I have recently been given a lesson in the correct terminology for the various forms of Keynesian thought from a regular commentator on the blog, who posts under the title of 'Lord Keynes' (hereafter
LK). For a long time now, he has posted comments critical of the perspective of this blog, and demonstrated a strong grasp of the various forms of Keynesian arguments. For a short while, I did engage with his arguments, but found that I ended up doing nothing but engage with his arguments, rather than writing the blog.
The reason for this is that, at whichever point,
LK would provide reams of 'evidence' in support of his assertions. In recent times, he has even proposed that, for example, the Austrian economists provide no evidence for their theory, which is clearly not true. What
LK and other
Keynesians do is pick and mix from the available evidence, present arguments for the defence of their arguments based upon the policy/experience of country 'x' doing policy 'y' with the result 'z'. Typically, what they do is identify an individual policy, and then separate it from the broader context of the policy. In doing so, they
appear to provide a cast iron case in favour of their policy.
I do not think that the
Keynesians are alone in this, but they seem to be masters of the art. One example oft cited by
LK is fairly typical, in which
LK suggests that the
Scandanavians have managed to be successful despite a large government sector (quoted from the comments section):
Denmark, Sweden and Finland are successful economies that run current account surpluses and that have substantially lower unemployment than the US or the UK, yet nearly half of all GDP is taken as taxes and spent by the government.
Germany, a manufacturing powerhouse and very wealthy country, takes 40.6% of GDP as tax revenue.
The UK is actually around the middle, not the higher end, of the spectrum.
By contrast, Haiti only takes 9.4% of GDP as tax revenue (before the earthquake, I might add), and what is it?? An economic basketcase!
The Haiti case simply makes my point. Apparently here is proof that low government expenditure is bad for your economy. No context, just a figure as 'proof'. We can also take the case of Sweden, which according to the
World Economic Forum, is ranked as 4
th in the world for competitiveness. The report uses the
following pillars for the ranking:
- Institutions
- Infrastructure
- Macroeconomy
- Health and primary education
- Higher education and training
- Market efficiency
- Technological readiness
- Business sophistication
- Innovation
Note that the ranking systems does not include tax against GDP. In the
Economic Freedom of the World 2009 report Sweden was ranked 4
oth,
despite the rankings scoring very negatively for large size of government expenditure with Sweden ranked 127
th on this measure. According to a
ranking of business regulation, Sweden comes in at number 18 overall, but is also number 7 for trading across borders. According to
the IMD world competitiveness rankings, Sweden comes in at the 6
th most competitive country in the world.
I can go on. For the
informal economy, where people work outside of the official economy, Sweden is ranked = 82
nd. According to the
Economist Intelligence Unit, Sweden ranks number 2 for 'e-readiness'. Sweden holds 11
th place for the
number of patents in the US patent system, and ranks
4th in the world overall. Sweden lies at the third best in the world on rankings for
perceptions of corruption. The country also rates at number 3 for
technological achievement. Sweden has the
6th highest level per capita of spending on research and development, and the second highest aggregated (curiously after Togo as number one). On the
technological achievement index, Sweden ranks 4
th (creation of technology; diffusion of recent innovations; diffusion of old innovations; and human skills). On the
global innovation index, Sweden ranks as number 4 (though this does include government policy such as patent law, and fiscal policy). Sweden is the
world's most networked economy.
Of course, what the
Keynesians will say is that this is all an achievement of government policy and the large proportion of GDP that goes into the state. However, how can a generous benefits system support, for example, the innovation that is shown here? Is the innovation what allows spending of this size, or is it that the spending causes the innovation. Cause and effect - how do you untangle these? Is the ability for government to spend so much the effect or the cause? I expect that LK will answer some of these rankings with examples of how government action facillitated the ranking. The problem is that this takes the particular context of one country as an exemplar for another country.
When the
Keynesians propose country 'x' as an exemplar, they appear to view all countries as having identical strengths and weaknesses, and take no account of, for example, business culture. For those like me, who have worked in US, UK, French and German companies, as well as having worked with the Japanese, the Italians, Swiss, Chinese and so forth, it is apparent that there are real differences in business culture.
For example, hhilst I have worked with Swedish people, I have not done so enough to have a clear perspective on their business and working culture. However, I have had considerable experience of working with another oft cited example from the
Keynesians, and that is the Germans. In particular, I have worked for a German multinational. My experience of working with Germans was that I was deeply impressed. They have a culture of thoroughness, of attention to every detail, and this is ideal for a manufacturing base. When compared with a British company, it was all very impressive. It is not just the experience of working within a German company, but also my experience of working with Germans in general. How does this kind of factor fit into explaining the success of country 'x', 'y' or 'z' in the examples given by the
Keynesians. The answer is that, because it can not be measured, it does not appear (comments from those who have worked with German business welcomed).
The point I am trying to make here is that policy 'x', 'y' or 'z' does not operate in a vacuum, but in the context of a long history of economic policy, social policy, educational policy, particular resources, particular stages of economic development, and the global economic context of the particular time and so forth. As I have said, the
Keynesians are not alone in this, and this is why economics is a matter of such debate. Cause and effect are actually very difficult to identify when looking at any individual policy. It is why opposing schools of economics are able to justify their positions in direct opposition to one another. I will give another example of this generalisation from country 'x' to country 'y' later.
One of the most interesting points that
LK is making is that high government expenditure can sit alongside economic success, and this is why he cites the examples of Scandinavia etc. What he does not cite are the counter examples such as the UK. The UK has seen a steady
expansion of the size of the state in the UK over the last ten or so years. However, having expanded the state, the UK is now in deep economic trouble. Is this not a counter example to those that he has given? Could it be that there are factors specific to the cited examples that allow them to support such a large state, but the UK lacks those factors?
LK will not doubt suggest that the UK state misused their increasing control over the output of the country....
In a recent example, I mentioned the work of Carmen
Reinhart and Kenneth
Rogoff '
This Time is Different', a book founded upon empirical evidence, and
LK immediately responded with a list of authors who have criticised their work. No doubt, the critiques included counter examples, and this is what we always find. For every example, in a complex history of economics, and a complex world, there are always ways to present a counter argument - as there is endless variability in contexts. In the end, what we are always left with, is the underlying theory, and which theory we choose to believe, and which interpretation of the 'facts' is most credible.
For example,
LK puts the explanation for post war economic growth as
follows (in the comments section):
The sources of post war growth can be found in effective financial regulation (to prevent asset bubbles), discretionary fiscal and monetary policies, and Keynesian demand management.
It is an explanation that has often been offered by
LK. Note that the economic growth during this period takes no account of increased productivity of labour, or the many innovations that took place during this period. If we want to see an explanation for why an economy gets richer, would it not be useful to take into account the innovations and technologies? Instead of this,
LK looks at the monetary and fiscal policies, and Keynesian demand management as explanations. I will ask a simple question.
If a factory yesterday can make 1000 toasters per hour per unit of labour, but in a years time can make 1200 toaster per hour per unit of labour, does this not represent a real increase in material wealth?
What we have are two different explanations for the same thing; growth in economies in countries like the US and Europe. In my version, we can see real changes in output per worker as new and more efficient production methods, systems and machines are introduced, creating real increases in output per worker (and this includes services), and we can see a real and measurable outcome of such innovation. On the other hand, we can see abstract and indirect theoretical transmission mechanisms that are represented by 'effective financial regulation (to prevent asset bubbles), discretionary fiscal and monetary policies, and Keynesian demand management.' The post world war growth, according to
LK is resultant from
Keynesian policy....and there is no way to comprehensively disprove his view.
My answer to the
LK argument is that economic growth is created by the kinds of innovations that make increases in outputs, and development of new goods and services, possible. Those innovations are created in the competition between suppliers of goods and services, each trying to outdo each other in the market, in a battle for profits and survival. Whilst monetary and fiscal policy might have an influence, along with the regulatory regime, these are not the drivers of economic growth. Instead, they are potential
hindrance of economic growth, and the best outcome that they might achieve is a neutral effect upon growth. None of these lead to the innovations that mean that there can be more output of good or service 'x' by worker 'y'.
In other words, government monetary policy, fiscal policy, and regulation do not create the innovations that create real increases in output. In the end, you can choose which is the better explanation of the post war growth. Was it government policy, or a period in which innovation created massive gains in output?
One argument might be that elements of government fiscal policy might have some indirect impacts, such as the proportion of government spending being used in
effective and efficient education programs. Some government funded research programs
might also lead to innovations that will impact upon output in the economy. However, how those research programs might produce results in comparison to the actual investment in research, in comparison with having the money being used in research by private organisations/individuals, is a question for which there is no neutral answer. For example, elements of the modern Internet flowed from US government defence research, but the application benefits in the civilian Internet were coincidental but huge.
But then again, the huge amount of money poured into defence programs must surely eventually result in some kind of breakthrough...
In proportion to the total of government expenditure, how might we measure such benefits, and how might they be compared to private R&D expenditure? If the money were left in private hands, what kind of economic growth might it achieve? We do not know the answers to such questions, and there is no
neutral way of making such an
assessment. There is no data that might objectively measure such a thing.
This brings me onto
LK's favourite term, which is the idea of 'industrial policy'. This is a bit problematic, as it is always vague and undefined. I will quote some examples from
LK:
That is why they need to nationalize banks, tightly regulate them, control allocation of capital to productive investments, adopt aggressive trade and industrial policies and rebuild manufacturing and output of tradable goods and services. (here)
This can be done through social policies to help families as well as immigration and vigorous industrial policy. (here)
It's [the US] main problem is that it allows it multinational corporations to ship its jobs to East Asia.
This can be fixed quite easily through industrial and trade policy or by taxing corporations according to the value added in the US. Yes, that means higher prices for manufactured goods. But it also means employment, investment, stronger industries and a healthy economy. (here)
The rise of China was very little to do with comparative advantage. It rose through aggressive industrial policy.
The UK and US can use aggressive industrial policy as well to rebuild their manufacturing sectors. (here)
Only in one case have I found anything that might explain what industrial policy might really mean, and that is a link provided by Lord Keynes to a Google books
page on Taiwan's emergence as a modern economy. Other than suggesting a formula which might,
or might not have, contributed to Taiwan's growth, it is all rather vague. If we look at
LK's blog, we find a few indirect references:
The only region that showed an increase was East Asia, precisely the region dominated by the protectionist state-led model of industrialization, led by Japan, South Korea, Taiwan, and (from the early 1990s) China. (here)
In another
post,
LK discusses the New Zealand experience of industrial policy, but never makes clear exactly what that policy was, or how it might have succeeded. Instead, he discusses external factors, and claims that the big fall in GDP was a result of
neo-liberalism. Once again, we have a selection of factors that suit the argument being made (if you read the post, it does not mention many of the factors involved, such as what drove the eponymous instigator of the liberal policies known as
Rogernomics to declare that the country faced economic ruin - and the instigator was a Labour MP).
What we have here is some very vague suggestions from
LK, that are never fully elaborated. I used Google to search my site for industrial policy comments from
LK, and could not find anything which might explain how this industrial policy might
really work. There are certainly indications that the intent is to introduce capital controls, impose tariffs (direct or indirect) and to control industrial sectors - as well as hinting at
mercantilist policy. However, I will not comment on these here, as they are only speculation.
Then there is the Keynesian perfectly circular arguments for government borrowing. These are the arguments that government borrowing is unconstrained, and that government borrowing might be a way to lead an economy out of recession. According to
LK, there is no limit to government borrowing, and that government borrowing creates economic 'growth'. This is a recent comment from
LK, in which he claims 'proof' that economic stimulus works:
Secondly, the Western countries have returned to mild growth and are not contracting: this is proof of the success of fiscal policy (you are mistaken to say that Keynesian stimulus can never be proved “wrong”: if we got a major depression and negative growth in the face of large fiscal stimulus, then this WOULD demonstrate that something is wrong with the Keynesian theory).
The most interesting thing here is that
LK actually thinks that the consumption of borrowed resource represents economic growth. The simplest way to illustrate why this is such an odd idea is to pull away any restraints on borrowing. For the sake of illustration, let's imagine that the US had a credit line of an additional $1 trillion this year, in addition to their current huge borrowing, and that the US utilised that credit line. If they did so, they could start any number of huge projects, all utilising that borrowed money, and there would not just be GDP growth, there would be a massive boom in the economy. GDP growth would sky rocket.
If this is the case, why not just borrow that additional $1 trillion. The economy would boom, tax revenue would boom, and the economic growth would mean that the debt to GDP ratio would fall, suggesting that the debt is more serviceable. If this is the case, then it would seem that, the more that is borrowed, the greater the economic growth, and the more successful the economy. On this basis, every economy should add ever more borrowing every year to ensure endless economic growth. After all, the growth reduces the debt to GDP ratio, and increases the tax revenues to ensure repayment of the debt. Here is a recent
example of this thinking from
Krugman, offering a critique of German austerity measures:
"But that doesn't make sense. Even if you manage to save 80 billion euros – which you won't, because the budget cuts will hurt your economy and reduce revenues – the interest payments on that much debt would be less than a tenth of a per cent of your GDP. So the austerity you're pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position."
So here you have it - cutting a budget deficit hurts tax revenues. This is so circular, that I find it beyond belief that any person might suggest this as a realistic approach to economics. If government borrows money, and that borrowed money enters the economy, then more activity will take place, which will create more government tax revenue, meaning that the government can claim that the economy is growing whilst improving their ability to service the debt that they used to start the whole process.
It is a perfectly circular system. It is an economic perpetual motion machine. So what is the problem with this economic perpetual motion machine?
The trick to understanding this is not to think of government borrowing money, but of borrowing of resources. When a government borrows money from overseas, they are actually borrowing the output of that overseas country. For example, if borrowing from the Gulf states, it is the equivalent of borrowing oil. When that oil enters into the economy, it allows for increased activity in the economy as the oil is
consumed. At each stage of activity in the economy, a percentage of that oil is consumed and that oil is a contributor to the output within the economy. It is a system in which real resources are being consumed. The problem here is that the consumption is consumption of Saudi Arabian output, not US output. In consuming the oil, the measurement is not of US output, but is a measure of US output + Saudi Arabian output.
All the time this consumption is taking place, there is an accumulation of an obligation to provide goods and services in the future to repay the loan of oil in the future. Those goods and services will necessarily require the consumption of resources (including oil) in the future to repay the loan of oil. If this is the case, then a percentage of the total resources of the US must be allocated to making this repayment. If those resources are being utilised to repay the loan of oil, then they will not be available for internal consumption. Remember, the oil resources that were borrowed have been consumed.
What all of this tranlates into is that, if you borrow and consume huge amounts of resource, it is possible to achieve growth in activity. I can not argue with this. It is self-evidently true. It is very easy to generate activity with borrowed resources. Just borrow more and more, and you will generate ever more activity. That this is the case does not in any way imply that this is a good long term strategy for an economy. It is actually the easiest thing to do - borrow money to create activity. It is so easy that we might think a monkey could do it. It is not clever, it is not sophisticated, and you do not need to have a PhD in economics to understand that if you throw enough borrowed resources into an economy, it will create activity. But where does it leave you, but with an obligation to repay that resource in the future.
What about if the borrowed resource is used for investment? It may be that some of those oil resources were borrowed and used to create new output, for example, building a factory. If this is the case, it might be that the factory will later produce goods and services that might help pay for the borrowed oil. The question here is to ask whether this is actually what is taking place? Are the gargantuan sums of borrowed money being directed into investment or consumption?
If it were the case that the huge sums of money were being
wisely invested in new and productive investments, we would see a massive growth in the US economy as a result of the investments. However, we can not see any such resultant growth, but instead see the US limping along, with no real signs of recovery.
The answer of LK to this problem is to suggest that the massive stimulus spending is not being correctly utilised, and should be used for infrastructure projects/ other projects specified by the wise sages of post-Keynesianism. What I always find interesting about such proposals is that, if these projects were of genuine economic benefit, why were they not undertaken before? After all, all governments want economic growth, and there is no reason why such projects might produce such a return in the good times as in the bad times. What has changed? By curious coincidence, these projects move from being unconvincing in the good times, to convincing in the bad times. In other words, the value of the projects is being subjectively reassessed in the bad times. What was a poor investment becomes a good investment.
As an interesting example, LK
cites the case of the success of the stimulus in China as follows:
First: the tremendous success of Keynesian stimulus in China and Australia.
To repeat a previous post:
In the face of a massive collapse in their export-led growth economy, what did China do?
They implemented a massive $586 billion dollar Keynesian stimulus – and then got a very impressive recovery, so impressive in fact that with growth in the first quarter of 2010 at 11.9%, there is talk that they may need to cool down the economy.
Does that sound like a “failure”?
Australia also implemented a large Keynesian fiscal stimulus, which worked very well, and it benefited from China's stimulus as well.
Conclusion? Countries that are close trade partners benefit tremendously from Keynesian stimulus in both countries.
Your failure to even address this point severely undermines your whole argument.
I am not sure whether LK has been to China, but there are large swathes of China that genuinely lack infrastructure. As one example of the government spending on infrastructure, the last time I was in China, I went along a pot-holed track and could see a massive new highway being built alongside it. The road was opening up a large area of Sichuan province to the rest of China, and would thereby pull that region into the Chinese economic system. There was little potential for economic development of the area prior to the road being built, as the communications were simply too poor to allow any growth. When I viewed the road being built, there could be little doubt that it was a genuine investment which would allow the people of the region to contribute to economic growth in the future.
You may note the difference here. In an emerging economy such as China, there are many projects that are not only attractive, but actually essential. This is not to say that all investments in infrastructure in China will repay the investment (it is a very corrupt country), but that it is easy to find good investment projects. Even before the crisis, China was investing heavily in such projects (as there were so many that were necessary) and they have just accelerated this process. Unlike a developed economy, these projects were self-evidently a good investment before the 'bad' times. Furthermore, China is a current account surplus country, meaning that it can pay for these projects without the risks in having to borrow the resources of other countries to fund the projects.
What we will see from the Keynesians is that they will suddenly find hundreds, if not thousands, of projects that have been crying out for investment. They appear as if by magic, as soon as there is a downturn. In the case of an emerging economy like China, many of the projects will be of great value, but in a developed economy, they are unlikely to be anything but of marginal benefit at best. In using China as an example, LK does exactly what I discussed earlier. He takes a case out of context to 'prove' his point, but in reality, proves nothing. I believe that I have answered LK completely here, and his use of this example just illustrates my point about context. Any comparison of the situation of China and a country like the US is pointless.
What of all those unemployed? According to the Keynesian arguments, all of these people are sitting around as unproductive resource. Would it not be better to employ this idle resource?
It is a tempting argument, if only for the dignity of the unemployed workers (which is a concern I share). However, in employing these people, for example in infrastructure projects, they are not a resource that is being used productively, but rather a resource which costs more resource to
appear to be productive. If the infratructure project is not viable as an investment, then the additional resources needed to emply these workers mean that they are just consuming additional resources in their employment. Compared with having the unemployed worker sitting at home (for example on benefits) this represents a net increase in resource consumption per person who is employed on the project compared with being unemployed at home.
'Yes', in the short term, a person can appear to be gainfully employed, but at what cost for the future?
To illustrate the point, prior to the crisis exploding, there was high employment in many developed economies as a result of the credit boom. All of those people appeared to be engaged in productive and useful employment. However, the apparently productive employment was resultant from the borrowing of resources from other countries, and the consumption of these resources. Each of these people employed as a result of the credit boom looked every bit like they were making a net contribution to the economy, but many of them were just facilitators of consumption of the output of other countries. Their net contribution to the economy was actually negative, as they were part of a system in which consumption exceeded output. The result is the massive debt overhang in many developed countries. The Keynesian stimuli just offers more of the same. Just as the private debt overhang led to unemployment now, the government debt overhang will create unemployment in the future. It is just a delay, not a solution.
The private debt accumulation led to lots of employment in unsustainable sectors, such that resources were directed into an unsustainable economic structure. When the structure collapsed, unemployment went up. However, the stimuli measures have sought to turn this back, but by doing the same thing as the original problem. By trying to support an economy based upon borrowing, which entrenches an unsustainable structure.
This is the other problem with the Keynesian solution; it evades the underlying problems in an economy. If we think of the net over-consumption in the economy, it must be the case that, at some point, the balance must be reversed to pay back the previous over-consumption. By borrowing more money, the structure of the economy is left in a form in which large sectors of the economy are structured towards the over-consumption. If people are employed on infrastructure projects that represent a consumption of resource (not an investment), then the sectors of the economy that are supported by over-consumption are left in place. These sectors continue to have resources directed at them. Replacing private borrowing with government borrowing just leaves the same structure in place, completely unreformed.
This kind of problem, however, is not apparent at the time of the stimulus spending. In fact, none of these problems are apparent at the time of spending the stimulus money. This is why LK can claim success, as he has done, for recent bouts of stimulus spending. LK points to country 'x' and says look how they have returned to growth having spent 'x' amount of money on a major stimulus. As I have said earlier, it is no wonder that pouring masses of borrowed resource into an economy will stimulate activity. It really does not take much to see the cause and effect, but it is a different matter to see the long term consequences.
So why does LK think this will work long term? I will
quote from one of his recent comments:
That the effect of a stimulus is “transient” is an utterly trivial point. Of course it is.
The whole point is to temporarily stimulate the economy back into growth, so that demand for private goods will be restored and private business confidence and output will rise - which creates a self-sustaining economic expansion.
Output of what will rise? If you are stimulating with borrowed resources, yes, output will rise, but it will rise in the sectors of the economy which otherwise can not support themselves. You are simply entrenching the structural problems, as I discussed earlier. It is not self-sustaining, as the parts of the economy that are supported by overconsumption remain in place. They can only be supported by ongoing borrowing for consumption.
I have noted in previous posts that, as economies such as the US and UK returned to so-called growth, we could see a commensurate deterioration in the trade balance. No doubt, all of the consumption fuelled by the borrowing will support the economy for a little longer, but the underlying structural problems are kept in place at the cost of accumulation of debt. It is a transient effect, and this in not an 'utterly trivial point' as LK claims. It is exactly the point. As soon as the stimulus is withdrawn, the economy will return to the problems that have not been addressed. This brings me to another point.
LK criticised me recently as follows (my words quoted in italics):
If the fiscal stimulus runs out of steam, have another one, and another one, and another one. If it is not working, a larger one will do the trick. If the larger one does not do the trick, then there is an even larger one that might be do the trick. In nobody will lend, print money. If that does not work, just print more.
I assume this is mainly meant to be rhetoric?
If not, which countries have tried 6 stimulus packages that failed? Answer: none.
Have any countries tried 5, 4, or 3 stimulus packages that failed? Answer: none.
In fact, have any countries even tried 2 stimulus packages yet??
Yes, Japan. It has long been using all of the tools advocated by LK. And when these did not work, the cry is that they should have done more of 'x' and 'y', they stopped the stimuli at the wrong time etc. No doubt LK will claim that Japan did not apply their various stimuli correctly...or they should have pushed on through with more of the same. More bridges to nowhere....
And this leads me on to the next problem, which is the idea that government borrowing
is different from private borrowing:
In the real world, the government controls monetary policy. Its debt isn’t even remotely like private debt. An entity that has the power to create money cannot go bankrupt.
It can certainly use too many real resources, cause inflation in boom times, increase the external deficit unsustainably, or stupidly borrow money from private markets when it has no need to.
Within this argument, we see that LK is a supporter of printing money (or he will no doubt use the weasal term quantitative (QE) easing). I agree that borrowing money on private markets is foolish, but that is because I do not agree with the borrowing of money in the first place. However, the proposal of LK appears to be that the best route is to simply print money, and utilise this rather than money borrowed from private markets. As we know, this is what the UK was doing until recently. For those of us who pointed out this was inflationary, we are now being vindicated. The UK is indeed now subject to growing inflation, despite the 'output gap', despite the fall off in private credit. In fact, the UK is importing inflation due to the decline in the value of the pound, and this despite the Bank of England's continuous predictions of deflation. The only question remaining is how far the inflation might climb (although the austerity measures being proposed
may put a halt to the inflation).
The problem is this. If you start down the road of printing money to finance deficits, you eventually create inflation. The transmission method of the inflation may be through currency depreciation, may be through a boom in credit, asset price appreciation or a host of different conduits. It may be that the effects are delayed, for example where the UK banks used the process of QE to rebuild reserves. However, eventually, the new money appears in the economy. When it does so, it must be sterilised, or it will lead to inflation, and here is the problem. In order to sterilise the money, the Bank of England must sell assets to destroy the newly created money, which means selling gilts. In doing so, the process of QE just becomes a delaying mechanism, as those gilts must be sold in private markets. Either that of the Bank of England must print money to sell the gilts to itself, thereby defeating the purpose of the sale (though I would not be surprised at such a lunatic policy).
It is an incoherent idea to suggest that a government does not eventually need to turn to private markets to finance their deficits. And if the private markets do not want to buy? What happens then? The money created remains in the system....and the inflation will follow...
And this is why government debt is like any other debt. Sure, a government can not go bankrupt in that they have no money, but a country can end up with a worthless currency that can not be used to exchange for goods and services. In order for a government to borrow, the potential lenders have to, in the end, believe that they will have the borrowing repaid in a value that exceeds their lending. So a government can print money, and default on its debts indirectly. However, a default is a default is a default, regardless of the specific form of the default. The more a government borrows, the greater the call of the creditors on the future output of the borrowing country. If the output does not increase faster than the borrowing (not including the output that is itself resultant from the borrowing), then, at some point in the future, there will be a loss of output for internal use in the borrowing country. Either that, or the country defaults on debt (for example paying with printed money).
And when a country defaults, with outright or indirect default, the credit will stop, or will be offered at high interest rates to reflect the risk. Whichever the case, the private debt markets will impose a fiscal discipline on the government. It is not that the private markets are evil and anti-democratic. They have a reasonable expectation of repayment when they lend money. If there is any evil (though I do not like this word) it is governments seeking to bribe their voters with borrowed money today which will have to be repaid by others in the future. It is the lie that this is sustainable and can be continued with no future consequence. I keep coming back to the point - it is easy, if not lazy, to just keep borrowing more money, in order to support a failing economy. Pouring borrowed money into an economy is the easiest thing in the world, but it is the repayment of the borrowing in the future that is the challenge.
A good example of this lazy and dishonest approach to economic management are the state pension schemes. As every year goes by, the liabilities steadily accumulate. As they do so, governments pretend they are not there, as confronting the problems of the accumulating debt would not be popular. The pensions will, one day, need to be paid, and that liability is going to become the liability of the following generation. It is no different from borrowing to build a hospital, or a new road. In both cases, the benefits accrue to one group now, at the cost of future tax payers. In the case of pensions, the provision of savings to support the pension schemes would come at a cost of less activity in the economy now. Less 'growth'. In the case of the hospital built with borrowed money, the same thing. In all cases, someone is going to have to pay for these benefits, just not the people who are enjoying the benefits.
This is the Keynesian policy writ large. The avoidance of only consuming what you can produce. Beneath all of the sophisticated arguments, it all comes to this central point. If you borrow, you must repay. I do not believe in government borrowing at all, but borrowing more than your underlying growth of wealth creating capacity means that someone in the future must pay for your consumption now. This is morally bankrupt and irresponsible.
And then I come to the question of why governments borrow in the first place. If there is unemployment, why borrow the money to alleviate the problem. Why not just tax more and use the taxes to pay for the unemployed? The reason is that the high tax would be unpopular. Why borrow to build a new hospital. Because paying for the hospital directly would be reflected in higher taxes for the users of the hospital. How much better to spend borrowed money and call it 'investment' or other euphimisms for passing on cost to those in the future. And for people like LK, they offer sophisticated arguments, endless cherry-picked evidence to hide the fact that if you consume more than you produce, unless your output increases above the rate of your borrowing, someone is going to pay in the future.
Someone in the future is going to have less, so that you can have more now.
There are many other arguments made by LK, and many other Keynesians. Within all of their arguments, we always come back to the same themes. Government borrowing is the solution to all ills, and if governments can not borrow now, they can always print money. It is the endless pushing of today's problems into the future. It is exactly like the pensions problem. Do not confront difficulties now, just leave them to the future. But this is the great attraction of Keynesian economics. It is why defenders of Keynesian policy gain so much support.
However, as one
commentator put it in the Telegraph, the days of spend now pay later are over. Later is now. Many governments are now facing the point where the markets are asking how governments plan to pay back the money they have borrowed. In the world of LK, he proposes that the answer is to ignore the markets, and print money instead, ignoring that one day, like it or not, the markets
must buy the debt. No doubt, printing money might delay the problem a little longer, avoid the absolute need for economic restructuring, but only at ever greater cost later. This is the problem with the soltuions offered - they delay confronting the problems to create a greater later cost.
I fully expect reams of counter argument from LK. He will, insist that his case is right, will contest the Swedish point, and so forth. However, for the readers of this blog, just think about the perpetual motion machine of government borrowing creating economic growth. Borrowing to consume now creates wealth in the future. Wise 'investments' appear from thin air. Think of the way in which China offers 'proof', entirely free of context. Think about the pension deficit, of how easy it is to pass the buck. Think of the arguments about how governments do not need the private markets for borrowing as they can just print money. Think how easy it is to pour money into an economy, but how difficult it is to pay back.
It is a lazy economics dressed up with sophistication and misdirection. It is easy to have a party on borrowed money, but less easy to deal with payment in the future. It is very easy to spend the money of future generations and have good times now. Any idiot can do this. The true genius of Keynesian economics is that they can dress this up so well with theory.
In the end, my argument rests on one key point. If you consume more than you can produce through borrowing on an ongoing basis, you have a problem, and you can only delay facing that problem for so long.Note: LK has written extensively on mnay subjects and, even with such a long post, I have not covered them all. In fact, to give a full response to LK would take a lifetime, so I leave this reply partly unfinished. I also note that LK has added some substance in his recent comments on industrial policy. Unfortunately, added after this post was written, and I really do not want to revise the section. This was time consuming enough.
