Deficit de­niers

Hard eco­nomic truths can­not be wished away Roger Boo­tle

The Daily Telegraph - Business - - Front Page - Roger Boo­tle is chair­man of Cap­i­tal Eco­nomics roger.boo­tle@cap­i­tale­co­nomics.com

Ihave just read a book en­ti­tled The Deficit Myth by the Amer­i­can econ­o­mist Stephanie Kel­ton. The book was dan­ger­ous even be­fore coro­n­avirus struck but it is even more so now when gov­ern­ments are rack­ing up huge deficits and the ra­tio of gov­ern­ment debt to GDP is soaring. It ap­pears to sug­gest that we shouldn’t worry about this debt and should just lie back and en­joy it.

It would be very nice to be­lieve that our con­cern was based on a myth. Un­for­tu­nately, in eco­nomics, if some­thing is very nice to be­lieve, you prob­a­bly shouldn’t.

In fact, the propo­si­tions es­poused by Pro­fes­sor Kel­ton are a pe­cu­liar mix­ture of truths, half-truths and down­right false­hoods. That’s pre­cisely what makes the book so dan­ger­ous. Ready embrace of the bits that are true may se­duce you into be­liev­ing the bits that aren’t.

The book is an ex­po­si­tion of what is known as Mod­ern Mon­e­tary The­ory. It has its ad­her­ents in many coun­tries. Prof Kel­ton was eco­nomic ad­viser to Bernie San­ders, and MMT in­flu­enced those around Jeremy Cor­byn when he was Labour Party leader. So this is not just an aca­demic cu­rios­ity.

At one point Prof Kel­ton asserts: “MMT demon­strates that the fed­eral gov­ern­ment is not de­pen­dent on rev­enue from taxes or bor­row­ing to fi­nance its spend­ing…” That sounds pretty rad­i­cal.

Yet there are some places where the book seems sim­ply to be re­assert­ing the pre­cepts of Key­ne­sian eco­nomics for the ben­e­fit of an au­di­ence that has never com­pre­hended them be­fore. I sup­pose that has some value. These Key­ne­sian nuggets are propo­si­tions with which I whole­heart­edly agree.

At one point she says, “in­creas­ing the deficit doesn’t make fu­ture gen­er­a­tions poorer and re­duc­ing deficits won’t make them any richer”. That is a mes­sage I have re­peat­edly con­veyed in this col­umn. The in­ter­est paid on gov­ern­ment bonds doesn’t dis­ap­pear into a black hole. It is re­ceived by the bond­hold­ers.

Mind you, this doesn’t mean that there aren’t po­ten­tial prob­lems for fu­ture gen­er­a­tions as a re­sult of fis­cal largesse be­cause, un­less gov­ern­ments re­sort to in­fla­tion, other things equal, higher debt means higher in­ter­est pay­ments that have to be fi­nanced some­how or other. In the end, they are fi­nanced out of re­duced spend­ing or in­creased tax­a­tion. Taxes dis­tort and de­press in­cen­tives and hence eco­nomic growth. So hav­ing a set-up that im­plies more taxes in fu­ture is hardly to be rec­om­mended.

Prof Kel­ton also says that it is mis­lead­ing to think of the fi­nances of the gov­ern­ment in the same way that you would think of the fi­nances of a house­hold. This too is clas­sic Key­ne­sian­ism. There are op­tions open to gov­ern­ments that aren’t open to house­holds. What’s more, in­creased spend­ing and bor­row­ing by gov­ern­ments can, in the right cir­cum­stances, end up ac­tu­ally re­duc­ing deficits and debt ra­tios.

It is also true, as the book says, that gov­ern­ments don’t nec­es­sar­ily have to bor­row from the mar­kets. Un­like house­holds, they can fi­nance them­selves by print­ing money. More­over, in some cir­cum­stances they should.

But what is shock­ing or rev­e­la­tory about this? Gov­ern­ments have been do­ing this now for years and are cur­rently do­ing it on a mas­sive scale.

Granted, they have been do­ing this in­di­rectly, rather than di­rectly. They have is­sued bonds, which cen­tral banks have then bought and, in the process, cre­ated money. But so what? The dis­tinc­tions be­tween mon­e­tary and non-mon­e­tary fi­nanc­ing can sound the­o­log­i­cal at best. And the in­sti­tu­tional bar­ri­ers sur­round­ing gov­ern­ment ac­cess to the money print­ing press can seem ar­cane. Nev­er­the­less, they are crit­i­cally im­por­tant for pre­vent­ing in­fla­tion.

In parts of the book, Prof Kel­ton ap­pears to recog­nise these lim­its. And she cer­tainly recog­nises in­fla­tion­ary con­straints. At one point she says: “that’s not to sug­gest that deficits don’t mat­ter, so we can throw cau­tion to the wind and sim­ply spend, spend, spend.”

She also says: “Of course, MMT recog­nises that deficits can also be too big.” Well, that’s a re­lief!

So what is she say­ing? She seems to be claim­ing that MMT pro­vides a new the­o­ret­i­cal frame­work. Yet it would be pretty ex­tra­or­di­nary if the ba­sic the­ory con­cern­ing the pub­lic fi­nances, money cre­ation and in­fla­tion were to be proved wrong in 2020.

Ad­mit­tedly, Keynes made some revo­lu­tion­ary con­tri­bu­tions to eco­nomic the­ory in the Twen­ties and Thir­ties that still hold good to­day.

But even he recog­nised that there were con­straints and he would cer­tainly not have given his sup­port to un­lim­ited gov­ern­ment bor­row­ing or mon­e­tary fi­nanc­ing.

So maybe it is just about mag­ni­tudes? In 2010, the econ­o­mists Car­men Rein­hart and Ken­neth Ro­goff claimed that the his­tor­i­cal ev­i­dence sug­gested that 90pc was the key level for the ra­tio of debt to GDP. Once you got above this point, they said, gov­ern­ment debt caused se­ri­ous prob­lems for an econ­omy.

To me, that number al­ways looked ar­bi­trary at best. And it jarred with UK ex­pe­ri­ence.

We have spent more of the last 250

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years with debt above that level than we have with debt be­low it. More re­cent ex­pe­ri­ence has proved that, at least in the short-term, gov­ern­ments can rea­son­ably op­er­ate with debt well above 90pc of GDP, as Ja­pan has done for ages.

If that is what Prof Kel­ton is say­ing then she is in good com­pany – in­clud­ing Olivier Blan­chard, for­merly chief econ­o­mist of the IMF.

This isn’t a prove­nance that you would nor­mally as­so­ci­ate with the ditch­ing of con­cerns about ortho­dox fi­nance. And, in­deed, he doesn’t throw these over­board.

He just ar­gues that, be­cause of very low in­ter­est rates, which he ex­pects to be sus­tained for a good while, it is now safer to run with higher ra­tios of gov­ern­ment debt to GDP than was true in the past.

He is prob­a­bly right about this – even though there are con­tin­ued dan­gers, which he him­self ac­knowl­edges. The Deficit Myth

is a catchy and at­trac­tive title for a book. Un­for­tu­nately, what it has to say that is true is by no means new.

And what it has to say that is new is down­right false.

Pro­fes­sor Stephanie Kel­ton was eco­nomic ad­viser to Bernie San­ders

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