By Gareth B

“There is no more persistent and influential faith in the world today than the faith in government spending.” – Henry Hazlitt

The first half of Mr. Kantor’s article published in the Business Day on 19 January 2012, titled “Why agencies should be calling for more SA debt — not less,” features many welcome and commendable elucidations. From the superfluous nature of the ratings bestowed by the agencies that missed the greatest speculative bubble in history to the obvious problem of government labour regulations hamstringing formal employment and the wonderful reference to the direct causal link between the expansion of the money supply and inflation (often a point not openly espoused). In light of this I shall reserve my response to the concluding paragraphs.

To point: “Raising debt rather than taxes to fund capital formation is surely superior from a rating agency concerned more about the growth outlook than current debt ratios.”

The sticking points in these kinds of exhortations are usually definitional. What does Fitch, and the author, mean by “growth”? Do they mean getting GDP to increase because, if that’s the case, then more government-spending and inflation (money creation) is going to help drive that number up because that’s a primary portion of what that statistic is actually measuring. The icing is already baked into the cake, so to speak.

But prior to this Mr. Kantor explains that “…there can be no prospect of defaults on rand-denominated debt, only of more or less inflation, given the unlimited ability of the government to increase the supply of non-interest-bearing rands.” Thus Mr. Kantor’s position is that the negative consequences of his proposal: the ire of the ratings agencies, inflation and more taxes in future, are off-set by the benefits reaped from government making capital “investments” on behalf of the economy as a whole so “growth” can be spurred.

But is the GDP measurement really the “growth” we should have in mind?  It seems like Fitch doesn’t think so as they make it clear their concerns are with private sector employment and the structure of the government’s expenditures as the bulk of the budget pays for bureaucrats and social welfare. As citizens the “growth” we should be hoping for is expanding production, new businesses blossoming, new job opportunities offered and standards of living increasing, not growing government.

In any case, there are a few problems and fallacies surrounding government spending and investment:

Firstly, the government cannot create wealth or resources; it can only redistribute them. In this process the government will use the money it gets from taking on new debt to bid factors of production away from the private sector towards its own projects. As the author proposes that this spending be for “essential infrastructure” it is likely to end up subsidizing services the government has monopolized. Thus, Mr Kantor is in the uncomfortable position of proposing even more money be given to the dreaded parastatals; zombie businesses that are anachronisms from South Africa’s former fascist economic apparatus. These organizations are demonstrably terrible at managing capital effectively and providing efficient, cost-effective services. Many of them could not halt bleeding losses without constant bailouts, let alone make a profit, even with their subsidies and special regulatory breaks! We don’t need them, but we need the services they provide and they are our only choice because of state monopoly privilege so the quandary is of government’s own creation; debt-finance is just feeding the untamable beast.

Secondly, while Mr. Kantor is correct that “essential services” such as electricity, roads etc. would be crucial for the growth of production; the “solution” of having the government allocating resources to these endeavours by taking (albeit in a delayed, insidious manner) the productive gains of the private economy is unjust and inefficient. And how do we even know “we” are making a good investment?

China indulged in similar inflationary and debt-financed policies that centrally-distributed capital investment and has now ended up with a slew of malinvestments; bubbles in real estate, local government and favoured industries while the real capitalist portions of its economy battle with high price inflation. High property and rent prices are rampant in the productive parts of China whilst rural villages of a few thousand people have tremendous skyscrapers constructed in them or whole cities built in the empty Mongolian desert. And the artificially debased currency harms the peoples’ ability to import goods and resources while factors of production that could be applied more productively than government policy are sapped out of the grasp of businesses not connected enough to the ruling elite to receive their good grace.

Though it may seem like not emulating the policies of inflationary and centrally orchestrated “booms” in places like China was a missed opportunity for South Africa, in reality, missing the mania may well be a saving grace for us.

The recent debacle over the tolling of highways in Gauteng is a good example of the aforementioned problems and illustrates that public opinion is finally turning against South Africa’s quasi-fascist model of government service provision. People, whether aware or innate, are beginning to sense the extent of the rip-off. They know they’ve already paid for the shoddily-built roads they use many times over and that the structure of resource allocation and distribution by government capital investment is benefiting those connected to the government; those who spend the new money first and those who can provide the worst product for the cheapest rate. After all, if there’s no market, no competition and no consequences when your service has already been financed by government debt and not the end consumer why expect the situation to improve?

If the government truly wishes to aid businesses and those so in need of economic progress a fundamental transformation of its governing philosophy is required. It must realize the limits of its ability to effectively direct projects and distribute resources and the potential harm caused by utilizing monetary inflation and debt accumulation in this flawed pursuit. Even the most optimistic outcome of central planning would still only be a Pyrrhic victory when the full extent of its effects, both seen and unseen, are considered.

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – F.A. Hayek

Gareth B is an enthusiast of the Austro-libertarian tradition.  Presently resident in Johannesburg, he has also lived and worked in London and Chicago.