Thursday, 3 September 2015

Bill Mitchell argues for no national debt.

There is much to be said for a “zero national debt” policy, which Bill Mitchell argues for here. Milton Friedman advocated the same in 1948.

See Friedman’s para starting "Under the proposal..." here.

Bill, in his first paragraph and in reference to a recent meeting in London, says “Surprisingly there were some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.”

As regards Bill’s reference to “opportunity costs” I suggest that can be put in plainer English - something like: why should one lot of people have to pay tax to fund interest on government debt, just to enable another lot to earn interest on their savings?

A National Savings Fund?

Re Bill’s claim that peoples’ desire to save can be catered for via what he calls a “National Savings Fund”, that NSF is presumably owned and run by government, so that comes to much the same thing as government debt. 

There are however SOME DIFFERENCES between national debt and NSF, as pointed out by Neil Wilson in the comments after Bill’s article. For example those allowed to save via the NSF would doubtless be limited to citizens of the relevant country. However, if the argument for more national debt is invalidated by the argument that it’s wrong to pay interest just because loads of people WANT interest on their savings, then so too is the argument for an NSF.

Generational considerations.

One popular argument for government debt is that if public investments like infrastructure are funded by debt that spreads the cost across the generations that benefit from the investment: that is future generations allegedly have to pay interest and eventually repay the debt. The flaw in that argument is that it involves time travel. That is, it just isn't possible to consume real resources (e.g. steel and concrete) in 2050 so as to build a bridge in 2015.

Put another way, having a future generation repay a debt simply involves one lot of people paying money to another lot (the debt holders). That’s just a load of paper pushing: it has nothing to do with real costs or real resources.

Nick Rowe has tried to argue against the latter point with his so called “overlapping generations” idea. I demolished that idea (least I think I did) here. But be warned: the arguments for and against Nick's overlapping generations idea are complicated.

Debt may reduce volatility.

A possible argument for government debt, but only debt that pays a very low rate of interest is this. If the private sector has a large stock of base money and it goes into a fit of irrational exuberance, it may spend too much of that money at once, which could cause excess inflation. In contrast, debt is more difficult to spend: try buying a car using UK government Gilts, or US Treasuries.

David Hume on government debt.

And finally I’ll let David Hume, writing about 250 years ago, have the last word. As he put it:

“It is very tempting to a minister to employ such an expedient, as enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamours against himself. The practice, therefore, of contracting debt will almost infallibly be abused, in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to impower a statesman to draw bills, in this manner, upon posterity.”

1 comment:

  1. I should think that if the private sector became too exuberant the government would step in to calm that down.We would be looking at a new set of tools here but with time we could learn how sensitive the system was to various stimuli.End of the day, it has to be better than selling national debt in the way we do....which is merely a glorified job creation scheme for the City.


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