Monday, May 23, 2011

Why we should stop worrying about deficits

Deficit Hysteria Redux

In response to Uncle Tom's early post. The conventional wisdom is that Govt debt matters. The conventional wisdom is, as is so often the case, wrong. The same authors have an excellent article debunking much of "This Time Is Different”, Reinhart and Rogoff. Government debt creates a credit balance/asset in the private sector.

Posted by bellwether @ 06:39 PM (1572 views)
Please complete the required fields.



11 thoughts on “Why we should stop worrying about deficits

  • Hi Bellwether

    Choosing this article as a response to Uncle Tom’s posting seems a little odd because Uncle Tom’s article doesn’t even mention government deficits but does talk a lot about inflation.

    Your posting also has some words about inflation:

    ‘Rather than “paying for” government spending, the real macroeconomic purpose of taxes is to keep private income and spending at a noninflationary level.’

    ‘In conclusion, there is no financial constraint on the ability of a sovereign nation to deficit spend. This doesn’t mean that there are no real resource constraints on government spending, but these constraints, not financial constraints, should be the real concern. If government spending pushes the economy beyond full capacity, then there is inflation. Inflation can also result before full employment if there are bottlenecks or if firms have monopoly pricing power.’

    i.e. inflation does matter in MMT and if necessary, it should be reduced by increasing taxation rather than tinkering with interest rates.

    So both articles appear to have something in common although Randall quotes Von Mises so I presume he is into Austrian economics rather than MMT.

    Reply
    Please complete the required fields.



  • bellwether says:

    QG I take your point, I did rather shoe horn the reference in! Apologies. To make good I responded directly on the thread.

    The general thread is awareness that UT is of the belief that deficits and sovereign “debt” really matter and tend to burden future generations, that said I should have made the point better. The article is however good and I urge anyone interested in the topic to read.

    Reply
    Please complete the required fields.



  • stillthinking says:

    Government debt for the population means either, paying taxes to maintain or paying taxes to reduce. Both involve going without for the taxpayer.

    From an extreme, if everybody would be a pensioner in ten years from now, and everybody had their pension as a debt due from the government, then they would be penniless on retirement as their tax rate must equal their pension.

    That the government can spend money into existence is a fallacy. They can never do anything more than transfer wealth because the government has no capacity to produce. I really think that this is one of those things where it is better to think what happens to real goods and services. The -only- time a government can stimulate the economy is when they have previously saved, in our case this could not be further from the truth.

    Surely the whole point of debt is that real stuff is behind your credit note, in the case of the government there is no real stuff apart from what is raised in taxation. That deficits don’t matter is a sophisticated (in the bad lying way) argument.

    How can anybody hold a credit note from the government and think that they have real savings !!!??!!! When the only way the government can ever provide is to raid the production of that self-same credit holder. It’s a circle. There is nothing there. Passing on debt to the younger generation is a different story, but only if you can get them to take it, and if they are stupid enough to take it good luck to them.

    Reply
    Please complete the required fields.



  • @stillthinking

    “the whole point of debt is that real stuff is behind your credit note, in the case of the government there is no real stuff apart from what is raised in taxation”

    That’s a contradiction. When our government sells gilts they have something very real and tangible to sell: all UK taxpayers! Because the government forces us to pay tax in pounds, it can sell a future income stream of pounds to interested parties. It’s not very nice when you think about it; forcing us to pay tax in pounds is a kind of slavery but that’s the way it is.

    Bellwether’s post is a bit long. Here’s something a bit easier:
    An introduction to Modern Monetary Theory
    When I first came across MMT, I was repelled by it but I’m starting to see it in a slightly different way these days so if you find it strange, I can sympathise with that.

    Reply
    Please complete the required fields.



  • bellwether says:

    ST, China is largely a centrally planned (govt run) economy. We could hardly say it produces nothing.

    Reply
    Please complete the required fields.



  • Also http://bilbo.economicoutlook.net/blog/?p=332 – where it’s also argued that in a closed system (net exports = 0) government deficits create nongovernment income such that those deficits equal, by identity, the private sector surplus (net savings, or private sector savings less private sector investment). No government deficit, no net private savings.

    Reply
    Please complete the required fields.



  • stillthinking says:

    Amazingly enough, I don’t live in ignorance because of the exhausting efforts of reading through lengthy pro-debt exposes. I disagree with government debt because its an expensive scam on the population. My point is that the debt is very real, and I would personally prefer the government to not run any up.

    But this is all water under the bridge, because we already committed as a nation to maxing out the credit card so its done whatever the relative merits are.

    Reply
    Please complete the required fields.



  • ST the country does not run on a credit card, and there is no notion that it can max credit out. This is not mere sophistry but a simple statement of fact. It is tempting for individuals to think of state debt as akin to personal debt but there are few similarities.

    Reply
    Please complete the required fields.



  • general congreve says:

    Personally I embrace deficits. The only thing that worries me about the UK deficit is that it is not big enough. C’Mon, full steam ahead to a golden future boys!!!

    Reply
    Please complete the required fields.



  • easybetman says:

    Hi Bellweather,
    You should really change your title to MMTer says deficit doesn’t matter. MarkWandworth did a blog post on MMT a fews weeks
    ago too and one comment says it all – MMT is neat on paper but impossible to implement in real world.

    During the printing process, the money goes to people like bankers. In the taxation stage, the burden falls on the squeezed
    middle class. The result = MMT spring (derived from the term ‘Arab Spring’).

    Further, please name me a government who promised to raise overall taxation and still got elected.

    Reply
    Please complete the required fields.



  • bellwether says:

    Easybetman, MMT isn’t something to be implemented, it is a description of what actually happens. If you read the article you will see that the argument isn’t that deficits don’t matter at all, but that they matter for reasons different to those usually cited. The difference matters.

    General Congreve you are Harold Camping.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>