In an editorial published on April 30, 2013 under the title:
“Debt and Growth” and the subtitle: “Attacking Reinhart-Rogoff to revive the
spending machine,” the editors of the Wall Street Journal write about the economic
model they choose to follow, saying the following about it: “In our model,
every dollar of government spending has to come from somewhere, which means it
is either taxed or borrowed from the private economy.”
That point is worth discussing in depth, and I'll come to it
in a moment. Before I do that, however, here is what the editors of the Journal
go on to say in that same paragraph: “Thus the crucial issue isn't merely the
level of debt … The important matter is what that additional debt is buying.”
This takes the edge off the accusation they make in the subtitle to the effect
that someone out there wishes to revive the spending machine as if this – in
itself – were a bad thing. Well, the Journal editors now say it may not be all
that bad after all – at least under some circumstances. Fine, and I hope the
apology is accepted by the other side.
This matter settled, we come back to the subject of economic
model. I begin by putting down two points that no side in the debate can
refute. They are these: First, the velocity of money in the system – of which
the government is a part – plays a major role in the matter of growth. Second,
the amount of cash in the system (called money supply) is elastic as can be
seen by looking at the balance sheet of the central bank. And when a bubble is
forming – in housing or the equity markets, for example – the same elasticity
can be seen in the balance sheets of the private financial institutions.
Consequently, if something happens to a society that makes
the private sector reluctant to invest, the money supply may remain high in the
system but the velocity of money will be reduced. This will shrink the economic
growth, a situation that the government can remedy by getting into the loop in
a more prominent fashion thus add velocity to the money. The disadvantage of
this move is that the government must get the money from somewhere. The
question to ask, therefore, is where from?
Well, there was never an objection to the central bank doing
“quantitative easing” which meant that the Fed printed money and exchanged it
with sovereign debt, commercial papers and the like to flood the system with
cash, and get the economy moving again. The idea was that the bank was merely
exchanging cash, which is a form of equity, with assets which are another form
of equity. This would not be inflationary, it was reasoned, because when the
time will come and the economy will have started to grow, things will be
returned to the way they were, thus get back to normal again.
The policy worked for a while but, like their Japanese
counterparts before them, the people at the Fed discovered at some point that
they had reached a saturation level after which pushing money into the system
was like pushing on a string. The money sat in the vaults of the banks, the
safes of big corporations as well as the wealthy but was not moving. If it did
at all, it is because it had found investment opportunities abroad.
As to the local population, it chose to “deleverage” and
repair its own balance sheets rather than spend the little it was earning to
buy anything more than the necessities of life. This kept the local rate of
growth at a low level which is why some people started to say that the
government should get into the loop and help boost the velocity of the money.
This meant that the government had to borrow from a private
sector that was flush with cash it was not spending, or do better than that and
borrow from the central bank at near zero interest rate. The effect of this
would be to put the money in the hands of people receiving entitlements or
welfare or food stamps, for example. The idea being that these people would be
the ones to pull on the string that the Fed could no longer push from its side.
The money should gain velocity, it is thought, thus add to the growth of the
economy.
Time will tell how well this model will work. In the
meantime, however, it must be recognized that this is a model that neither the
Keynesians nor the classicists have seen before. It is a new experiment that
merits a different kind of debate not the going back to old models that no
longer apply as fully as they once did.