Saturday, 10 October 2015
Simon Wren-Lewis (Oxford economics prof) said here that concerns about the size of the deficit and rapidly increasing debt at the height of the crisis (around 2010) were “understandable”. I beg to differ.
First, it’s “understandable” that NON-ECONOMISTS should be concerned. After all, an individual person, household or firm gets into trouble when its expenditure exceeds income for too long, and excessive debts are incurred. However, those who HAVE STUDIED economics (and not even to degree standard) ought to be aware of the difference between microeconomics and macroeconomics: in particular they ought to be aware that household deficits and debts are not comparable to GOVERNMENT deficits and debts.
SW-L cites a list of twenty people (mainly economists) who were anti deficit (i.e. pro-austerity) in 2010. Those twenty wrote a letter to the Sunday Times in 2010 advocating austerity and SW-L says their mistake was “understandable”. Well I don’t agree: their “mistake” or rather incompetence was a disgrace to the economics profession. Those people should be removed from their jobs and given jobs to which they are better suited, like sweeping the streets. (I’ve listed them below).
But of course, an Oxford professor like SW-L can’t use language like that: professors have to be ultra-polite and couch any criticism of their peers in terms that are so anodyne that you’d hardly think criticism was involved at all.
That unfortunately results in incompetents remaining in their jobs.
The letter from the twenty so called “economists” starts thus.
“In the absence of a credible plan, there is a risk that a loss of confidence in the UK's economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next Government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 Pre-Budget Report.”
So to paraphrase, the authors claim that “loss of confidence” by the UK’s creditors might result in interest rates charged by those creditors rising, and it’s widely accepted that increased interest rates reduce demand, which of course would “undermine the recovery”.
Well the glaring flaw in that argument is that a country (like the UK) which issues its own currency has complete control of the rate of interest its government pays to borrow. That is, to reduce interest rates, the country’s central bank (CB) just prints money and buys back government debt. Indeed, and taken to the extreme, the CB can buy back the entire national debt which in a sense is what several countries have done over the last few years under the guise of QE.
To be more accurate, the US, UK and other countries have not bought back “the entire national debt”, but they HAVE BOUGHT BACK almost all the NEW DEBT issued or incurred in the last three years or so. So effectively, they haven’t borrowed at all: they’ve simply printed money and spent it (and/or cut taxes).
Thus the claim by the above twenty so called economists that a loss of confidence will cause a rise in interest rates is complete nonsense on theoretical grounds, plus it has turned out to be nonsense in practice.
Moreover, as both Keynes and Milton Friedman pointed out, having the state simply print money and spend it (and/or cut taxes) in a recession is a perfectly viable way of implementing stimulus: that is, it’s debatable as to whether it makes much sense for a government which prints its own money to borrow the stuff.
Printing money needn't cause inflation.
Of course whenever the words “print” and “money” appear in the same sentence a number of economically illiterate economists and others who have not studied economics appear from the woodwork chanting the word “inflation”.
And the answer to that point (as I and others have pointed out a thousand times) is that increasing the money supply is not inflationary unless it results in excess demand, as explained by David Hume over 200 years ago.
Foreign exchange markets.
Now let’s consider the “currency instability” to which the twenty so called economists referred.
Clearly if just ONE COUNTRY like the UK ran a relatively large deficit, then confidence in its currency might deteriorate. But the reality is that a very large “other country” was doing the same in 2010: the US. That greatly reduces any possible fall in value in the pound.
But even if the US had not been doing the same thing at the same time, why exactly would there be a reason to think the pound would fall in value? After all, the only purpose of a deficit is to maintain demand at a level that brings about full employment. EXCESS DEMAND would draw in excess imports which would hit the value of the pound, but enough demand just to bring about full employment would not draw in any more imports that full employment brought about by other means.
Credible plans are nonsense.
The latter point about the purpose of a deficit (or surplus) being to maintain full employment leads nicely to the next point which is that “credible plans” of the sort advocated by the twenty so called economists to reduce (or increase) deficits are a complete nonsense: they’re a contradiction in terms. That is, since the purpose of a deficit is to counteract any shortfall in demand, and since the extent of future shortfalls is not predictable, it’s a complete nonsense to have any sort of “credible plan” as to what the deficit will be at any point in the future.
That is, in two years time, consumer and business confidence might suddenly increase, as a result of which demand would rise. So in consequence, a smaller deficit, or even a surplus would be called for.
That is why Keynes said, quite rightly: “Look after unemployment, and the budget will look after itself”. That is, the only “credible plan” should be to attempt to use the deficit / surplus to keep the economy at full employment. In contrast, the size of the deficit / surplus is simply a number that comes out in the wash. It should be ignored.
The final nail in the coffin.
Of course the proof of the pudding is in the eating: i.e. have continued deficits since 2010 actually brought about “currency instability” or “higher interest rates”? No they haven’t!!!
In short, those twenty so called economists (listed below) are incompetent. Their mistake was not “understandable”. They should be put onto sweeping the streets.
The twenty incompetents.
Orazio Attanasio, University College London; Tim Besley, LSE; Roger Bootle, Capital Economics; Sir Howard Davies, LSE; Lord Meghnad Desai, House of Lords; Charles Goodhart, LSE; Albert Marcet, LSE; Costas Meghir, UCL; John Muellbauer, Nuffield College, Oxford; David Newbery, Cambridge University; Hashem Pesaran, Cambridge University; Christopher Pissarides, LSE; Danny Quah, LSE; Ken Rogoff, Harvard University; Bridget Rosewell, GLA and Volterra Consulting; Thomas Sargent, New York University; Anne Sibert, Birkbeck College, University of London; Lord Andrew Turnbull, House of Lords; Sir John Vickers, Oxford University; Michael Wickens, University of York and Cardiff Business School.