WASHINGTON – In a WSJ op-ed piece, (How to Keep Proving the Economic Pessimists Wrong, December 15, 2014), George Osborne, UK’s Chancellor of the Exchequer, (Finance Minister), argues that Britain is doing a lot better than other OECD countries because, along with enacting pro-growth policies, it stuck to its public spending reduction policies, even though they were and still are unpopular.
No future with a growing debt
Here is his basic point: “…You can’t build a better [economic] future on a mountain of debt“. What is remarkable about this basic, self-evident truth is that it is not at all self-evident.
In fact, most policy-makers in the rest of the developed world would argue that debt reduction is instead a very bad policy.
Not al all self-evident
They would passionately argue that in difficult times, such as the tough post-2008 recession years, the good medicine is to increase public spending, and therefore add to the national debt. Anemic economies need “stimulus”. And this means more public programs, more public jobs, more subsidies, and more welfare.
The basic rationale for all this is stubbornly enduring Keynesian mythology. When the economic engine stalls, then you add fuel and lubricants, and lots of them. If the engine keeps stalling, well this means that your “stimulus package” wasn’t big enough. Therefore, redouble your efforts: spend more.
Do not starve a sick person
Look, there is wisdom in the notion that you do not want to starve to death a sick person. And this would be the impact of sudden, drastic public spending cuts.
But the idea that a large and growing national debt will have no negative impact on overall economic performance is plain lunacy. Look at Greece, Italy or Japan.
You really think that there is no correlation between dismal economic performance, anemic or zero growth, and the fact that in these severely weakened countries the state’s main economic policy concern is paying interest on a crushing national debt?
More public spending is good
And yet, what Osborne just wrote about the impossibility of founding a healthy economy on a mountain of debt, is not just controversial, it is in fact considered a recipe for disaster in most Western countries.
In today’s world, more public spending is still considered the magic cure-all elixir that will rejuvenate any sick economy.
Spending goes to income support subsidies
This could make some sense if increased spending would be devoted to new investments in basic infrastructure, (power generation and distribution, new roads, more efficient freight rail links), that would strengthen the economy’s backbone.
But the truth is that most of the new spending goes to finance old and new entitlements. In other words, it goes to support unaffordable income support social programs.
Of course, all the recipients welcome public subsidies. But the very notion that fiscally unaffordable welfare programs that give people the illusion of being a bit better off are the foundations for future prosperity is stupid.
Healthy economies are built on innovative, internationally competitive, high performing sectors that are able to create new wealth.
More debt generated in order to keep people happy works like cocaine. Right after you take it, it feels like an energizing tonic.
But it is in fact poison.