Research / Other publications
Yes, I know that the headline should really read “Is it I who am mad—or the world’s leaders?” but the dubious grammatical form used above is better suited to the populist sentiments of this article. And though populism and populist are words routinely used to mean “insane,” “dangerous,” or worse “problematic,” some kinds of populism are in fact social truths that experience has shown to be accurate and valuable, i.e., commonsense.
That applies especially to truths about spending, saving, investment, and borrowing. Copybook maxims on that score go from Thomas Jefferson’s “Never spend your money before you have it,” to Shakespeare’s “Neither a borrower nor a lender be/For loan oft loses both itself and friend/And borrowing dulls the edge of husbandry.”
With that prudent advice ringing in our minds, let’s look at how prudently our political masters are handling our collective expenditures, revenues, borrowings, and investments. The first thing to notice (though few do) is just how massive the sums involved are.
Estimates differ but in the U.S., apparent president-elect Joe Biden is proposing a budget of $5.4 trillion equal to 24 percent of America’s GDP. He’s also proposing a smaller (but still massive) tax increase that would leave a gap of $2 trillion dollars for the U.S. Treasury to borrow. But cheer up—it’s bipartisan. President Trump’s budget estimates for 2021 weren’t much lower at 4.8 trillion equal to 21 percent of GDP and a deficit of $966 billion.
Now, expenditures to cope with the pandemic and lockdowns are emergency spending that almost everyone agrees is justified or, to be more precise, inevitable. That’s why the Trump budget rose to an annualized rate of 30 percent of GDP at the height of the pandemic this year. But a cool $700 billion is accounted for by Biden’s “Build Back Better” agenda that would increase spending on infrastructure, the environment, and the Green New Deal. That's equal to one-eighth of Biden's projected total spending for 2021 and one-third of the likely deficit.
The picture is the same in Britain where Boris Johnson’s government, as well as spending vast sums to ameliorate the pandemic and concomitant recession, is embarking on a green industrial revolution and unrelated (even contradictory) infrastructure spending. There too the Labour, Lib-Dem, and Green opposition parties attack these plans as too little, too late. In both countries the general attitude has been Spend! Spend! Spend!
After all, everyone knows that Tomorrow Is Another Day!
Scarlett O’Hara, Gone With The Wind’s heroine, may be out of fashion in racial politics, but financially she’s never been so enchanting to so many powerful people.
That may be because we simply can’t get our minds or even our imaginations around the figures when they rise from million to billions to trillions. To help us do that, here’s David Schwartz, the science writer and a brilliant popularizer, explaining them to NPR listeners:
The difference between a million, a billion and a trillion is like the difference between eleven and a half days, 32 years and 32,000 years.” Do the sums: a $2 trillion dollar deficit the equivalent of 64,000 years in time measurements.
And an $5.4 trillion dollar total annual budget... or a $23 trillion accumulated national debt... is equal to... but I see the audience’s eyes glazing over... No -- they’re crying.
Now, it’s certainly true that borrowing is economically justifiable and potentially profitable if it’s likely to produce a stream of income or equivalent benefit that over time more than equals the cost of the capital borrowed. A home mortgage is a humble example.
It’s also the case that government investment can be economically worthwhile if it creates an economic environment that hikes productivity, spurs general economic growth, and thereby increases tax revenue for the Treasury. Some state investment meets those criteria, but by no means all. So we should apply certain tests to proposals such as the green industrial revolution and the Green New Deal?
The test that governments seem to like most at the moment is the question:
Can we borrow at a low interest rate?
It’s a fair question but it should be a secondary one. A low interest rate means it’s cheaper to borrow, but that’s a modest benefit at the best of times and no benefit at all if the investment produces less wealth than the cost of borrowing. And if interest rates rise as they tend to in periods of inflation produced by government over-spending, then the modest benefit becomes a horrendous cost, especially when your accumulated borrowing has reached $23 trillion. So the next—or rather, prior—question becomes:
Can we make sure the investment pays off?
To which the honest answer is, No. As the distinguished political theorist, James Burnham, author of The Managerial Revolution, used to say in his rules on life: You can’t invest in retrospect. Some of the visionary Green schemes proposed by Joe and Boris, such as electric airplanes and cheap hydrogen cars, can’t be invented simply because we establish a state fund to invent them, any more than the flying cars and personal jetpacks of Matt Ridley’s youthful imagination exist today because we wanted them, as he noted in a column on the ten big things wrong with the green industrial revolution.
I quoted the column last week, but it can’t be quoted too often because to judge from government policy no one in Whitehall or the Beltway has read it. It should be especially worrying that many of the schemes for transitioning from fossil fuels to “renewables” all cost more than the cheap fuels they are meant to replace and need state subsidies for longer than their advocates claim in advance. Demands for extended government subsidies should be a warning. Innovations will occur, of course, because a free economy is an innovation machine. We simply don’t know what they’ll be, and if we concentrate state funding on bright ideas too early, we risk being unable to fund the good ones that survive the sorting out process.
But they lift productivity and economic growth, surely?
Again, the proof of the pudding will be in the eating, but the signs don’t look that good. What economic benefit is likely to arise from the total electrification of Britain electric cars require that would match both its cost and the cost of forcing motorists to give up petrol-driven cars from 2030 onwards? If the answer is that we will benefit from the technological innovations that British and American auto manufacturers make in the course of developing cheaper and more efficient EV’S, we could have those benefits anyway by allowing them to make the cars that the motorists want at a price they can afford and at a pace that would allow government and industry to transition in line with market demand changes. Then we might get technical innovations in both EVs and petrol-driven cars.
We don’t do that because the real aim of policy is not technical innovation—that’s a by-product at best—but a reduction in carbon emissions, or net-zero in short. That’s why everyone concedes that electricity prices will rise for industry as well as for consumers, putting the industries in countries with green hairshirt economic policies at a serious disadvantage with their foreign competitors. How will that kind of enforced economic primitivism help us either to raise productivity or to pay back the money we’re now borrowing? It won’t.
Since this is a global problem, though, surely, our competitors like China are making the same sacrifice?
Well, no they’re not, as a matter of fact, and when they say they will, they usually ask “the West” to give them subsidies to do so. In the meantime, the Chinese Communist Party—no idealistic Greens in that Politburo—is bringing new coal-fired power stations on line with emission levels greater than the U.K.’s entire carbon output.
So why are we doing this?
That’s a bigger question to which I’ll return next week. But it certainly requires explanation because unless the laws of economics have been repealed, the policy of spending and borrowing massively in order to make our economies less productive and efficient can only have one result. It was forecast most eloquently by Rudyard Kipling in his once-familiar poem "The Gods of the Copybook Headings":
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."
Something to think about.
Original article here.