Why America's Having the Wrong Economic Debate
It's every talking head's favorite topic: to restate the obvious, America and Europe are having raging debates about deficits and budgets.
But to state what should be obvious--these debates don't matter. They're smokescreens: second, third, or perhaps fourth order problems.
The reason's simple. To satisfy the austerians, let's assume we balance budgets today--through the most vicious of austerity programs. To satisfy the Keynesians, let's assume we then stimulate fiscally, to recover some of the lost ground in terms of employment and aggregate demand. These stylistic changes will alter, for a very short while, GDP growth, and perhaps, to a small extent, employment, income, current and capital accounts, and, if we're really lucky, even net wealth creation.
Yet, unless we go deeper, and reboot the institutional fabric of the economy, another full-blown financial crisis is simply likely to recur--soon. Think about it this way. Financial and economic institutions--banks, funds, corporations, credit rating agencies, to name just a few--are mostly the same as yesteryear, structurally and functionally. In fact, it's still largely the same people, chasing the same short-run incentives, trading mostly the same instruments, products, or services, for the same purposes, in the same markets, utilizing the same asset bases, with the same investors.
In short, from a substantive point of view, little or nothing has changed (sans the largely toothless, superficial financial "reforms" so heavily, sharply, and ceaselessly critiqued by Paul Volcker, Simon Johnson, Bill Gross, and Raghuram Rajan, amongst others).
Let me put that more simply. It's the bailouts, stupid. See the chart? It says, incontrovertibly, that the deficit spiralled into oblivion primarily because of yesteryear's bailouts--not for all the panoply of largely illusory reasons politicians and pundits are throwing about carelessly and thoughtlessly.
Hence, I'd suggest that even should we "resolve" the deficit debate today, we're simply likely to find ourselves back in exactly the same position a few short years from now. Or perhaps even a significantly worse, more toxic, one, a deeper hole, if you take on board Andy Haldane's "doom loop" scenario. Because, as the chart implies, we remain unprotected from the deeper immediate cause of imbalanced budgets--crises, crashes, and blowups. Think: bubble, crash, collapse--wealth transfer. And another round in the vicious cycle of austerity, instead of steps towards prosperity.
Imbalanced budgets in the simplest sense represent near-term misallocation and malinvestment. The right solution isn't merely passing the buck, by slashing expenditures. It is, more deeply, institutional reform--to ensure that malinvestment becomes productive, long-run, investment in tomorrow.
It's an institutional crisis--a crisis that strikes at the heart of capitalism. We're treating it like a minor mishap, that a bit of political triage can quickly paper over. It can't--and the longer we persist in this fundamentally misguided direction, the deeper and harder this Great Stagnation's likely to get.