Last week in the FT Martin Wolf sounded a Keynesian battle cry, passionately urging governments to redouble their efforts to use cheap funds to raise future wealth and so improve the fiscal position in the long run:
It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.
Mr Wolf is of course incorrect. It is absolutely conceivable that governments will not be able to earn a positive return on borrowing. Indeed, the United States has spent the entire previous decade borrowing money to invest in highway building and war. Mr Wolf also goes on to use the case of Japan, yet another country that spent 20 years investing in negative return public works projects. Or, as others have described it: paving the country over with cement.
What has the United States won for itself, after a decade of Keynesian largesse and cheap money policy? Mostly, a further increase in poverty. As the Census Bureau reported this week, poverty in America advanced for a third straight year to reach its highest levels since 1993. While Keynesianism appears to have a benevolent, humanistic intent it is greatly disappointing that so many of its advocates do not also recognize its destructive aspects. Yes, free markets misallocate capital routinely. But Keynesianism as a policy also distributes capital unevenly, and unfairly. First receivers of government capital gain competitive advantages. First receivers of easy monetary policy also gain, and become predatory. The housing bubble was perhaps the most spectacular example of the destructive force of easy money, which resulted in a huge transfer of risk and wealth, recycled through society.
But the greatest flaw with Keynesianism now is that, like the economy itself, it has run squarely into the energy limit. As the most recently updated data shows, 2011 will be the 6th year that world production of crude oil was unable to increase beyond the ceiling established in 2005. Oil remains the primary energy input to OECD economies. OECD economies are of course where the Keynesian experiment has flourished longest, first in Japan, then the United States and now Europe. It is hardly, hardly the case that the current financial crisis in the OECD is “simply a matter of accounting.” Instead, the crisis is one of systemic, structural growth now permanently limited by energy costs as OECD economies try to service debt loads that have escaped their ability to manage. Change all the digits, and the energy limit remains.
While I continue to be an advocate of debt jubilee, and, of energy infrastructure Keynesianism (building out more efficient transport and non fossil fuel energy production), the energy-intensity problem of OECD economies is now the controlling factor in the West’s ongoing crisis. The redoubling of government efforts to distribute paper capital to society will not bring forth the cheap energy required to spur the growth Keynesians either assume, or have failed to even consider.
–Gregor
“Inconceivable that government borrowings…cannot earn a return far above costs.”
Mr. Wolf, you keep using that word. I do not think it means what you think it means.
As always, a sharp perspective that does not get a proper airing inside the Beltway. When the ne plus ultra of government is claiming you’ve created jobs, talking about a new model for the economy in which jobs *will not be created* is a non-starter.
This sounds like a great deal of confusion on both sides, really. One can only evaluate the government’s outlays on a very macro scale, and classic Keynes shows that, in the current environment, any investment, however poorly “returning” in the gimlet-eyed sense, (helicopters dropping money comes to mind), would help restore overall GDP and employment on a sustained basis, and thus pay back over the long run, reducing government deficits into the bargain.
While I certainly appreciate your resource restriction focus, it simply is not relevant here. Krugman has pointed out in some detail that resource constraints have a relatively minor role in restricting growth, even now. We can hire people to build windmills, or do pedicures.. Replacing our highway infrastructure with rail or eco-pods or whatever would also do wonders for the economy, just like it did in WW2 and thereafter. There is also a huge reservoir of conservation yet to seriously tap.
I would put the issue as one of distribution. If we continue to distribute wealth upwards, to people who save money and are currently shy of investing it, we will continue to spiral downwards on a macro basis. Even with all the resource constraints, if we distribute money more equitably, the economic (and cultural) system can be restored to a more prosperous equilibrium, and economic incentives can be used into the bargain to drive conservation and infrastructure transitions as well.
We are of kindred spirit…nice article. It’s what I have been preaching for more years than one can remember.
Another great piece. Thanks.
Hope the new home is treating you well.
“While I certainly appreciate your resource restriction focus, it simply is not relevant here. Krugman…”
You make a good point. But, the wealth distribution flow you’re citing has an energy factor, too. Physical capital is much more valuable than paper money. Corporate assets in the form of… whatever, is worth more in place defecating dividends as long as possible. If the energy exists to run it on a profitable cash margin for shareholders, run it into for-ev-er, and damn the whales!
It is very difficult to achieve a high ROC today investing in physical construction of more “stuff.” The energy inputs are becoming an egregious cost. I get that people who live in boxes their whole lives think an infinite number can conceivably be constructed. The energy equation is fixed, finite. Fiat money seeks to subdue the equation, or abuse it.
“I would put the issue as one of distribution.” You must’ve experience the recent blackout in Southern California. Or, maybe you’re in Vermont waiting for an airlift of supplies after having roads washed out by Irene.
This piece would be more informative if you cited actual numbers. For example, you say “Indeed, the United States has spent the entire previous decade borrowing money to invest in highway building and war.” What are the amounts, and what percentage of GDP were they over the course of the last decade?
Secondly, can you really compare investing in public infrastructure with spending on wars?
Lastly, you have not developed your argument that “…systemic, structural growth (is) now permanently limited by energy costs…” The chart shows crude oil production, but not energy costs.
Like-minded people will no doubt nod their heads at this post, but I’m not persuaded.
Gregor Macdonald is an oil analyst and energy sector investor, who also focuses on the coming transition to alternatives.
Read Full Article »