My favorite newspaper, The Philippine Daily Inquirer, has spelled it out: “We are all Keynesians now.” This spending-as-growth philosophy was mentioned in the context of the lower-than-hoped GDP growth figure of 4.9% for the first quarter, year on year.
Most people are not so stupid as to believe that spending per se is going to get an economy ouf of the doldrums. If I were to ask the Inquirer editor about it, I’m sure he or she would qualify spending in terms of infrastructure, education, health, etc. and not Playstations.
WHAT IS TAKEN FOR GRANTED
But it is taken for granted that:
1. It is the government, not the private sector, that should be doing the ‘stimulus’ spending;
2. GDP (consumption + investment + government spending) is a reliable indicator of economic well-being;
3. Central banks’ monetary policy is either ‘neutral,’ or low lending rates boost investment; and
4. Investments can be sustained without reference to prior saving.
And maybe when considering these four points, one might realize that being ‘all Keynesians now’ contributes to the problem.
KEYNESIAN/NIXONIAN THEORY IS BAD THEORY
There is no going around it; John Maynard Keynes, to whom prevailing economic thought is most indebted, wrote bad, careless theory. I will discuss this in the context of the above.
GOVERNMENT ‘PUMP PRIMING’
The mechanism of government in itself does not allow for market activity. The only reason economic progress has happened over millennia is that state intervention has not been so encompassing as to impede the manifestation of valuations by market players, e.g. managers, laborers, bankers, etc.
As I explained recently, economic goods do not have an inherent value by which elected officials can proceed to allocate them; prices come about when people exercise their subjective valuations of scarce resources, by which x amount of good y is used for activity z.
The process is so complex that even if a politician somehow magically knows how a certain product, say, a pencil, is to be distributed in a way that corresponds exactly to pencil buyers’ demand, the politician will still have to face the task of determining how the allocation of the pencil’s ingredients, e.g. wood, graphite, transport, etc. is to be done in a way that corresponds to present individual valuations. And of course, the economy is made up of more than just pencils! So to believe that one is capable of directing the distribution of even a single good is the height of conceit, and by necessity makes for a bad investment.
INAPPLICABLE TO DEVELOPING COUNTRIES?
One might concede that the process as I have articulated above may be accurate, but inapplicable to a developing country where many lack the means. But the above is just as relevant; how could any person know, in the absence of the price system, how ‘social services’ are to be provided to the poor?
Free markets make for efficiency, not just in money-maximizing ventures among businessmen, but also in charitable distribution of goods, wherein people’s valuations as to how best to help the less fortunate, manifest themselves. Or are we to believe that only government is capable of ‘benevolence,’ or that the government does not actually represent ‘the people’?
GDP IS NOT AN ACCURATE GAUGE
While incomes are somewhat represented in GDP, we are looking at nominal figures whose relation to inflationary manipulation by central banks is not sufficiently balanced by the use of ‘real’ figures. Also, having an aggregate number to represent productivity says nothing about sustainability of whatever economic activity is being conducted. GDP in itself says nothing about employment, which to me is the primary indicator of sustainable enterprise.
Employment numbers also have to be compared with consumption data. If you are somewhat familiar with the Austrian school of economics, you might see that I am driving towards an understanding of GDP and spending in the context of the business cycle. Without this tool, the booms that preceded the busts of the early and late 1990s, the early 2000s, and the since-2007 period look like everlasting prosperity.
CENTRAL BANK POLICY AND SAVING
Another aspect of the Austrian business cycle theory is monetary inflation, by which the cash in your wallet is losing purchasing power as you read this. It is this process of inflation that makes for low lending rates and unsustainable booms, due to the absence of a corresponding amount in saving.
The principle is quite simple; employment and economic activity grow over time due to previous saving. But when investments are financed by central banks, there is no growth, only the signals that falsely indicate growth. It should be common sense that simply printing more P500 or P1,000 bills does not create economic goods, but only distributes them in ways favorable to the politically privileged. And spending in the hopes of a multiplier effect on investment will only result in less resources by which to invest later on.
A WORLDWIDE CRISIS
To be sure, the lousy economy is not limited to the Philippines; but it is precisely the worldwide acceptance of interventionist economics that has impeded economic progress to the degree that it has influenced coercive government policy. However small a change we move in the opposite direction, towards market freedom, will have its positive effect on the standard of living.
‘CORRUPTION’ HAS LITTLE TO DO WITH IT
We can’t blame cautiousness in spending for low economic growth. Can we really believe that the administration is cutting down on spending due to worries of corruption, when it has no qualms about distributing pork barrel?
What of the budget deficit? Is that to be ignored? Funny how the April budget surplus was trumpeted just a couple of weeks ago.
And spending implies taking from the private sector, whether sooner or later. It’s bad enough to reduce productive enterprise via present taxes, but to pile on debt via deficit spending, i.e. future taxes, is no better.
Another harmful aspect of government is its monopolizing ‘social services’ to the degree that DoH, DSWD, DepEd, etc. mandates are enlarged.
CONCLUSION
This is really meant as a brief overview of government-as-hindrance-to-economic-growth. If you would want me to expound on certain things, or if you have a pro-interventionism argument with which you would like to pwn me, let me know.
It is a given that ‘spending’ is an important component of the economy, but the question of who does the spending is most crucial in determining whether such economic activity is sustainable. To acquire a greater understanding in this regard, one has to look beyond the Keynesian framework.
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