Tuesday, 3 May 2011

Government spending, stimulus almost worthless

JOHN MANGUN
OUTSIDE THE BOX
Business Mirror
http://www.businessmirror.com.ph/home/opinion/10623-government-spending-stimulus-almost-worthless

This country is an absolute financial disaster, governed by completely incompetent and irrational leaders with no clue about how to help the nation’s economy.

How bad is it? Official unemployment is at 21.3 percent. The latest numbers show that retail sales dropped 8.6 percent in March following a 4.3-percent fall in February. Inflation is increasing every month, with April seeing consumer prices rise 3.6 percent over March’s number of 3.3-percent increase. Wholesale prices are even worse, up 7.7 percent year-on-year over 2010.

The gross domestic product (GDP) contracted by 3.7 percent in 2010 and for 2011, economic shrinkage expected to be minus 0.20 percent. The only bright spot is Industrial Production, which is growing at an annual rate of 3.6 percent.

No, I am not speaking of the Philippines. Our industrial production increase was 11.2 percent year-on-year for February 2011.

Those numbers above are from Spain.

Spain is a textbook example of government spending the people’s money without any rational thought or concern for the future. Spain was borrowing like crazy for “public-works projects.” Spain now has the largest high-speed rail system, eclipsing France with the recent opening of the Madrid-Valencia high-speed train service. The problem is that train will serve only 10,000 passengers a day. Spain does have 1.1 million daily train passengers, so $8.7 billion was spent to service less than 1 percent of Spain’s train-riding public.

From The Week magazine: “While the high-speed rail advocates claim that the trains are better for the environment, the cost of high-speed rail is so much that most people still use their cars for the Madrid/Valencia trip, since it is much less expensive, virtually nullifying the environmental argument.” Brilliant government planning.

Everyone is certainly aware now why the global financial system has fallen apart along with most of the Western countries’ government balance sheets: too much debt. And too much of the debt was used to buy useless and non- productive projects.

However, the core problem is that governments around the world believed in the economic theories as expounded by John Maynard Keynes, Keynesian economics.

Proponents of Keynes believe that government can spend money to stimulate economic growth. Although tried countless times, including during the Great Depression in the US, it has never worked successfully.

In theory, it looks wonderful. As normal businesses are subject to boom-and-bust cycles, the government can step in to spend, and thereby stimulate business activity until the private sector gets going again. Sort of like Dad paying the bills until the kid gets a better job.

In the last two years, the US government has spent nearly $2 trillion in “stimulus” and unemployment continues to be high and not coming down by any substantial amount, and economic activity is virtually at a standstill.

Government spending, particularly for “stimulus,” does not work. Government spending to help a nation’s economy is a failure in virtually every country.

The National Bureau of Economic Research (NBER) was founded in 1920 as a private, nonprofit, nonpartisan research organization. Using data as far back as 1960, a paper, “How Big (Small?) Are Fiscal Multipliers?” published by Ethan Ilzetzki, Enrique G. Mendoza, and Carlos A. Végh, provides the proof. It is available at http://www.nber.org/papers/w16479. While very technical and dry reading, this is the authors’ conclusion:

“In developing countries [like the Philippines], the response of output to increases in government consumption is negative on impact.” Are you hearing that? This study shows that in countries like the Philippines, government spending and “stimulus” have no economic impact.

What about the “First World?” “In developing countries, output increases in response to a shock in government consumption only with a lag [of two to four quarters] and the cumulative response of output is not statistically different from zero.”

In developed countries, the impact of government spending as economic stimulus can be one-to-one, that is for each dollar spent, you can get $1 of economic activity. Except, “During episodes where the outstanding debt of the central government was high [exceeding 60 percent of GDP] the fiscal multiplier was not statistically different from zero on impact and was negative in the long run.” The Western nations, all which are over that 60 percent of GDP threshold, have gone further into debt hell and all the money spent is for nothing.

Fed Reserve Chairman Bernanke could have taken economist Milton Friedman’s advice and dropped $2 trillion on the people from a helicopter and had the same results without the cost of government managing the stimulus program. Also giving the people the money directly would have done more for economic activity, since the people know how to invest and spend better than the government.

No business or company in its right mind using its own money would have built that train in Spain (or most of the government-funded projects), since that venture did not make any economic sense because it could not generate a profit.

The authors of the NBER study give many reasons, including exchange- rate flexibility, open trade and inflation-targeting regimes, as reasons why government spending is not successful in open economies. Their final understanding of the situation is, “We have found that the effect of government consumption is very small on impact, with estimates clustered close to zero.” Zero is the economic impact of government spending.

But they do say this, which can have a positive effect on countries like the Philippines. “While increases in government consumption decrease output on impact in developing countries, increases in government investment cause an increase in GDP.” Notice the key word: investment.

The leftists scream for more government handouts and control. If they cared about their own wealth and the plight of the poor, they would be screaming for less government. When Philippine Airlines was government-owned, I could not fly to Roxas City and have lunch at Baybay beach for P240 roundtrip on Cebu Pacific as I recently did. When PLDT was a government-sanctioned monopoly, you waited years for a telephone. When the government operated the toll roads, there was no Skyway.

Government spending cannot stimulate the economy. Only the people can do this.



E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc.

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