On Deficits and Stimulus

I had quite a lively response to my previous post "Are Wars Good for the Economy?", and decided a followup post was in was in order.

I don't disagree that government spending can boost the economy, by definition it adds to GDP. The only concern I have is with deficits and debt. When the the economy is doing well, you should balance your budget or run a surplus, and when the economy is doing badly, you should borrow to increase GDP through spending or tax cuts (which one you choose can be battled out later, I actually like that this one has a mix of the two). The problem as I see it is that we were running huge deficits before the economic crisis, and while it is definitely in our short term interest to go even more into debt to get us out of the economic funk, it is in our long term interest to show the international markets we're borrowing from that we're going to spend responsibly in the future and that we won't run huge deficits when our economy is growing again. If our international lenders don't think we will be fiscally responsible in the long term, they would stop lending and things would get much worse and fast.

And small note on war and the economy, there have been significant extenuating circumstances the times when war has been seen as stimulative in the past, and there are even more examples of when it has been anything but stimulative. I hope that spending that money on making stuff at home instead of on blowing stuff up overseas might have a slightly more stimulative effect. My fear is that looking back we'll find that it doesn't matter what you spend government money on, it matters how you finance it.

Becoming the Land of the Setting Sun

Dear Japan,

Japan we love you, but it’s time that you faced the fact that you’ve got a problem. You mean a lot to us - so much so that our new secretary of state went to visit you before any others. But after the lost decade of the 1990s, you can hardly afford to have your GDP shrinking at twice the pace of the GDPs of America and Europe - 12.7 percent last quarter according to Bloomberg.
It breaks my heart to say this, but you need to come to grips with the fact that if you keep this up, you won’t be the world’s number two economy for much longer.

We’ll still be there for you, but you have to understand that we have problems of our own. I know that it may hurt your feelings, but you should know that our new leaders might suggest sometime soon that is time for you to officially establish a military to help us out with East Asian security. On the surface it may look like we are being selfish, or that we are trying to leave you, but you don’t need to worry - our special relationship is not over, it’s just changing. Please understand that this request comes out of a deep respect for you and our belief that it could even help to revitalize your manufacturing industry. Just understand that we still care about you, and we only want what’s best for you. Please stay in touch, and let us know if there's anything we can do to help.

Sincerely yours,
-America

Are Wars Good for the Economy?

There is a myth that wars are good for economies, and as evidence people point to World War I and World War II. This is not the case. It is important when discussing the extreme budget deficits and borrowing during World Wars 1 & 2, that America was mainly borrowing from its own banking system. More importantly, America was neutral during much of both of these wars, and during that time Europe was purchasing weapons and borrowing money from us, and it was the eventual repayment of these loans enabled the post war booms in America following both wars. America was doing great after the World Wars, but Europe was not. England and France lost their empires, and Russia and Germany lost even more.

Some have said that the only way to get out of our current economic funk is by entering into a war, or using an equivalent amount of government spending. The fact is we've been at war for seven years. The problem is that we've borrowed all of the money to conduct those wars, and thus our economy worsens.

Looking back at the example of World War II, the United States is playing the role of the European countries, while China is playing the role of America - sitting back and lending as we get in way over our heads.

Speaking macro-economically, war and long term overspending is not good for the economy. It is good for the lenders, but not the debtors.

I'm Back!

My thesis is complete, I've got my Masters Degree, I'm in a new job where I have the freedom to blog, and I've finished my new more serious blog template. What's more, I've had quite a few things I've been wanting to write about, so get ready for an onslaught of posting! I also want to reintroduce my personal blog I've neglected: mrbento.blogspot.com. For friends and family, or anyone else who is interested, I'll be putting all further non-international politics postings over on that blog. One request though, please comment to let me know what you find interesting!

It's great to be back,
-Adam