There are currently a number of economists crowing over the absolute success of fiscal policy. I am still unconvinced that fiscal policy has any meaningful impact on economic output. I continue to believe that the programs to date have merely masked the underlying weakness in the economy.
“Masked the underlying weakness – Isn’t that exactly the definition of fiscal stimulus?” you ask.
The answer is not necessarily. To explain my views here, let’s turn to the case of China, the current poster child for successful fiscal and monetary stimulus and a crisis already occurring. In the second quarter, GDP increased at a rate someplace in the high teens. (China only issues real GDP on a four-quarter change basis; so, quarterly changes must be inferred.) The growth rate was phenomenal and is directly attributable to government intervention.
How did China achieve this remarkable growth? Easy. I believe that the government simply insisted that factories continue producing output—I am sure the insistence was accompanied by a promise of a fiscal transfer. Factories keep producing output, calamity averted, the stimulus is effective.
In fact, GDP gets an additional boost. The factories are producing output that nobody is buying – exports remained depressed and consumption is not picking up all of the slack. The output from the factories is accumulated as inventories, a positive contribution to GDP. But, since nobody is buying the price of the inventories also falls. Real GDP gets an arbitrarily large boost as the price deflator declines. [I am exaggerating for hyperbole. I know some of the goods were purchased but the increase in output likely owes to exactly the channels I am suggesting. If you want to see this at work in the United States, go back to the fourth quarter of 2006. Autos made a large positive contribution to GDP as the prices of new cars fell sharply and the real value of car inventories was pushed up.]
This is not real growth. It is not real growth in the present and it is a direct drag on growth in the future. Barring a sudden increase in OECD demand, China is in for some hard times.
This is the nature of fiscal stimulus.
Posts
Do Higher Wages Mean Higher Standards of Living?
-
Editor's note: We have updated macroblog's location on our website,
although archival posts will remain at their original location. Readers who
use RSS sho...
4 years ago
2 comments:
Okay so the idea of drag on the future. What is the best way to measure the governments balance sheet? What are the size of its explicit and implicits financial obligations? How does the ramping up of debt now effect the ability to provide already promised services?
Government balance sheets are best measured by the level of government bonds currently held by the public. If a fiscal authority issues debt and it is purchased by the central bank, this transaction is not an increase in debt--if I move my wallet from my left pocket to my right, my net debt does not change.
Implicit and explicit future obligations are inconsequential. At each point in time, the fiscal authority will make a public policy decsion on how much to spend. If it can afford to meet its implicit obligations it may chose to do so. However, over time, there have been many implicit obligations that have not been financed. (If you question this assumption, call up your local authority and ask them--I don't care where you live; the answer will be the same.)
Of course, the ramping of debt now is a constraint on the fiscal authorities ability to meet its implicit promises. For the United States, the biggest promises are SS, medicare and medicaid. Large debts now reduce the likilhood of those obligations being met. The probability of a partial default on these payments has always been high and is now likely much higher. For example, I cannot picture a world ten years from now in the United States where we do not means test SS benefits.
Hope this helps.
SE
Post a Comment