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October 17, 2012



Labour cut spending as a proportion of GDP, lower than the average under Thatcher.

It ran a deficit because it cut taxes much lower than the average under Thatcher.

This has more in common with Reaganomics than Keynes.


"what proved to be a ruinous asset price bubble"

Post hoc ergo propter hoc macro MUST DIE.

Luis Enrique

thinking of the deficit as the passive counterpart of private sector activity rather rules out the use of fiscal policy as a tool of economic management.


If the private sector operates a surplus and the public sector operates a deficit and ther is concern that the deficit is structural, isn't the response to increase tazes, or have I missed something?

Frances Coppola

Direction of causation is the issue. Is the public sector forced into deficit spending as a passive response to private sector saving, or is the private sector saving as a Barro-Ricardian response to public sector deficit spending - i.e. in the expectation that there will have to be higher taxes to pay for it, as D says?


Similar to frances coppola, this is one of those few things that you commonly write where i think 'wow, you are saying that private spending is exogenous!', how can private actors coordinate that! It doesnt make sense on its own unlike most of your stories. I suppose it makes more sense if you add in the assumption that the public sector is forced/choosing to defend a positive real interest rate for savers. Then private sector saving forces the pubic sectors hand.

But if thats true, thats insane and terrible public policy! Its a massive subsidy to savers that we cannot afford if the real rate of interest is negative, whether that is due to contingent elements of the economy or due to technological stagnation.


Is not the big picture here as some other economic bloggers have claimed, that China has gone through a massive Capitalist industrialisation but still has a state run financial system. So you have massive profits as in the British Industrial revolution and forced savings and lending. So Britain and the USA could increase their consumption via saving in China, and why not?

If people for what ever reason will lend to or invest in your economy and allow you to consume much more why is that bad? Keynes would say that it is not the boom but the bust that is the problem and the bust is a capitalist failure from poor regulation of finance. But a boom that allows you to eat more restaurant meals or built public infrastructure or have higher welfare benefits if your a claimant is quite fine. If we had not borrowed the savings they would have gone else where or world output would have been lower. So we would have been poorer and China would have been poorer as well. Some one must use the savings or they become worthless.

All of these politicised discussions about economics seem to skirt around the underlying issue of opportunity cost and uncertainty. Unless some one can think up plausible counter factual policies the conclusions from these arguments are unfounded.

james higham

The structural budget deficit is the sort of pseudo-scientific concept that brings economics into disrepute.

The whole nature of the international debt is a fiction as well.


Only an economist could think it plausible that the global savings glut, which is the root of our current economic crisis, was a concerted private sector response to a hypothetical (global!)future tax hike, rather than a consequence of mercantilist policies and hoarding of wealth by the new global super-rich.

Right-wing economic policies from the 1980s have inflated the wealth of the rich everywhere, from US to China, at the expense of the rest of us. The resulting tsunami of wealth has chased return around the globe, driving down real interest rates and creating the credit bubble. In the process, it stuffed the pockets of the bankers with gold - they came up with ever more risky financial engineering to inflate their bonuses and milk this global cash cow. When the balance sheets toppled, governments were left to pick up the pieces and take the blame.

Its a simple story, and far more plausible than tales of 'Barro-Ricardian' response dreamt up by economists who have left the shores of real economic life a long way behind.

Philip Walker

Luis, Frances, Nick and D are right. What ever possesses you to think that the State, uniquely among economic agents, is incapable of controlling its own budget?

George Carty

Instead of running big budget deficits, wouldn't it have been better to impose heavy tariffs on goods from China and other mercantilist countries, preventing the overseas savings glut from happening in the first place?


What ever possesses you to think that the State, uniquely among economic agents, is incapable of controlling its own budget?

Its revenues and outgoings are both highly geared to GDP, but with unpredictable and varying leads and lags?


@ Frances, Nick, Philip - I am saying that in this case, the private sector's surplus was (largely) exogenous. I do so for 3 reasons:
1. There are plausible causes of such a surplus - the Asian savings glut and "great stagnation"/dearth of investment opportunities.
2. If the causality were the other way round - with the public deficit causing a private surplus - you'd expect to see real interest rates rising so that a higher cost of borrowing reduced private sector investment. But in fact interest rates fell.
3. It's possible in theory that the public deficit raised private saving thru Barro-Ricardo equivalence. But why did this cause companies to save in anticipation of higher tax whilst households borrowed. Were agents expecting really expecting a shift in the tax burden? Or isn't it more likely that such equivalence just didn't hold?
@ Philip - there's nothing unique about the state being incapable of controlling its own budget. Why do companies make losses?

Philip Walker

Chris: fair point. I think I might have been confusing gross expenditure with net deficit.

Perhaps I should ask about two of the other questions which always bug me when this kind of argument comes up. Firstly -- though I may be misunderstanding the argument -- I thought this was about cashflow accounting. Is that right? Because companies can be loss-making but cashflow-positive, and vice versa.

Secondly, we tend to attribute different reasons for a single company making a loss from the reasons you are giving for the state being in deficit. This is probably partly to do with the fact that we are treating the state both as a monolithic single economic agent (not unlike a giant company) and also as a sector in its own right: but then, what if we treated Tesco as a sector in its own right?

Will Richardson

Tesco is a much smaller player than it's government but crucially it's a currency user, while the government is a currency issuer or creater. Government excess spending into the economy supplies the money demand needed to pay taxes and net save and if large enough, balances aggregate demand and supply at a full employment, stable prices equilibrium. There is no need for a currency issuer to borrow what it can create out of thin air as Jens Weideman let alone Ben Bernanke and Alan Greenspan have acknnowledge; you might want to read up on Beardsley Ruml's side note that taxes for revenue are obsolete.

Another way of looking at it is that if government deficits are less than desired foreign and private surpluses, there will be over supply/under demand and mass unemployment aka the last 30 odd years of so called great moderation.

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