Public economics 101

It is obviously politico-economics as the neoclassical tradition renders it. We know that since the days of Lindahl, Allais, Boiteux etc. The budget is a transfer mechanism as well as a balance.

● Consider the recent bills in the U.S. and in Australia. Student loan debt is gone. Generous public help came to the rescue and students will pay little after graduation. This is a transfer. This is an example of political redistribution of revenue. λ Now consider Turkey. The corporate sector’s open FX position fell all the way down from USD 195 billion in March 2018 to USD 81.5 billion in March 2024, i.e. from 22% of 4-quarter rolling GDP to 7%.

● Well, the corporate sector open position graphic tells us how this could happen. The pandemic and the two years before that when reserves were sold helped close this position.

● The FX debt visibly dropped from its peak. Now the short position can be re-opened. This is one of the outlets where CBRT reserves were spent. It was political redistribution. But can you compare this distribution decision to student loan debt relief in the U.S. and in Australia, and other expenditures?

● The social and political meanings of two income redistributions via budgetary policy could not be more opposed to each other. Also consider CARES, ARP and the Chip act etc. that both caused a lot of manufacturing investment and provided comfort to the American people. These are good examples.

● There is the following argument. Financing the current account deficit by means of asset investments, i.e. the financial account, amounts to financing domestic growth by using foreign savings. But there should be a budgetary counterpart to that.

● For instance, there can be growth-enhancing fiscal cuts but there is no way to curtail the current account deficit –which is about foreign currency and the saving gap- while trying to keep growth rates high.

● Maintaining the growth rate intact requires an increase of domestic savings, either private or public. This means fiscal deficits should be adjusted, that is “reduced”, as the current account deficit narrows.

● Obvious though it may be, this point is often overlooked. Just cut the deficit anyway.