Why additional public borrowing isn’t necessarily bad
7 January, 2013 at 18:04 | Posted in Economics | 12 Comments[The policy of austerity has failed. We need more investment in job]
Q: Wouldn’t this involve the government borrowing more?
A: Yes, it would involve paying for the investment by borrowing. That is what a company would do if it saw a good investment opportunity, and we are always being told that the public sector should learn from good practice in the private sector.
Q: Wasn’t it excessive borrowing that got us into this mess?
A: Borrowing for a good reason is not a problem, as anyone with a mortgage will tell you. Borrowing becomes a problem when it underestimates the risks involved, and when the borrower may not be able to afford the repayments. The financial crisis was caused in part by excessive borrowing by consumers who thought house prices could never fall, but mainly it was banks over-extending themselves. The recession caused high government borrowing, and not the other way around.
Q: But isn’t public sector borrowing at record levels?
A: Yes, but so is the desire of the financial markets to buy public debt. This is why interest rates on public debt are so low. The financial markets desperately want to buy government debt, and so they are prepared to get very little back in return. That is one reason why now is just the right time for the government to borrow to invest.
Q: The government tells us that if it borrows more we will become like Greece.
A: This is nonsense. It is no coincidence that all the major countries experiencing a government debt crisis are in the Eurozone, because Eurozone countries do not have their own central bank. Governments outside the Eurozone have no problem borrowing at the moment – as I said interest rates outside the Eurozone are at record lows. If there was a serious risk that the UK would become like Greece, interest rates would not be so low.
Q: Isn’t it wrong for the government to be borrowing more when consumers are so strapped for cash, and often cannot borrow or are trying to rebuild their savings?
A: Exactly the opposite is true, as any economics student will tell you. If consumers are saving more, there is less spending power in the economy. If the government also spends less, we get a recession. That is the basic mistake the government is making. This is the other reason, besides low interest rates, why now is just the right time for the government to borrow more. In a recession, there is no danger that government spending will crowd out private spending, and it is much more likely to stimulate the economy.
Q: But surely no government can keep on borrowing more forever.
A: Of course not. But the right time to cut government borrowing is when the economy is strong, and the cost of borrowing is high.
Q: All politicians will find an excuse to spend more or tax less, and put off the day that borrowing is brought under control. At least this government has had the courage to deal with the problem, unlike their predecessors.
A: As many countries besides the UK are finding, it is much more difficult to bring down borrowing when the economy is weak. By contrast, many governments have succeeded in reducing borrowing when the economy has been stronger. Before the financial crisis, the ratio of government debt to GDP in the UK was below the level when Labour came into office in 1997. Bill Clinton successfully reduced US government debt during the 1990s, when the US economy was growing strongly.
Q: But government borrowing more now will inevitably mean higher taxes in the future. We should not burden future generations in this way.
A: Not necessarily. By spending more today, we can reduce the need for the government to spend in the future, so taxes need not rise. As far as future generations are concerned, I suggest you ask some of the nearly one million young people who are currently trying to find a job what they think.
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The group think that takes place when it comes to economics is indescribable. A sickness really. An older one – “Home prices never fall.” More recently – “We can conjure money out of thin for as long as we want and there wont be any consequences.”
No paper currency has ever survived because govt.’s cant keep their hands off the printing presses to pay for the promises they make to be re-elected. But no one cares to learn the lessons of history and we are therefore doomed to repeating those mistakes. A quote from Bastiat puts our current day predicament in perfect light.
“The people will be crushed under the burden of taxes, loan after loan will be floated; after having drained the present, the State will devour the future.”
Frédéric Bastiat, French economist, 1850
Comment by Tyler Roberts— 7 January, 2013 #
“No paper currency has ever survived..” Really? Where is the evidence? I cannot think of a single instance of a paper currency ceasing to “survive”. The nearest thing to that occurs in regimes run by total and complete idiots like Mugabwe. But even he has now got inflation down to a few percent, and his currency has “survived”. And then there was hyperinflation in Germany in the 1920s, but that was caused by serious political disturbances and reparations for World War I.
In short, in normal circumstances, paper currencies “survive” very nicely.
Comment by Ralph Musgrave— 8 January, 2013 #
Whether it be private sector credit/money or public sector credit money it’s all about its productive use. The crisis was largely brought about by the unproductive use of private sector credit. While now is a good time for governments to be borrowing it still has to be put to productive use.
Comment by Dave Holden— 7 January, 2013 #
“We can conjure money out of thin for as long as we want and there wont be any consequences.”
This is moron-think to frame money creation in this way.
I hate to tell you this but funding the consumption of our production is not conjuring up money out of thin air…we earn every penny of it.
It doesn’t seem to occur to folks that the energy we rely on from the Sun comes from “thin air” too…we don’t borrow it.
Next thing we know the clowns will want to charge us interest on that too.
Comment by paul— 7 January, 2013 #
You cant issue unlimited fiat money because you will destroy your national currency as Krugman puts it….
Comment by marc— 8 January, 2013 #
“You cant issue unlimited fiat money because you will destroy your national currency as Krugman puts it….”
Another straw man erected…no one ever advocated issuing unlimited fiat…issuance is limited to the level of production at full employment so that we can consume what we produce.
Otherwise we end up with a shortfall resulting in increasing inventories and decreasing employment.
Comment by paul— 8 January, 2013 #
@paul can I trust that you will repay it when times are good?
Comment by marc— 9 January, 2013 #
@paul why does not the US raise its taxes especially on the rich?
Comment by marc— 9 January, 2013 #
marc,
There would never be a reason to “repay” (what a silly notion) whether times were good or not…there is no “debt” to repay, nothing is owed but interest. Bonds are money, worth more than plain Jane dollars (they pay interest) and there is a huge (understatement alert) demand for them…the holders don’t want plain old dollars, but if occasionally one does they can be exchanged for dollars on demand.
The question about the taxes is a good one but probably for the wrong reasons…policy makers don’t understand the function of taxation and the rich hold the power, so they won’t allow their taxes to be raised.
From where I sit the best argument for taxing the rich till they bleed is to prevent them from amassing too much power.
Comment by paul— 9 January, 2013 #
http://www.levyinstitute.org/pubs/wp272.pdf
“Functional Finance and Full Employment:
Lessons from Lerner for Today?
by
Mathew Forstater
The Jerome Levy Economics Institute
July 1999
The Asian Crisis, with the fallout in Latin America and the transition economies; the Russian default;
continuing troubles in Japan; weaknesses in the structure of the new European EMU; volatility on Wall Street;
deflationary pressures in the global economy: recent economic developments invite a reconsideration of some
of our most deeply held beliefs concerning economic theory and public policy. Even within the hallowed halls
of mainstream economics, voices of dissent can be heard. Paul Krugman, Joseph Stiglitz, and Jeffrey Sachs are
among those whose recent proclamations indicate that we have entered a period in which orthodox views are
being openly questioned, creating an atmosphere characterized by a crisis of confidence.
Such periods of impending crisis and open expressions of self-doubt, questioning our most deeply held beliefs
about the way the world works, creates a climate in which the ideas of the great unorthodox thinkers of the past
may be revisited. The work of those who in the past dedicated their lives to formulating solutions to the
challenges of modern capitalist economies may contain lessons applicable to the contemporary situation. It is
in this spirit that this paper revisits the early works of Abba Lerner, outlining fifteen such lessons regarding
macroeconomic theory and policy, as fresh in the context of the current scene as they were some five decades
ago when they were first formulated.”
Comment by Jan Milch— 9 January, 2013 #
Question growth and liquidity and you will be throw to the wolfs! Why do not you build a bridge, destroy a bridge, build bridge, destroy a bridge etc that will also increase GDP. For god sake dont raise taxes that will destroy growth.This quest for growth (and fiat money irregardless of “liquidity trap”) is driving me insane….
Comment by marc— 12 January, 2013 #
maybe socialize losses and privative gains might be appropriate here ie just continue to grow the economy and dont take back any stimulus (none is arguing for suffering but you also has to be realistic). Who cares about debt ( I think has US has the largest debt in history and no it will not become irrelevant as the economy grows or people refuse taxes. If you want to foul me you better try harder than that)….
Comment by marc— 12 January, 2013 #