The US economy is on ‘government life support’, but instead of spending trillions of dollars to prop up its ‘unviable’ economy and repeat Japan’s mistakes of the past 20 years, policymakers should overhaul the economy by investing $3 trillion in 21st century industries, reasons fund manager and economist Richard Duncan in his most recent book The Corruption of Capitalism: A strategy to rebalance the global economy and restore sustainable growth. In an interview with DNA, Duncan also explains why he believes that China’s export-led economic boom of 20-plus years is at grave risk. Excerpts:
There’s been a revival in the US economy, and banks are returning their TARP funds and paying out big bonuses. Is America back in business?
The US economy is on government life support. In 2009, US GDP will contract probably 2%. Had it not been for the government spending through a 10% budget deficit, GDP would have contracted by 12%, perhaps more. And unemployment would have gone up to well above 20%. In other words, it would have been a replay of the Great Depression.
Next year too, the US economy will be completely dependent on government life support. As long as the government spends another $1.4 trillion, the economy will be just fine, but it cannot function in the absence of government support, and would collapse into a Great Depression. For years to come, the economy will have to be supported by massive government deficit spending.
Governments around the world responded to the economic collapse with massive public spending that Keynes would have approved of. What’s wrong with that?
Keynes’ masterpiece, The General Theory of Employment, Interest, and Money, was published in 1936, and it didn’t have any influence on how governments responded to the Great Depression. The Keynesian theory was never put to the test. Now that we’ve fallen back into a New Depression, it’s been tested. Governments implemented extreme Keynesian policies to prevent their economies from collapsing into a Depression. But because Keynes’ theories weren’t tested during his lifetime, he didn’t offer us any recommendations on how to get economies off the government life support. That’s the problem we’re confronting now. Governments are supporting the economy, and if they stop spending, the economy goes back into severe recession. We need to take Keynesian analysis further. Not only do we know that we must spend to support the economy when a very large credit bubble implodes, we now need to figure out how to use this government spending wisely so we can restructure the US economy and permanently resolve this crisis at its very core. At the core of the crisis is the fact that the US economy is not viable the way it’s currently structured. It makes very little that the rest of the world cannot buy much cheaper elsewhere.
So what’s the permanent solution?
The Congressional Budget Office projects the US budget deficit will be $7 trillion over the next 10 years. (Their assumptions are wildly optimistic.) Spending that money will support the economy just as massive Japanese government spending has supported the Japanese economy over the past 20 years. But Japan’s spending hasn’t fixed Japan’s problem. Japan stimulated the economy by building bridges to nowhere and really didn’t achieve anything. US policymakers should learn from Japan’s experience, recognise that they’re going to have to spend enormous amounts of money to support the economy and understand that it would be a disaster if they spend it in the same way that Japan did.
Instead of spending $10 trillion and getting nothing expect further deindustrialisation of the US over the next 10 years, US policymakers should invest an extra $3 trillion over that 10-year period in solar energy, genetic engineering and biotechnology and nanotechnology - the industries of the future. It would be possible to completely restructure the US economy so that it could make products that the rest of the world desperately wants, which they can’t buy anywhere else at any price. That would solve the crisis in the US economy.
How can the $3 trillion be raised — and is there political appetite for higher deficit spending?
The expansion of government debt in Japan to more than 200% of GDP demonstrates just how great a government’s capacity to borrow is. It’s true that Japan had the advantage of domestic savings, but the US too has other advantages.
But my bigger point is that the money is available. During the bubble years (the 1980s in Japan’s case, and the 1990s and most of this decade in America’s case) enormous amounts of profits were made. When the bubble bursts, that money realises that if it doesn’t shift from speculative ventures and become invested somewhere safe - like government bonds - it will be destroyed. So it’s the profit made during the bubble years that make it possible to finance very large deficits that are necessary to support the economy after the bubble pops.
That’s what we saw in Japan, and that’s what we will see in the US - and in China as well when China’s bubble pops.
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