Governments around the world have embarked on the greatest financial experiment of all time. That experiment has been labelled by the media as "stimulus" and involves a mixture of government aid, tax relief, unemployment payments and central bank money manipulation on the grandest scale imaginable.
We’re tripping over the financial crisis can that was kicked down the road in 2008/2009, but instead of addressing the issue of national profligacy, governments are doubling down.
In a recent article for the Financial Mail, Maarten Ackerman, Richard Calland and Mike Law put this recent stimulus at close to $12-trillion, about 8% of global production (SA’s great big stimulus stumble, August 6). All this state and central bank action is premised on the idea that governments can prime the pump, restart the economy, rekindle the animal spirits and defibrillate the deviation from the business cycle. But can they?
In the US, after the onset of the pandemic the federal government passed laws allocating $2.2-trillion of congressional funds to various aid and fiscal relief packages. This was accompanied by the US Federal Reserve issuing $4-trillion of newly digitised currency in exchange for every imaginable debt the financial markets could muster.
In 12 years the Fed has taken its balance sheet from $1-trillion to $7-trillion, 61% of which comprises US government bonds in some form or other.
In SA, our government was not quite in the same position. There is talk of R500bn "injected" into the economy, 40% in the form of a government promise to stand behind loans issued by private banks. A further R130bn will be reprioritised funds, that is, tax monies re-allocated rather than additionally drawn from the economy. That leaves about R170bn than can be defined as any kind of stimulus.
The perennial question that is never answered is how it can be that a country can stimulate itself. By what means can a nation be prodded or cajoled to make more in one financial year than it did in the previous year? Is "stimulus" any kind of meaningful word when applied to nation-state economies?
Since John Maynard Keynes and his general equilibrium equations, economists have proposed policies that view the economy as some kind of machine with levers. From "investment-savings" and "liquidity preference-money supply" (IS/LM) graphs to dynamic stochastic general equilibrium models, their complexity speaks more to the increase in modern computing power than to any intellectual insight.
They rely on parameters within equations that summarise the totality of the human experience - our desire to spend or save, to invest or to hold off, to hire or fire. A few tweaks on the levers, a twist of the dial, and voilà! Full employment, zero inflation, a Keynesian utopia.
However, there is much academic scepticism about our ability to model the economic world with such mathematical substitutions. The biggest problem with such models is the assumption that what has gone before will remain true. If savings were "x" and interest rates are lowered to "y" then output moves to "z". But as Goodhart’s Law states, "any observed statistical regularity will tend to collapse once pressure is placed on it for control purposes".
In other words, people look at their governments and second-guess them; people are sneakier than stochastic models allow for.
In 1976, Robert Lucas nailed the point home when he showed how basing any economic policy on historic priors was doomed to failure if people could modify the behaviour on which those models were premised. For the most part, the Lucas critique stands unchallenged.
Like karma, credits are offset by debits in the real world. For every stimulus measure a debt is raised that has to be paid back. In other words, for every year of stimulus we have corresponding payback years.
Since 1995 the SA government has registered a budget surplus only twice. We have been receiving "stimulus" for 23 years, and the result so far is a negative per capita growth rate and a public debt figure that has gone from about a third of GDP at the start of the century to 62% in 2019.
As we know, our more recent stimulus will blow this out of the water. Online dictionaries don’t have a direct antonym for stimulus, but suggestions include deterrent, disincentive, discouragement, depressant.
Setting aside fiscal stimulus for a moment, the world is also witness to an insane global experiment in monetary expansion. SA is yet to truly embark on money printing, thanks to sensible caution at the Reserve Bank, but its US counterpart has been less than modest. The amount of money issued by the Fed involves a mind-blowing number of zeros, and it is hard to see how this will end well for the dollar.
This purchasing of financial assets, lowering yields (and exploding share prices), purportedly injects money into the economy. Ackerman, Calland and Law slipped something similar into their article, claiming "cutting rates by three percentage points in the year to date ... is equivalent to a R100bn injection".
Pensioners, on the other hand, will tell you that every 25 basis point gain to a mortgage holder feels like it comes directly out of their pockets. Lower interest rates do not give money to people; they merely transfer wealth from one group of consumers to another.
While a zero interest-rate policy ostensibly benefits consumers, it makes a mockery of everything we understand about economics and consumer behaviour. How are we to choose between consumption today and deferral to production tomorrow if our discount value is zero? If we are neutral to time, we become gods. Today, tomorrow; it matters not. Whither stimulus?
The idea of economic stimulus is therefore flawed, but we should not confuse this with state aid. The government had limited choices in shutting down parts of the economy, so policies such as the Temporary Employer/Employee Relief Scheme, PAYE payment deferral and the social relief of distress grants were practical solutions to the very real problem of human desperation.
SA will not be the only country to suffer hard financial choices, but it only makes things worse to twitter “stimulus” at a government whose cupboard is bare.
This article was first published on BDLive on 13 August 2020