Tuesday, Mar 23, 2010
Forget everything you ever knew about budget deficits
The Nation: In Defence of Deficits
A big deficit-reduction program would destroy the economy. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession--even to a second Great Depression. For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. Bankers don't like budget deficits because they compete with bank loans. Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Too much spending, net of taxes, may lead to inflation, often via currency depreciation--though with the world in recession, that's not an immediate risk.
8 Comments
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1. mark wadsworth said...
I read as far as this Big Fat Lie: "the economic engine of the private credit system" and decided that the rest was probably tosh as well.
If "putting money in people's pockets" is a good idea, how about tax cuts (on everything but land or property values)? Doesn't that stimulate the economy far more than the government spending our money on whatever it is that Byers, Hewitt, Hoon and their ilk tell them to spend our money on?
2. easybetman said...
Nah... most of the government spending goes to companies that deliver services to the government and to civil servants. Also, deficit spending is nothing other than a deferred taxation (unless UK population wants to vote for default in a few years time , then the lenders will take the hit).
Based on this, it will be a current or deferred transfer of fruit of labour / wealth from about half of the country to the other half (those who supply services to the goverment, often at inflated prices. A friend told me of a cable that cost £3 and was sold to a government department for £40m, as well as those who work for the public sector).
If anything, I much prefer government mailing a prepaid credit card to each of the UK tax payer or tax cut.
3. 51ck-6-51x said...
Dr James K. Galbraith certainly has the credentials, but what is he on about here? He says, and I think this is the crux of his argument, that public deficits are good because they never need be repaid. That's not the same as having no cost.
4. quiet guy said...
"With government, the risk of nonpayment does not exist."
I suggest that anybody who believes this should convert their savings into long dated gilts.
"Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid."
As 51ck-6-51x has highlighted, our creditors expect to be paid.
http://www.telegraph.co.uk/finance/economics/5881107/UK-government-debt-almost-9p-of-each-1-in-tax-will-be-needed-to-pay-the-interest.html
"Bonds owed by the government yield net income to the private sector"
This would be true if US Treasuries were only being sold in America but in practice, the USA can export its inflation due to its reserve currency privileges - for now.
"For functional credit to return, we'll have to reduce the unpayable private debts now outstanding, to restore private incomes (meaning: create jobs) and collateral (meaning: home values)"
So he wants another property bubble. Perhaps this is a revealing indicator of Dr Galbraith's concerns about the economy.
5. uncle tom said...
There is a tiny bit of logic here as far as the US goes, but it doesn't work for the UK or most of europe.
The population of the USA is growing at about 1% p.a. - over three times faster than in the UK - this presents a growing army of taxpayers, which is statistically significant.
They also have quite a lot to gain from a devaluation of the dollar - they need to become more economically competitive, to cut unemployment; and while that will push commodity prices higher, the fact that most Americans never venture beyond their borders, and are well disposed to the concept of buying American; means that the pain would be outweighed by the gain.
It is logical and sensible for the Americans to tackle their budget deficit without excess haste. The same argument does not hold water in the UK.
6. drewster said...
I'm glad the article has stirred up some opinions. For the record, the writer is the son of famous economist J.K.Galbraith (according to Wikipedia).
It dovetails nicely with my theory that printing sovereign debt is the same as printing money. Both are only as good as the issuing government's word. Both are inflationary (and so is bank-created credit). Paying back government debt (i.e. running a budget surplus) would reduce the money-supply, and in consequence trigger a recession. Indeed, as this article goes on to point out:
So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions--with each surplus followed by a recession.
Since the BoE started their quantitative easing, we've been complaining about "printy printy" and the risk of inflation. However the government has been quietly inflating away for years, thanks to the ever-expanding budget deficit.
Can this go on forever? I don't know. But it seems to have worked so far.
Incidentally, China's boom also appears to be linked to deficit spending:
Reuters: China's State Budget Deficit is Tip of Iceberg
7. mark wadsworth said...
Drewster: "It dovetails nicely with my theory that printing sovereign debt is the same as printing money."
That's not a theory, that is cold hard fact. Psychologically there are subtle differences, and they can have different impacts on long and short term interest rates or inflation, but that's just details.
"Paying back government debt (i.e. running a budget surplus) would reduce the money-supply and in consequence trigger a recession"
Quite simply not true on the facts. The Australian government, for example, has been running a small surplus for decades and they are doing OK (until their house price bubble inevitably pops). In the late 1990s the UK government was pretty close to running a surplus and we were doing very nicely thank you.
8. drewster said...
Mark,
You are correct. I was over-simplifying. What matters is overall credit growth. In the current climate, where private credit is contracting, governments are minded to borrow heavily in order to maintain the overall level of credit. This prevents deflation (in particular HPC), which, although we would welcome it, would cause unemployment to rise and generally make the government unpopular.
As Australia's housing bubble shows, private credit growth has more than made up for any government budget surplus.