Friday, 26 July 2013
Mike Norman on the irrelevance of the deficit and debt.
You might think there is a contradiction between Mike’s claim that the debt doesn’t matter, and the jaundiced view of national debts expressed by David Hume in the right hand column of this blog. The two are actually compatible, and for the following reasons.
David Hume is concerned with where a government aims to raise money for public spending AS A SUBSTITUTE for taxation. In that case there is no effect on demand (or at least influencing demand is not the object of the exercise). And it is very questionable as to whether governments should ever do this – certainly in the case of current spending. Moreover, even the popular and “common sense” view that governments should borrow to fund capital spending is very debatable. See here.
In contrast, to borrowing as a substitute for tax, there is expanding both borrowing and spending. That is widely regarded as raising demand (especially if interest rates are held constant or reduced). I’m not saying I think that’s the best way to raise demand, but certainly that’s a different kettle of fish to what concerned David Hume.