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Against the tide: Is excessive public-sector leverage necessary?

Piling on public-sector leverage in an attempt to cure a recession that was itself caused by excessive private-sector leverage makes no sense. It might even create stagnation.

What’s bugging me?

What’s bugging me is the consensus view that prolonged fiscal and monetary stimulus is necessary to ensure sustainable economic growth. The protagonists of prolonged fiscal stimulus deploy the argument that the economy is a twin-piston engine. Rising government dissaving is the result of falling private demand and thus of rising private saving. If the private piston of growth goes down, the public-sector piston of growth must go up. The marginal savings surplus in the private sector must be matched by the marginal decreases in savings by the public sector. If not, the economy will lapse into depression because of an excess of savings and a dearth of demand.

This is Keynesian economics. But as with all great macro theories, I have my doubts. The current rise in government dissaving is not the counterpart of falling private demand and rising savings. It is far bigger.

No risk of depression

There was never any risk of a great depression, which was a debt deflation spiral, because widely dispersed price deflation never happened and core inflation remained positive. Indeed, monetary policy during this crisis was the antithesis of what happened during the Great Depression. Also, trade protectionism was avoided on a major scale (or has been so far).

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