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A few years ago, Mike and Bernie Winters were playing the Glasgow Empire. Mike went on alone to do his schtick, and after a few minutes Bernie stuck his head through the curtain. “Aww shite” shouted an audience member, “There are two of the fuckers”.
Well, there’s two of this fucker too. In the top right, I’ve put some links to some of the stuff I do in my day job. I'll be updating this regularly. Yes, I’ve decided to stop flogging the dead horse that is my book.
My latest take:

Companies' financial surplus - the excess of retained profits over investment - is close to a record high…Firms are still hoarding cash, despite the improved economic outlook…The public finances will improve significantly if - and probably only if - the corporate surplus falls…
Firms were net savers long before the financial crisis hit us - which is one reason why the government ran a deficit before then. This was because, as Federal Reserve chairman Ben Bernanke said, there was a structural dearth of investment opportunities in the western world even in the "good" times. Nothing has significantly changed. If anything, the emergence of widespread spare capacity and the reduction in trend growth as a result of the recession might have reduced investment opportunities even further.
And herein lies the risk of real trouble. If the government cuts spending whilst firms are still unwilling to invest, aggregate demand could fall which in turn would reduce tax revenues, thus keeping the deficit high.

Comments

[Ralph Musgrave]

“Real trouble” could easily arise given the clowns running the show, both in Europe and the U.S.

In contrast, what any sane government would do, given a drop in investment spending, is simply to raise government spending (and/or cut taxes). The fact that this increases the dreaded deficit is total and complete non-problem as Abba Lerner and advocates of Modern Monetary Theory have been repeating till they are blue in the face.

Deficit can accumulate as extra national debt OR extra monetary base. Where the objective of a deficit is stimulus, it is utterly pointless letting the national debt rise: it is monetary base that should be allowed to expand, as for example Warren Mosler (one of the main proponents of Modern Monetary Theory) points out at this URL – see 2nd last para.

http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

[Luis Enrique]

This dynamic mechanism you point to - govt tries to cut deficit, firms don't want to borrow, accounts have to add up, GDP falls, deficit stays high - sounds like a downward spiral with no stopping point, so long as the government keeps trying to cut the deficit. But just like a Keynesian multiplier runs out of steam eventually, the downward spiral can come to a halt.

What is the precise way of putting this question? I guess it's something like: what is the change in deficit in period t+1 resulting from cuts/tax rises in period t? If that figure is close to 1, things look good (perhaps like the IMF thinks) if that number is close to zero, we'd have to hack away for ages just to close the deficit a little, and create a huge recession and mass unemployment in the bargain. Some left-wing commentators imply the number is zero*.

We cannot appeal to an accounting identity to discover the likely value for this number, because those identities hold whatever the number is. So the key thing I guess is the observation that firms see no investment opportunities, and things like low interest rates, lower expected future taxes, lower wages, availability of skilled workers etc. aren't going to induce them to expand. However, if it turns out that the government is able to cut the deficit according to its timetable, where will you turn out to have been wrong?

[another question, related to something I frequently ask about, which are the implications of moving to a less capital intensive economy - what if capital requirements are so low that in aggregate firms can always invest out of cash flows? how would that change our interpretation of the data?]

* see, I think, Duncan's forecast here:

http://liberalconspiracy.org/2010/09/23/ireland-continues-to-deteriorate-and-were-heading-there-too/

[Luis Enrique]

one day I need to figure out whether this MMT malarky is snakes oil or not

[Paul Ralley]

Chris,

I've been waiting for years for your book to come out in paperback, should I assume it never will? Anywhere I can get a cheap / e copy?

[John Meredith]

Eric Morecombe was once asked 'what would you have been if you hadn't been comedians?'

'Mike and Bernie Winters,' he replied.

[Frank H Little]

Since I'd just commented on another blog that Dave & Ed reminded me of Mike & Bernie Winters, I thought this was going to be another comment on THAT SPEECH. (By the way, I have cast John Prescott as Schnorbits.)