The benign deficit

There's a point I made in my previous post that I'd like to emphasise. It's that voters support austerity for the same, sometimes mistaken, reason that they support price controls - because they under-estimate the extent to which emergent processes sometimes produce benign outcomes.

What I mean is that what free marketeers say about the price system - that it is the benign outcome of uncoordinated individual decisions - is also true of government borrowing now.

This borrowing is the counterpart and effect of decisions by millions of companies and households (pdf) around the world to save and not invest*. Given that much of the rest of the world wants to be net savers, somebody must be a net borrower - and that somebody includes the UK government.

This borrowing is as John says a solution not a problem - because it is helping to sustain demand.

At this point I could write thousands of words about MMT. But why bother? Just look at real bond yields. These tell us that financial markets are untroubled by government borrowing - because the same net savings which cause this borrowing also cause low interest rates.

In this sense, the division of opinion is not between left and right but between economists and non-economists. Most economists are more or less relaxed about the deficit for the same reason that they often support freeish markets - because they appreciate that individuals' uncoordinated decisions sometimes have tolerable outcomes. Non-economists, being less aware of this, are keener for the government to "control its borrowing" just as they want state control over other aspects of the economy.

All that said, there are two massive caveats here.

First, I am NOT saying that deficits are always benign any more than I am saying that other emergent processes are. Whether either is the case or not varies from time to time depending upon the circumstances**. I can imagine - and have seen - circumstances where big government borrowing is a problem. It's just that those circumstances are not here not now.

Secondly, some of the reasons for high net private savings around the world are assuredly not benign: weak welfare states, a lack of consumer confidence and secular stagnation. In a better world, the government would be borrowing less. But inferring from this that the government should cut borrowing is like withdrawing medicine from a sick man because he wouldn't need it if he were healthy.

Which brings me to a problem. It's possible that many of the causes of global net savings - and we can to them ageing populations in Europe - are longlasting. To the extent that they are, government borrowing might persist. If so, the Fiscal Charter's promise to achieve a surplus on PSNB by 2019-20 might require yet more counter-productive fiscal tightening. Deficit reduction should be state-dependent, not time-dependent.

I appreciate that there political reasons why Labour might support the Fiscal Charter, but I'm not so sure there are good economic ones.

* I stress around the world: the counterpart to government borrowing is now an overseas deficit - which is to say net savings by the rest of the world.

** Note here that, yet again, the bigotry of anti-Marxists is 100% wrong. It is me the Marxist who is stressing that context is everything whilst anti-Marxists of right and left want to see lawlike generalizations where none are appropriate.

Comments

[Luis Enrique]

but the fiscal charter is about running a surplus during good times? And in good times, surely a government surplus is the counterpart of individual decisions to borrow and spend?

[Bob]

In that link to a post you say Ricardian Equivilance and "crowding out" are problems for government borrowing.
Govt borrowing is really printing. You print Gilts. This increases savings.
There is no financial crowding out. It is a myth.
Government spending can crowd out real resources though.
As to RE, I have never seen any evidence for it, and plenty against it. Could you show me a good example of RE in practice?

[Britonomist]

I don't agree that interest rates are indicative of financial market participants not being concerned about the debt, just indicative that they're aware that the central bank can and will always intervene to keep interest rates where they want them.

But interest rates are the elephant in the room, how much will debt interest servicing costs explode if the central bank decides to raise rates back to historically average levels? What will this mean for government expenditure? I think it's vitally important we stop costs and expenditure getting out of control, for the sake of sustainability.

[serenis.cornelius]

Thank you for these "salutary reminder" which evokes for me a clear "kalecki-Keynes-Vickrey tradition".There are sadly too few people who understand this approach of the deficit. I add that the multiplication of the bubbles and krach épisodes is also a "measure" of the miscomprehension of what the deficit really is.
Best regards.
serenis cornelius

[reason]

It seems to me that there is another story hear.

I think the big error that "Austrians" make is in thinking that savings is directed (i.e. people know what they want to use the savings for). Savings are mostly contingent (i.e. a form of insurance). People don't know what they will spend their savings on, they don't even know what their choices will be, or what their preferences will be at a later date. People want to build financial assets as a buffer stock.

Financial assets are of two basic types - equity (shares in income streams from real assets) or debt (promises of income stream from other people or institutions). Complicating the issue is that money -(that lubricant for modern economies) is almost all created as debt, but not all debt creation creates money.

I think that the higher the proportion of money that is created via private borrowing, the more unstable the economy will become. Money creation via government spending, however makes the private sector more resilient (because financial wealth is increased without a corresponding increase in private debt). Private financial wealth creation should be concentrated in real asset purchases or lending to governments, not in private borrowing.

[reason]

P.S. I think that means that in general there is an optimal long term stock of government debt, that increases as GDP increases (i.e. paying off the debt is a big mistake). I think that the "Washington Consensus" policy mix of tight fiscal policy and loose monetary policy is 100% wrong - fiscal policy should be looser (especially if the new debt is used for public infrastructure investment) and monetary policy tighter to reduce private borrowing. And this combination should push down asset prices (less leverage) and push up yields (hence excessive private leverage is a lot of the explanation of low interest rates).

[Matt M]

Nail on the head - massive overseas surpluses are from mostly plutocratic states: Saudi Arabia, China, many SE Asian countries, Central Asia etc.

Basically the elites in these countries can't recycle funds to generate returns in these places so need to dump it into the west causing distortions.

In a way, the distortions empower the elites here too to do the same political things causing reverb effects. Eventually the capital can't go anywhere.

I always believed Marx was correct in his analysis of capitalism as inherently unsustainable as plutocrat returns plummet naturally causing more and more extreme behaviours/policies/laws to be put in place to sustain them - abolishing borders for immigrants, cutting pensions, privatisations etc.

Funny how it was elites in feudal states that inadvertently took down the middle class in advanced countries.

In a sense, it was the welfare state and regulation that saved capitalism from itself by forcing plutocrats to recycle funds.

[Bob]

"I think that the higher the proportion of money that is created via private borrowing, the more unstable the economy will become. Money creation via government spending, however makes the private sector more resilient (because financial wealth is increased without a corresponding increase in private debt). "
This is MMT's "net financial assets."

[Anders]

Chris - would that low bond yields told an unequivocal story about deficits being acceptable. I fear Osborne would say it's precisely the anti-deficit rhetoric, and the cuts to public services, which are keeping a lid on gilt yields.

[Neil Wilson]

"And in good times, surely a government surplus is the counterpart of individual decisions to borrow and spend?"

Only if you have no external sector.

You need to adopt 'functional' finance, not sound finance. Ignore the numbers and concentrate on unemployment and price stability.

Keep unemployment low, prices stable and savings well distributed and let the budget fall where it may.

[Neil Wilson]

"But interest rates are the elephant in the room, how much will debt interest servicing costs explode if the central bank decides to raise rates back to historically average levels?"

That's a political choice. There is no need for the government to pay interest at all to any third party not under its control. It can do it all internally within its own and controlled entities.

The whole political debate should be about why the government needs to pay money to savers, particularly overseas savers when it patently doesn't have to.

[reason]

Neil Wilson
Yes, definitely for countries with their own currency.

[Benoit Essiambre]

" I stress around the world: the counterpart to government borrowing is now an overseas deficit - which is to say net savings by the rest of the world."

Of course the third alternative is an increase in net aggregate investment, that is creating more new capital. This requires real interest rates to go sufficiently low, possibly quite negative.