Spending your way to political glory

 

A major institution in Kazakhstan reportedly will unveil a proposal in a few days that the government spend $12 billion more each year for seven years.  This is supposed to create income and jobs over the presidential term of Kassym-Jomart Tokayev.

The idea is that the economy is growing too slowly because people aren’t buying enough.  So the government should give them more money to spend. It need not give them a lot, because they will re-spend what they get.  For example, suppose that the government spends $1 at the grocery. The grocer will take the dollar and spend (say) nine-tenths, or 90 cents, at the drugstore, saving the rest. The druggist will spend nine-tenths of the 90 cents that she receives, or 81 cents, at the newsstand. So far, the dollar from the government has generated another $1.71 in spending, and more rounds of spending will ensue.  That’s the multiplier.

In the 1920s and 1930s, liberal macroeconomists led by John Maynard Keynes developed the multiplier model to help the economy spend its way out of a depression. Under such conditions, the model is fine. People are not buying all that the economy can produce, so unemployment is high.  Spending more can create jobs.

But that is not the case in Kazakhstan. The average rate of increase in prices, or inflation, is a sizzling 17.7% per year. Prices are rising because people are demanding more than firms can provide.  The economy is not in a recession; it is overheating. If the government feeds the flames by spending more, prices, not output, will rise. The tenge will weaken, because foreigners won’t pay those high prices for exports.  And the public will protest the high prices: Remember the fuel-price hikes of January.

Kazakhstan’s economy produces $273 billion per year of goods and services (gross domestic product). At the moment, $273 billion is a generous measure of its capacity to produce.  A boost in public spending of $12 billion would be 4.4% of this amount. That is, demand would overshoot capacity by more than 4%, in addition to the overshooting that already occurs.  More inflation would follow.

Defenders of such boosts in public spending say the central bank can cope with inflation by “fine-tuning.” They’re passing the buck, and for no good reason.  The National Bank of Kazakhstan can only raise interest rates to lower demand, thus undoing the attempt to raise it. And it may accidentally raise rates too high, setting off a recession. So this approach of the big spenders to leave it to the Bank to fix their inflation gains nothing in the end.  And it may lower income and raise unemployment, the opposite of what they want to do.   Yes, the Bank should stabilize prices, but there is no point to getting in its way. It is already doing a miserable job: Its alleged target for inflation is 4-6%.

Those who plan a fiscal stimulus in Kazakhstan don’t understand the problem. The lack is not of demand but of supply. The country needs more capacity: More workers; machines, equipment, and buildings; and knowledge about how to produce (technology). It should invest in education, health, and infrastructure, raising capacity in the long run for Kazakhstanis and their children—not resort to delicious, but dangerous, sugar highs.

--Leon Taylor, Baltimore  tayloralmaty@gmail.com

Note: This update corrects the estimate of 2022 GDP by expressing it in 2022 dollars.

Update, October 11: The International Monetary Fund has marked down its global forecast for 2023.  From the 3.2% growth predicted for 2022, growth would fall to 2.7% for 2023.  Its July forecast had called for 2.9% growth in 2023.  

The IMF's chief economist, Pierre-Olivier Gourinchas, gave remarks that may prove prescient for Kazakhstan.  Governments must borrow less, he said. “Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities...."  

If Astana adopts the proposal discussed here to spend a lot more, it will be at loggerheads with the National Bank, which seeks to cut inflation by raising interest rates.  In an interview with The Financial Times, Gourinchas compared a clash between fiscal and monetary policies to two fighting drivers of the same car.  Markets will ask:  "Which way is that car going? Are we really fighting inflation or are we really stimulating economic activity?”     

  

 References

Chris Giles and Colby Smith.  2022.  IMF forecasts "very painful" outlook for global economy.  The Financial Times.  October 11.

International Monetary Fund.  2022.  World economic outlook report October 2022:  Countering the cost-of-living crisis.  

Good reading

Jeanna Smialek.  2022.  Inflation is unrelenting, bad news for the Fed and White House.  The New York Times.  October 13.