The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

A Member of the Law Professor Blogs Network

Tuesday, April 23, 2013

EconoMonitor : EconoMonitor » On Japan’s Widowmaker Trade and Reinhart and Rogoff

The real fear with government deficits and debt is waste, corporatism and corruption. I actually wrote extensively about this after another interview with Lauren Lyster last year. We should just spell it out for people instead of making things up. That’s what this is all about. People are concerned that government is a poor allocator of capital and that allowing it to deficit spend on a large scale and add net financial assets to the private sector is going to lead to economic underperformance. Think about the bailouts for example: don’t they lead to some companies that couldn’t make the grade getting a second go at competing with companies that could? How is that good for growth? A bailout is a risk shift, a socialization of losses. It takes private losses of some economic agent in the private sector and shifts them onto the public balance sheet. This keeps that economic agent in business and keeps jobs in place. But I would argue it lowers long-term growth. That’s what is wrong with large-scale deficit spending (and easy money): it helps keep zombies alive either explicitly though direct bailouts or implicitly through reflationary policies that goose GDP or lower the cost of capital of marginal enterprises, shifting capital investment toward those marginal companies and projects.


Correctomundo. --ts

| Permalink