Still Getting Economic Policy 180 Degrees Wrong

In economic policy, there is one big question, which is, to improve the economy, should the government spend more or should it spend less?  Obviously these two things are the opposite of each other, and both can't be right.  If one is right, the other is wrong, and indeed destructive.

To decide the right answer, we can look out into the real world for evidence of what works.  And there we find the absolute champion of fiscal discipline, where government spending is well less than 20% of GDP, namely Singapore.   Singapore has averaged 5.28% annual growth of GDP since 2007 (a period that includes the financial crisis) and has unemployment of around 2%.   There is an abundance of jobs for young people.

At the other end of the scale, where government controls absolutely everything, we have Cuba and North Korea.  The people starve.  And of course there's the blow-out spending champion, claiming to "help" its people with every kind of handout and the most massive government housing program ever attempted -- Venezuela! How's that going?  Well, it seems that Venezuela has $5,3 billion of bond payments due in October, and it can't pay both those and also for its imports of food and consumer goods.  So as it saves up money to pay the bondholders, everything is disappearing from the stores.  There is a "massive default on the country's import chain."  From Bloomberg News on September 8:

With foreign reserves at an 11-year low and arrears to importers growing, Venezuelans are struggling to find everything from basic medicines to toilet paper. And prices are surging on the goods that they can buy, saddling the country with the world’s highest inflation rate.  The nation’s bonds are sinking as President Nicolas Maduro fails to stem the crisis, extending declines today.

And in Europe, where government spending hovers around or even above 50% of GDP for almost all countries, the economies languish.  OK, Switzerland does very well; but its government spending is well below that of all its neighbors, at about 34% of GDP.    Really, this is not all that complicated.

Enter the UN, OECD and World Bank.  These are the grand know-it-alls purporting to tell the governments of the world what to do.   The three have just come out with a big joint Report prepared for something called the "G20 Labour and Employment Ministerial Meeting" that took place in Melbourne, Australia on September 10-11.  And what solution do these grand know-it-alls propose for the world's economic woes?  You guessed it -- higher government spending. 

OK, their recommendations are couched in nearly impenetrable doublespeak.  Try this:

In conclusion, the current situation calls for strong and well-designed employment, labour and social protection policies to address both cyclical and structural challenges, applied in conjunction with supportive macroeconomic policy mixes. The effectiveness of such policies would greatly increase if actions are taken collectively at the G20 level in a coordinated manner.

The "supportive macroeconomic policy mix" thing is their code for more government spending.  And then, pay particular attention to that last phrase, which demands that "actions [be] taken collectively at the G20 level in a coordinated manner."  Translation:  none of you are allowed to cut spending and prove us wrong by outperforming the rest of us.

The New York Times jumped right in on September 20 to parrot the line of the international organizations.

The report is clear that when consumption and investment wane, government is supposed to make up the shortfall to revitalize the economy.

Well again, the options are increasing government spending and cutting government spending.  Both can't be right.  In one direction lies Singapore and Switzerland, and in the other Venezuela, Cuba and North Korea.  Turns out that all of the UN, OECD, World Bank and New York Times favor the direction of Venezuela, Cuba and North Korea.  No surprises there.  But how could such seemingly authoritative people be so completely and utterly wrong on something so important and so obvious?  Got me.