Tuesday, 9 June 2020

Stephen King: HSBC’s very own pro-austerity and useless economic adviser.


King is a typical example of the sort of economic illiteracy that is all too common at the top of the economics profession: the sort of illiteracy perhaps most starkly illustrated by Kenneth Rogoff and Carmen Reinhart of Harvard.

In particular, King (along with Rogoff, Reinhart etc) see government budgets and deficits in much the same way as they see household budgets, deficits etc. Put another way, they don’t get the distinction between macro economics and micro. Or put it yet another way, they don’t understand Keynes or MMT.

King’s first mistake in an article of his (entitled “Paying for the Pandemic”) is his claim: “The good news is that governments can currently raise funds relatively cheaply…..”. (See his 3rd para.)

Actually governments, in concert with their central banks, can “raise funds” at no cost at all, in that any government of a country which issues its own currency can print as much money as it likes. And indeed some governments are doing that right now.

He then trotts out the old canard that the result of measures taken to combat the effects of Covid (compounded by a possible recession in four or five years time) will be a much higher than usual national debt, and that, so he claims (as does Rogoff etc) will mean raised taxes at some time in the future.

In common with Rogoff, King does not explain exactly what the problem is with those raised taxes, but presumably the alleged problem is that those taxes make everyone worse off.

Well as I’ve been trying to explain for almost ten years on this blog, those taxes (strange as this might seem) do not actually make anyone worse off. Reasons (for the umpteenth time) are as follows.

Government debt, as explained by MMT, is an asset as viewed by the private sector which holds that debt. I.e. government debt is simply money (base money to be exact) which has been locked up for a while and which yields interest.

Now if the private sector wants to hold a much larger than usual stock of money at a zero or near zero rate of interest, what’s the problem? To illustrate, if five million people decide the keep £500 under the mattresses, so what?

Indeed the latter decision to hoard is a bonanza for government and taxpayers. Reason is that governments feed additional money into the economy via public spending, thus to enable the latter hoarding to take place, government and its central bank can order up ten new hospitals, or a hundred miles of new railway line or whatever, and all government has to do in return is print and hand out bits of paper called “£10 notes”. Nice work if you can get it!

But suppose a year or two later, the private sector no longer wants to hold its sock of government debt and/or pile of £10 notes kept under mattresses? Well in that case the private sector will try to spend away that money, which will quite likely result in excess inflation. So government will have to raise taxes to curb that inflation.

But note that there is NO REASON WHATEVER for that to result in a pay cut or rise in unemployment: the purpose of the taxes is simply to cut demand to a level which maximises numbers employed in as far as that is compatible with acceptable inflation.

Incidentally the situation is actually A LITTLE more complicated than that in that some debt is held by foreigners or internationally mobile debt holders. But I don’t want to burden pro-austerity simpletons with too much complexity: they seem to have enough difficulty understanding the relatively simply and basic point in the above few paragraphs. 

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