Monday, October 20, 2008
It used to be that the only time government spending would spiral out of control was when there was a war to fight.
A real war, that is.
Throughout most of the last few hundred years, you can look at measures such as inflation and see that monetary caution was quickly "thrown to the wind" when bullets started flying.
Largely due to John Maynard Keynes, that all changed during the 20th century and, since the last link between paper money and something tangible was severed in 1971 when Nixon closed the "gold window", it seems that politicians are all too eager to borrow vast sums of money and crank up the printing presses whenever economies sputter.
At some point, ever-higher levels of indebtedness and loss of confidence in paper money will cause these remedies to lose their effectiveness. Government measures such as the "debt ceiling" in the U.S. and "fiscal rules" elsewhere around the world are really a charade and taxpayers will eventually come to realize this.
Does a ceiling serve any purpose when it is regularly raised but never lowered?
In the meantime, politicians and economists continue down this increasingly worn path as evidenced by this report in today's Guardian about new spending plans in the U.K. to combat the economic slowdown.
Darling invokes Keynes as he eases spending rules to fight recessionThe problem with allowing government borrowing to rise is that the debt never gets paid down - not in Britain, not in the U.S., not in Japan...
The Treasury confirmed yesterday it intends to fast-track spending planned for future years as Alistair Darling signaled that he will use next month's pre-budget report to relax Labour's long-standing fiscal rules to head off the worst effects of the recession.
Over the weekend the chancellor indicated that the government would seek to reflate the economy with a period of targeted spending on large infrastructure projects. Darling said yesterday that the economic thinking of legendary economist John Maynard Keynes was coming back into vogue.
"Much of what Keynes wrote still makes sense. You will see us switching our spending priorities to areas that make a difference - housing and energy are classic examples where people are feeling squeezed. What I want to avoid is getting ourselves in a position governments have done in the past, where you face an immediate problem and cut back on the things the country will need in the future ... we can allow borrowing to rise," he added.
While Keynesian remedies were surely appropriate during the early and mid-20th century when there were other constraints on government largess, here in the 21st century, where there seem to be no limits to what the state can do, they are about to be put to the test.
Surely there is an expiration data on invoking Keynes.