As Adam Smith said, “People of the same trade seldom meet
together, even for merriment and diversion, but the conversation ends in a conspiracy
against the public….”.
So when two Harvard economists are made to look silly (Rogoff
and Reinhart), another Harvard economist, Laurence Summers, comes to their
rescue in the Financial Times. The FT article is reproduced nearly word for word at Huffington.
And one of Summers’s arguments in defence of R&R is the
straw man argument that we cannot let debts “accumulate with abandon”.
Well – doh – no one ever said they SHOULD accumulate “with
abandon”.
Certainly one group that advocates a more relaxed attitude to
deficits and debts (advocates of Modern Mondetary Theory, like me) do not
advocate “abandon”. We have VERY SPECIFIC ideas as to EXACTLY how big deficits
and debts should be.
And those ideas are little different to Keynes’s dictum: “Look
after unemployment and the budget will look after itself”.
In other words if the amount of deficit required to maximise
employment as far as that is consistent with keeping inflation under control is
much bigger than any previous deficit, then so be it. Conversely, if a SURPLUS
of record proportions is needed to achieve the above “unemployment / inflation”
objective, then again, so be it.
To judge by his last paragraph, Summers doesn’t get the
latter point. He says, “This is not the time for austerity, but we forget at
our peril that debt financed spending is not an alternative to cutting other
spending or raising taxes. It is only a way of deferring those painful acts.”
Those two last words “painful acts” indicate that Summers is not
too clued up here, and for the following reason.
A painful act is an act that makes you worse off. In
contrast, and in line with Keynes’s above dictum, if taxes are only raised when
such taxes are required to damp down demand and inflation, then no “pain” is
involved!!! That is, such taxes simply
remove money from the private sector which, were it to be spent, would stoke
inflation, and make us WORSE OFF.
And doing something that prevents you becoming worse off is
not “painful”: taking an asprin to cure a head ache is not “painful”.
Now are you puzzled by the idea that raising taxes can make
you better off or stop you becoming worse off? Then go back to square one above
and read the above paragraphs again.
The only sense in which Summers can be said to be right in
referring to “painful acts” is that such “acts” could be POLITICALLY difficult.
But he doesn’t say anything to the latter effect, so I assume he isn’t referring
to that specifically political point.
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