Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday, 9 November 2015

Where would you get the money from?

In the recent furore in the UK over tax credits, I do not recall any government minister being asked the following question by a journalist: why don’t you just borrow more? Yet to any economist that is the most sensible, and indeed obvious, question to ask.

I just do not think most journalists (and I’m tempted to write and therefore politicians) have yet realised this crucial difference between austerity in 2010 and austerity now. [1] In 2010 debt to GDP ratios were rising fast, everyone was talking about market panic, so people like me who thought deficits should be larger had some explaining to do (although, as Ben Bernanke recently said, we were right). But now austerity already enacted has stabilised debt to GDP ratios, not just in the UK but in the US and Euro area. Over the next five years debt to GDP ratios in the UK will be falling.

This means that further austerity is no longer about stabilising debt and an imagined market panic. Instead it is about an obsessive need to cut debt to GDP really fast, or more likely a desire to shrink the state. It isn’t primarily about Keynesian economics any more [2], but instead about any kind of economics. Remember there are no economists prepared to defend Osborne’s fiscal charter. In economic terms the fiscal charter itself is the real embarrassment. The issue is no longer do we increase the level of government debt for the sake of the economy, but do we need to raise tax credits or cut vital public services just in order to cut government debt quickly.

Perhaps the most charitable explanation for this failure of journalism is that most people do not understand some very basic points. Governments running surpluses are rare. Unlike individuals, nearly all governments have always had a large amount of debt. Unlike individuals, nation states live for a very long time. Because the amount they produce also grows over time (real growth and inflation) that means that the ratio of debt to GDP (which is what matters) can stay constant even if they run deficits. For example with debt at 80% of GDP, and a conservative estimate of average 4% nominal growth, the UK’s debt to GDP ratio would stay constant with a deficit of 3.2% of GDP.

3.2% of GDP is a lot of money. It means the government could run deficits of £60 billion today (£70 billion by 2020) and not raise the debt to GDP ratio. By comparison, the now derailed cuts to tax credits were worth less than £5 billion, and the spending review is trying to save £20 billion.

So here is a simple exam question for journalists. If any politician over the next 5 years proposes not to cut some item of expenditure, or not to raise some tax, and they are asked where is the money to do this coming from, which of the following answers is most convincing?
  1. We would generate more tax receipts by making the economy stronger.
1/10. Every political party thinks their policies will raise growth and therefore bring in more revenue, but they should never rely on this happening. In some cases political parties (pretend to?) believe things that we know are untrue, like tax cuts will pay for themselves. Of course some policies, like cutting tax credits, could well damage the economy by reducing labour supply, but again it is highly unlikely that such damage would make tax credits self-funding. So any interviewer would be quite right to raise their eyebrows at this answer.
  1. We would save money by making public spending more efficient.
1/10. Same problem as above.
  1. We would print more money.
3/10. Not as silly as it may sound when central banks have already created a huge amount of money (QE) to buy government debt. So no raising of eyebrows (or worse) appropriate in this case. But in the current UK and US context (but not the Eurozone) where central banks are talking about when they might start reducing QE it looks like an answer which is out of its time.
  1. We would cut the following expenditure instead, or raise the following taxes, or get rid of the following tax breaks.
8/10. A good answer, particularly if the funding measures are specified and the sums are realistic and not double counted. Works in all seasons. Right now opposition parties have plenty of scope here, as Jolyon Maugham spells out.
  1. We would borrow more.
10/10. In the current UK context the best answer, although if you had given this answer in Ireland or Spain in 2004 you would get 0/10. It may seem too easy to be true, but in the rather peculiar circumstances where you have a Chancellor that is pursuing reckless austerity for extremely dubious reasons it would be utter foolishness to turn your back on this gift horse.

Yet most politicians are incredibly reluctant to give that answer, in large part because they think they will get the raised eyebrow treatment from journalists or worse. So we have the crazy situation that no single economist is prepared to endorse the fiscal charter, but pretty well every journalist treats any suggestion that we should depart from it as unacceptable. That just cannot be right.

[1] Andrew Rawnsley rightly points out that the political reaction to the tax credit cuts over the last five months shows how little most journalists know about ordinary people as well as economics (yes, that Westminster bubble), but he fails to note the critical role of the fiscal charter, and so treats the need to find some extra money as self-evident.

[2] There still is a Keynesian argument about risk, but take that away and the case for a more gradual pace of deficit reduction is still very strong.   

64 comments:

  1. "But now austerity already enacted has stabilised debt to GDP ratios, not just in the UK but in the US and Euro area. "

    I find this a very unfortunate sentence, when all the evidence that we have got in the past 6 years shows that there was easily enough hysteresis to make the long term fiscal situation worse from austerity. OK, you might argue that enacted austerity has stabilised it as in stopped it from falling, but I doubt many people would understand it that way.

    Debt to GDP has stabilised despite the destructive austerity as it soon became clear that there was no way a country with a central bank (or even an association of countries with an institution that finally decides to more or less play the role of a central bank) would default, which fear was what temporarily drove interest rates so high. Austerity did not help at all in bringing them down, and indeed the UK had higher rates than Japan and the US, who were not engaged in as much austerity -not any in the case of Japan.

    I think I know what you are trying to say, but to see you quotable as stating that enacted austerity has stabilised the debt ratio seems to be conceding a very wrong, and politically destructive, point.

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    1. You are right that I was wrong to presume this. But what I would take issue with is its importance. The possibility that austerity (compared to delaying fiscal consolidation until interest rates are higher) permanently reduces GDP is strong enough on its own to condemn austerity - you do not need the argument that austerity also makes the D/Y ratio worse.

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    2. You and I agree on that of course.

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  2. I do like the penultimate sentence in the above article, however I don’t agree with the big difference in points out of ten awarded above to No.3 (print money) and No.5 (borrow more). Points were 3/10 and 10/10 respectively.

    Reason is that (as pointed out by Martin Wolf) there is little difference between base money and debt at a low rate of interest. Thus “borrow” at a low rate of interest is almost the same as “print”. In fact SW-L’s only criticism of “print” is that “it looks like an answer which is out of its time”: not very convincing.

    In fact I’d go further: borrowing (i.e. taking money off the private sector) is deflationary. Now what’s the point of doing something deflationary when the object of the exercise is the opposite, namely stimulus or “reflation” to use a word that is no longer fashionable?

    In short, I sympathise with the idea put by Milton Friedman and Warren Mosler namely that we should dispose of all government debt: i.e. put an end to government borrowing.

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    1. "In fact I’d go further: borrowing (i.e. taking money off the private sector) is deflationary. Now what’s the point of doing something deflationary when the object of the exercise is the opposite, namely stimulus or “reflation” to use a word that is no longer fashionable?"
      Hmm, I disagree. "Printing" is less likely to cause inflation than "borrowing."
      But if that liability is "more money" then taking money off the private sector it is not. The swap is largely pointless.

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  3. Your timing could not have been better, particularly, regarding the "imagined market panic" the BBC have, with no critical consideration or representation of alternative views dutifully reported that "Mr Osborne warned that if the government does not control spending and reduce levels of national debt there is a risk of loss of confidence in the economy."

    G.O: "I know some ask: why do we need this surplus?...I'll tell you why: to protect working people. A surplus will make our country more resilient, safe and secure. It means that next time we have the money to help us through the tough times when the storms come. Let me put it another way: if our country doesn't bring the deficit down, the deficit could bring our country down. That's why, for the economic security of every family in Britain, the worst thing we could do now as a country is lose our nerve."

    Is no journalist/interviewer ever going to put him on the spot with the evidence, showing yields on 10 year UK treasuries falling even whilst the deficit ( and debt) was soaring during the 2008-10 period when no deficit reduction was taking place (and yields RISING during 2012-14) when deficit reduction policies had been in place.
    http://www.tradingeconomics.com/united-kingdom/government-bond-yield

    You couldn't make it up...

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    1. The storms will come if Osborne runs a budget surplus. Clinton ran a surplus during the 90's which resulted in the Dot.com bust of the early 2000. When the government runs a budget surplus it sucks spending and private sector wealth out of the economy. With Britain's ever incessant expanding trade deficit and private sector debt based over consumption the economy will become lop sided and fail miserably.

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    2. Indeed. Though the question remains as to why such economically illiterate and deceitful claims made by G.O...which are so easily disproved and shown to be complete nonsense go almost completely unchallenged in the media. Lies made by most people in public office are at least based on half truths or are ambiguous enough for them to accuse their challenger of misinterpretation. After all, who would dare make deceitful, obvious falsehoods when they know they could so easily be found out? Most people don't, unless of course they know that their deceit will go unchallenged by a very compliant media which fails the public miserably (informing the public, or at the very least providing a questioning stance and presenting alternative views/ explanations...as in the case of the BBC, who did neither.) would it be too much to ask for the media to point out that market sentiments and default risk are indicated by govt bond yields...rising or falling, and that osbornes claims do not correspond at all with the U.K. Bond yields as I described above. Easy to understand...rising yields implying worsening market sentiments and risk, not controversial, and offering a more complete, informing narrative to go with (and reveal) osbornes bare- faced lies.

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  4. Apropos of your comments on option three, I'd be very interested to read your thoughts on Adair Turner's argument in his new book, which argues for overt monetisation of debt (which is presumably equivalent to the monetization of a portion of government expenditure).

    I also don't understand why:

    a) given that inflation is nearly 2% below target (and there is talk in some quarterss of raising that target), there isn't room to print a bit of money, even if in small amounts;

    b) why it isn't possible to trade off extra QE/overt monetisation against additional rate rises -ie absorb any inflationary consequences of the extra money with rate rises. In such a case there would seem to be several positive consequences, including discouraging asset speculation/rising personal indebtedness that comes from low interest rates, and using money to meet structural macroeconomic objectives, eg investment or reducing debt.





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    1. I have written a lot in the past about helicopter money. On (a), the answer is that if the Bank thought the economy needed any stimulus right now, it would cut interest rates. On (b), you cannot do this because money financed fiscal expansion is ruled out by having an independent central bank, unless that bank did helicopter money.

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    2. Thanks. Isn't monetising debt different than helicopter money (which has only ever been tried in Australia, as I understand it), because it accrues to govt not households?

      On a), I was assuming they were worried about further fuelling asset bubbles - and they are close to ZLB, which you yourself alays pointment to as a constraint. Given that inflation has been consistently below target and investment is low, why doesn't it automatically follow that more stimulus is needed? Eg because of anticipated delayed affect of low interest rates to date or something?

      In the case of b), why couldn't the MPC formally be given that option, and asked to target eg productive investment or low total indebtedness levels as well as inflation? Or any other institutional arrangement - point is, institutions should be designed to enable good policy options to be implemented. So if this is a good policy option, why not alter the precise relationship between govt and central bank, or terms of bank mandate, to enable it? Eg bank could decide if any amount would be made available consistent with mandated objectives, then govt could decide precisely how to spend.

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    3. Anon, Re “a”, low inflation is partly down to the collapse in commodity prices. Once that’s worked it’s way thru the system, I gather inflation will rise by nearly 1% all else equal. But I agree: there’s room for a bit of printing.

      Re “b”, I think you’re making the popular assumption that because interest rates have been falling for 20 years, that therefor they are ARTIFICIALLY low. I’d argue that, on the contrary, rates have been artificially high for a long time because of the huge amounts borrowed by government – borrowing which I claim is pointless. My reasons are here:

      http://ralphanomics.blogspot.co.uk/2015/11/a-brief-guide-to-why-government.html

      Re the last sentence of your 15th Nov 15:16 comment, that’s exactly what is advocated by Positive Money, the New Economics Foundation and Richard Werner. See:

      http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf


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    4. Relatedly, a month ago you were saying talk of rate rises was a product of convention that they tend to come in at this point post crash, rather than for any more fundamental reason, and that rates should be cut instead. So why not print money instead, I'd that's the case? http://www.independent.co.uk/voices/comment/this-recovery-is-the-slowest-for-at-least-a-century-so-why-do-rates-have-to-rise-10489130.html

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  5. Nobody prints much of anything now.
    You "get the money" from spending the money (from HM Treasury's cash buffer). This then generates an amount of tax and saving. The government can voluntarily swap reserves for Gilts at a higher rate.
    The amount of tax and "deficit spending" to "fund" the spending is decided *after* the spending.

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  6. It's utterly fascinating to watch an Oxford economics professor here who cannot differentiate between the total tax take and the distribution.

    Changing the taxation alters the distribution and arguably makes it 'fairer', but it won't eliminate the deficit or even change it substantially. And that's because the deficit is caused by the savings desires of the private sector. The government has little influence on it. It is what it is.

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    1. You really ought to read some basic macro. A cut in taxes will only have no influence on the private sectors financial balance if they spend all of the tax cut.

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    2. They don't.
      The gross saving rate is 11.6%.

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    3. Look, I'm simply explaining that to get the deficit down you have to reduce the savings rate. And you do that by confiscating people's financial savings or forcing them to borrow more (and in a way that doesn't stop them spending.)

      There is *no other way of doing it* in the round.

      Currently for every £100 the government spends it gets £89.40 back in taxation and £10.60 goes to an increase in the net savings in Sterling of the population.

      Taxing the rich and spending on the poor is classic 'balanced budget' multiplier stuff that has *limited effect* in an open import deficit nation. (Essentially the spend leak to imports and you can't tax foreigners that easily).

      Many of the poor have loans with high interest rates and pay them down as they are living hand to mouth.

      You may be able to increase activity but you will not affect the deficit rate unless you affect savings behavior.

      And the question then is why do you want people to have less savings and more borrowings?

      "You really ought to read some basic macro."
      I see classic lines like this :

      "Tax cuts are only one third as effective as government investment in new capital spending projects"
      and the complete bullshit is then backed up by some magic number calculation that shows the multiplier is 1.5 for capital spending and 'only' 0.5 for tax cuts. Obviously the bigger number is better because, well, it always is isn't it.

      On the other side you have this belief that if the multiplier is less then 1 for any activity then you shouldn't undertake it.

      Let's expose the assumptions those statements are based upon:

      1. There is a fixed amount of money available
      2. If the government spends from this fixed pot of money, it automatically crowds out an alternative activity with a multiplier of one.
      3. That you can ignore the effect on the distribution of savings.

      All of those beliefs are rubbish.

      The debate is always based upon an amount of government expenditure. Functional finance thinking shows this is putting the cart before the horse. Rather than saying how much output can we get for £10bn of government action, we should be saying given we have a GDP output gap of £80bn how much do we need to deploy on the various policies to get that - given the multipliers and savings/income distribution of those policies.
      There is this idea that government actions inevitably prevents private sector action. This is crowding out again. Endogenous money theory demonstrates that the money supply is elastic. It goes up and down as required by the demands in the economy. You won't run out of money. So if there is stuff stood idle, it can always be brought into use without affecting anything else.

      So suggesting that government action with multipliers less than one shouldn't happen is nonsense. It ignores the value of net-savings. It ignores the obvious point that a do-nothing alternative means that nothing additional happens.

      Relieving the burden of debt on individuals is a valuable action. It makes them feel more secure and therefore more likely to spend in the future. It reduces the size of bank's balance sheet in the economy and allows you to narrow them more easily - diluting their economic power so that they are no longer too big to fail.

      I think that's something we should be looking at doing. Yet you'll still get people pointing out that it has a low fiscal multiplier and we'd be better off building bridges to nowhere instead.

      The issues are what is the output gap, what are the current savings distributions and what are the desired savings distributions.

      Government then does functional finance to hit that.

      Any thoughts?

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    4. Wren Lewis (this post!)
      "In some cases political parties (pretend to?) believe things that we know are untrue, like tax cuts will pay for themselves."
      Things that we know are untrue ;)

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  7. How long would raising the amount of money a government prints work for reducing the debt to GDP ratio? Is there a point where this method may no longer work? You rated this method as a 3/10, so I was just wondering how it effective it could actually be.

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  8. Maybe the whole low-wage / tax credit system is seen as a subsidy to low-value employers and something that the UK government should not be doing.
    Taking value out of the more productive elements of the economy in order to sustain low value parts does not seem to be a good use of resources.
    In that sense, borrowing more to reduce the value of the economy seems like a bad idea.

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  9. Questions from a non-economist: If you reduce the amount of money circulating in the economy (say by taking £5 billion out of the pockets of consumers) does that not also reduce GDP by some measures?
    Conversely, if you borrowed £5 billion and gave it to consumers, would it not raise the GDP?

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    1. I too am a non-economist, but since no one else seems to be answering this question and for the sake of a challenge, I will, if you don't mind, have a go.

      Under normal circumstances the preferred method of stimulating economic activity and thereby raising GDP is to lower interest rates. This encourages spending by reducing both the attractiveness of saving and the disincentives to borrowing. Greater spending promotes economic growth because firms employ those who would otherwise be unemployed in order to meet the new demand. Under circumstances such as the present ones, however, in which interest rates are already just about as low as they can go (i.e. close to zero) then, yes, in answer to your second question, simply giving consumers more money, probably by means of helicopter money, may be an effective way of stimulating economic activity and so raising GDP. As I understand it helicopter money as generally conceived is done by simply creating new money, rather than by borrowing. Presumably this is because the point of borrowing money as opposed to simply creating new money is to avoid increasing the total amount of money in circulation while the point of helicopter money is exactly to increase the amount of money in circulation. Borrowing money (i.e. taking it, albeit temporarily, from someone else) would defeat that object. Simply increasing the amount of money in circulation will not always have desirable consequences. If there is little slack in the labour market (i.e. if there is little unemployment or underemployment) then the increased cash in circulation will not lead to higher productivity (since in that case we're already working at close to full capacity) and will lead only to rising prices. Similarly, taking money out of the pockets of consumers, probably by means of tax rises, will, by the same token, yes, in answer to your first question, probably have a contractionary effect on the economy, reducing GDP. Like I said, though, I'm not an economist. There are probably dozens of mistakes in what I've just written.

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    2. I suggest that you stay a 'non-economist' and think in terms of value instead of money.

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  10. In communicating with journalists, I think as many medium- and especially long-term graphs you have available to make your point the better.

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  11. Today the UK 10 year gilt is a little over 2%. The German 10 year is under 0.7. When a country can borrow at what is an effective real negative rate who is borrowing from who? The problem with question is not how the government can get hold of money, but how it can get rid of it, without having to spend it on something. The exam question is: how can govt send net financial assets to private business and so sustain their profits without expanding the state's share of GDP when other sources of profit are closed (households fully leveraged / current account in deficit). Answers on a post card to No 11 Downing St.

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  12. What's the qualitative difference between 1, 2 and 5? Surely, the assumption is that assitional borrowing will be invested such that it adds to growth, as in 1 and / or improves existing services as in 2. Or are you advocating borrowing just for the hell of it?

    The only sensible question is not: 'where would the money come from?' (which reflects a widespread misunderstanding about the dynamic nature of balance sheets), but: 'what are you going to do with the money?' which is implicit in answers 1 and 2.

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    1. "Or are you advocating borrowing just for the hell of it?"
      No. It's to give corporate welfare away.

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  13. Young George could remove the tax subside to BTL landlords, worth 12billion I think (if anyone has a different figure feel free to correct me).
    He could get HRMC to chase up tax avoiding companies with a serious will.
    He could only give the winter fuel allowance and free TV licenses to people with no occupational pensions(which tends to be the better off middle/upper class).
    These tax credit cuts are like his balanced budget, politicking of the worst type.
    The aim is nothing more than to shrink the state and leave the 99% more vulnerable to rentier exploitation.

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  14. Is there no difference between stabilising the debt-to-GDP ratio at 80%, 40%, or 300%? Is the actual level of debt irrelevant, as long as it isn't increasing? Genuine question. The point of austerity is presumably to stabilise debt at a lower level than it currently is.

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    1. Genuine answer - we do not really know. The general feeling is that current debt to GDP ratios are too high, but no one has a good idea of what the optimum level might be.

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    2. "Genuine answer - we do not really know. "
      Then stop worrying about it. Let the deficit and "debt" float - let us decide what they are through our actions.
      The question is the real resources, and what to do with them. We can eliminate current econ departments and have them monitor real resources, like the work done at the Levy Institute.

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    3. Debt levels are not very meaningful if no account is taken of the assets side of things. Current debt level would be too low if, say, most power plants, rail operations, much of London land... were in public hands.

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    4. So "we don't really know" but there's a "general feeling" (very scientific!) "that current debt to GDP ratios are too high".
      Yet in the article you state "the ratio of debt to GDP (which is what matters) . . ".
      Make your mind up. Seems to me we have tyranny by arbitrary numbers. Let's worry about the real stuff.

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  15. You discussed the consequences of raising taxes and cutting the budget as opposed to borrowing more money. Do you think the trade-off between borrowing more money in the long run will outweigh the consequences of raising taxes and cutting the budget, which is a solution that fits best in the short run?
    TG

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    1. I think the relevant question is why you would want to reduce debt (to GDP) levels rapidly (as in fiscal charter) rather than more gradually. Arguments for doing rapid adjustment very weak.

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    2. "Genuine answer - we do not really know. The general feeling is that current debt to GDP ratios are too high, but no one has a good idea of what the optimum level might be."
      "I think the relevant question is why you would want to reduce debt (to GDP) levels rapidly (as in fiscal charter) rather than more gradually. Arguments for doing rapid adjustment very weak."
      ???
      The general feeling?
      This is not science.

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  16. The really worrying bit about this post is the existence of Questions 3 and 5 on the same exam paper. It shows a fundamental misunderstanding of how the system actually works.

    Who said that Debt to GDP ratio was a metric that matters? The Bank of Japan has proved over the last two decades, that it doesn't.

    The Debt to GDP ratio of A fiat currency ISSUER is basically meaningless. Public (Treasury) debt is private sector savings, Pound for Pound. Interest paid on such debt (which isn't debt as you understand it), adds to private sector spending power, which drives aggregate demand in the economy; raises the GDP.

    The real biggy, is the private sector, currency USERS, Debt to GDP ratio. This is big and will have to get even bigger than Q3 2009; if the fool Osborne continues on his banzai mission for a budget surplus. And, he is attempting to do it in a country that has the second highest Current Account deficit on the planet.

    You can't compare Ireland or Spain in 2004, with the UK. Nobody in the Eurozone ISSUES their own currency, the UK does. Apples and Pears.

    And, one more time. A SOVEREIGN FIAT CURRENCY ISSUING GOVERNMENT, DOES NOT """""BORROW""""" ITS OWN CURRENCY FROM ANYBODY.

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    1. "Who said that Debt to GDP ratio was a metric that matters?"

      Reinhart & Rogoff, who rather than beng drummed out of the profession in disgrace, are still treated as distinguished academics. http://cameronmustgo.blogspot.co.uk/2014/12/blog-post.html

      But then they're not really unusual in places like the Harvard economics dept.: https://www.youtube.com/watch?v=i-uDtvqJL7A

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  17. I'm not sure why stabilising debt:GDP ratios in itself means there's now no need to take further steps to alter them, which seems to be the assumption of the first part of your post?

    Isn't the argument something like this: (1) the economic cycle has't been abolished, (2) there will be another recession at some point, (3) we need to be able to borrow more when that future recession hits, and (4) hence we need to reduce the debt:GDP ratio while we can so that we're in a good position to do the right thing in that recession?

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    1. I was not implying there was no need to reduce the D/Y ratio, but rather that without the cuts to tax credits and the spending review D/Y would still fall. I looked at this argument in a previous post

      http://mainlymacro.blogspot.co.uk/2014/07/uk-fiscal-policy-from-2015-with-shocks.html

      and the IMF have also crunched the numbers - Osborne's pace of debt reduction is too fast to be justified by this argument.

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    2. I must say I find your post, Mark Pack, more convincing that SWL's response below it. "Osborne's pace of debt reduction is too fast to be justified by this argument" is a statement of opinion (in much the same way as, "Over the next five years debt to GDP ratios in the UK will be falling" in the main article). Too fast because why?
      Nick

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    3. Not opinion but economic analysis: see

      http://mainlymacro.blogspot.co.uk/2015/06/should-we-aim-for-budget-surpluses.html

      On optimal debt policy I do know what I'm talking about.

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  18. "In the current UK context the best answer, although if you had given this answer in Ireland or Spain in 2004 you would get 0/10. "
    These are totally different monetary systems Simon. If you are in Ireland or Spain the thing to do is get your country the hell out of the Eurozone!

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    1. I think I'm going to have to ask you to stop making the same point over and over again. Everyone knows this. It has no relevance.

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  19. "I do not recall any government minister being asked the following question by a journalist: why don’t you just borrow more?"
    Do you know how that would sound? Better to point out how govt borrowing is not borrowing at all - all government spending works by crediting bank accounts and taxes debit bank accounts. The government does issue Gilts but this is disconnected from the spending operation. Only legislation by right-wingers forcing the government to "fully fund itself in the market" (that's a direct quote from them) and sold as "sound economic management" fools people - including an Oxford professor.

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    1. Lookie here:
      "The chancellor has asked most parts of the government to come up with savings of between 25% and 40% by the end of the current parliament. A number of departments, including health and overseas aid, have had their budgets protected.
      In a speech in London, Mr Osborne warned that if the government does not control spending and reduce levels of national debt there is a risk of loss of confidence in the economy.
      "I know some ask: why do we need this surplus?" he said. "I'll tell you why: to protect working people.
      "A surplus will make our country more resilient, safe and secure. It means that next time we have the money to help us through the tough times when the storms come. Let me put it another way: if our country doesn't bring the deficit down, the deficit could bring our country down.
      "That's why, for the economic security of every family in Britain, the worst thing we could do now as a country is lose our nerve."
      Nope. The UK government always has infinite money.

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    2. Lookie at the top of the page...this one covered already.
      Get with the programme soldier! ;)

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  20. I always pose the question this way as it pertains to the U.S. What would happen if we cut Social Security benefit payments to retirees by 50%, and maintain the payroll tax at the same rate? One might assume the fiscal picture improves as the deficit declines.

    But, what would happen to all the goods purchased with those Social Security payments that go away, supposedly making the fiscal picture better? NGDP would drop. The current average SS check of about $1300/month would drop to about $650/mo, so each person spends that much less. So I hope Joe the plumber does not do a lot of work for retirees.

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  21. Sam Brittan was, as always, years ahead of his time on this question. In "The Treasury Under the Tories" he wrote (about more expansionary fiscal policy) "Do not ask where the money will come from. The short answer is the Bank of England printing works at Debden." Electronic money means we don't even need to rise the paper and ink now.

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  22. When you write, Simon, that "Over the next five years debt to GDP ratios in the UK will be falling" aren't you laying bare the arrogance and hubris of the economics profession? What if there's another recession? What will happen to debt to GDP ratios then?

    Or let me put it another way, What if there's another recession *inside five years?* Because we know for sure that there'll be another one sometime.

    As far as I can work out, debt to GDP was about 35% in 2005 and had nearly doubled to about 65% by 2010. I think we can reasonably suppose that if another recession comes along in the next 5 years or so it will go up again from its current level. You say it won't, and your prediction might be right, but that's all it is - a prediction. And one by an economist, to boot.

    As I understand it the Keynesian argument runs that borrowing more now may worsen matters in the short term but leads to a more favourable debt to GDP ratio in the medium term. But what if there's a recession before the medium term arrives? If our debt to GDP ratio nearly doubled between 2005 and 2010, where would the next recession take us?

    Or have you abolished boom and bust too?

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    Replies
    1. Recessions are typically the result of people saving more. A large proportion of savings is in government debt (particular in a recession, when investing in firms appears more risky). So why do you think it is a problem when governments in a recession supply more of their debt to savers?

      This by the way is basic Keynesian stuff, and one reason why government debt is different from an individuals debt.

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  23. One more potential answer. In certain cases, public investment could directly raise enough revenue from user charges to pay off the loan. I believe this to be the case currently for housing as rent, even at below-market rates, should suffice to pay back low-interest loans after covering maintenance.

    Clearly this only applies to some investment opportunities but how would you score this response in these cases?

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  24. I agree with Ralph Musgrave in preferring option (3): when the UK still needs economic stimulus, why not run budget deficits financed directly by the Bank of England? Stimulus without debt. (assuming the Bank is willing to do so in its discretion). This would expand the economy and the debt to GDP ratio would steadily decline, without increasing taxes or cutting spending. There is no down side to this so long as the government keeps an eye on potential inflation.

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    Replies
    1. The downside is that it changes the relationship between the BoE and the Govt, would be abused by politicians wishing to manipulate the electoral cycle, and would eventually lead to a run on the pound as investors no longer wished to keep assets in a currency whose value was being eroded. Apart from that it's fine.
      Nick

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    2. Why not address the reason I gave in the post!

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    3. Your answer was just political: that central bankers in the UK and US are talking about reducing monetary stimulus so my suggestion is untimely. That's not the same as being incorrect. They are being premature. More stimulus is still appropriate and I'm suggesting an alternate way of getting it--even though it is political unthinkable at this or any other time. For now.

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    4. You may be right, but why go for something that is very controversial and politically off the table when you have two perfectly good alternatives?

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    5. Thanks for your response. I just feel progressive economists need to start introducing this alternative to the public. As it is, it is so taboo that most people, including educated people, have never heard of this idea--apologies, I don't think too many non-economists read your blog, or any other economics blogs. People need to hear about why financing stimulus without debt doesn't have to result in hyperinflation. I think you agree that irrational fear of rising national debt has prevented sensible fiscal policies for recessionary times. Here's an alternative that doesn't involve increasing the national debt but no one knows about it.

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    6. Adair Turner and others (including myself) have been plugging away at the idea of helicopter money e.g. see this Guardian article

      http://www.theguardian.com/business/economics-blog/2015/may/21/now-the-bank-of-england-needs-to-deliver-qe-for-the-people

      But I at least also agree with central bank independence (if its done right) and the Bank would not (rightly or wrongly) be doing helicopter money right now

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  25. "We would print more money."
    The same objections to that apply every time a bank makes a loan and corresponding deposit. If we reduce bank-created money and increase government spending is that "printing money" in your eyes?
    No government ever "prints money." There is a certain amount of money that is literally printed but it is separate from spending.

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  26. This is a little unfair. I have never accepted that the fiscal charter and the surplus objective make any sense.

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  27. How would fractional reserve banking play a part in the money added into the economy, and how does it work?

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