Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 11 March 2016

A (much) better fiscal rule

Today the Labour Shadow Chancellor John McDonnell will give a speech where he puts forward an alternative fiscal rule to George Osborne’s fiscal charter. It involves a rolling target for the government’s current balance: within 5 years taxes must cover current spending. It leaves the government free to borrow to invest. Investment cannot be unbounded, as there is a commitment to reduce debt relative to trend GDP over the course of a parliament.

No doubt we will hear the usual cries from the opponents of sensible fiscal rules: Labour plan to borrow billions more than George Osborne and they plan to go on borrowing forever. The simple response to that should be that it is right to borrow to invest in the country’s future, just as firms borrow to invest in capital and individuals borrow to invest in a house. Indeed, with so many good projects for the government to choose from, and with interest rates at virtually zero, it is absolute madness not to investment substantially in the coming years.

This part of the rule is similar to the main fiscal rule Osborne himself adopted under the Coalition, which in turn is not unlike previous rules adopted by Labour. What is new is that McDonnell’s rule involves what could be termed a ‘zero lower bound knockout’: if interest rates hit their lower bound following a recession, the focus of fiscal policy shifts from deficit targets to helping monetary policy support the economy. It reflects the knowledge we have gained since the global financial crisis.

Again critics will claim that the knockout would have meant building up even more debt after the last recession. But what matters with debt is its relationship to GDP, and it is far from clear whether more stimulus in 2009 and 2010 would have increased the debt to GDP ratio, because you are increasing GDP as well as debt. But even if debt to GDP did rise, this reflects the right choice. It means prioritising the real economy - jobs and wages - over an obsession with government debt.

We will no doubt be told by government supporters that this would have led to financial disaster, just as we are also told that the coalition saved us from disaster. We will be told this by some economists working in the financial sector - a sector that created the Great Recession. But there is no evidence for this impending disaster, and plenty of evidence that it is a complete myth. As Paul Krugman might say, in a country with its own central bank the bond vigilantes just keep failing to turn up.

Recessions come and go, you might respond, but higher debt will always be with us. That ignores two key points. First, prolonged and deep recessions cause lasting damage. UK GDP per head is currently over 15% below pre-recession trends. Does none of that have anything to do with the slowest UK recovery from a recession in centuries? Second using fiscal policy to end recessions quickly does not mean higher debt forever. The key point is that debt can be reduced once the recession is over and interest rates are safely above their lower bound. Doing that will be no cost to the economy as a whole, as monetary policy can offset the impact on demand. Obsessing about debt during a recession, by contrast, costs jobs and reduces incomes, as every economics student knows and as the OBR have shown.

The rule happens to mean that pretty well all of the additional austerity Osborne has detailed since the election is unnecessary. But that is a byproduct of adopting a sensible rule. If there is any ‘reverse engineering’ going on, it is with the fiscal charter, which some argue was adopted with the political purpose of making Labour look less prudent before the election. As McDonnell notes, no economist has attempted to defend Osborne’s fiscal charter.

Yet I know this point worries some Labour MPs and commentators. They say, quite rightly, that one of the main reasons the 2015 election was lost was because Labour were not trusted on fiscal policy. But the basic truth is that you do not enhance your fiscal credibility by signing up to a stupid fiscal rule. Apart from getting attacked for doing so by people like me, your collective heart is not really in it and it shows. You get trapped into proposing to shrink the state as Osborne is doing, or hitting the poor as Osborne is doing, or raising taxes which makes you unpopular. And if by chance it ever looks like you might be getting that trust back, Osborne or his successor will move the goalposts again.

The far more convincing way to get trust back is to adopt a fiscal rule that makes sense to both economists and the public (‘only borrowing to invest’), and actively talking about it. When the Conservatives accuse you of borrowing, you do not try and change the subject, but remind people that is what firms and consumers do. Borrowing is not a dirty word, particularly when it is on vital investment and you can do it for almost nothing! Indeed borrowing to invest shows you are optimistic about the future and are prepared to do things to make it better. In contrast those who would turn down these investment projects in order to reduce debt as fast as possible have a negative outlook that fears the future.

The Conservatives know they are vulnerable on public investment. Osborne tries to give the impression that he is doing a lot of it, but the figures do not lie. In the last five years of the Labour government the average share of net public investment in GDP was over 2.5%. During the coalition years it fell to 2.2%, and for the five years from 2015 it is planned to average just 1.6%. That is not building for the future, but putting it in jeopardy, as those whose homes have been flooded have found to their cost.[1]

[1] Besides cutting spending on flood prevention while part of the coalition, Damian Carrington revealed yesterday that UK funding for research on flooding has been cut by 62%! There can be no better indication of the madness of George Osborne’s deficit obsession.   


  1. I would be more impressed if he had been clear about what consitutes 'investment'. It is easy enough to justify extra revenue spending as investment in order to justify it.

    1. Unless Labour say otherwise, investment is what the ONS define as investment, rightly or wrongly.

    2. Yes, but your problem - and Labour's problem - is that you aren't borrowing to invest, you're borrowing to spend like a sailor on shore leave to cover (what should be) transfer payments and the consumption of public sector goods, and then - having made all those choices - you want to borrow to "invest". Watch McDonnell sliding all over the place, incidentally, on the Marr show on Sunday when he was asked whether higher wages for public sector workers constitutes "investment". Pull the pointer forward to 29 minutes if you want to watch the hard-wired evasion. We're spending eighty billion we don't have this year. The first time a Labour politician tells me that they want to i) let public sector wages respond to supply and demand, and ii) stop subsidizing nonsense like help for mortgage holders in difficulties (with no lien applied to the property afterwards), I'll listen to what they have to say on "investment". Labour's a party that plays host to people who think that building a Trident sub when you believe that it delivers no utility is a sane endeavor. I'm a Tory who believes that we should have nuclear weapons, so I'd build the subs. But to think they're unusable, but to want to build them to "keep workers in jobs" and "boost the economy", suggests derangement. People who think that infrastructure is a no-brainer because borrowing is so cheap might want to ask themselves the following question. "Given that infrastructure improvements make possible the more productive use of plant and workers, and given that we can borrow cheaply precisely because nobody thinks investing in plant makes sense (even with the prospect of new and improved infrastructure), are we certain about the impact of the proposed "investment"? What is it that the investors who currently spurn car manufacturing (say), and who contemplate index-linked infrastructure bonds, think they know about the economy's future, that we're sure they're wrong about?"

  2. A perfectly sensible policy. The problems are.

    1. It is almost indistinguishable from that of Ed Balls. Revealing that Corbyn was elected on a false prospectus.

    2. John McDonnell has no credibility in selling it. Indeed, having McDonnell front this up undermines the future viability of the policy itself. McDonnell has used language indistinguishable from the rhetoric of Liz Kendall ("nothing leftwing about excess spending.") From her it was credible. Not from our class warrior friend.

    3. Use of such 'rules" strongly echoes Gordon Brown who, fairly or unfairly, has no credibility in the public's mind.

    Overall? It doesn't matter a damn. But it is good to have your preferred political strategy put to the test like this. We'll see if it works, won't we?

    1. Another problem (at least as regards sudden large scale increases in infrastructure investment) is that there's a shortage of relevant skills. In contrast, a GRADUAL increase in such investment over 5 years or so would be possible.

    2. The other problem is that it is unclear (to say the least) how this policy of fiscal rectitude (which again I approve of) is compatible with other pledges (eg abolition of student fees).

      The answer must be higher taxes (matching the increases in spending).

      Again, good luck getting Corbyn, who you failed at the relevant time to adequately criticise, to sell that.

    3. Yet another problem is created if the person responsible for the policy having presented it refuses to answer any questions about it. As, yet again, McDonnell did today.

    4. As Paul Mason points out in the New Statesman, the policy announced today can be distinguished from the policy of Ed Balls, first of all. Secondly, Ed Balls and Miliband accepted the "need" to make unnecessary spending cuts that would impact on low and middle-income people. McDonnell and Corbyn do not.

      Kendall, almost certainly, would have also signed up to spending cuts. So, that's why Corbyn being elected and not Kendall was a good thing.

    5. You mean this?

      The single difference Mason identifies is insignificant, indeed a caveat about emergencies that is implicit in any long term fiscal policy.

      As for the rest of the stuff about cuts, the same overall policy equals the same overall policy.

  3. Simon, the first of the labour fiscal rules relating to bringing the Debt/GDP ratio down over the course of parliament got me thinking. I remember a couple of years ago you gave a talk in Manchester on Debt/GDP ratios and whilst we were unsure of the optimum Debt/GDP there was a consensus that this needs to come down from its current level. However, let us say we have a target Debt/GDP ratio in mind and we are currently above that target. Do you think there is an optimal rate of decline in this ratio that would maximise welfare across generations? I am thinking of a social planner type problem here. I would be interested to hear your thoughts on this. As a result, do you think a fiscal commitment to bring down the ratio of Debt/GDP sufficient?

    1. I think it is an unresolved issue. But my own view would be that increasing public investment is a clear priority right now, so we need a rule that allows that to happen.

  4. SW-L claims “The simple response to that should be that it is right to borrow to invest in the country’s future, just as firms borrow to invest in capital and individuals borrow to invest in a house.” That’s a popular argument which is actually very questionable, and for the following reason.

    The REASON why “firms and individuals” borrow is shortage of cash: i.e. if a firm or individual happens to have cash to spare, why would they borrow? And governments have a near infinite source of cash, namely the long suffering taxpayer. So on that basis, it doesn’t make sense for government to borrow to fund investments.

    Kersten Kellerman wrote a paper which challenged the idea that public investment should be funded by borrowing: “Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”” (European Journal of Political Economy). I’ve got a copy, but can’t find it on the internet, for some strange reason.

    1. The standard argument is that borrowing can mean that those who benefit from the investment pay for it.

    2. Cash shortage is not the unique reason. I may prefer to borrow if I foresee a Rate of Return on Assets greater than interest rate on borrowing

    3. I agree there are often good arguments for making "those who benefit from an investment pay for it". But if an investment is funded via tax, that doesn't preclude charging users for repayment of the relevant capital sum and charging them for interest.

  5. When Cameron produced his idea of the Big Society, Andrew Neil said on the BBC why not call it the Strong Society?

    Presumably Cameron wanted his slogan to be a corrective in his mind to the criticisms of power from such terms as Big Business and Big Government.

    I have written on this blog before that the Big Society is a rebadging of the early Thatcherites' use of Victorian Values, which itself was all about reducing the size of the state to the level it was in the interwar years when many of the 1980s' Tory MPs were children in the southeast of England where unemployment during the Great Recession was negligible.

    The last stand of this persistent idea of Thatcherite historicism rests in 2016 on the Bond Vigilante argument.

    Paul Krugman blog August 25, 2009 'Where are the bond vigilantes?':

    "For now, at least, interest rate movements seem to reflect views about the economic situation and the prospects for eventual Fed tightening. Rates rose as the end-of-the-world scenario receded, then stabilized. There’s no hint in the data of fears about (a) crowding out (b) inflation (c) default. It’s good to be an advanced country."

    Krugman blog Feb 24 2015 'Phantom Phiscal Crises':

    "Remarkably, nobody seems to have laid out exactly how a Greek-style crisis is supposed to happen in a country like Britain, the United States, or Japan – and I don’t believe that there is any plausible mechanism for such a crisis. That’s still true — but fear of such a crisis persists. That’s true even though — as you can see from the figure — the apparent relationship between debt levels and borrowing costs has vanished now that the ECB is doing its job as lender of last resort."

    UK politicians hanging on to ideas that have had their time have been variously called die-hards, ditchers, ultras; it is time for Cameron and Osborne's Big Society to join that list.

    1. As you have mentioned the Japanese, I have posted elsewhere today the following. The problem with the Japanese people is they save far too much. Every time the government spends new money into existence, the Japanese households save it and don’t spend it. Fortunately, the Japanese; the USA and the UK, issue their own currency. In the Eurozone, everyone uses a foreign currency, which they have no control over. If you issue your own currency, you do not have to "borrow" it from anybody, at home or anywhere else.

      The 230% debt to GDP in Japan, is of no worry, as the vast majority of it is held domestically. The Japanese government should stop issuing its equivalent of Gilts. Replacing the outstanding Gilts with the cash (the previous government spending, that bought the Gilts in the first instance); might encourage them to spend a bit more. The future value of cash declines by a percent or so each year, without having idiotic negative interest rates on commercial bank “reserves”, which they can’t lend anyway.

      QE is supposed to boost asset prices, to boost collateral values, for cheaper, easier to get, corporate loans for “supply side” investment. The Conservative “supply side” mantra, that investment creates demand, is actually a myth.

      Corporates don’t invest when they have spare capacity and no customers. Consumer demand is what drives the economy. Lack of wages, as stashing profits take more of national income, means less spending; “aggregate demand” is too small. When the government sector is reducing its spending at the same time as the private sector, the only way is down. Particularly if you are a net importer like the UK.

      Remember that QE also takes spending power out of the economy. Replacing a Gilt with reserves, means the interest payments don’t get paid into the private sector, but back to the Treasury, via its own central bank.

      The Eurozone is a hopeless case. The simplest and most effective thing that could happen is, the ECB buys up ALL the outstanding and new Eurozone Treasury bonds from all nineteen Eurozone national Treasuries. That is it “monetises” the debt directly; the same as the Canadians do. Governor Carney can tell them all about that.

      That way, the nineteen national Treasuries can spend “reserves” (cash), like the UK and the US; instead of spending Gilts into a secondary, parasitic, spiv bond market, at stupid artificial interest rates. If the ECB won’t play, then the nineteen Eurozone governments should, as one, nationalise their own central banks, and threaten the ECB with nineteen separate Euro currencies; that’ll **** ’em.

  6. I really wish for years that politicians hadn't been allowed to get away with conflating Government finances and the Economy. I've lost count of Cameron speeches where he says he'll talk about the Economy then talks about Government finances.

  7. SPinning Hugo is of course certain that nothing the currently constituted Labour Party can do will be any use. But I found your article reassuring, especially on the 'lower bound' issue. I was quite depressed to hear the policy announced this morning, thinking there was no escape from deficit obsession but your explanation gives some hope. But you are quite right: the key is to keep talking about it and get the idea out there that borrowing at 1% to invest in projects with IRRs of 10% and up is what the government should be doing.

    In that context, there was a measure of how far we have to go on BBC's Today programme this morning. Talking (relatively intelligently) about how revisions to GDP may be necessary, and how errors in calculation might mean that the recession was exaggerated by the statistics, Nick Robinson (who almost certainly knows better but likes to pretend he doesn't) said words to the effect "So if the recession wasn't as bad as the figures said, we didn't need so much austerity." !!! Bangs head on table!

  8. All good, except for the the commitment to lower debt/GDP over the term of the parliament.

    What if there is a crisis? Why over a parliament, instead of a 5 year rolling window?

    What if debt/GDP keeps falling and falling? Then you're bound by the fact that it can never increase again.

    So you are implying that the optimal debt/GDP ratio is 0? According to such a rule, once you reach it, it must remain 0 at the end of every parliament for eternity.

    1. It is not my rule, but Labour's proposed rule. The commitment is to reduce debt to trend GDP, which should avoid your first point. What this rule in effect does is to put an upper limit on public investment.

    2. Isn't it highly pro cyclical, though?

    3. You are working with Labour. It is your rule. And it makes no sense whatsoever.

    4. with terms like rolling target and current balance I think you can talk to voters about this until you are blue in the face .
      Seems you suggest investment will be limited , by commitment to reduce debt / gdp . But then you say investment will increase gdp . So where is the limitation ?
      Voters may be comfortable with the idea of households or firms borrowing to invest .
      But the labour party is not your average firm or household .
      It has a bad reputation , vis a vis economics .
      You may believe the financial sector created the great recession . And no doubt you , and a certain wing of the labour party will repeat this ad infinitum . As for voters , well labour was in govt , operating a financial sector policy . And labour had a dubious economic pedigree pre crisis .
      Then there is the heroic assumption that a labour govt spending policy will return the u k to trend gdp .
      Because , you know , labour never fails , or the general policy is idiot proof .
      No need to worry about debt . Deal with it later . When interest rates rise . Via monetary policy . Which is , presumably lowering interest rates . So basically permanently low interest rates ? If so , no harm in saying so ?
      This is great stuff for all those who want to see socialists in govt spend loads of money .
      Oxford academic supports more public investment .
      Seriously though . Under corbyn , voters will get a good look at the real labour party . If they didn't understand the reality here before .
      I can only assume the oxford academic cant see , or won't see this , leaning out from the ivory tower .
      Still , while the likes of you continue to support labour , labour goes on .
      And so too , does Thatcherism .

    5. The rule here is a political commitment to reduce the debt to trend GDP. There is no proposal in McDonnell’s speech to make this legally binding. That is why it refers to a parliamentary term rather than a rolling window, as it will be for the electorate to decide whether any failure to achieve this was a result of poor financial management or economic circumstances that made it wise to ease back on the commitment.

  9. Excellent post, but "investment substantially" in the second paragraph should be changed to "invest substantially".

    So there goes SpinningHugo with his 'givens' again. Strange how those 'givens' are always exactly in line with right wing rhetoric isn't it?

  10. "It involves a rolling target for the government’s current balance: within 5 years taxes must cover current spending. It leaves the government free to borrow to invest". Well, the problem in my opinion, is in the inadequate use of "Public Investment" concept. I leave only the example of Education expenditures classified as current expenditures (and that comprise teachers salaries, and ....) but the ones that can have a high social rate of return above the atual rate of interest. On the other hand we have plenty of irrational investment to choose and abuse

    1. We will need to be careful in mapping investment to accounting definitions, as we do not want to make sensible policies vulnerable to statistical vagaries. As an example of this, the ONS has since 2014 decided – correctly in my view – to follow the European System of Accounts 2010 and include R&D under Gross Fixed Capital Formation, whereas previously it was put under current expenditure. Its economic character has not changed as in either case it should be regarded as investment. There is a similar discussion to be had around skills to allow us to invest in ‘human capital’ without that breaching the ‘day to day balance’.

  11. There will be little workers employed to build new roads and railways - because anybody who can do that is already employed by the construction industry doing other things.

    That's why they are complaining about a lack of skilled workers.

    So if you try to do 'investment' - which has a *specific National Accounts definition* whatever you and the other advisors to McDonnell say - all you do is drive up inflation. Or your projects never get done.

    This is precisely the problem with using 1930s ideas in the 21st century without actually understanding the situation in the 30s and the situation now and how they differ.

    Vote Corbyn. Vote for the 1970s.

    Now we have a service economy and the low skilled people are employed in that. Unfortunately the jobs they do *do not fall* into the accounting definition of 'investment'. But that actually doesn't matter because they spend their wages just the same, and the investment is done by the people who receive that extra demand - to expand output to cope with the extra demand.

    All this talk of fiscal rules is really silly. It just makes McDonnell look even more dodgy than he did before.

    "The far more convincing way to get trust back is to adopt a fiscal rule that makes sense to both economists and the public (‘only borrowing to invest’), and actively talking about it. "

    There is no need for all this. What there is a need is to explain how it actually works. People saving for pensions creates a government deficit.

    Because a government deficit is actually a source of an increase in private saving. All spending will come back as tax if there is no saving in the spending chain. Also the government has infinite money because it issues the currency. Spending is constrained by real resources. Tell McDonnell to say that all government spending will come back as tax ('cashback') to Osborne's face and keep questioning.

    I don't want a chancellor who lies in charge and I don't want him advised by a bunch of people that are advising him to lie and are *desperate for unelected power*. I am considering voting Tory. Osborne only lies. Such an improvement.

    1. McDonnell recognises the skills issue: “Latest figures suggest that 22 percent of all jobs vacancies are going unfilled as a result of a lack of candidates with the right skills or experience. Here, too, government can intervene directly. But it must do so effectively. The present Chancellor's solutions are inadequate. Ofsted was damning in its report on the many new apprenticeships being offered. The surge in numbers had led to a slump in quality. We're not just failing our young people if we fail to provide them with the skills they need. The entire economy suffers as a result.”

      So Labour understands that a big push on skills will be needed to support the investment programme but also to boost productivity. On construction skills, this is often quoted as if it is an unpassable barrier. It is not. A few weeks ago, I heard a CEO from one of the big house-building companies claim on ‘Today’ that while his company had faced a major skills gap several months earlier, they had taken action including in-house training and now thought they were on top of it. Some specialised skills will of course take longer to develop but remember we have many graduates working in jobs that do not use the skills they have. This is one of the aspects of an economy working below capacity.

      McDonnell is right to highlight skills but this is a problem we can fix with some effort if we really want to.

    2. The argument here on saving and taxation ignores the foreign sector. Tripartite balancing means that the government deficit is driven both by the private sector surplus of saving over investment and the balance of payments deficit, which has grown substantially since the financial crisis. Hence some government spending might not return as taxes as it might instead also increase the BoP deficit. Much of the debate on macroeconomic policy seems to be conducted as if we had a closed economy.

      As well as recognising that saving for pensions will tend to increase the fiscal deficit, we also need to ensure that the economy will have the capacity to pay those pensions when they become due. This is another good reason for emphasising public investment designed to increase that future capacity.

  12. Unless quantitative easing is in the mix in which case you could quantitatively ease your way to a lot more infrastructure potentially almost without limit.

    1. QE or not, we shall still be limited by resources, whether available domestically or purchased externally. We need to acknowledge that.

  13. If it's a perfectly sensible policy and it's being put forward by a Labour opposition, perhaps those who purport to be supporters (and members) of a Labour opposition will get behind it.

    I'm a terrible optimist.

  14. So, Labour are offering "austerity lite". Sorry but, recycling Gordon Brown ain't going to do it. "Investment" done by a public sector currency "issuer", is totally different to investment done by a private sector currency "user". Until that is understood, there is no point in debating it further.

    BTW, all spending in the public sector starts out as revenue spending. Capital spending, is the revenue spending that the accountants manage to make look like capital spending, for budget purposes.

    Anyway. poor Governor Carney. But, there again, he is paid the big bucks, to take the hit for a neo-liberal government, that is getting its fiscal policy wrong, in spades.

    Carney came from Canada where the central bank purchases government debt (monetises) directly from the Treasury. The UK and the USA governments don’t allow this, the BoE purchases government debt in the secondary markets. This allows a casino market in bonds, that has no socio-economic value; but, makes a lot of City investment banks rich. The USA used to do the same as Canada, but Wall Street got that changed, via its tethered politicians.

    So please don’t let the politicians dump on Mark, there is very little he can do. Particularly as he is trying to compensate for Osborne’s, uncharted, “austerity heavy” plan. He knows, (but can’t say), that trying to get a budget surplus, in an economy that is a net importer, means the only way is down to increased private sector debt. He, and the OBR, have been hinting about high, and getting higher, levels of private sector debt, but politicians, assuming they understand what Carney and the OBR are trying to tell them, which is doubtful, don’t give a toss.

    Central Banks in general, have very limited powers to stimulate an economy. QE, as a monetary policy tool, has proved incapable of increasing aggregate demand in any economy where it has been tried. Neo-liberal monetary policy is the problem, A fiscal expansion policy is the solution. Unfortunately, we don’t have a politician with the testicular fortitude to enact the latter. Perhaps we need a Donald!

  15. Professor David Hendry got it right - - this isn't only the "most stupid government in his lifetime" it is also going to turn out to be one of the most economically destructive in our history. The only skills shortage in Britain is a shortage of brains among our politicians, businesses, media and the self-consuming bubblicious financial service sector.

    Unless we start investing in energy (preferably renewables), manufacturing (i.e. something that adds value), biotechnology and education, we are going to be chasing an economic Tantalus in perpetuity with no prospect whatever of reducing either the deficit or the debt to any sustainable level. At a zero bound there won't even be any prospect of inflating some of it away. Osborne's rentier paradise, with its low productivity, low revenue collection, low investment, low growth, low wages, low skill, lo-manufacturing and lo-export economy, is never going to deliver anything other than an economic cripple.

    As for the crowded out private sector, where is it? Looking short-term, investing in property bubbles, milking a low-wage workforce (one increasingly dependent on tax credits and housing benefit) and waiting (forlornly) for the much-maligned state to initiate something.

  16. In my view the problem with this is that it doesn't address the real issues of the future. In some respects of course investment in infrastructure etc is a no-brainer at least until energy costs return to realistic levels and the UK then struggles to keep the lights on. On the other hand, the policy doesn't address the key issue of current account deficit. People want services they are - collectively - not prepared to pay for. Ageing population, change in job prospects and consequent education needs, failing productivity and the return of greater levels of unemployment - all of these mean that to balance the books govt revenues need to increase substantially. No-one of any political persuasion will vote for increased taxes. Hubris masquerading as statesmanship wont even scratch the surface. Someone needs to start spelling out that we face some really tough and unattractive choices - and start thinking about how those can be made whilst maintaining a decent and viable society. One thing is for sure - the future will not be just like the past but with everyone a little bit older.

    1. There will indeed be choices to be made to balance day to day. On the spending side, we should cut out unnecessary expenditure, such as Trident (which adds nothing to our usable defence capability) or the inefficiencies generated by trying to run the NHS like a set of competing supermarkets. We can increase tax revenues through removing exemptions that benefit only the wealthy (Labour has already started work on identifying these) and steps such as raising property taxes at the top end of the market. Such measures would not impose any extra burden on the vast majority of voters so need not carry an electoral cost if positioned properly.

  17. Why would the monopoly issuer of £'s need to borrow £'s from anywhere in order to be able to give out more £'s ?

    Why does the monopoly issuer of £'s not just spend £'s without borrowing ?

    The monopoly issuer of £'s does not need to somehow get their hands on £'s before they can spend. Borrowing in order to spend only delays the eventual taxation or other income that is needed to repay all of the debt.

    Borrowing does not increase the monopoly issuers funds available for spending.Those funds are there regardless.

    Also, when the monopoly issuer of the currency borrows ( which is a political choice)all the monopoly issuer is doing is borrowing back some of the currency it has already spent. Thus, this works against the monopoly issuers original intent of a fiscal stimulas.The monopoly issuer of the currency is putting in a stimulas with one hand and taking it away with another. In effect dstroying real resources that could be used elsewhere.

    Surely, the only reason the government spends money and then borrows back what it does not tax, is because deficit spending, not offset by borrowing, would cause the overnight interest rate to fall to zero ?

    The monetary constraints of an overnight interest rate target dictate that the government cannot spend money ( a reserve add) without borrowing ( a reserve drain)or taxing ( a reserve drain), nor can the government borrow (a reserve drain) or tax (a reserve drain) without spending ( doing a reserve add) first?

    Therefore, would it not be a better idea for the monopoly issuer just to spend into the economy ? This way it is not encouraging the economy to save and give some of it back in the form of corporate welfare that accompanies the issuance of public debt. ?

    Why on earth is the monopoly issuer of the currency imposing self constraints on itself like this ?

    Would it not be a better idea if the monopoly issuer of currency just set the overnight interest rate to zero and spent anyways. By setting a support rate on the reserves. Thus dstroying public debt issuance all together.

    Then set up a national savings fund in the form of income bonds. Fully guarenteed by the monopoly issuer.

    Public debt markets add nothing to the UK when you look at how much they cost in real terms. A proper cost-benefit analysis would conclude that the market should be destroyed and not encouraged.

    1. There's a real problem in conflating "money" with "real goods and services." Simon's point is that there will be fewer real goods and services for purchase post-Brexit and that as such deficit spending via any means will create inflation rather than real growth.

  18. the disintegration of public and private wealth by the failure to invest in the maintenance of it, including human capital, is the legacy of the austerians

    they view themselves as the guardians of wealth

    they are in fact the destroyers of it

  19. You say, "The key point is that debt can be reduced once the recession is over and interest rates are safely above their lower bound. Doing that will be no cost to the economy as a whole, as monetary policy can offset the impact on demand."

    Do you mean the ongoing deficit spending or the stock of debt just created? If the latter, can you elaborate on how it is to be reduced? And if not reduced, why it doesn't matter?

    1. I mean the stock of debt, which you can decrease by cutting spending or raising taxes.

  20. Saying that the government should borrow to invest because borrowing is cheap is an implicit statement about the return on government investments.

    Borrowing is cheap when the cost of borrowing is less than the return on government investments, otherwise expensive.

    What is the return on government investments, and how did you calculate it? If you don't know, I don't see how you can ever say that government borrowing is cheap.

    What if government investments tend to make a loss? In that case the government should never borrow to invest.

    1. If there is one thing that the government sector has over the private sector, it's that it can *always* get money more cheaply. Indeed, while Simon decries the MMT stuff, one of the key insights is that treating government borrowing as "raising money" that it otherwise does not have is a poor analytical framework. Government has a theoretically infinite supply of "money," and a restricted supply of literally everything else in the entire world. It's better, in my view, to look from the angle of government *purchasing* rather than government *spending*.

      As far as "government investments making a loss," that's a key part of the precise reason government spending may be the better option. There can be positive externalities to balance-sheet losses (see, for eg, the NHS, or public schools, or roads, sewage, the fire department etc). The private sector won't bear those losses and thus reliance on them means society is poorer overall, and so the public sector should take these "losses" on.


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