Plenty of editorial space has been dedicated lately to the dearth of fiscal stimulus measures being globally employed — and the overabundance of “austerity” measures, ostensibly referring to some countries’ mix of (typically) tax increases and government spending cuts.
From Fisher Investments’ perspective, though, this is largely betting on the wrong racehorse — namely, the government.
Consider: Under both austerity and stimulus programs as described, the primary focus is on the government’s role. And it’s presumed “austerity” won’t work because it cuts back government’s role, while the exact opposite is believed of stimulus — that it will help spur economic growth precisely because it boosts government involvement in the economy.
As big fans of the private sector, we rather find such arguments off base in a few respects.
First, suspend for a moment the assumption economic growth hinges on government action — and instead accept that the primary engine of global economic growth is actually the private sector. Operating from that starting point, presumably most global governments seeking to spur economic activity would focus their efforts on measures aimed at helping the private sector.
Then, austerity could possibly look more like tax cuts and maybe decreasing the government’s overall size relative to the private sector. “Fiscal stimulus” would be far less necessary — rather, it would seem crucial to leave as many dollars in the private sector’s hands as possible so it might employ them how it best sees fit.
Which makes the UK’s recent fiscal stimulus plans interesting — because it plans on achieving it through the private sector.
In other words, rather than allocating government funds directly to infrastructure projects, the UK plans to provide guarantees on up to £50 billion of private investment in infrastructure projects.
According to The Wall Street Journal, “The plan, called UK Guarantees, is designed to use the strength of the public-sector balance sheet to accelerate major infrastructure projects that have stalled because of difficulty accessing private funding amid tough credit conditions.”
Now to be sure, the government guaranteeing loans isn’t exactly laissez faire — there’s still some government meddling there, but it’s far better than the government just spending the money itself. To the extent it’s successful, which remains to be seen, this sounds like a win-win, to us.
After all, government spending is indeed part of the GDP calculation — simply represented by the acronym, CIGX (Consumer spending + Investment + Government spending + Net Exports). So that governments are involved at all isn’t so much the problem — it’s when government presumes itself the primary economic driver that the potential trouble starts.
Because the reality is the private sector has been proven time and again the far more efficient employer of capital — primarily because in order to survive in an extremely competitive (and now, near-universally global) economy, businesses must use capital efficiently and earn a profit.
If they’re unsuccessful, they go out of business, whereas no such motive really exists for the government — if it fails to earn a positive return on its investments or never earns a dime, it doesn’t go out of business. The government’s aim is entirely different, which is not necessarily a bad thing, but is certainly a detriment when it comes to best determining how to effectively deploy capital in an economy.
Rather than a global boosting of fiscal stimulus and abandoning of austerity measures altogether, we suggest instead governments consider the Brits’ planned approach to infrastructure investment — and finding ways for governments to promote private efforts at boosting economic activity.
In the long run, they’re far more likely to be successful (and possibly profitable) at what seems very likely an ultimately lower cost overall to taxpayers — always a plus.
-Amanda Williams, Fisher Investments Editorial Staff
This article constitutes the views, opinions, analyses and commentary of the author as of July 2012 and should not be regarded as personal investment advice. No assurances are made the author will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.