Politicians not picking up the cue that the electorate does not favour a fresh Keynesian-style stimulus are suffering at the polls.
"We have been going back and forth for a century. Keynes: I want to steer markets.
Hayek: I want them set free.
There is a boom-and-bust cycle and good reason to fear it.
Hayek: Blame low interest rates.
Keynes: No it’s animal spirits."
So goes the chorus of a popular rap anthem on YouTube these days. Indeed, the rather arcane ideological debate between more and less government intervention is now all the rage.
And, if the latest opinion polls in many developed countries are anything to go by, the pendulum is swinging back in favour of Hayek with voters increasingly disenchanted by the meagre results the massive stimulus efforts have yielded.
A New York Times-CBS survey released last month shows that an absurdly-low 6% of Americans believe that the stimulus has created any jobs. A Quinnipiac University national poll reveals that 74% of voters think the US is still in a recession, even though the economy has registered some growth over the past year.
The latest betting odds suggest that the Republicans are now favoured to win back control of the House of Representatives in November 2010, an outcome that entails the Democrats lose a record number of seats less than two years after an emphatic victory.
US President Barack Obama’s popularity rating is currently at a new low as more voters disapprove of the job he is doing. His calls for enacting further stimulus measures to boost growth are also finding fewer takers in Congress as legislators sense that more and more Americans view rising debt as the primary threat to their long-term well being.
Trends in primary election races ahead of the mid-term Congressional elections indicate that voters are denouncing politicians who do not fight for a smaller government.
Such voter vigilantism regarding government spending is not restricted to the US. Fiscal consolidation is in vogue in Europe as well.
The peripheral countries of the eurozone — including Greece, Ireland, Portugal and Spain — have adopted austerity measures under duress because of both market and peer pressure from the core European nations. Countries such as the UK are embarking on a sharp fiscal adjustment to achieve debt sustainability in a pre-emptive manner.
Conventional thinking says that populism involves government handouts. That sentiment was reflected in Bank of England governor Mervyn King’s remarks during this year’s UK election campaign, when he reportedly said the party focused on getting public finances back in order ‘would be out of power for a generation’.
The opposite happened with the Conservatives winning the election on a fiscal austerity platform and subsequently committing to cut UK’s budget deficit from 10% of GDP currently to nearly 1% by 2016.
The debt crisis in countries such as Greece is forcing voters to make tough choices amid growing recognition that government spending has reached a point of rapidly diminishing returns.
Government spending as a share of GDP in many European economies has surpassed 50% and, even then, economic growth has remained very weak over the past few years.
Younger voters in particular are demanding a reduced debt burden by favouring policies that will raise the retirement age and cut the size of retirement benefits.
Interestingly, in Sweden, longconsidered the model welfare state, the centreright coalition led by the conservative Moderate Party has been gaining ground over the left-leaning Social Democrats due to its more marketfriendly economic policies.
Apart from fears that a higher debt burden will lead to a fiscal crisis, the electorate’s aversion to more stimulus spending stems from the fact that the enormous amount of money spent so far has barely changed the economic situation on the ground.
In the US, for one, the current economic recovery has been one of the weakest in post-war history despite the $787 billion in stimulus spending and unemployment has barely declined from its peak rate of more than 10%.
The limited benefits from the government largesse appear in fact to have flown disproportionately to a privileged few; compensation to public sector employees and some of those in the financial industry is approaching new highs.
Almost by definition, a stimulus involves bailouts that end up protecting existing inefficient players but do not provide renewed vigour in the economy.
Some sort of a Darwinian flush is necessary after a long cycle to clear the ground for fresh crop to emerge, and indeed capitalism draws its dynamism from a natural clearing mechanism.
Allowing boom-bust cycles to play out without government intervention served the US economy well in the 19th century, when it emerged stronger after a downturn.
To be sure, policymakers carried the faith in the market’s purging power too far in the 1930s when they left the policy mix of tight money and high taxes in place well after the cleansing of the excesses from the system.
That resulted in the Great Depression, and when parallels were drawn to that era following the meltdown in 2008, the impulsive reaction of policymakers was to do everything it takes to bail out the economy.
However, this time around, governments may have swung to the other extreme by not allowing a meaningful clearing of the rot from the system and, thereby, legitimising a part of the debt binge.
Japan, for instance, has tried to prop up its economy for the past two decades through big fiscal spending and various bailout packages. That has given rise to an increased share of the government in the economy and an associated fall in productivity.
The US by nature is a conservative society with puritan values that does not like too large a role for the government. Expectedly then, the electorate has started sending a message to the incumbents in Washington that it has had enough with all the wasteful government spending given the little it has done to revive growth and the prospect it has brought of higher taxes in the future.
Small businesses, which employ nearly 60% of the US workforce, are not hiring new workers amid concerns over a future hike in taxes to finance the mounting debt load.
The Keynesians still argue that the global economy needs an even greater stimulus to prevent the formation of a vicious spiral wherein sputtering growth yields even wider budget deficits due to declining government revenues.
They contend that worries over a debt crisis are overblown, as bond markets in many of the leading economies from the US to Germany remain quiescent given the very weak private sector demand.
The Keynesian prescription is to plough in as much government spending as the bond vigilantes can take — in other words, until bond yields rise a lot higher.
It seems the Keynesians do not seem to appreciate what the electorate wants. Voters are crying out for lower deficits and less public spending, as they do not want to reach the point of no return for government finances.
The developments in Greece this year have spooked them, as it is apparent that once the bond markets revolt, the only option left is to cut spending in a draconian manner. The electorate also perceives more government spending as a cover for special interest groups that manage to corner much of the extra money for themselves.
This does not imply that fiscal austerity will immediately boost growth either. A fiscal adjustment involves some short-term pain although it can foster growth in the medium to long term, particularly if the route followed is less government expenditure rather than tax increases.
Herein lies the paradoxical problem: cutting deeply-entrenched government spending remains politically difficult even in the wake of all the signals from voters. As a result, any progress in fiscal retrenchment will be slow unless there is an outright debt crisis.
But it is clear that voters are in no mood for a fresh Keynesian-style stimulus spending and the politicians who do not pick up that cue are likely to suffer at the polls.
So, it is now back to Hayekian values that are based on the belief that no one spends someone else’s money better than they spend their own.
This is a radical departure from the popular thinking just a year ago, when the huge stimulus efforts by policymakers had us believe that we are all Keynesians.
Posted by D S Upadhyay , CEO at KFMC | 13 Jul, 2010
Posted by kailash chandra sabat | 13 Jul, 2010
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