Tuesday, 25 August 2020

Financial Repression Revisited.


This is one of the better articles published recently by Project Syndicate. It’s entitled “Financial Repression Revisited” and is by Anne Krueger (former World Bank chief economist).

Her basic point is as follows. First, she says the large debt arising from Covid should not be a problem in that if it turns out to be necessary to pay down that debt, that can always (at least in theory) be done by raising taxes. But, as she rightly says, raising taxes can be politically difficult, in which case government and/or central bank will then have to find some other way of imposing some sort of deflationary effect.

The alternative she suggests is artificially high interest rates, but that, as she rightly says would be distortionary: it would lead to a loss of GDP (even at full employment). My answer to that is that interest rates in the 1990s were far higher than they are now, and that did not seem to dent growth all that much, so I doubt the economic hit would be all that much.

She should perhaps have taken the argument a little further and asked the question: what do we do about the latter problem? Well my answer is that there’s not a lot we can do.

I certainly wouldn’t recommend holding back on the deficit and debt build up and thus imposing more unemployment NOW just so as to ease a problem with might not actually appear at all in a year or two, and which, if it  does appear, might not be all that serious .



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