{"id":13724,"date":"2011-03-04T20:13:25","date_gmt":"2011-03-04T09:13:25","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13724"},"modified":"2011-03-04T20:13:25","modified_gmt":"2011-03-04T09:13:25","slug":"there-are-no-better-or-worse-deficits","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13724","title":{"rendered":"There are no better or worse deficits"},"content":{"rendered":"

\t\t\t\tI have been travelling today and so haven’t had much time outside of my commitments. But I did read some truly astounding articles today. As the conservatives take control of the political processes in the advanced nations they are revising history faster than we can read about it. Meanwhile they use the TINA claim to implement policies that damage the well-being of the average citizen and set up dynamics that will manifest as the next crisis. And we say we like it – because we have been bluffed into the TINA lie. The fact that the public believe all the conservative dogma and go along with it astounds me. Economics is not that hard. If no one is spending then output will fall and unemployment will rise. But somehow the public believes the opposite. They have been conditioned to believe that a rising (large!) budget deficit is bad and a falling (small!) deficit is good. The reality is that there are no better or worse deficits.
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\nBut first, in this Bloomberg article (March 4, 2011) – Gillard Concern at Aussie Gains Shows ‘Dutch Disease’ Risk<\/a> – there is discussion of how exchange rate movements can promote unbalanced growth across sectors within a nation (a continual problem in Australia). Many readers have asked me about the Dutch Disease concept and I plan to deal with it next week sometime. The policy response is as you will guess not the one the current Australian government or conservatives advocate.<\/p>\n

But today I consider two UK Guardian articles from smug conservative politicians that were published in the last week that show how far reality has been lost in the current period. The first was from the British Chancellor George Osborne (February 28, 2011) – Labour’s reality deficit<\/a>.<\/p>\n

If you copy the text around the photo of the article and paste it into a text editor you will see that the Guardian is still referring to his as “Shadow chancellor George Osborne” (in the alt text for the image dated 20\/8\/2008). I think that would be a better option – the fact that this rabble was able to win office and have Osborne running economic policy is a statement in itself.<\/p>\n

It also shows how bad the Labour Government was and that is what the article is about.<\/p>\n

According to Osborne who seems to think he is now wiser than wise:<\/p>\n

\nEd Balls has not learned the lesson of our 13 years in opposition: the need for a credible alternative.\n<\/p><\/blockquote>\n

That made me laugh – the “credible alternative” part. There is no credibility in the current British government’s economic policy strategy. The fact that the British voters have ratified the policy (by electing them) just tells me the public education system in Britain has failed (some years ago) and it has produced xxcxwx.ts.<\/p>\n

Osborne spills the beans on the previous government who claimed there was no criticism of their fiscal strategy over the last decade. Osborne says that there were warnings about the “”structural” hole in the public finances”. Apparently, the British Treasury “under Ed Balls’s guidance”:<\/p>\n

\n… attempted to silence IMF criticism of the UK’s structural deficit. You can’t attempt to silence something that doesn’t exist.\n<\/p><\/blockquote>\n

The fact that the former British government tried to silence the IMF is about the best thing that it did in office. Plaudits go out to them. The IMFs concept of a structural deficit is heavily biased towards calling a true underlying surplus a deficit. So they pressure governments to run balanced budgets which are in fact deep surpluses (that is, very contractionary).<\/p>\n

This is a technical argument and I explain it in common language in this blog – Structural deficits – the great con job!<\/a>.<\/p>\n

But once you get over the bias in the measurement, the IMFs notion of a structural deficit (as essentially bad) is nonsensical and should be ignored anyway.<\/p>\n

Please read the suite of blogs – Fiscal sustainability 101 – Part 1<\/a> – Fiscal sustainability 101 – Part 2<\/a> – Fiscal sustainability 101 – Part 3<\/a> – for more discussion.<\/p>\n

Also please read – The IMF continue to demonstrate their failings<\/a> and Bad luck if you are poor!<\/a> and IMF agreements pro-cyclical in low income countries<\/a> – for more discussion.<\/p>\n

Osborne also suggest that the OECD is a reliable witness and judge. He says:<\/p>\n

\nAnd you can’t silence the OECD, which said that the UK’s structural deficit went from second best in the G7 in 2000 to the worst in 2007.\n<\/p><\/blockquote>\n

There is no such thing as a budget – structural or otherwise – being “best” or “worst”. These are measuring and relative concepts that have no meaning when applied to what a budget actually is.<\/p>\n

You can have the best unemployment rate – because we know that a low unemployment rate is unambiguously a good thing to achieve. So you can also have the worst unemployment rate either in time comparisons or across nations\/regions\/cohorts.<\/p>\n

But no such clarity exists when talking about budgets.<\/p>\n

Is a large budget deficit bad and a small budget deficit good? Answer: it is a meaningless question.<\/p>\n

The previous link – Structural deficits – the great con job!<\/a> – goes into detail about how the recorded budget outcome can be decomposed into the component that automatically varies over the cycle without any change in government policy (automatic stabilisers) because tax revenue and welfare payments are cyclical.<\/p>\n

The remaining component reflects the discretionary government policy choices and so if the government aims to conduct an expansionary policy stance (adding to aggregate demand growth) then the budget outcome should move towards or into deficit and vice versa.<\/p>\n

So you could get a final budget surplus outcome while the discretionary stance was expansionary and other obvious configurations. I explain in the blog above how this ambiguity is resolved – the ambiguity is in interpreting the dual components of the total outcome.<\/p>\n

But the standard mainstream economics way of resolving the ambiguity uses potential output levels that are biased towards accepting higher than necessary unemployment as the full employment benchmark. So a structural deficit published by the IMF or the OECD are typical surpluses in reality meaning that attempts to get the structural deficit (that component reflecting discretionary choices) into balance actually push fiscal policy into contraction. The bias is to impose fiscal drag on the economy.<\/p>\n

That is why we have had persistently high unemployment in most countries for the last few decades.<\/p>\n

But measurement issues aside, the budget is not a valid policy target. It is largely an artefact of private sector spending decisions. If private spending is strong then the budget deficit will be lower (if not in surplus) irrespective of what government decides. The opposite is the case.<\/p>\n

Governments should worry about the well-being of the community which involves high levels of employment and real wages growth. The budget balance has to be whatever it takes to achieve these real goals. So you might get to full employment with strong productivity growth with a low deficit, a high deficit, somewhere in between or even a surplus – depending on the spending decisions of the private domestic sector and the state of the external sector (net exports).<\/p>\n

The correct way of appraising government fiscal effectiveness is to ask about community well-being. On that benchmark the British government is running a failed state and its deficit is too low.<\/p>\n

The only sense you can make of a good and bad deficit is in relation to what the real economy is doing. If there is a spending collapse, the automatic stabilisers will ultimately close the spending gaps because falling national income ensures that that the leakages equal the injections – so sectoral balances hold.<\/p>\n

But the resulting deficits will be driven by a declining economy and rising unemployment. I would call these deficits bad<\/strong><\/p>\n

Fiscal sustainability is about running good<\/strong> deficits to achieve full employment if the circumstances require that.<\/p>\n

You cannot define fiscal sustainability independently of the real economy and what the other sectors are doing.<\/p>\n

Osborne the suggests that the Labour Opposition is misguided by claiming:<\/p>\n

\n… it would stick to Alistair Darling’s plan to halve the deficit in four years, but day after day it opposes the spending cuts that requires.\n<\/p><\/blockquote>\n

I agree that is misguided. The plan to impose a sort of light fiscal austerity (relative to the Conservative plans) was a poor choice and reflects a deficient understanding of the opportunities that a sovereign government such as in Britain has. As I noted above, the British government should be running a much larger deficit at present to stimulate employment which would see the deficit fall over time.<\/p>\n

But at no time should any government set some budget outcome. It will typically fail to achieve it but in the process will likely cause untold damage to the private sector.<\/p>\n

Osborne then claimed that:<\/p>\n

\nLabour’s leadership claims we are dealing with their deficit for ideological reasons, but funnily it doesn’t accuse the organisations who support our approach of a similar motive. The pace of the government’s plan is backed by, among others, the G20, OECD, IMF and European commission – and at home, the CBI, IFS and two of the three main political parties. That doesn’t look like an ideological line-up to me. Quite the reverse: it is close to a domestic and international consensus.\n<\/p><\/blockquote>\n

That really made me laugh. All of tehse institutions and organisations advance a neo-liberal ideology and rehearse the mainstream macroeconomics which extols the virtues of so-called “self-regulating” private markets and failed to see the crisis coming. The types of policies that the mainstream economics framework consider to be appropriate would have turned the recession into a depression.<\/p>\n

All these organisations are part of the problem. They are part of the Washington\/Brussels-Frankfurt consensus. The fact that they dominate the public debate (the “domestic and international consensus”) just shows how successful the ideologues have been in consolidating their hold on the intellectual debate.<\/p>\n

It also shows how weak the progressive alternative is.<\/p>\n

Then I read the article by British business secretary Vince Cable (March 3, 2011) – Vince Cable promises to take ‘vigorous, targeted action’ in the budget<\/a>.<\/p>\n

From bad to worse!<\/p>\n

His article was a sulking, whining piece that attacked anyone who dare criticise the current British government’s policy stance.<\/p>\n

He was quoted as saying he was feeling “exasperation” with commentators who:<\/p>\n

\n… expect that the government can somehow guarantee an immediate, miraculous, return to rapid economic growth.\n<\/p><\/blockquote>\n

The reality is that governments cannot guarantee private spending is strong enough to ensure “rapid economic growth”. But what governments can do is create “public activity” with 100 per cent certainty. They can implement direct public sector job creation to ensure that anyone who wants to work but cannot find a job in the private sector has work.<\/p>\n

That is 100 per cent certain. The government could eliminate all but frictional unemployment if it wanted to. Once the private spending decisions are made the resulting unemployment rate is a choice<\/strong> of government.<\/p>\n

Once the private sector has made its spending based on its expectations of the future, the government has the capacity to ensure that total spending in the economy is sufficient to sustain full employment.<\/p>\n

Non-government spending gaps over the course of the cycle can only be filled by the government.<\/p>\n

The national government always has a choice:<\/p>\n