The mistakes
made by R&R are so numerous that it’s difficult to keep up with them. But
here is just one, which I’ll examine in detail. It’s this passage of theirs:
“Nevertheless,
given current debt levels, enhanced stimulus should only be taken selectively
and with due caution. A higher borrowing trajectory is warranted, given weak
demand and low interest rates, where governments can identify high-return
infrastructure projects. Borrowing to finance productive infrastructure raises
long-run potential growth, ultimately pulling debt ratios lower.”
Unfortunately
the latter idea seems to be supported by Martin Wolf, who I thought was bright
enough to know better.
So Rogoff’s basic
claim is something like: “productive public sector investments expand GDP and
repaying a given amount of debt from and expanded GDP is clearly easier than
repaying from a smaller GDP”. Sounds sensible doesn’t it? Well it’s actually nonsense.
First, the
decision to go for what R&R call “high return infrastructure investments”
SHOULD NOT have anything whatever to do with whether an economy is in recession
or not. Indeed EXACTLY THE SAME goes for private sector investments.
That is, if
an investment makes sense or is “high return”, and the economy is NOT IN
RECESSION, that investment should still be made, shouldn’t it?
Why do
recessions occur?
Recessions
occur because the private sector saves too much (i.e. spends too little).
Incidentally, that’s “save” in the sense of accumulate money rather than
accumulate physical goods or investments like houses.
So in that
scenario, government has to net spend more to make up for private sector
caution. And that in turn results in the private sector accumulating savings:
in the form of government debt or extra monetary base (and it doesn’t matter
which, as pointed out by Milton Friedman, Keynes and numerous other
economists).
But note
that phrase “accumulating savings”: the deficit gets at the fundamental cause
of the recession, that is, what the private sector regards as an inadequate
level of savings.
Now suppose
the private sector after a while decides that its savings are commensurate with
a rate of spending that brings full employment (and that could be due to
increased private sector confidence or the aforementioned extra savings or
both). In that scenario, government can stop running a deficit, and simply
leave the level of debt or monetary base where it is.
There is no
need to “repay” the debt, and just leaving the debt where it is costs government
nothing (assuming the REAL or inflation adjusted rate of interest is around
zero, which is where it currently is in the case of the US, Germany, Japan and
the UK).
Another
alternative is that the private sector gets OVER-CONFIDENT, and it is
indisputable that the private sector goes into “over-confidence” mode from time
to time. In that scenario, government will need to rein in private sector savings.
I.e. it will need to raise taxes and grab savings off the private sector.
But that’s
not “repaying a debt” in the normal sense of the phrase. It’s simply a case of
government saying to private sector entities, “give me some more money else you
go to prison”. And moreover, that extra tax DOES NOT COST the private sector
anything in the sense that it’s simply a measure which is implemented to as to
stop the private sector OVER SPENDING, the result of which would be excess
inflation, which in turn would make the private sector WORSE OFF.
And that all
applies REGARDLESS of whether output per head is increasing due to R&R’s
“high return investments”. That is, EVEN IF output per head was not expanding
at all because for example the pace of technological improvement had
temporarily ground to a halt, the above points about savings, confidence, etc
would still apply.
Ergo . . .
Rogoff’s point about “high return” public sector investments is looking
increasingly irrelevant.
The final
nail in Rogoff’s coffin.
Next, let’s
suppose government does actually spot some “high return” investments, and
borrows money to make such investments. Will that do anything for the
recession?
Well,
assuming government just borrows and invests, the result will be that interest
rates rise. And a reasonable assumption thee is that government investment will
just crowd out private sector investment. So the IMMEDIATE effect on aggregate
demand and employment will be ZERO. I.e. the investment is of no immediate use
for exiting the recession.
Of course,
where government DOES BORROW and invest (or simply expands its non-investment
type spending) with a view to exiting a recession, the central bank is highly
unlikely to ACTUALLY LET INTEREST RATES RISE. So the reality is that if
government does borrow so as to invest in “high return” public sector
investment, there will indeed be a “recession exiting” effect.
But as just
intimated, that has ABSOLUTLY NOTHING to do with whether the money borrowed is
spent on investments or non-investment type spending.
Conclusion.
Rogoff’s “high
return” investment point is a COMPLETE IRRELEVANCE.
No comments:
Post a Comment
Post a comment.