Red Ink, the Budget, and the Economic Outlook

Red Ink, the Budget, and the Economic Outlook
China Times editorial (Taipei, Taiwan, ROC)
A Translation
August 4, 2009

[ Editor's note: For the record, the Keynesian economic analysis and economic policy prescriptions recommended in this editorial are exactly wrong.

For the correct analysis and economic policy prescriptions, see:

The Myth of Good Government, by Llewellyn H. Rockwell, Jr.
http://www.lewrockwell.com/rockwell/myth-of-good-govt.html ]

The central government is working on next year's budget. Should the government concentrate on balancing the budget and reducing the deficit? Should it concentrate on limiting the expansion of fiscal policy and bolstering the economy? No one can agree. Now would be a good time to offer some views on the current situation, the prospects for the economy, and the lessons of history.

It has been nearly a year since the global financial tsunami broke out. Most economies are still experiencing negative growth. Their annual growth rates are negative. But their quarterly growth rates have turned positive. Taiwan's fourth quarter growth rate last year was -8.61%. This year's first quarter growth rate was -10.24%. This year's second quarter growth rate will be -8.5% In this year's fourth quarter however, the growth rate will be 5.2%. Last year's fourth quarter and this year's first quarter were both down over 5%. But this year's second quarter turned positive and showed a growth rate of 0.34% This year's third quarter showed a growth rate of 7.66%. Therefore the current tsunami probably bottomed out in the first quarter of this year.

Global financial markets have also rebounded strongly. The Dow now stands at 9000 points. The Hangseng has jumped to over 20,000 points. The Nikkei has zoomed to 10,000 points. The Shanghai Composite Index may return to 3400 points. The TAIEX has returned to 7000 points. Orders for listed companies and revenue expectations for the future have also turned positive. Although annual growth rates are still negative, quarterly or monthly growth rates are positive. Order visibility has been increased to several months. Based on these figures and on vendor reactions, we are undoubtedly seeing the seeds of recovery.

But as we revisit the past, so-called economic recovery is not a matter of course, straight-line trend. One must understand the cause of an economic downturn. Premature removal of the factors aiding economic recovery could cause the economy and financial markets to return to previous lows.

During the normal business cycle, economic decline naturally leads to lower interest rates and lower production costs. Eventually the economy reaches a point where manufacturers decide there is a profit to be made. Manufacturers increase their investments. Consumption gradually increases. And the economy gradually recovers. But in the event of a bubble economy and the financial turmoil that follows, national wealth is often substantially reduced. In order to survive, companies must drastically reduce corporate debt. Financial institutions are unable to provide loans. Companies across the nation deleverage themselves. At this point, one must rely on strong fiscal measures by the government to bridge the gaps. If the government prematurely withdraws its financial support, the economy may bottom out once again.

Japan's experience with a bubble economy is a living history lesson. After Japan's bubble economy of the 1990s burst, Japan lost more than half of her wealth. The economy depended entirely on 10 to 20 trillion yen in annual government debt. It was revived by fiscal policy support. This ensured that Japan's GDP would not be significantly reduced by the global recession. But in 1997, as the economy began to recover, the Ryutaro Hashimoto government promoted its fiscal consolidation program. As a result the economy immediately collapsed. It experienced five quarters of negative growth. In 2001 the Koizumi government made the same mistake. Koizumi trumpeted financial consolidation. He limited the amount of new bonds that could be issued annually to 30 trillion yen. This was insufficient to make up for the economic shortfall. The results was a rapid deterioration in the economy, and a blow to the financial markets.

What was the payoff for financial consolidation? The answer is, it was a negative one. Hashimoto's goal was to reduce the deficit by 15 trillion Yen. But the economy was dealt a serious blow. Major tax cuts were counterproductive, and eventually increased the deficit by 16 trillion Yen. Koizumi's fiscal consolidation ultimately increased the debt to 35 trillion Yen. Earlier, during the Great Depression of the 1930s, the United States government's New Deal fiscal stimulus led to an economic recovery. In 1937 however, in order to "balance the budget," it scaled back prematurely. It reduced expenditures. This dealt the economy another blow. Industrial production plummeted 33%. The stock market plummeted 50%. Instead of decreasing the deficit, it increased the deficit.

The financial tsunami has forced governments the world over to join hands to save the market. They have injected liquidity into financial markets. They have also adopted an expansionary fiscal policy. So far these policies have been effective. Global financial markets have rebounded. The real economy has successfully negotiated the trough, and is beginning to take off. Recently they held several large-scale international conferences. The participating countries agreed to consider exit mechanisms to avoid future inflation. But they also stressed that "now is not the time to exit."

Therefore, the government's 2010 budget will remain a deficit budget. Overall expenditures fell 3.8% from 2009. But an economic stimulus package will increase domestic demand. The budget adopted will reflect continued expansion. We believe that the weak economic recovery must continue to receive support. The government must make these expenditures and assume responsibility for them. During the coming year, domestic unemployment will continue to increase. The government must not prematurely withdraw its fiscal support in order to balance the budget.

But what about leaving the debt to our children and grandchildren? What are we to do about that? If the government attempts to balance the budget, and thereby reduce the debt left to our children and grandchildren, the results may be counterproductive. Japan's example is a warning. Once the economy has recovered and stabilized, tax revenue will naturally increase. The budget deficit can then be reduced. The government can gradually reduce the support it provides the economy. That will be the right time for fiscal consolidation.

中時電子報 新聞
中國時報 　2009.08.04
就先暫時赤字吧─談總預算與景氣
本報訊

明年中央政府總預算正籌編中，對政府該以預算平衡、減少赤字為重，抑是持續擴張財政政策，以支撐經濟為主，各界一直有爭論。在此不妨以景氣現況與前景、過去歷史的殷鑑，嘗試提出一些看法。

去年爆發全球金融海嘯至今，已接近一年了，雖然大部分國家的經濟年成長率，仍在負數，全年也仍難轉負為正，但季成長率則已轉負為正。以台灣而言，經歷去年第四季八．六一％的衰退，今年第一季衰退更達十．二四％，第二季預估也將衰退八．五％，一直要到第四季才轉為五．二％的正成長。但以季成長率而言，去年第四季與今年第一季衰退幅度都在五％上下，但第二季則轉為○．三四％的正成長，第三季更成長七．六六％，因此，這波海嘯的谷底應落在第一季。

此外，全球金融市場也都已強勁反彈；美股站穩九千點，港股飛躍過二萬點，日股衝上萬點，陸股上證指數看回不回到三千四百點，台股也回到七千點。上市公司的接單、營收及對未來的預期，也已轉負為正，縱然年成長率仍在負數，季或月成長率則多已呈現正數，訂單能見度已提高到數月。由這些數據與廠商反應看，復甦幼苗已現當無疑義。

不過，回顧過去的歷史，所謂的經濟復甦，不是一個「理所當然」的直線趨勢，如不能深入理解經濟滑落的原因，過早撤除幫助經濟復甦的助力，經濟與金融市場，仍有可能回落到低點。

在一般的景氣循環中，景氣滑落後自然產生利率下滑、各項生產成本降低，終而到廠商認為「有利可圖」的區間，接著是廠商增加投資、消費逐步加溫，終而讓景氣上揚。但在大型泡沫與金融風暴之後發生的景氣循環，則往往面臨全國財富大幅縮水、企業為求生存強力減債、金融機構貸放能力縮水等全國性的「去槓桿化」收縮效果，此時，就是要靠政府強力的財政措施去彌平這個缺口。如果政府過早撤回財政支持，景氣可能再落回谷底。

日本走過泡沫經濟的歷史就是一幕活生生的教訓。九○年代日本泡沫經濟之後，全日本財富損失過半，經濟全靠政府每年十幾到廿幾兆日圓的預算赤字，所推動的財政政策支撐起來，因而讓日本不至於陷入ＧＤＰ大幅衰減的大蕭條困境。但一九九七年，在景氣已漸有生息之際，橋本龍太郎政府推動財政整頓方案，結果經濟隨即重挫，產值連五季萎縮。二○○一年的小泉政府再重蹈覆轍，小泉鼓吹鞏固財政，限制年度新公債發行額數量在三○兆日圓內，但卻無法彌補經濟缺口，結果讓景氣再急速惡化，金融市場重挫。

整頓財政的成果呢？答案是適得其反。橋本的目標是降低財政赤字十五兆日圓，但因經濟大受打擊，稅收大減，最後反而是預算赤字增加十六兆日圓。小泉的整頓財政最終也讓預算赤字膨脹到卅五兆日圓。而更早前的三○年代大蕭條，美國靠新政的政府財政刺激出來的經濟復甦，到一九三七年又為了「平衡財政」而過早縮手、削減支出，結果經濟再受重創，工業生產急跌卅三％，股市又暴跌五○％，財政赤字則反而增加。

這次的金融海嘯，全球政府聯手救市，除了挹注流動性資金到金融市場外，也採擴張性的財政政策。目前看來，這些政策已發揮功效，全球金融市場紛紛反彈，實質經濟也走過谷底穩步上升。過去一段時間的幾個大型國際會議中，雖然與會各國都同意該考慮政府的「退場機制」，以避免未來發生通貨膨脹；但也同時強調，現在「還不到退場的時候」。

因此，對政府在九九年度預算中，繼續採赤字預算，整體歲出雖然較九八年減少三．八％，但對擴大內需的刺激經濟方案，預算額度將採持續擴張的編列，我們認為是現階段支持微弱的經濟復甦幼苗，政府必要的支出與承擔的責任。更何況，在未來一年中，國內失業率仍將持續飆高下，政府不應過早為平衡財政而撤回對經濟的挹注與支持。

那麼，債留子孫，怎麼辦？務實的講，現在政府為平衡財政、不要債留子孫而削減財政支出，結果可能適得其反，日本的例子殷鑑不遠；經濟回春穩定後，稅收自然增加，財政狀況即有改善餘地，政府亦可逐步抽回減少對經濟的支撐。這時，才是整頓財政的適當時機。