Sunday, 27 July 2014
The incompetent “Congressional Research Service”.
It’s hardly surprising politicians haven’t a clue about the debt or deficit given the advice they get from the CRS. Rebecca M. Nelson authored some defective advice for Congress: entitled “Sovereign Debt in Advanced Economies.
The first mistake is in the first paragraph which claims “Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years.”
The idea that increasing a particular form of spending will result in increased debt is of course nonsense: government can perfectly well fund increased spending from tax: a point that the average ten year old can probably work out. But it gets worse.
In the section entitled “Policy Options”, Nelson lists five ways of reducing the debt, most of them involving significant problems. She misses out a method of reducing the debt which involves no problems at all (of which more below). Her five solutions are thus.
1. Fiscal consolidation. That, as she rightly points out involves raising taxes or cutting public spending. I.e. it involves austerity.
2. Debt restructuring. As Nelson rightly points out, that can involve extending the period of the debt or cutting the rate of interest. Both of those involve breach of contract: i.e. they involve robbing lenders.
3. Inflation. Well that hardly brings benefits for the country as a whole. Plus it involves, again, robbing lenders: in particular if inflation is SUDDENLY AND DRAMATICALLY increased specifically so as to rob lenders or debt holders.
4. Growth. That is certainly the least harmful.
5. Financial repression. According to the author, the latter “generally refers to the use of government policies to induce or force domestic investors to buy government bonds at artificially low interest rates…”.
Essentially that’s just a tax, and if government wants to increase taxes why not increase the more normal types of tax, like sales tax? There’s no need for the convoluted process involved in forcing people to buy debt which pays an artificially low rate of interest.
The problem free solution.
As I’ve pointed out time again on this blog, this is to print money and buy back debt (i.e. implement QE). And as to any inflationary consequences, that can be dealt with by increased taxes. Assuming the stimulatory effect of the QE equals the anti-stimulatory effect of the tax, then GDP remains the same: i.e. no austerity is involved.
However, the inflationary effect of QE does not seem to be DRAMATIC, to judge by the QE that has taken place over the last two or three years, thus the amount of increased tax would probably be equally small.
By the way, I normally need a few cups of coffee in order to get my brain sufficiently active to write a post on this blog. But I wrote the above in 20 minutes on one of my “caffeine free dozing around all day doing nothing” days.