This
voluminous paper by the IMF is a waste of ink and paper. It’s entitled “Fiscal
Adjustment in an Uncertain World”, and was published in April 2013.
Basically it argues that deficits and
national debts are too high. But the paper itself says “in practice it is
difficult to pinpoint what constitutes a prudent amount of public debt.”
(p.vii).
Well forgive me stating the obvious, but
if you don’t know what constitutes a “prudent” amount of debt, how do you know
that any particular level of debt is too high or too low?
Anyway, their basic argument (surprise,
surprise) is that too high a level of debt constrains economic growth. And with
a view to bolstering the claim, they cite (you won’t believe this) Rogoff and
Reinhart.
Now if the IMF had cited R&R before
the recent uncovering of flaws in
R&R’s work, then OK. But this IMF work was published in April this year:
that’s AFTER the flaws in R&R’s work was publicised. Taxpayers of the world
are clearly getting brilliant value for money from the IMF, I don’t think.
Next, and with a view to bolstering
their claim that excessive debt constrains growth they cite a number of other
“authorities”. The first of these is another IMF paper.
The paper is “Fiscal Deficits, Public Debt,
and Sovereign Bond Yields” by Messers Baldacci and Kumar. And basically all
this paper shows is that there is a tendency for high debt to result in the
relevant country having to pay a relatively high rate of interest on that debt.
Well of course!!!! The average six year old has probably worked
that out.
What both the above IMF papers
completely miss is the following point, which has been fully grasped by most
advocates of Modern Monetary Theory (MMT), and doubtless many others.
In a recession, governments need to run
deficits and those deficits CAN ACCUMULATE as debt. Though as Keynes and Milton
Friedman both pointed out, they can equally well accumulate as extra monetary
base.
Now recessions are caused by a decline
in private sector spending, i.e. by an increase in private sector saving.
(That’s saving of money or something near money, like public debt, rather than
saving in the form of accumulating physical assets, like houses.)
In short, recessions are caused by an
increased desire for what MMTers tend to call “private sector net financial
assets”. And if you have an “increased desire” for something, you
aren’t going to demand a huge price holding an additional stock of that item,
are you?
In other words, where a government runs
up debt so as to deal with a recession, it won’t have to pay very much interest
on that debt. Want some evidence for that? Well the “real” or “inflation
adjusted” rate of interest on US, UK, German and Japanese debt has been around
ZERO for the last few years!!!!!
Conclusion so far: in that a government
runs up debt so as to deal with a recession, those increased rates of interest
that the IMF worries about just won’t materialise.
But of course, governments don’t run up
debts just to deal with recessions. Governments sometimes run up debts for
unjustified reasons. A common reason is that voters tend to blame tax increases
on politicians more than they blame politicians for the increased interest
rates that result from irresponsible government borrowing. So politicians are
always tempted to pay for government spending by borrowing rather than by
raising taxes.
Thus the “discovery” by Baldacci and Kumar
that there is a tendency for high debt to result in high interest rates is no
discovery at all. It simply reflects the fact that governments are less than
100% responsible when it comes to running up debt.
The IMF paper does quote so called “authorities”
other than R&R and Baldacci and Kumar. But the latter two pairs of authors
are such a joke that I just cannot be bothered looking at the other so called
authorities.
Conclusion.
What the IMF SHOULD BE SAYING is
something along the lines of: “present debt levels are perfectly OK because
that debt is being used to counter the recession, but governments need to be
prepared to raise taxes and/or cut public spending when the recovery comes. And
if a government FAILS TO raise taxes or cut public spending come the recovery,
then interest rates will rise.”
Instead, what the IMF is saying is more
along the lines: “high debts PER SE are undesirable, and ANY reduction in
deficits and/or debts is to be welcomed.”
And a final bit of advice for the IMF in connection with what constitutes a "prudent" level of debt. Keynes answered that one long ago when he said "Look after unemployment and the budget looks after itself". In other words, keep unemployment as low as is consistent with acceptable inflation. As to the debt, if the private sector hankers for a big stock of private sector net financial assets, then the debt will be relatively high. If not, it won't. And trying (a la IMF) to somehow FORCE a lower level on debt onto the private sector than the private sector wants will simply lead to excess unemployment. Thus any preconceived ideas as to how big the debt should be are pure nonsense.
Good post. Pretty clear explanation
ReplyDeleteRalph,
ReplyDeleteI recently followed the link to Warren Mosler's site, which appears somewhere fairly prominently on your site and read with interest the "Seven Deadly Frauds of Economic Policy" paper, among others.
Doesn't he say that the deficit can be basically as big as the government wants it to be, and not only does that not matter, it's actually a good thing, and indeed a budget surplus is a bad thing.
(Obviously not so big that it causes inflation though).
Quite interesting in any case, although I am not sure I go along with him in all respects.
I imagine the IMF are not big Mosler fans.
Hi Monty,
DeleteYes, I agree with most of what Warren Mosler says. He actually wrote an article about a hypothetical household consisting of parents and children in which they set up their own currency. He uses that mini-economy to illustrate very nicely some of the fundamental characteristics of money, national debts etc. See:
http://www.gate.net/~mosler/frame001.htm
I would have mentioned it if it had illustrated the points I made above, but I don’t think it does. It’s worth a read anyway.
Another article (written by Paul Krugman) about an equally simple mini-economy which I think is also a “must read” is this:
http://www.slate.com/articles/business/the_dismal_science/1998/08/babysitting_the_economy.html
Thank you for the links Ralph. Very interesting.
ReplyDelete