Big Economic Problems from Big Governments

The G-20 Summit just came to an end on November 16. In order to boost global confidence, the leaders on the 20 richest countries on the planet promised to boost output by two trillions within five years. However, considering numerous “red warning lights” that have popped up, the promise is likely to be broken.

The Rising Sun Is Setting Again

The first warning comes from Japan, which has entered another recession. One of the main culprits is, in the nth rendition of the Laffer Curve, the sales tax increase, which has “drastically changed [consumers’] spending patterns.” You don’t say…

In order to get back to its vigorous growth of the 60s and 70s, Japan needs to get out of the vicious Keynesian circle it’s been trapped in since the 1990s. Indeed, there hasn’t been a single budgetary surplus since about 1993, government (nominal) debt has nearly tripled since that year and economic growth has been wildly yo-yoing (black line, left scale) despite near-null interest rates (blue line, right scale)  – all going in the opposite direction Keynesian logic dictates.

Real austerity measures like Canada enacted in the 1990s and the U.S. in the early 1920s is the best bet to let the Rising Sun shine again.

Japon

China’s Artificial Economic Growth

The Chinese neighbor also needs to learn to slow down government spending, as it’s one of the main reasons why the economy keeps growing so much. Non-profitable infrastructures and the corresponding local debt problem, ghost cities and overcapacity are just few of the problems incurred by such spending, very similar to what Japan lived in the late 1980s.

Should the Chinese economy crash, or at least slow down significantly, there will be repercussions to regions that have profited from natural resources export like Australia, Brazil and Africa. If it happens, then governments need to resist the Keynesian siren song if they want to go back to real sustainable growth, i.e. not driven by artificial incentives such as those seen during the housing bubble.

The Deflation Boogeyman

Europeans would do well to learn this lesson, and they too have followed Lord Keynes’ advice of deficit spending. France, Italy, Greece and the United Kingdom, just to name a few, have all tried to spend their ways out of the recession, without much success – what more, the first three are all in violation of the Stability and Growth Pact, stating that deficits can’t be above two percent of GDP.

Such weak growth spurs the fear of deflation, i.e. a fall in the general level of prices. Fortunately, this fear is unfounded as deflation and depression don’t seem to be linked. In fact, deflation should actually be welcomed as it will help speed up recovery like no government on central bank stimuli can do.

In short, Prime Minister David Cameron is right to be worried about these warning lights on economic prospects. And in order to turn them off, he needs to revisit his famous countryman’s advice to have minimal government, which will spur private initiative and cause an enrichment of society.