As Simon Wren-Lewis said in the title of a recent article, “macro media is alive and well”. (“Macromedia” is Wren-Lewis’s term for the widespread belief among newspaper and other media economics commentators that household budgets can be compared to government budgets.)
A recent Economics Observatory article completely fails to understand the above macro/micro distinction. The title of the article is “What are the fiscal consequences of the UK response to coronavirus?”
Towards the end of the article and in reference to the expanded government debt, there is a section entitled “How Will We Pay For It?” That title is of course likely to arouse the suspicious of MMTers (not to mention Wren-Lewis) if not give them a fit of apoplexy, because the title seems to imply that government debt can be likened to the debt of a household or firm. Moreover, the article comes to no firm conclusion as to when the debt should be repaid!
So you might wonder what the point of the article was. Well there’s a hint at the bottom of the article where it says the Economics Observatory is funded by public money via the Economic and Social Research Council. Translated: the Economics Observatory is given lots of lovely free money, so to justify that, they have to churn out some sort of article from time to time.
But let’s run thru the “how will we pay” section – I’ve actually run through the basic ideas here a dozen times before on this blog, but when it comes to getting ideas across, you’re pretty much wasting your time with logic or reason: constant repetition is what does the trick.
This section gets off to a bad start when it says “For the most part, this borrowing will be financed by an increase in the issuance of gilts by the Debt Management Office. Government debt already stands at its highest level in over 50 years and will rise further over the coming year.”
Well that’s debatable, to put it mildly, given that almost all the increase in the debt over the last five years or so has been bought back by the Bank of England as part of QE. The net result is that that tranche of so called debt is a debt owed by one branch of the state to another. As several people have pointed out (including me in a letter in the Financial Times), if the relevant debt certificates (Gilts in the case of the UK) were simply torn up and thrown on a fire, the economic effect would be zero.
There is however the potential problem that having done a major QE operation (or thrown lots of Gilts on the fire), there is an expanded stock of base money out there in the hands of the private sector, and that is potentially inflationary. Plus if it does turn out to be inflationary, it will be necessary to cut the deficit and/or run a surplus so as to cut that stock. As the Economics Observatory article puts it, we may need “some combination of future taxes, future spending cuts….”.
The article cites two or three different ideas as to how much “repayment” needs to be done and when. For example it says “In a survey of 30 UK economists by the Centre for Macroeconomics, the majority of respondents believe that there is no need to announce plans to redress the surge in debt until the pandemic subsides.”
And for a second view, the article says “Muscatelli (2020) and some others favour spreading these costs across several generations, by issuing debt with very long maturity dates (50 or 100 years), or even debt that never matures (perpetual debt).”
Well there’s a simple flaw in all that, which is thus.
Private sector spending is unpredictable but is pretty obviously related, if only in a tenuous way, to various factors, e.g. household and business confidence. Another factor is (gasps of amazement) how much money people have.
So if the above mentioned increased stock of money in private sector hands does in fact prove to be inflationary, then tax increases would be justified. But if not, then they wouldn’t! In fact any such tax increases would simply result in a totally unnecessary increase in unemployment!
So the conclusion is . . . . . wait for it . . . . . roll of drums . . . . that the deficit (or surplus) simply need to be whatever keeps unemployment as low as is consistent with acceptable inflation. Or as Keynes put it “Look after unemployment, and the budget looks after itself”.