I dreamed I saw St Augustine…it was Ambrose Evans-Pritchard
n his Confessions St Augustine of Hippo recalled how, as a young man torn between the pleasures of the flesh and devotion to God, he had prayed “Grant me chastity and continence, only not yet”. This neatly sums up the thinking of those economists and policy makers today who, faced with spiralling debt and historically low interest rates, acknowledge that this cannot continue indefinitely, but say that some prosperous tomorrow, not today, is the time to address those issues.
An example of this Augustinian economics came from Ambrose Evans-Pritchard in the Telegraph on Sunday. As Evans-Pritchard reported, the International Monetary Fund has crunched some numbers and discovered that the fiscal multiplier is not 0.5 as previously thought but between 0.9 and 1.7.
This means that it was previously thought that each £1 of government spending would generate an increase in GDP of 50p. Now it transpires that each £1 of government spending actually generates an increase in GDP of between 90p and £1.70p. It follows from this that cutting £1 of government spending does not, as was thought, cause GDP to fall by 50p but by somewhere between 90p and £1.70p.
One lesson to take from this is to be wary of econometrics. The spread between 0.9 and 1.7 is pretty wide. If the multiplier is 0.9 it is actually much closer to the 0.5 originally thought than the 1.7 upper bound which is the cause of such horror.
A second lesson is to question the idea that government borrowing and spending boosts economic growth. Economic growth is a deceptively tricky thing to measure so policy makers and economists use a proxy, GDP, which actually measures spending. Obviously any fool can boost their spending (GDP) by borrowing a load of money; what’s more questionable is to what extent this represents economic growth, i.e. the capacity of the economy to generate goods and services.
A third lesson is to be wary of the IMF which changes its mind like most people change their socks. The IMF’s latest stance, after embracing stimulus and then austerity, is that the news about the multiplier suggests an easing of austerity. Greece, with a debt of over 160 percent of GDP, will be better off if it borrows a bit more money. Of course, Christine Lagarde, head of the IMF, assures us that getting spiralling debt under control remains necessary, but explains that “Reducing public debt is incredibly difficult without growth”. Budgetary balance but, like the horny teenage Augustine, ‘not yet’.
Evans-Pritchard agrees that while the eurozone’s runaway debts need to be dealt with now is not the time. “The Greco-Latins should be given more time to cut their deficits” he says, “The AAA creditor bloc should stop cutting altogether until the eurozone is off the reefs”.
Like other Augustinian economists, Evans-Pritchard makes the same argument over monetary policy, writing recently
“Needless to say, I will be advocating 1933 monetary stimulus à l’outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE ‘CREDITISM’) to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again”
The Augustinians tell us that while our economies are in the tank this is not the time to be sorting our finances. The trouble is that we didn’t do anything to sort out our finances when our economies were galloping along. The same goes for monetary policy.
Our economies are so weak that ultra-low interest rates are apparently called for. But ultra-low interest rates were also, apparently, the order of the day in the years before the crisis. We will deal with all this someday, the Augustinians tell us, but it appears that, as Creedence Clearwater Revival sang, Someday Never Comes.
There is a bigger problem though. Just as patients can become hooked on painkillers so can economies get addicted to short term fiscal and monetary fixes. Consider how Evans-Pritchard advocates for massive monetary stimulus until “GDP is restored to its trend line, at which point the stimulus can be withdrawn again”.
But this is exactly what failed last time. The massive monetary stimulus enacted by the Federal Reserve to stimulate the American economy in the wake of the bursting of the dot com bubble in 2000 led Americans to flock into the real estate market and banks to package and repackage, sell and re sell the new debt that ensued. But as soon as this monetary stimulus was withdrawn interest rates rose as they were bound to. This popped the housing bubble and, with it, much of the world economy.
Enterprises undertaken when interest rates are artificially low will not survive when they rise. Every monetary stimulation contains the seeds of the ensuing bust.
It seems that, whether the economy is up or down, while rocketing debt and low interest rates are really, really serious problems which need to be dealt with, the time is never quite right to cut spending or let interest rates rise. This is the Augustinian creed.
Indeed, it doesn’t seem too hard to imagine Evans-Pritchard or Lagarde kneeling before an effigy of Lord Keynes and beseeching “Grant me a balanced budget and sound money, only not yet”.
This article first appeared at The Commentator