Robert Skidelsky: arbitrary deficit reduction targets are a farce.

Robert Skidelsky made a good five minute speech recently in which he criticised the UK finance minister’s (Osborne’s) arbitrary deficit reduction targets, which Osborne (as is entirely predictable) has completely failed to meet. (H/t to Mike Norman)

One reason that arbitrary deficit reduction targets will almost never be met is that, as Skidelsky correctly points out, the appropriate size of the deficit is largely dependent on factors which are unpredictable. E.g. private sector confidence and hence spending is not predictable: the less that confidence, the bigger the deficit needs to be. And conversely, if the private sector goes into a fit of irrational exuberance, not only will the deficit need to be smaller: a surplus might even be in order.

So what’s the optimum size for the deficit? Very simple: it needs to be whatever gives us full employment. Or as Keynes put it, “Look after unemployment and the budget will look after itself”.

And as for the idea we constantly get from the massed ranks of loudmouthed economic illiterates, namely that excessive deficits lead to the debt rising and we can’t let the debt rise too far, I’ve given the answer to that a hundred times on this blog (as have others).

The first answer is that the debt can always be wiped out by QEing it (which incidentally cuts interest paid on the debt).  Second, the debt (or more accurately the debt and monetary base) are ASSETS as viewed by the private sector. Thus the bigger those assets, the more the private sector will spend, all else equal. Thus the debt is self-limiting.

That “self limit” may be much bigger than in previous decades, or it might be much smaller. Who cares? What’s the problem if it’s bigger than in the recent past?