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June 23, 2017


bob mckee

Your chart also suggests that growth is affected by other things than changes in govt spending ie. investment etc. So whether austerity or no austerity is good or bad is unproven by it.

Ralph Musgrave

Nice article, except that Chris argues in his last two paras that we should increase growth IN ORDER TO help cut the debt/GDP ratio. Strange argument, given that growth is desirable ANYWAY.

The crucial question is: what’s the optimum size of the debt. Or more accurately (as MMTers keep pointing out) what’s the optimum amount of “debt plus base money”. As Martin Wolf, MMTers and a few others have explained, debt and base money are essentially the same thing.

Since the rate of interest paid on “debt plus base” varies with the amount of D+B, there are a range of choices: from “zero interest” and a smallish amount of D+B (favoured by Milton Friedman and Warren Mosler (founder of MMT)) to more D+B accompanied by a higher rate of interest.

The Friedman & Mosler zero rate has plenty going for it. Though you could argue that locking up that money in the form of government bonds (i.e. paying SOME INTEREST) is desirable because it makes it more difficult for the private sector to go mad and spend all that money at once (given an outbreak of irrational exuberance) which would result in hyperinflation.

I quite fancy the latter argument, while paying a rate of interest that is less than inflation. That way government profits at the expense of its creditors.

So I vote for a rate of interest on the debt of around 1% and whatever D+B that results in.


«defining austerity by the change in the cyclically-adjusted primary budget deficit.»

Why care about *that* definition of "austerity" in isolation, when what matters is the whole economic policy posture of the country, not even of the government?

Focusing on the cyclically adjusted deficit especially after C Crouch clearly described "private keynesianism" is at best obsolete, if not actively misleading, as "private keynesianism" is based on credit and regulatory policy as to (only technically) private debt.

Ignoring the overall policy picture helps those who want to redistribute upwards via the "even wealthier effect" of having a wildy loose credit policy designed to boost asset prices and rents. That makes middle and lower income people much worse off than a slightly tighter fiscal policy.


«One is that fiscal tightness depresses GDP growth and this cannot be adequately offset by monetary policy when we’re near the zero bound.»

The "zero bound" is way off: interest rates are near zero only for "friends of friends" of the BoE, in particular the fraudulent and bankrupt financial conglomerates of the City. Interest rates are far from the zero bound for their customers.

The zero bound that JM Keynes was discussing was that of the cost of funds for labour-intensive investments in productive capacity, or more properly the margin between the nominal cost of funds and the profit rate of those investments.

Currently the nominal cost of funds for asset speculation is near 0 (but only for "friends of friends" of the BoE), and the profits from asset speculation are colossal.

Investment in labour-intensive productive capacity still has a positive gap with their cost of funds, but that's not that important as asset speculation is far more profitable, to the point that the Chief Economist of the BoE suggested that pensioners sell their share and bond savings and buy property instead.

Ignoring that there are multiple interest rates for different types of borrowers, and what JM Keynes and H Minsky pointed out as to that, is just New Keynesian or neoclassical delusionism.

James Webber

The need to increase trend growth is crucial. This is how Canada escaped its chronic deficit problems back in the 1990s, even though politicians like to claim they did it by cutting spending.


I like your suggestion of shrinking the state by asking less, rather than overstretching public workers. I wondered what I could come up with:

Education: Cut teaching workload by reintroducing optional 6th form study. Fund trade and apprentiship education.

Health: Remove GP prescription requirement for the pill.

Work: Encourage unionisation.

"Defense": Pacifist foreign policy. Decrease military budget; shift spending to aid & intelligence.

Social security: Citizen's income (duh). Scrap means-testing.

Immigration: Open borders.


John Mills on the deficit


"To prop up our economy, we have borrowed money on an almost unimaginable scale. The monetary base in the UK has increased since 2000 by an almost unbelievable 1,000pc, storing up potential trouble in the future. The government deficit – largely a mirror of the equivalent balance of payments shortfall – is still running at some £80bn a year. Austerity programmes are never going to put this right. The only realistic way to do so is to sell more abroad to close the balance of payments gap."


You specify r = 1.5% but what is your assumption about g (trend growth rate)? This matters as if g > r then we have what Michael Darby called Pleasant Monetarist Arithmetic, which seems to be what you are assuming. If r > g, we are in the world of what used to be called Unpleasant Monetarist Arithmetic.


Missing is an argument about what the marginally additional borrowed money would finance. Realistically, "austerity" ought to mean failing to invest in activities with future benefits and present costs which meet a positive NPV test when discounted at the borrowing rate. This rule will give larger deficits during recessions and lower deficits (or even surpluses) when few resources are unemployed (MC = P of inputs into public sector investments) and strong growth raises the opportunity cost of borrowing.


Ditto Thaomas.


Austerity is called for when inflation is high and threatening to go higher, relieving the monetary authorities of the need to choke off private investment with high interest rates.

That is not now.


The level of interest rates are an indication of the potential level of economic growth of an economy, when the return on credit is low then interest rates must also be low in order that the extension of credit remain profitable, in such economic circumstances the trend rate of economic growth too, is low.

So if low interest rates are indicative of a low level of trend economic growth and given that the level of an economy's borrowing is serviced from the proceeds from its future economic growth then an economy experiencing such economic conditions then can only afford a lower level of borrowing as a result, hence the need for austerity.


«The level of interest rates are an indication of the potential level of economic growth of an economy»

That is a ridiculous statement based on the bizarre neoclassical notion that "interest rates", whatever they are, are set by the market on the basis of demand and supply of loanable funds for investment.

They are actually set by the government (using the sock puppet of the central bank and the excuse of the target rate of wage inflation), that also decide who gets which rate (by setting capital requirements for lenders).

In practice they are just an indication of how much the government wants to redistribute from which categories of debtors to which categories of creditors or viceversa.

«So if low interest rates are indicative of a low level of trend economic growth»

The opinions of G Osborne and D Cameron as to "low interest rates" for their mates were:

“A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.”

“It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do. When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills. In this way, low interest rates mean more money to spare to invest for the future. A sharp rise in interest rates – as has happened in other countries which lost the world’s confidence – would put all this at risk… …with more businesses going bust and more families losing their homes.”


But the level of interest rates are not set arbitrarily, in order to optimise economic growth they must be set at levels which respect the level of return on credit which the prevailing economic conditions provide and so ultimately reflect the level of economic growth of an economy, my point is entirely economic and not political.

The increasing affluence of socially progressive societies favours the affluent classes because of their higher market value and disfavours the lower social groups because of their lower market value. Which is a profound problem for a progressive party which purports to be the defender of the interests of the lower social groups.

The level of welfare spending in developed economies is the result of the alienation of lower social groups from participation in those economies by the social and economic consequences of economic growth and development.

If welfare spending becomes unaffordable then the choice is either to ignore the social costs of further economic growth on the lower social groups or the economy be configured less to the interests of the affluent middle class and more to that of the lower social groups in order to allow them greater participation in the economy so that they be less dependent on welfare subsidy.

The third way is of course denial based on economic naivety which is the triumph of progressive faith over economic reality which is the basic position of the middle class progressive left.

The three options could be described respectively as: progressive neo-liberalism, nativism and progressive cosmopolitan populism.

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