Wednesday, 24 September 2014
Positive Money’s Money Creation Committee solves a dilemma.
As Tejvan Pettinger righly points out in an article entitled “Budget Deficit Targets”, the main advantage of budget deficit reduction targets is that they help stop politicians behaving irresponsibly. (He lists various forms of irresponsibility under his heading “Benefits of budget deficit targets”). And for the benefit of any readers not sure what types of irresponsibility I’m referring to, a classic one is borrowing so as to fund public spending rather than collecting taxes to fund such expenditure. The latter wheeze (as David Hume pointed out over 200 years ago) helps incumbent politicians ingratiate themselves with voters.
But as Pettinger also correctly points out, the main disadvantage of strict targets is that they can result in tax increases / spending cuts at a time that may not appropriate for the economy. A dilemma.
Well there’s a simple solution to that dilemma: take all decisions on stimulus out of the hands of politicians while leaving LEGITIMATE POLITICAL decisions in the hands of the electorate and politicians – that’s “political decisions” like what proportion of GDP should be allocated to public spending and how that should be split between education, defence, etc.
And that’s exactly what Positive Money’s Money Creation Committee achieves.
Moreover, taking all decisions on stimulus out of the hands of politicians actually just enhances or extends the advantages that are gained from giving the central bank a measure of independence (which amounts to removing from politicians some of their say over stimulus). That is, bond markets always lend at a lower rate to a country with a relatively independent central bank than to one with a central bank substantially under the control of politicians.
When the Bank of England gained independence in 1997, there was an instant fall in the rate at which the UK could borrow, plus the pound immediately rose relative to the Dollar and Euro which meant an instant standard of living increase for Brits.