As the US economic indicators turn down and election year politics heats up,
the calls from politicians for more government intervention and enhanced
economic stimulus are becoming more strident. Last week, with the onset of the
general presidential campaign, and with increased attention on the economy
shown by the Bush administration, something big was in the air. That is, the
kind of massive new federal spending initiatives that we haven't seen since the
Great Society of the 1960s.
In particular, Federal Reserve Board chairman Ben Bernanke's June 4 address to
the rain-soaked Harvard graduating students provided much food for thought. In
it, Bernanke spent a great deal of time discussing both the burdens imposed on
the economy by
high energy costs and dependence on foreign oil and the positive economic
effects offered by more robust fiscal stimuli (which is economic speak for
increasing government spending without increasing taxes).
Bernanke appears to have been laying the groundwork for the next great federal
spending campaign. As has been the case in the past, federal spending is touted
as a means to fix our nation's social and structural problems, while
simultaneously igniting economic growth. Although this is a mix that no
politician can resist, all it promises the citizenry is botched policy and
hyperinflation.
It appears that, despite government statistics showing sluggish growth, our
economy is heading into a recession, perhaps severe. Depression is also a
possibility. While the government and financial elites are only grudgingly
coming to this conclusion, the rank and file has accepted the reality and is
demanding solutions.
The most politically "attractive" way out appears to be to lower interest rates
still further and encourage more spending, both on a personal and federal
level. However, big expansions of government spending may encounter resistance,
and as a result would need to be carefully packaged. Spending on alternative
energy just may fit the bill.
Although few deny that the development of alternative fuel sources would be a
good thing for this country and the world, it is wrongheaded to believe that
government-directed spending can bring about meaningful change on that front.
Government spending involves three major problems: inefficiency, political bias
and major cost over-runs.
Almost without exception, the executives within government (bureaucrats) are
unskilled in business. Although many are academically gifted, few have
experience, or interest, in balancing investment and financial risk. History
has shown time and again that government spending on economic development is
notoriously wasteful and leads to enormous taxpayer liabilities and unintended
consequences. For example, the vast government spending over decades to reduce
US poverty has failed lamentably. Some would argue that it has even contributed
to the institutionalization of poverty. Similarly, increased government
spending on education has led to steady declines in educational quality.
By promoting and sponsoring inefficient solutions, government spending can push
out entrepreneurs who might otherwise revitalize an industry. Indeed, it is
government spending that has almost single-handedly transformed our once great
producer nation into a consumer nation. Once established, government spending
programs never disappear. It is certain that any new bureaucracy created to
develop alternative energy will persist indefinitely, whether or not it
succeeds at all.
What history has clearly shown is that it is government "non-spending", in the
form of reduced taxes and regulation, that has proved the greatest boost to
enterprise.
In truth, politicians are much more interested in the spending than they are in
the results. In distributing taxpayer money, politicians can play the part of
Santa Claus, especially if they don't raise taxes to pay for the goodies. In so
doing, they are reading directly from the textbooks of John Maynard Keynes, who
somehow gained academic transcendence by claiming the government can jump start
the economy by simply printing money and spending it.
Of course, there is a price to be paid for such deficit spending, a little
nuisance called inflation. When the government prints money to meet its
obligations, it debases the currency. In effect, it levies an inflation tax to
make up the difference. If the authorities can disguise the inflation in the
short term, then so much the better for them. Not so much for the rest of us.
No one should be fooled by all this talk of a government-led effort that will
finally wean us from our dependence on foreign oil, rid the planet of its
environmental woes, and supercharge the economy in the process. Instead, it's
simply a recipe for more bureaucracy and higher inflation. Have we all
forgotten how the "Guns and Butter" of the 1960s led to the stagflation of the
1970s? Our politicians are banking on it.
John Browne is senior market advisor at Euro Pacific Capital.
Euro Pacific Capital commentary and market news is available at
http://www.europac.net. Its free on-line investment newsletter is at
http://www.europac.net/newsletter/newsletter.asp
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