The deficit lies mainstream economists knowingly tell us

29 Jul, 2023 at 11:12 | Posted in Economics | 4 Comments

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[The interview was given to Mark Blaug in 1995. In transcript: “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked, [it] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires …”]

Samuelson’s statement makes me come to think of the following passage in Keynes’ General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

4 Comments

  1. But what are the reasons Samuelson gives for suggesting that budget deficits are not a problem? Then we get things like Samuelson crosses, which are not explanations, but tautologies.

    It is dangerous to get neo-classical economists to represent a pro-Keyensian position,because as your own post on Myrdal points out, these arguments are not on proper ontological – empirical, social or psychological foundations. And from a dubious ontology, they make axiomatic-deductive conclusions.

    What we need is nuance. Some countries do have the scope to go into deficits – particularly those with reserve currencies or are not open economies dependent on raising funds in international capital markets. This makes budget deficits problematic for many emerging currencies that need a hard currency to purchase dollars to purchase essential non-substitutable imports and inputs. And Britain recently found out that it is not only emerging countries that are prone to dangers.

    So the best form of discourse would be an historically widely and deeply informed discussion. Nuanced conclusions can then be made carefully after such a discourse.

    Another thing, monetary or budget rules does not mean pro-market. Japan and Germany before the neo-liberal era were not market economies in many respects-they had collective bargaining and capital rationing. But they had budget balance rules and monetary rules, which many who know the history of these countries very intimately, would argue were part of their success.

    Comment by Nanikore— 1 Aug, 2023 #

    • Nanikore, can I once again propose different stories, supported by the same available evidence (due to its noisy character)? Why do Britain’s problems seem entirely a product of defeatist psychology, while Japan boldly threw off the silliness of budget rules? And how many more decades can Türkiye keep printing lira to buy dollar swaps, without political consequence (since lira inflation is insured away by indexation)?
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      That being said, can i prove to you all how to make a sure-thing options spread bet that shorts the yen? If I sell long calls with different strikes and close them out before FXY reaches them, am I guaranteed to win, and win big if the yen declines against the dollar in the next two months?

      Comment by rsm— 2 Aug, 2023 #

      • They are big questions, and the “noise”, well the detail, that is important. That is where the nuance comes in.

        David Edgerton is the man to read about the industrial decline of Britain. We can look at the end of its exploitationary empire and the fact it never recovered from its phyrric victory in WWII. During the neo-liberal era deindustrialisation and financialisation was accelerated. The weaknesses of its industrial and social structures, which goes back a long way, would never be solved by monetary or fiscal expansions.And with a dependence on internaitonal capital markets to which they are now at their mercy, we have seen very clearly its scope for such expansions are now limited: like emerging markets it faces the prospect of a currency crisis. This is not an argument for austerity, and certainly not an argument for austerity that targets the most vulnerable. But again we need the nuance.

        Japan’s budget deficits started in the late 1960s which are to do with domestc politics which I won’t go into now, but its big deficits are related to US pressure to close its bilateral external deficit (whose cause had nothing to do with Japan’s fiscal positions). A big story here, but ultimately the result was the 1989 crash. But Japan will not become a Turkey or Britain because it is a closed economy that funds its deficits with domestic savings and has a sound industrial and social structure.

        Turkey can go on doing what you said for some time, and has done since at least the end of the Ottomon Empire. Turkey is a basket case and will remain so. This is no Japan, Germany, Korea or Taiwan.

        The causes of the 2008 financial crisis and distortions we see I think are related to many years of excess liquidity and financial deregulation. This has benefited large asset holders and inflated the prices of things like gold and art. Meanwhile labour is undervalued. This is something that Gary Stephenson, an ex-trader, articulates well.

        I think foreign currency traders and speculators have long been the winners from Japan and other’s actions during the neo-liberal era. And it looks like they will continue to be. As individuals they just can’t lose. And the system ensures that their institutions are bailed out when they do.

        Comment by Nanikore— 2 Aug, 2023 #

    • Nanikore (replying here to your most recent reply deeply nested below), yet again, can a hardcore heterodoxist supply data from Japan to ask: if the Bank of England did Yield Curve Control, would Truss have passed her budget?
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      In other words, what if we look back on this era with the same critical perspective that we look back on the Fed’s unwillingness to expand in the Great Depression, because the tools of Yield Curve Control provably relax deficit constraints and indexation relaxes nominal inflation constraints?

      Comment by rsm— 4 Aug, 2023 #


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