A number of politicians and journalists are increasingly putting forward the case for increasing Government spending rather than cutting it. I thought I'd outline a few points on the issue. I will throw forth a few bullet points for consideration here because this is far too large a subject matter to effectively deal with succinctly...
- It is precisely because Cameron/Clegg have managed to sell their austerity programs, that the UK is able to borrow money at low levels. If they had indulged in more spending than, in my humble opinion, the market would have punished the UK. Moreover, the UK has a system of 'elected dictatorship' which means that the market is not pricing in the likelihood of Ed Balls getting anywhere near the public finances
- Corporate cash balances have helped hold back market rates because traditionally in recoveries (and I accept this one is anaemic) they push up yields as they search for capital
- Promulgating Government investment requires you to be unencumbered with any notions of inherent efficacy differences between public and private sector investment. I am not free of such prejudices; in fact, I think less Government spending is usually a good thing. Who is doing the investment is arguably more important than the absolute level
- Throughout history, whenever Governments have cut deficits (Sweden, Canada et al) it has always been through cutting spending rather than raising revenue. This doesn't tally well with raising expenditure.
- In my opinion, the expansion of Commercial & Industrial loans and business investment usually follow a cyclical upturn in consumer expenditures. I think what is different, this time around, is that the banking sector (the issuers of capital) has faced significant challenges this year.
- It was a mistake not to allow the forces of creative destruction to eradicate the leadership of the banks and destroy their perverse incentive structure. The management are clearly not fit for purpose, are only interested in siphoning off the assets of the banks at the expense of the shareholders, and have thus far demonstrated no ability whatsoever to generate shareholder value when the taxpayer isn't supporting the direction of their underlying assets by buying them up
- Japan has undergone an experiment in stimulating expenditure and supporting 'Zombie industries' with the aim of sustaining employment and growth and, it has failed miserably. Governments simply aren't the best authorities when it comes to productive investment.
- The US underwent a significant expansion of public sector spending without raising the revenues to pay for it. This is why their deficit is so large. Noticeably, it was the Republican administrations of Reagan and George 'W' Bush than engaged in expanding spending whilst cutting taxes.
So frankly, the idea that the UK or any other Government should actually be increasing public expenditures is folly of the highest order. The key is to cut spending yet seek ways in which to encourage the private sector to invest, by rolling back the frontiers of the state. In the UK this might involve things like relaxing planning restrictions on new house build in the South East or encouraging research into genetically modified foods. There are many ways to promote growth, but the worst of which, is wanton Government expenditures. It's been tried. It doesn't work.