Thursday, 16 October 2014

James Tobin said deficits are inevitable.

But his reasons are unnecessarily complicated. See here. (A tweet by Stephanie Kelton drew my attention to the latter article).
There is actually a far simpler reason why near permanent deficits are inevitable which I’ve been banging on about for years on this blog (e.g. see para starting “First..” here.) The reason is thus (in green).
The national debt and monetary base lose value in real terms thanks to inflation. Thus if the debt and base are to remain constant relative to GDP (which in the very long term they do, more or less) then they have to be topped up regularly. And there is ONLY ONE WAY of topping them up, and that’s via a deficit.
Moreover, that is compounded by real economic growth. That if the economy grows in real terms at X% a year, and if the debt and base are to remain constant relative to real GDP, then even more topping up, i.e. deficit is needed. In fact if inflation is at the 2% target, and growth is 2% and if the debt and base are say 50% of GDP, then the deficit well need to be 2% of GDP (50% x (2%+2%)).
The above of course assumes a more or less constant desire for savings: i.e. if there is a sudden RISE IN the desire to save (e.g. up to Japanese levels), then the deficit would have to be significantly increased).
And that’s it.
Simple enough isn't it? But the strange thing is that no one (far as I know) gets it.
And that all confirms my suspicion that if anyone produced a nice simple E=MC2 style solution for economic problems, professional economists far from welcoming that would run a mile. Professional economists DO NOT WANT simple solutions for economic problems: that tends to put them out of work. Or as Upton Sinclair put it, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

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