Thursday, October 22, 2009

In thrall to a long-dead experiment

By Patrick McIlheran

Milwaukee Journal Sentinel

We are all Keynesians now, Richard Nixon is said to have said. Too true, says Hunter Lewis, who's got a new book on how the famous British economist is still messing with your life.

And he is. We are all followers of John Maynard Keynes in the sense that lab rats, learning a maze by electric shocks, are disciples of some psychologist's theory. We no more benefit from this than do the rats.

Keynes, who died in 1946, is fashionable again. Politicians pray for his blessing on their stimulus plans, since Keynes preached that the way out of a slump was for government to spend lots of money. It should borrow vastly, said Keynes, and spend it on anything. He's the guy who first suggested paying some to dig ditches and others to refill them.

Nor just in slumps, said Keynes: Governments should print money, loads of it, to drive interest rates toward zero. This would cause a permanent boom, if only we also tax away money hoarded uselessly by rich people.

Sound familiar? Of course, says Lewis, who explains the doctrine precisely in "Where Keynes Went Wrong." Washington's embrace of Keynes went uninterrupted through Clinton to Bush to Obama. Fannie Mae's loose loans, the Fed's giveaway rates, bailouts, the porkulus: all Keynes, no matter the party.

How has that worked? "There's just no evidence" that this ever cured a recession, Lewis told me. Keynes "wasn't particular interested in evidence."

History suggests he should have been. Keynes was embraced by Franklin Roosevelt in the Depression; this stalled the mid-1930s recovery. Keynes' ideas in the 1970s led to stagflation. Japan stimulated crazily in the 1990s, giving itself the Lost Decades. The cure for the 2001 slump set up the 2008 crash.

Whereas recessions without stimulus - America in 1921, Southeast Asia in the 1990s - were sharp but swiftly over.

When governments pump stimulating rivers of money, they manipulate prices, the economy's gauges. By juking interest rates, the price of money, you're messing with the most critical gauge. The ensuing unreality leads to inflation, dot-com bubbles or foreclosed subdivisions. Stimulus is like curing a hangover with Thunderbird.

Lewis feels Keynesianism, an intellectual bubble, is nearing a pop, if only because Washington is running out of willing lenders. About time, he says. It has punished thrift and encouraged profligacy. It has led government to turn swaths of the economy into federal protectorates. "That's the single thing that worries me most," he said, the way bonds between government and business make the two indistinguishable. It sickens democracy.

Keynes wasn't a clear writer, says Lewis. He was self-contradictory: The solution to bad debt is more debt, for instance. The more you spend, the more you have. Deficits are a kind of savings. Lewis becomes grimly hilarious when he compiles the Keynesian paradoxes now being spouted. You realize our leaders aren't making sense.

Keynesians argue that it does make sense, only you rabble aren't equipped to comprehend. Keynes believed the economy couldn't be left up to rabble, who were ruled by "animal spirits." It had to be run by the wise - by people like him.

"He said, 'If things go too far in the wrong direction, I'll just step in and fix it,' " said Lewis. "Then he died."

We since have learned that governments are ruled by spirits as animal as anyone's, only with bigger paws. No one is so short-term as politicians, thinking of re-election and seduced by an urge to be in charge. This is why Keynesianism has triumphed among them, said Lewis: "It's a rationalization for policies that they'd like to pursue anyway."

So we all live in a $24 trillion experiment in whether, this time, stimulus will work. Two questions from one of the rats:

First, if the government rigs reality by messing with the value of money, how can we expect any other part of the economy to not be distorted and dishonest?

Second, if we abandon simple, comprehensible rules and rely on constant tinkering by wise leaders, what happens when we instead get leaders who, having done no work but rabble-rousing among Chicago's poor, have not the least clue about running an economy?

Revered, Keynes has no answer.

Patrick McIlheran is a Journal Sentinel editorial columnist. E-mail

Monday, October 19, 2009

Record US deficit stokes concern

By Martin Crutsinger Washington

What is $1.42 trillion (R10.4 trillion)? It is more than the US's total national debt for its first 200 years and more than $4 700 for every American man, woman and child.

It is also the 2009 US federal budget deficit, three times more than any other deficit before. Some economists warn that unless the government start to cut spending or raise taxes, it could sow the seeds of another economic crisis.

Treasury figures released on Friday showed that the government spent $46.6 billion more than it received in September, a month that normally records a surplus. That boosted the shortfall for the full fiscal year that ended last month to $1.42 trillion. The previous year's deficit was $459 billion.

As a percentage of US economic output, it's the biggest deficit since World War II.

Forecasts of more red ink mean the federal government is heading toward spending 15 percent of its money by 2019 just to pay interest on the debt, up from 5 percent this year.

President Barack Obama has pledged to reduce the deficit once the great recession ends and the unemployment rate starts falling, but economists worry that the government lacks the will to make the hard political choices to get control of the imbalances.

Friday's report showed that the government paid $190bn in interest over the last 12 months on Treasury securities sold to finance the federal debt. Experts say this tab could quadruple in a decade as the size of the government's total debt rises to $17.1 trillion by 2019.

Without significant budget cuts, that would crowd out government spending in such areas as transport, law enforcement and education.

Already, interest on the debt is the third-largest category of government spending, after the government's entitlement programmes and the military.

As the biggest borrower in the world, the government has been the prime beneficiary of record low interest rates. The new budget report showed that interest payments fell by $62bn this year even as the debt was soaring.

The Congressional Budget Office projects that the debt held by investors both in the US and abroad will increase by $9.1 trillion over the next decade, pushing the total to $17.1 trillion under Obama's spending plans.

The $1.42 trillion deficit for 2009 - which was less than the $1.75 trillion projection that Obama made February - includes the cost of the government's financial sector bailout and the economic stimulus programme. Income taxes also dwindled as a result of the recession. Coupled with the impact of the tax cuts under former president George W Bush earlier in the decade, tax revenues fell 16.6 percent.

"We should be desperately worried about deficits of this size," says Mark Zandi, the chief economist at Moody's "The economic pain will be felt much sooner than people think, in the form of much higher interest rates and much higher rates of inflation." This could result in stagflation - a mix of inflation and economic stagnation.

The administration has pledged to include a deficit-reduction plan in its 2011 budget, which will go to Congress in February.

National Debt Clock