Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
There was an interesting conference in Tokyo last week which featured academic Eisuke Sakakibara, the former Japanese government vice minister of finance who is characteristically known as “Mr Yen” given his knowledge of banking and world financial markets. Sakakibara predicted a prolonged recession lasting until 2015 because fiscal deficits are being deliberately withdrawn by misguided governments. The neo-liberals are claiming that public debt ratios have to be cut to reduce the “future tax burden on our children”. The reality is that intergenerational burdens work in exactly the opposite way in a fiat monetary system to what the mainstream neo-liberal claim. The misguided fiscal policy direction the neo-liberals are pushing will impose real burdens on our children. They will be less educated, less skilled, less experienced, and have lower income as a whole as a result of the fiscal austerity. Their future possibilities will be reduced as a consequence. In fact, the whole anti-budget deficit argument is just a ploy to seek ways whereby the elites can get more real income now and more real income later for their own enjoyment. Spreading the real output more widely through fiscal interventions frustrates that aspiration. Significantly, our children never hand real output back in time to pay for the public debt incurred at a previous time.
The Tokyo conference – The 2nd Japan-US Joint Public Policy Forum (December 8-9) which was co-organized by Sasakawa Peace Foundation and The Woodrow Wilson International Center for Scholars – was entitled “Looking Ahead: Japan-US Economic Partnership in the Post-Lehman World”. The speech given by Eisuke Sakakibara – The Possibility of World Recession – was important given his on-going influence in policy circles.
In an April 2009 Interview, Sakakibara said in response to what needs to be done:
… this is probably a once-in-a-century crisis that the world is suffering jointly. And it will be very deep and prolonged. We need to recognize that. It’s quite possible that we will have a continual recession for 4 or 5 years. Coordinated action on the part of the developed countries will be necessary, and what is left at this moment is fiscal policy. Of course, coordination of fiscal policy is always very difficult because politics is involved in the formation and implementation of those policies. But that probably will be necessary to recover from this deep and prolonged worldwide recession.
In his speech in Tokyo last week, Sakakibara maintained the same theme and predicted that the global recession “may last up to eight years as the U.S. heads toward a “lost decade” similar to Japan’s slowdown in the 1990s” (Source).
His predictions were covered in an article in the Melbourne Age (December 13, 2010) – World recession until 2018? – by Bloomberg writer William Pesek.
Sakakibara reportedly said that:
… the world is set for a long-term structural slump reminiscent of the 1870s – when average global annual growth was about 1 per cent …
Because “governments are putting fiscal austerity ahead of restoring stable growth” and they “should increase bond issuance to support stimulus spending”.
Pesek notes that “recent data in the US and Japan and financial turbulence in Europe suggest a fresh global recession is a distinct possibility in 2011” and “what levers are realistically available to revive demand?”. With monetary policy unable to move in a stimulatory direction (“interest rates are already at, or close to, zero”) then:
That leaves increased government spending as the only real way to stabilize things.
The rest of Pesek’s argument is consistent with his deficit terrorist leanings – talking about “loads of public debt” (Bill: so what? Exactly what does loads mean?) and that “too much debt is wreaking havoc in Europe, where Ireland was the latest domino to fall” (Bill: the havoc in Europe is a result of their flawed monetary system not the public debt outstanding).
With the sage message of Sakakibara resonating I then reflected on an article in the UK Guardian last Monday (December 6, 2010) – The left must tackle the baby boomers’ timebomb – and mused about how some people (the Guardian writer) are not on the same planet as the rest of us.
The by-line of that article was that “the gains made by the baby boomers – generous pensions, overpriced properties – will leave the younger generations with a legacy of debt”.
Bill: no they won’t!
The portent of the article is that public cuts are necessary to save the future generations and that the left (meaning those who oppose the cuts to public spending) had better realise this and ensure the cuts are “equity inducing”.
Bill: what the f#&k!
The British debate is being fuelled at present by nonsensical offerings from the right-wing propaganda machine – the Adam Smith Institute – which released a report in late November entitled – On Borrowed Time – subtitled “Avoiding fiscal catastrophe by transforming the state’s intergenerational responsibilities”.
I hope they only produced an electronic copy of this report because not a single tree should have been sacrificed in rendering this rubbish for the public eye. It is 44 pages of unmitigated drivel.
Britain faces a fiscal emergency along Irish lines in the near future, even after current spending reforms … the coalition’s sums will not add up until the state radically changes its involvement in the economy. This means changing our approach to spending which economists call ‘age-related’ or intergenerational’. Activity which once defined the welfare state now undermines its fiscal sustainability and threatens its legitimacy. It also makes individuals reluctant to
assume new civic duties, with the state ‘crowding out’ private charity and voluntarism.
Apparently, Britain faces “fiscal turmoil by 2019” and because life expectancy is longer and people are more educated the old role played by the state of “insurer of first resort” is no longer justified and people should look after themselves – to “plot their own courses through life”
Okay, that is a philosophical consideration and should be debated at that level. It is not relevant to invoke faux financial stories (like “the government will run out of money” or “taxes will become onerous” etc) to provide some “authority” to justify your ideological position.
Furthermore, there is no macroeconomic understanding conveyed here – where will the spending come from? The tired old mainstream views of crowding out, Ricardian agents etc are all underpinning the Report without any recognition that there is no empirical support from these propositions (in fact, the empirical evidence refutes the mainstream claims) – and the theories used to support the views are deeply flawed.
The Report has a lot of simulations – which might or might not be accurate – probably the latter – but the actual point is not the accuracy but the relevance. These simulations do not address any issue that matters.
There is not one attempt to simulate what the British economy will make available over the simulated years in real output except they forecast a “compound annual growth rate (CAGR) of 2.5% over the period from 2010 to 2060” which is about the “trend rate of growth based on the historical performance of the UK economy since the industrial revolution”. That might or might not occur.
But the question is what does that real output growth mean in terms of the actual distribution of products and what productivity growth rate will underpin it. As the age demography changes the types of public goods that are required also change. Less primary schools and more aged care homes. The Report doesn’t model these transitions at all.
The real issue is whether the political debate will allow smooth transitions between competing uses of real resources although given the British economy is likely to be a long-term recession or close to it (as in the Sakakibara projections), even the notion of opportunity cost (using a resource in one way means you cannot use it in another) is flawed.
Various debt scenarios with fancy (sexist) names (“straw man”, “iron man”) are modelled based on different public spending cut profiles and the assertion is that by 2019 even the most optimistic (defined by their bias as lower ratios), the UK economy will be at “a tipping point now seen in Ireland”.
Then bond markets stop funding the British government. Even if that was remotely true the British government can always maintain its spending in sterling and the Bank of England can always control yields at appropriate debt maturities. There is no fiscal crisis ahead for the reasons given.
The only crisis ahead will be a real one with millions left in a state of unemployment and unable to save or risk manage their own futures. Further, cutting spending on research and education is a sure way to reduce the future potential growth path and worsen the real impacts of the rising dependency ratio (as a result of the ageing population).
All the proposals advanced by the ASI amount to privatisation. The question that has to be asked is whether privatisation will see more “real” resources available in 2019 than would be the case if the British government used its fiscal capacity to ensure higher rates of growth were maintained over this time horizon.
The fiscal austerity measures will undermine growth and reduce the capacity of the economy to provide the requisite real resources. There is no magic pudding whereby the privatisation of the public functions (national health care, pensions etc) will expand availability. The reality is clear – the withdrawal of the public spending will likely undermine existing private spending and the economy will go backwards.
The only lesson that Britain needs to take from Ireland (different monetary systems notwithstanding) is that spending equals income and increased income means increased saving, lower public debt ratios and lower budget deficits. The opposite – being the Irish dilemma is also true – cut spending and you cut income and reduce overall saving, increase public debt ratios and increase the budget deficits.
Anyway, the UK Guardian article noted above seems to have been influenced by the ASI Report. It says that the ASI director said:
We cannot keep voting ourselves generous pensions, healthcare and other benefits and vainly hope that our children will happily pick up the bill.
So not only will the bond markets punish governments which don’t implement fiscal austerity but, according to the Guardian, protecting current spending “would be irresponsible, if not downright immoral, to leave our recently accumulated debts to our children and grandchildren”
The UK Guardian article acknowledges that the “co-ordinated response by business leaders, right-wing think-tanks and Tory politicians is enough to make any Labour supporter concerned about a conspiracy” but that:
… there is a serious point here, one that has caused disarray on the left. It is well documented that baby boomers have accumulated much of the nation’s wealth and pose a problem for the future.
So are the baby boomers saddling their kids and grandchildren with debts and being selfish? Answer: it is not sensible or applicable in a modern monetary economy to construct these issues in this way.
The UK Guardian article claims that settling health care availability and pension promises through the market “price system” is the only way to avoid the “burden for the public purse”.
First, there is no debt burden borne by the future generations. That is a total myth.
The only reasonable conclusion when you understand how the monetary system functions is that burdens can only be considered in terms of real resources. In that context, the level of public debt that is carried through time has no bearing on what each generation is able to consume (or produce). The next generation will be able to consume the outputs of their labour in the same way that the current generation is potentially able.
Clearly, governments bent on fiscal austerity deliberately deny successive generations the ability to consume and produce but that is not an intrinsic function of the level of public debt outstanding. It is rather a wrongful policy direction driven by an irrational fear (and ignorance) of what the public debt means.
The mainstream belief is based on the erroneous conflation of a household and government budget. So when a household/firm borrows now to increase current consumption (or build productive capacity) there is a clear understanding that future income will have to be sacrificed to repay the loan with interest. This result follows because spending by the non-government body (household and/or firm) is financially constrained.
A household must finance its spending either by earning income, running down saving, borrowing and/or selling previously accumulated assets. There is no other way. Borrowing has to be repaid via access to the other sources of spending capacity but by implication such repayments reduce the future capacity to spend.
This is translated (erroneously) into the public sphere with the claim that governments have to pay the debt back in the future by increasing taxes. The consumption benefits of the higher spending now are enjoyed by us and our children pay for our joy by facing higher tax burdens. That is the nub of the mainstream argument.
But do our children forego real consumption in this way? Answer: no!
If our children produce $x billion in real GDP in 2020 all of that flow of real goods and services (and income) will be available for consumption should they choose to do that. They probably will save some of it (especially if the government runs a deficit of sufficient magnitude to fill the spending gap left by the desire to save by the non-government sector).
But the important point is that real GDP is not a reverse-time traveller. There is no government agency collecting real output to “pay back past debts”.
Moreover, running fiscal deficits which support aggregate demand at levels where everybody who wants a job can get one maximises employment and output each year and provides each demographic with the best opportunities to expand their real consumption possibilities.
Fiscal austerity – in the misguided hope that the public debt ratio will fall – undermines growth over time and the resulting unemployment erodes the capacity of our children to consume in the future. Potential output (expanded by investment) and productivity growth are cyclical in the sense that if an economy is in recession or stagnating investment falters and future growth potential is reduced. Similarly, productivity growth lags when aggregate levels of activity falter.
So the best way to increase the opportunity set for our children is to keep (environmentally-sustainable) economic growth strong and fiscal austerity will typically work against that reality.
The public debt ratio has no bearing on any of this. The only possible burden on our children relates to my term “environmentally-sustainable” which includes consuming through time within the limits of real resource availability.
If the current generation cruels the world’s environment and exhausts finite resources then unless technology changes dramatically (for example, to use different energy sources for transport, etc) then our children will not enjoy the same lifestyle that we enjoy (using enjoy liberally!). But that conclusion relates to competing uses of real resources.
The public debt ratio has nothing to do with that possibility.
Public policy should be aiming to promote material prosperity across time that allows the available real resources to be shared across generations and prorated according to a sense of public purpose. Using the “price system” only prorates according to “dollar votes” and intertemporal considerations are subjugated.
Once you understand that there are no real consumption burdens to be borne by our children as a result of the public debt ratios, you then can trace the origin of this myth to the false government/household analogy.
A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. A household is always financially constrained because it is the user of the currency.
This distinction means that the implications of a government budget is not even remotely like that of a household. When the government spends it credits bank accounts. The funds come from nowhere! When it taxes it debits bank accounts. The funds go nowhere!
These blogs tell you that government debt is just an interest-bearing manifestation of non-government saving and the funds “borrowed” by the government are just come from what it has spent anyway.
Governments pay back debt (upon maturity) and service the interest payments just like it spends more generally. It moves funds from an account at the central bank to the commercial banking system. There is no “financing” constraint involved.
There are clearly distributional issues involved in issuing and servicing public debt. The poor typically do not have savings which are can be used to purchase the debt and hence do not enjoy the income flows arising from servicing the debt. While these issues are important and should be considered they have no bearing on the legitimacy of the “debt burden” argument.
That argument is plain wrong.
There is a case to be made that the government should stop issuing any debt when it net spends. Such an action is unnecessary in a fiat monetary system and the benefits of the debt issuance do flow to the top-end-of-town more often than not. The other side of the equity argument however is that we should consider who benefits from the net public spending. Both considerations are important aspects of public policy. But the debate is never about the burdens of paying back the debt. There are no burdens.
A few days later (December 9, 2010) there was a letter to the Guardian in reply to its debt burden article from one Professor George Irvin who was quoted in the original article. Irvin contested the notion that debt is inherited by the children of the baby boomers. He said:
… who inherits the debt? The answer is the poor, the jobless, the single parents in unskilled work and increasingly the “squeezed middle”. It is certainly not the rich baby boomers, who will pass on large estates to the next generation.
While I understand the sentiment expressed here it is equally incorrect. No-one inherits the debt. The fact is that the disadvantaged inherit the burdens of the fiscal austerity which is a different point.
Yes, the fiscal austerity is driven by irrational fears about public debt ratios and in that sense there is some link. But to really expose where the policy failing lies requires us to understand the irrational nature of these fears which, in turn, focuses on the lack of legitimacy of the fiscal austerity rather than giving oxygen to the idea that the public debt ratio is problematic and something that we should be the slightest bit concerned about.
It is clear that fiscal austerity burdens those who rely on state aid and the unemployed that lose jobs (in both the private and public sector) as a result of the demand collapse. Their children also carry that disadvantage (burden) into their adult lives.
Persistent unemployment has major intergenerational impacts because the children inherit the disadvantage. The reason has nothing to do with the public debt ratio but everything to do with being excluded from training, work experience and other advantages that accompany secure work. The children learn by demonstration the pathologies that are associated with unemployment and social alienation.
So it is fiscal austerity that is to blame. Even discussing these intergenerational impacts in the context of public debt is misleading and providing the mainstream with a sense of credibility that they do not warrant.
Finally, the UK Guardian article chooses to quote – as an authority – some “private equity boss and business commentator” who not only said the government had to cut back its debt to “avoid saddling our children with debt” but also said that:
… private debt was also a scourge, and said banks should call in loans on small businesses with the slogan “a rolled-over loan gathers no moss”.
Cute I thought – the slogan. The message however is one of total ignorance especially in light of the most recent economic data to come out in Britain (December 9, 2010) from the UK Office for National Statistics which shows that Britain’s trade deficit worsened in October and in seasonally adjusted terms exports fell.
This is a country that is banking its recovery on exports growth. The external sector in Britain is reducing GDP growth. I also note that German exports shrank last month.
So if you understand anything about the National Accounts you will realise that you cannot simultaneously have the government and the private domestic sector reducing its debt levels while the external sector is in deficit.
The most salient National Accounts relationship is that a government deficit (surplus) is exactly equal to a non-government surplus (deficit). If the external sector is in deficit (say constant) then a rising government surplus (or declining deficit) will be mirrored in the private domestic sector by a rising deficit (declining surplus).
You cannot achieve deleveraging of both sectors under these conditions and to claim otherwise is to demonstrate a fundamental misunderstanding of how the economy and its sectoral relationships work.
Please read the following blogs – Barnaby, better to walk before we run – Stock-flow consistent macro models – Norway and sectoral balances – The OECD is at it again! – for more information about this.
Think back to the prediction made by Eisuke Sakakibara last week – a prolonged recession lasting until 2015 or so because fiscal deficits are being deliberately withdrawn. The destructive impacts of that misguided policy direction – fuelled by the erroneous claims of intergenerational debt burdens – is what will impose real burdens on our children.
They will be less educated, less skilled, less experienced, have lower income etc as a whole (distributional issues abstracted from) as a result of the fiscal austerity. Their future possibilities will be reduced as a consequence.
So in reality the burdens work in exactly the opposite way in a fiat monetary system to what the mainstream neo-liberal claim. In fact, the whole anti-budget deficit argument is just a ploy to seek ways whereby the elites can get more real income now and more real income later for their own enjoyment. Spreading the real output more widely through fiscal interventions frustrates that aspiration.
That is enough for today!