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You don’t know Jack

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You don’t know Jack

I am going to focus on two comments made by Jack Mintz, the Palmer Chair of Public Policy at the University of Calgary, in his article in today’s Financial Post. They are related and cast serious doubt on the efficacy of any government fiscal policy.

In the first Jack stated: “It is not entirely clear that the last U.S. stimulus has worked all that well: It modestly dampened rising unemployment, but left monstrous deficits and fears of inflation, thereby creating new risks for the private sector making long-term investment decisions.”

It is easy to criticize. It is much more difficult to offer an alternative solution. What should the US Government and the Federal Reserve have done in response to the financial crisis that overwhelmed policy-makers and the economies worldwide in the late summer of 2008? Nothing?

Sometimes I believe that it is almost a shame that governments and central banks acted. If they had simply done nothing – an impossibility given the political realities of the day and the need to prevent a serious crisis from morphing into a catastrophe – the financial markets likely would have melted down (they almost did after the bankruptcy of Lehman, spurred in part by a chorus of economists screaming “moral hazard”), and the global economy likely would have spun out of control and into an abyss. But at least, inaction would have put an end to the drivel espoused by die-hard monetarists and their neo-conservative economist brethern who fear almost any form of government intervention.

I have applauded Ben Bernanke and the Fed, and I have criticized President Obama for outsourcing the stimulus package, which was sorely needed, to Congress. Action was required! What would Jack have done differently, even with the benefit of hindsight?

Regarding the monstrous deficits in the US, even if the government had done nothing, the so-called cyclically-adjusted deficit would have risen to well over $1 trillion. Indeed, a do-nothing fiscal policy would have left the US with budget deficits in the current $1.5 trillion range, higher rates of unemployment, and much more depressed consumers and business executives.

In the second comment, where Mintz is critical of both the Democrats who want more spending and the Republicans who want more tax cuts, he states: “Neither worries much about the eventual risks – public debt insolvency, inflation and a run on the US currency.”

Nor should they worry about these fantasies. There is no sign of inflation on the horizon; the greater threat appears to be the possibility of deflation. As the deficit has exploded and with it the public debt, long-term interest rates on US Government bonds have dropped sharply. Obviously the bond market does not seem to be concerned with either inflation or the “inevitable” insolvency of the US Government. But then what do people investing trillions of dollars really know, at least compared to an academic?

As for the run on the US dollar, first of all this would help US-based companies and the US economy, and greatly improve the net foreign indebtedness position of the US. However, where would the investors run – the Yen, the Euro, the Rouble, the Yuan? Japan and the EU are even in worse shape than the US. Can anyone really trust their investments in Russia? And there is no way that China will allow a massive inflow of money into its currency.

Mintz continues to miss a major point regarding risk. All investment decisions are forward looking and since they are based on guesstimates at best, they face risks – the risks of wrong assumptions. Risks are inevitable, as are mistakes. Doing homework and preparing contingency plans help mitigate some of the problems. At this time, the greatest risks facing US-based companies stem from the actions of their competitors. The prospects for the US economy might not appear promising, but if the competitors continue to ramp up their investments – in new facilities, technology, products, markets – US-based companies will find themselves falling behind and might have much difficulty in catching up regardless of what their government and central bank might do.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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