(Click chart to expand)
Last week in the FT Martin Wolf sounded a Keynesian battle cry, passionately urging governments to redouble their efforts to use cheap funds to raise future wealth and so improve the fiscal position in the long run:
It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.
Mr Wolf is of course incorrect. It is absolutely conceivable that governments will not be able to earn a positive return on borrowing. Indeed, the United States has spent the entire previous decade borrowing money to invest in highway building and war. Mr Wolf also goes on to use the case of Japan, yet another country that spent 20 years investing in negative return public works projects. Or, as others have described it: paving the country over with cement.
What has the United States won for itself, after a decade of Keynesian largesse and cheap money policy? Mostly, a further increase in poverty. As the Census Bureau reported this week, poverty in America advanced for a third straight year to reach its highest levels since 1993. While Keynesianism appears to have a benevolent, humanistic intent it is greatly disappointing that so many of its advocates do not also recognize its destructive aspects. Yes, free markets misallocate capital routinely. But Keynesianism as a policy also distributes capital unevenly, and unfairly. First receivers of government capital gain competitive advantages. First receivers of easy monetary policy also gain, and become predatory. The housing bubble was perhaps the most spectacular example of the destructive force of easy money, which resulted in a huge transfer of risk and wealth, recycled through society.
But the greatest flaw with Keynesianism now is that, like the economy itself, it has run squarely into the energy limit. As the most recently updated data shows, 2011 will be the 6th year that world production of crude oil was unable to increase beyond the ceiling established in 2005. Oil remains the primary energy input to OECD economies. OECD economies are of course where the Keynesian experiment has flourished longest, first in Japan, then the United States and now Europe. It is hardly, hardly the case that the current financial crisis in the OECD is “simply a matter of accounting.” Instead, the crisis is one of systemic, structural growth now permanently limited by energy costs as OECD economies try to service debt loads that have escaped their ability to manage. Change all the digits, and the energy limit remains.
While I continue to be an advocate of debt jubilee, and, of energy infrastructure Keynesianism (building out more efficient transport and non fossil fuel energy production), the energy-intensity problem of OECD economies is now the controlling factor in the West’s ongoing crisis. The redoubling of government efforts to distribute paper capital to society will not bring forth the cheap energy required to spur the growth Keynesians either assume, or have failed to even consider.