'Stimulus' spending

I continue to be amazed at the extent to which economists are driven by ideology. How else can you explain the diametrically-opposed views of conservative and Keynesian economists on the effects of government borrowing and spending? One side or the other are kidding themselves; and it's not easy for us non-economists to join - or even understand - the debate.

Clearly, values are involved here, but the question of whether specific policies work is an objective one.

Writing in The Wall Street Journal, Arthur B. Laffer makes a case (based on figures from the IMF) that stimulus spending has actually been counterproductive, "more like a valium for lethargic economies than a stimulant."

Of the 34 OECD countries, those that 'stimulated' the most from 2007 to 2009 saw the least growth in subsequent GDP rates.

"Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers."

It might be objected that an economic downturn will trigger increases in public spending, and so the appearance of a negative relationship between stimulus spending and economic growth. But Laffer focuses on changes in the rate of GDP growth to help isolate the effects of more spending.

"The evidence is extremely damaging to the case made by Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it."

Paul Krugman on Europe

It's always salutary to read or listen to - at least occasionally - those whose ideological perspectives are different from one's own.

Sometimes it's simply a matter of being confirmed in one's current views. Like the time I read a political book by Noam Chomsky (whom I respected as a linguist). I was staggered at the degree of anger and irrationality and extremism evident in Chomsky's prose. I had begun the book with an open mind, ready to be convinced: I was wavering ideologically at the time and had no vested interest in any particular system (beyond some investments in equities which could easily have been put into something else if I came to the view that capitalism was bad). But I found there was a huge gulf between where Chomsky was and where I was. I have no idea how he got there, and I was damned sure that I wasn't going to go there.

Paul Krugman is another kettle of fish, a distinguished economist who is also a liberal polemicist. I recently read an opinion piece by Krugman on political and economic trends in Europe, suggesting that we should call "the current situation what it is: a depression." Even putting aside the (unresolved) euro crisis, lack of growth and high levels of unemployment is leading to immense anger and resentment (against Germany, for instance), risks to social cohesion and a clear move in the direction of authoritarian governments.

Last month, the European Bank for Reconstruction and Development "documented a sharp drop in public support for democracy in the 'new E.U.' countries." Hungary, for instance, a country with a turbulent and tragic history, is in dire economic straits. According to Krugman, it has "suffered severely because of large-scale borrowing in foreign currencies and also, to be frank [Krugman acknowledging his ideological position!], thanks to the mismanagement and corruption on the part of the then-governing left-liberal parties."

This led to Fidesz, a center-right party, winning an overwhelming parliamentary majority last year. But now Fidesz, by a series of constitutional and legal measures and media control, seems to be moving towards authoritarian rule "under a paper-thin veneer of democracy." Krugman sees what is happening in Hungary, "in the heart of Europe," as a sign of things to come on the troubled continent. As he puts it, the breakup of the euro may be the least of Europe's worries.

My concern is that Krugman's ideological preoccupations may be distorting his analysis. He is hostile to German-inspired attempts to encourage austerity, suggesting that such an approach is leading to the death of democracy and to authoritarian forms of government. But the crisis was caused, at least in part, by profligate government spending (exacerbated in some countries by their participation in an ill-conceived experiment in monetary union). And something like the pragmatic German model may be the only alternative to fascism or whatever forms of nationalistic collectivism are currently garnering support.