You’d think R&R would be eating humble pie at the moment.
But not a bit of it. They’re fighting back with amongst other things a litany of
lies and half truths in the Financial Times yesterday. Their article there was
entitled “Austerity is not the only answer to a debt problem”.
Anyway, let’s look at their article in detail – should be
fun. In fact the lies, half truths, mistakes and nonsense is so voluminous,
that it’s taken me well over a thousand words to deal with it all below.
Debts near wartime peaks?
In their second paragraph they claim that, “the ratios of
debt to GDP are at historically high levels in countries, many rising above
previus wartime peaks.”
That is a gross mis-representation.
The reality is that the debt in most major countries is
nowhere near “wartime peaks”. Charts for
the US and UK are shown below.
Hat tip to The Atlantic for the second chart.
As to countries which are now in the Eurozone, national debt
for such countries is a different kettle of fish as compared to the debt of a
country which issues its own currency, but for what it’s worth, France’s post
WWII debt to gdp ratio was 208% (see p.23 here). That compares with 89% now.
As to Japan, its debt peaked at 200% at the end of WWII and
is slightly above that level now (218%)
So which are the “many countries” referred to by R&R
where debt is now above post war levels? A selection of desert islands in the
Pacific, probably. But that’s Rogoff “statistics” and spread sheets for you.
The unfunded pensions scare story.
Next (still on their second paragraph) they trott out the
scare story about “underfunded old-age security and pension programmes”. The
implication here is presumably that those pension liabilities will add to the
debt (although when writing propaganda it always pays not to be too specific
about what you’re saying: i.e. propagandists often imply rather state clearly
what they mean).
Well I have news for R&R: the UK state pensios scheme is
not funded. It’s what’s known as “pay as you go” scheme. I.e. the cost of
pensions in 2013 is paid for by taxpayers in 2013. And nothing wrong with that.
Indeed, there are even private “pay as you go schemes”.
In short, assuming sufficient taxes are collected in the US
in say 2030 to pay for pensions in 2030, there won’t be any increased deficit.
Due caution.
R&R then devote about 200 words to saying they are not
against more borrowing, particularly in a recession, but that such borrowing
should be done “with due caution”.
Well who could possibly be against “due caution”? That’s just
waffle and hot air.
Borrowing for investment.
Next, in an attempt to argue that SOME borrowing is
justified, they trott out the common misperception that: “Borrowing to finance
productive infrastructure raises long-run potential growth…”.
Well actually if you pay for an investment out of income,
rather than borrowing you get EXACTLY THE SAME improved “long-run potential
growth”. I.e. the productiveness of an investment IS NOT a reason to borrow: it’s
a reason to invest. Doh!
E.g. if you have well over £20,000 in the bank, and you want
to invest in a new car or small truck costing £20,000 , why borrow? Only
numbskull Rogoff and moron Reinhart would borrow in those circumstances.
In fact a Swiss academic (1) some years ago looked at exactly
that question, namely whether a government should fund investment from income
or from borrowing. The conclusion was that borrowing did not make sense.
The only reservation there is if government can borrow at a
near zero rate, there’s probably no difference between paying for an investment
out of income and out of borrowing. But in more normal times, the above Swiss
paper is probably right.
R&R’s “consistency”
lie.
Just after the above point about infrastructure, R&R
claim they have “consistently argued” for such investment “since the outset of
the crisis”. In fact, according to this Huffington article, they argued no such
thing.
Interest rates may rise.
R&R then trott out the old canard that “interest rates
can change rapidly”. Well sure they can. And for the economically illiterate
that might seem to pose a problem for a heavily indebted country.
But the first flaw in that argument is that interest paid on
EXISTING debt does not change one iota when spot rates rise. I.e. it’s only
debt about to reach maturity and which may need to be rolled over the might
cause a problem.
But is there actually a problem there? The answer is “no”: at
least certainly not for a country that issues its own currency. I.e. Eurozone
countries are wholly different. But (and wouldn’t you know it) R&R conflate
monetarily soverign countries with non-monetary sovereigns.
At any rate, I’ll concentrate on countries which like the US,
are monetarily sovereign, since R&R live there, and the US is presumably
their main concern.
So . . . is a rising interest rate a problem for an indebted
country? Well no: all it has to do is print money instead of borrow it (as
pointed out by Keynes and Milton Friedman).
Of course the knee jerk response from R&R and other
economicl illiterates will be that printing is inflationary. Well it’s not if
the economy is not at capacity, i.e. if it’s in a recession.
David Hume over 200 years ago pointed out that a money supply
increase is not inflationary except to the extent that it brings excess demand.
It seems that R&R are not very well acquainted with Keynes, Milton Friedman
or David Hume.
Let’s cheat our creditors!
R&R’s next daft suggestion is that debtor countries
should “write down” their debts. It’s not 100% clear from the phrase “write
down” what they mean. But in fact Rogoff spelled out quite clearly what he
meant in 2011: he suggested inflating away debts.
Well the result of that is totally predictable: no one is
going to lend to the country concerned for the next decade other than at a very
high rate of interest.
Creditors were cheated by the inflation spike in the 1970s.
The result has been a VERY SLOW long term decline in interest rates since then.
Creditors have have long memories.
What R&R and every debt-phobe needs to learn.
1. National debt is a net financial ASSET of the private
sector. That means it’s very different to some other financial assets. E.g. in
the case of money created by commercial banks, for every dollar of money, there
is a dollar of debt. That is, money created by commercial banks nets to
nothing.
2. The bigger is the private sector’s holding of net financial
assets, the more likely it is to go on a spending spree. In other words
national debts are self limiting. Put another way, if you carry on expanding
private sector net financial assets long enough, the point must come where the
private sector starts to significiantly expand its spending, and the recession
ends.
In fact the private sector may spend too much and exacerbate
inflation: in which case governemnt will need to confiscate private sector net
financial assets via extra tax. I.e. government can run a surplus. Ergo debts
are not a problem.
That’s not to say it’s easy to guage the right amount of
deficit or surplus, or to get the timing right. But the important point is that
IN PRINCIPLE, national debts for countries that issue their own currencies just
ain’t a problem.
__________
Reference:
1. Kellermann, K. (2007). Debt financing of public
investment: On a popular misinterpretation
of “the golden rule of public sector borrowing”. European Journal of Political
Economy, 23 (4): 1088-1104.
http://econpapers.repec.org/article/eeepoleco/v_3a23_3ay_3a2007_3ai_3a4_3ap_3a1088-1104.htm
___________
P.S. (4th May 2013). Jonathan Portes (director of
the UK’s National Institute of Social and Economic Research) also tried to very
R&R’s claim about current debt levels relative to post war levels. He found
that the R&R claim seemed to be essentially false for the five countries
for which Portes could find figures.
P.S. (6th May). Here is more evidence of Rogoff’s
dishonesty. Looks like he has refused for three years to let anyone see his
famous spreasheet: i.e. it was only very recently that he published it.
P.S.(22nd July, 2013). More evidence of Rogoff's dishonsty here.
P.S.(22nd July, 2013). More evidence of Rogoff's dishonsty here.
P.S. (3rd
Sept. 2013). Nice to see someone else pretty much in agreement with my above less
than flattering take on Rogoff and Reinhart.
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