Friday, 21 December 2018

The IPPR falls for the “fiscal space” myth.


The fiscal space myth is an idea which is popular with plonkers in high places, particularly at the IMF and OECD. It’s the idea that if a national debt is too high, interest on that debt will also tend to be high, which in turn will allegedly make it difficult for a government to implement fiscal stimulus (i.e. “borrow and spend”) come a recession.

Well if interest rates on the debt are relatively high, that means there is plenty of scope for implementing stimulus via interest rate cuts! So to that extent, the fiscal space idea is nonsense! Plus as Keynes pointed out  nearly a hundred years ago, a solution for recessions is for governments and central banks to simply create money and spend it (and/or cut taxes) - i.e. there is no need to incurr more debt in order to implement stimulus.

As for the IPPR, there is a passage in a work of theirs (authored by Tony Dolphin and entitled “Setting the Fiscal Rules”) which goes as follows.

“The long-run fiscal objective of the UK government should be to reduce the ratio of government debt to GDP. Academic research has not come up with a definitive answer to the question of what the optimal level of debt might be. But debt in the UK has doubled since the onset of the financial crisis and, as a result, it may be harder to respond to a future severe downturn in economic activity through an easing of fiscal policy. Debt needs to be reduced to create room for it to be increased again if needed.”

Let’s take that sentence by sentence. First: “The long-run fiscal objective of the UK government should be to reduce the ratio of government debt to GDP.”

Really? Why so?

Government debt, as MMTers keep pointing out, is a private sector asset. What’s wrong with the private sector having paper assets? Darned if I know.

Of course if the rate of interest paid on the debt is excessive, then certainly the debt needs to be reduced. On the other hand if the rate of interest is zero or near zero, then government debt comes to much  the same thing as base money (bundles of £10 notes if you like). What’s wrong with the private sector having bundles of zero interest yielding £10 notes, if that’s what the private sector wants? Again, darned if I know.

Next Dolphin says “Academic research has not come up with a definitive answer to the question of what the optimal level of debt might be.” Well MMTers have answer for that, which is that since private sector spending almost certainly with private sector net assets, the debt (plus the stock of base money) needs to be whatever induces the private sector to spend at a rate that brings full employment. MMTers sometimes refer to the sum of the latter two quantities, government debt and base money, as “Private Sector Net Financial Assets”.

As for how much of PSNFA should consist of debt and how much should consist of base money that’s not too important, since as already intimated, the two merge into each other: that is, base money is effectively debt which yields no interest (as pointed out by Martin Wolf in the Financial Times a year or two ago).

Incidentally, I’ve made most of the above points about a hundred times before on this blog, but if MMTers keep explaining basic simple points about economics till they’re blue in the face, the incompetents in high places at the IMF, OECD and IPPR may eventually understand them.


No comments:

Post a comment

Post a comment.