see if a Labor Govt will socialise the losses of all the property investors and banks when house prices head south over the next few years?

Ned S
Guest

They’d want to; Or as a bank depositor I’d be all for adopting the approach that for every $50K I had on deposit, some bloke who’d leveraged it up to half a mill to buy a house owed me that house.

PS: For anyone who may not have realised, the S in Ned S stands for Shylock! :)

bearamundi
Guest

You’ll get your pound of flesh Ned!!

Things are pretty dead here in Finland at the moment, business-wise. There is alot of anger around about the Greek fraud, and there seem to be alot of companies closing down. A couple of days ago a nearby paper mill closed down, 175 jobs lost. Point is, this must wash up on aussie shores sooner or later.
Rocket commented about household debt in aussie, which is THE point. You don’t have to be Rory Robertson to interpret those charts, and does he really believe what he tells us anyway?

Ned S
Guest

Thanks for trying to make me feel better Bear – Unfortunately I’ve lost a lot of faith in our western ‘free’ markets – I guess they can eventually reassert themselves? But as a close neighbour of the CCCP system, you’ll appreciate this can also take 80 years on occasion. :)

Ned S
Guest

“80 years on occasion” – Correction 70 – ‘Course one has to allow for the possibility the Soviets may have been quicker learners than us though?

bearamundi
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Had a few cognac’s(beautiful drink esp when followed by Calsberg) too many tonight and at the risk of making a complete fool of myself “I love you Ned sob,sob!!” Nah, you’re a good bloke. Those Soviets are freaking talented and excitable!! I noted that Medved has abolished the capital gains tax for foreign investment in Russia. Have to look at fine print, but it’ll be Gazprom for me if that is the case. If and when they get their act together look out world cos’ they’ll have you for breakfast. VS aussie politicans- “yeah, our citizens are earnest enough to… Read more »
Ned S
Guest
Yes mate. I drank cognac once – I promised myself the next day that I’d never do that again – And haven’t! :) The one that would be really clever would be for Medvedev and Hu Jintao to work on resolving any little lingering differences they might have – That wouldn’t be a power bloc that many would feel to mess to with in any hurry at all I suspect? If it came to that, I’d be suggesting your mob and Ms Merkel’s lot should sign on as well – And be trying to figure out how I could get… Read more »
bearamundi
Guest

I know you are messing with me, but the other A.B right, the self-effacing one?
I reckon those boys are talking things through as well. The Chinese are too smart to be taken advantage of twice. They don’t need us and they don’t care about us…
Finland rues the day it joined the EU. Denmark stayed out and avoided the nasty side-effects.
2 Finns sit down and start drinking. After an hour one Finn leans forward and exclaims: “It’s a nice day!!” To which the other Finn replies:”Did you come here to talk or to drink?”

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