Monday, Dec 14, 2009
This is how you do it Darling
Mail online: Slash spending - Ireland shows us how it's done
First, we know from the 1980s how large deficits, left unchecked, can lead to a dangerous spiral of mounting debt and ever increasing interest payments. Never again should we return to a position where all of our income taxes go to pay interest on the national debt.
Lenihan added: ‘In our everyday lives we do not borrow to pay for our household bills. We cut back and seek to live within our means. The same strictures apply at national level. Borrowing hundreds of millions a week to pay for day to day spending is just not on. Stabilising the deficit is the next key milestone in our plan to deliver economic recovery for this country.’
Posted by waitingtobuy @ 06:12 PM (788 views) Add Comment
8 Comments
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1. icarus said...
Let's not get caught up in the idea that all government deficits are bad and all GDP growth is good. China shows that there can be 'bad' 8% GDP growth (bridges to nowhere, new, empty towns, loans that won't create the revenue to repay them). Similarly government deficits can be good if they create real demand and employment and get the economy rolling again. The test of government deficits is whether they do this, not how big they are.
The 'governments are like households' line is nonsense - at least for a country with its own currency. If the US has a government deficit that deficit equals the total net increase in dollar financial assets of the non-government sector (households, businesses, foreigners). The government spends money by electronically crediting bank accounts held by the non-government sector. A trillion-dollar government deficit means the private sector has a net savings increase of a trillion dollars in financial assets, which can be spent on investing in businesses or buying goods and services and creating employment. If people are deleveraging and saving more than they spend then there will be excess capacity and unemployment unless the government runs a deficit.
Deficits and dollar-printing are just tools, and like any tool they can be used well or badly. Pumping money into the banks, where it sits or is used to inflate asset prices, is where one major "mistake" lies (probably not a mistake though, since it enriches those who swell party coffers). Pumping that money just about anywhere else would have done more good.
Before we pat the Irish Teashop on the back for being prudent let's see first whether this action works to prod the Irish economy into life.
2. shipbuilder said...
Good post, Icarus. Balanced views are getting rare round here these days.
3. Si said...
It sounds horrible over in Ireland. I seriously do not wish it over here.
Increasing taxes must be a better way out of this.
P.S. Since when has the mail become a reputable news source?
4. andrew said...
Absolute BS post Icarus, money borrowed has to be paid back and if it cannot be paid back then we have the current situation that we find ourselves in.
Governments do not create employment, they can only plug the gap for a while.
5. icarus said...
"Money borrowed has to be paid back". Nobody's denying that.
Next line is meaningless. BS? Look in the mirror.
6. Fraggle said...
I have to disagree Icarus. Governments *are* like households in this respect.
The rule is that households should not borrow for day-to-day spending (ie for it's necessary expenses), because it makes the future meeting of those expenses harder. Unnecessary expenses should be cut first. Borrowing is usually acceptable if it will be invested in a worthwhile endeavour, although it's still better to use savings for this, as a misallocation does not then affect other expenditure.
To argue against this rule applying to government, is to argue that borrowing does not have a cost. While this may seem superficially true for a government with its own currency, the cost in the case of unsuccessfully invested printed money is inflation ('cause in effect the money was borrowed from everyone that currently holds some, or is immediately due to receive some)
The confusion arises because it can be argued that what *constitutes* investment or day-to-day spending is different between households and government. The underlying principle, however, remains the same.
7. icarus said...
I can only re-iterate my second para @1. Government deficits = monetary savings for the non-government 'sector', including foreign holders of assets denominated in the currency. The US government neither 'has' nor 'doesn't have' dollars, just as a cricket scoreboard neither 'has' nor 'doesn't have' a hoard of runs. The govt's crediting accounts with computer-entry dollars is similar to the scoreboard's crediting a team with runs. A government with its own currency cannot run out of money as a household can.
As I said, this money-printing and deficit spending can be done well or badly, but that's a different discussion. Talking of the US, there's big positive correlation since WWII between govt deficits and economic growth. Eisenhower's road-building and other infrastructure programmes in the 1950s is only one example of strong growth and large deficits.
8. Fraggle said...
And I can only reiterate that it's wrong! :)
True, a government cannot run out of the currency in nominal terms, but the relationship to cricket scores ends there. If the cricket scoreboard was run in the same way as the money supply you'd have to inflation adjust the second teams scores to check if they actually beat the other team or not. In fact, this analogy bears further analysis. Why does the scorer not just hand runs out if there's an unlimited supply? Because it would be fraud. A run on the board represents the batters *actually running*. There are rules defining what a run is and what happens if those conditions are not met. It's those rules and the enforcement thereof that enable a run to have its 'value'. If the rules were not enforced, nobody would care what the score was, or make any decisions based on it. At the end of the day, a unit of currency needs to be worth something if it is to continue being traded.
With regards to the debt = savings argument, you need to remember that the government needs to reclaim the money at a later date via taxation. It is not savings in the account of the company, it is a loan to the company with a taxpayer guarantee, except that the company in question has no loan terms. It doesn't know it's meant to be paying it back! Now if the company then makes a good investment with that money, it will eventually be a net gain for the government, but not only does that depend on the company making a good investment, there will a be a lag before it comes to fruition. Until then it's still a drain. And if it *is* misallocated, it's a leveraged loss which makes it even worse.
You are correct that whether it's done well or badly is a different discussion, but you seem to be claiming that there is no practical limit to the amount of borrowing a government can do (making comparisons to households misleading), and that is simply not true. Yes, they can always print, but as Zimbabwe found out, printing doesn't solve everything. Their foreign currency liabilities did not (root) cause their problems, they accelerated them. Having our liabilities in sterling buys us time, but we can't keep promising runs forever. At some point, we will need to actually make our ground, and then a few more for the interest.
The practical limits to our borrowing is the servicing costs. Right now, that is being held down by low interest rates. As soon as they go up we're in deep trouble. Right now, the confidence trick is holding, but we're playing chicken against a truck while driving a Mini. Our bluff will eventually be called.