Saturday, 26 May 2018

The national debt and the chaotic thinking behind it.

You think there are good reasons for a government which has the power to print its own money to borrow money? Well think again. The reasons normally offered for that policy are a complete shambles. And I’m nowhere near the first to suggest governments should borrow nothing: Milton Friedman suggested that idea (see his section II) as did Warren Mosler (see Mosler’s 2nd last paragraph).

Anyway, one popular excuse for government debt is that it provides savers with a means of saving and enables savers to earn interest. (Incidentally, I’ll use the word government to refer to government and central bank combined.) Well no one objects to government issuing whatever amount of zero interest earning base money the private sector wants to hold, and neither Friedman nor Mosler objected to that. But why should taxpayers be robbed to fund interest on some of that money just because savers cannot get as much interest as they want from the stock exchange and other private sector investments? There’s no good reason for that robbery. (Incidentally, government debt is nothing more than government issued money on which government pays interest.)

Moreover, the effect of the latter “robbery based interest payments” is to bump up interest rates, which in turn means people will hold a SMALLER stock of REAL savings: housing, investment in machinery for their businesses, etc. So the net effect is to expand the amount of totally fictitious saving (government debt) and contract the amount of REAL savings. Now that’s a stroke of genius, I don’t think.


Another lame excuse for government debt is that it can fund infrastructure and other public investments. Well now, education is one huge investment, but state education for kids is funded via tax in most countries! Advocates government debt need to get their house in order there, to put it politely.

Also, many of the advocates of the “government debt can fund infrastructre” idea seem to be under the illusion that investment justifies borrowing. Not true.

First, no one borrows to fund an investment if they happen to have enough spare cash to fund the investment. Why pay interest to anyone if you don’t need to? And governments have a near inexhaustible source of cash: the taxpayer (plus governments can print a limited amount of money each year).

Second, as distinct from investment spending, it can perfectly well make sense to borrow to fund current or consumption spending. E.g. if someone who is perfectly credit-worthy wants to fund a wedding and honeymoon by borrowing, and pay the money back over a few years, a bank would have no good reason to turn down that loan application.

In short, the real reason for borrowing is shortage of cash, not the fact of making an investment.

Spreading costs over generations.

Another excuse for government debt is that it can allegedly spread the cost of funding infrastructure etc over the generations that benefit from relevant investments. That is, future generations have to repay the debt and pay interest in the meantime, which makes it look like they are paying a cost.

Unfortunately that idea defies the laws of physics, never mind the laws of economics. That is, it just ain’t physically possible to build a bridge in 2018 by using steel and concrete produced by the hard work of people living in 2030. That is, the steel and concrete absolutely have to be produced in 2018 or earlier.

As regards the latter debts and interest, what actually happens is that future generations do not just inherit a liability (the obligation to repay the debt): they also inherit an asset, namely relevant government bonds.

Smoothing out receipts from tax.

Governments receive more from tax in some months than others. Seemingly that irregularity can be smoothed out by government borrowing. Certainly if a microeconomic entity like a household or small firm is short of cash, it must do something about it, e.g. get a bank loan. But government is in a totally different position: it can print as much money as it wants.

But if government deals with the above irregularities by printing, clearly that means the private sector has a relatively large supply of cash in some months. Wouldn’t that be inflationary? Well it wouldn’t because if a firm or household has $X more than usual in its bank account and it knows it will have to pay the tax authorities about $X in a few months’ time, it is unlikely go on a spending spree with that cash!

Borrowing with a view to stimulus.

One form of fiscal stimulus consists of government borrowing money, spending the money, and giving bonds to lenders. But the effect of the latter borrowing, considered in isolation, is anti-stimulatory, i.e. “deflationary”. That is the effect of government simply borrowing money and doing nothing with it is deflationary.

Now what’s the point of doing something anti-stimulatory when the object of the exercise is stimulus? That’s a lunatic as throwing dirt over your car before washing it.

It might seem that the latter borrowing makes the relevant stimulus easy to reverse. Actually that’s not true: assuming a bout of “print and spend” needs to be reversed, and assuming it is to be reversed by government borrowing,  government can do that borrowing if and when the reversal is needed.

Do politicians borrow responsibly?

Is it desirable for politicians to have the right to borrow? Well hardly, if the Republicans are anything to go by.

When not in power a few years ago, the complained 27/7 at the top of their voices about the size of the deficit and debt. But that was when a deficit was needed so as to deal with the recession. And now that they’re in power, and a large deficit is not needed because the recession is over, they let the deficit and debt go thru the roof.

It makes more sense to put a fox in charge of a hen house than to give politicians the right to borrow. As David Hume put it, writing around 250 years ago, the freedom to borrow, if granted to politicians   “….will almost infallibly be abused”.

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