Sunday, 7 December 2014

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?


  1. Hi Ralph,

    It seems to me there are many deficit levels that would lead to full employment, for example, the government could employ everyone at average wage, initially this would lead to a very large deficit but if they are productive employed this would resolve over time - A big if. Alternatively given a productive and well run private sector it could run no deficit and still have full employment. Alternatively it could have a private sector driven by asset bubbles and have alternatively large and small deficits. Basically there is a lot that can happen below the accounting level.

    1. Yes, clearly the amount of deficit / surplus needed is dependent on many things, the most important being whether the private sector is running a surplus or deficit. I.e. if the private sector runs a surplus (i.e. saves) that depresses demand so government just has to run a deficit to compensate. And that’s no more than a re-statement of Keynes’s “paradox of thrift” – i.e. the ironic fact that thrift has a harmful effect (absent countervailing measure by government).

      What I meant when I said that the deficit needs to be “whatever gives us full employment” was “in any given set of circumstances, the deficit / surplus needs to be whatever maximises employment without exacerbating inflation”. Perhaps I should have made that clearer. I.e. “circumstances” can vary substantially from one year to the next, e.g. private sector exuberance or lack of can vary substantially.

    2. OK thanks, I understand. Personally I have issues with the details of "maximises employment without exacerbating inflation" in terms of politics/currency/trade/movement of people but I need to distill my own thinking on these issue some more.
      The clarification was very helpful. Thanks.


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