Let's get Fiscal
This is a meandering sort of piece with no overarching conclusion – just trying to get some perspective on government debt and finances. The US just rolled out a $1.9 Bn stimulus plan which is likely the largest stimulus on record. And with an eye-popping sum like that, the natural question is what else could have been done.
As policy levers Central banks have been called “the only game in town”. However, I believe fiscal firepower has a more interesting future role to play and may be set for a conceptual overhaul. With near zero interest rates, monetary policy has run it’s course. There are some non-traditional uses of China is spending massively on the “Belt and Road Initiative” to rework its entire economic model which could potentially inspire other mega projects. Mega Projects are nothing new of course – the Marshall Plan is a good example of fiscal firepower being deployed for larger aims. A fanciful example from history is “Atlantropa” – a project promoted by German engineer Herman Sogel to build hydroelectric dams and drain the Mediterranean basin. He believed the added landmass would provide a peaceful solution to problem of Lebensraum (“living space”) – one of the key geopolitical goals of the Nazi Regime. On a more grounded With the impending arrival of 5G, IoT and autonomous vehicle networks, there will be competition for infrastructure overhaul. And not all of it can be done by the private sector.
More generally there is the success of statist governments like China, Singapore, Taiwan, Korea and the UAE who have directed their economies very closely. Taiwan for instance, worked to bolster its scientific and technical capabilities and developed an unmatched Semiconductor Industry with global champions like TSMC. China which imports the vast majority of it’s infrastructure, is attempted to do the same with SMIC. And these developments are really about moving the whole country up the manufacturing value chain. It’s really an open question as to whether governments should pursue targeted investments and use fiscal firepower to do so if needed.
Lastly, there are speculative proposals like Universal Basic Income and schools of thought like Modern Monetary theory which effectively do away with traditional fiscal policy. UBI gained a bit of traction during Andrew Yang’s presidential campaign, and world-wide cash handouts in the wake of the pandemic are in effect a potential step in the same direction. With widespread impending automation, some sort of cash payment may actually become mandatory.
Going through the details of the $1.9 Tn stimulus package, there is stuff like a $350bn allocation for states (presumably for bailouts). And this isn’t really an argument against the stimulus or its contents per se. Lots of dollars are needed to just to compensate economic impact of COVID. Frankly, I don’t’ have enough knowledge of the US to comment on granular details. But the quantum looks sufficient to invite further discussion at least. Silicon Valley’s annual Venture Capital spend comes in at only $34Bn. And that’s money put to good use as Silicon Valley is practically the lynchpin of America’s economy – so likely some of these allocations could likely have been put to uses with better returns whether on economic or human capital.
The picture gets interesting if you overlay country budgets side by side. I’ve put in US against China its key competitor; thrown in the UK as a comparable developed economy; Sweden as representing the hallowed “Nordic Model”; Hong Kong as the epitome of the Free Market; and Singapore as a successful planned country. Note that data may be off, as budget categories aren’t consistently disclosed across countries and just typing it out is a strenuous activity. Feel free to point out, as I’d love to correct it when I have time.
(figures in USD Bn)
Some interesting observations pop up. In the US, Individuals contribute to the bulk of taxation revenues in the US. Which on the face of it is a very surprising observation, considering the strength of the US private sector. It also has the highest defense spend as a percentage of outlays. China looks to be more evenly distributed in that regard. Hong Kong get’s a significant chunk of its revenues from land taxes (being the most expensive real estate market in the world).
Looking at where the outlays go, it’s better to look at things on a per capita basis. The UK seems to raise the most per person followed by Sweden. Social security and Healthcare per capita are actually is actually higher in the UK and the US vis-à-vis Sweden, likely reflecting inefficiencies or perhaps just higher costs in those countries. The two countries also have a significant interest burden, which is easily the equivalent of a major head like Education or Health. Singapore allocates a substantial amount for “Economic Development” related to targeted policies on Trade, Industry, Transport and Manpower.
(figures in Actual USD)