The government might 'sign' the borrowing agreement, but they are not signing on the behalf of the government but on behalf of us. In the end, the only way that the borrowing can be repaid is for us to repay the borrowing. The government may determine the proportion of the debt that each of us will pay, but in the end, the borrowing is paid collectively by us, not by the government. The government is simply the conduit through which the money is repaid by us.
It is, of course, very convenient for governments to pretend that they are doing the borrowing, not us. In pretending that they are doing the borrowing, they can pretend that they are doing the right thing by us, when in fact they are imposing debts upon us, whilst pretending that they are not doing so. It is an outrageous misdirection, and one which people seem to accept without question. There are some exceptions, such as government holdings of enterprises that produce profit, but these are only a drop in the ocean of repayments. In the end, there is no way to repay 'government debt' except through our efforts and labour.
Nevertheless, we see the expressions 'government debt' and 'government borrowing' everywhere we look (including on this blog, which is something I will try to remember to address). The idea that governments do not repay debt, and the we do, came as a startling revelation to my friend. It is really quite odd that we collectively allow ourselves to be deluded into thinking that governments can, of themselves, borrow money. Long term readers of this blog will, I expect, be familiar with the problem of 'government borrowing', but I hope that newer readers will now listen to politicians/economists/pundits who talk of 'government borrowing' with a little more cynicism. In essence, the concept is just one great big deceit.
Krugman, the Nobel Prize Winner?
I often read the work of Paul Krugman, as he is a good indicator of the thinking of those who would see this economic crisis answered by exactly the wrong actions. Of late, he has managed to highlight the absurdity of his own views, with his now infamous argument that a fake alien invasion would serve to stimulate the world economy back to growth. Here follows the transcript of the now infamous nonsense (with original interview and transcript can be seen here):
It was an astounding moment in the discussion of economic theory, where the silliness of some economic theory was laid bare. As you would expect, many have seized upon this comment to make fun of Krugman. The idea that we should build planetary defences for an imaginary alien invasion just highlights the madness of diverting resources into non-productive uses, and the absurdity of the broken window fallacy. However, Krugman is still taken seriously by many, and is an influential economist.
PAUL KRUGMAN, NEW YORK TIMES: Think about World War II, right? That was actually negative social product spending, and yet it brought us out.
I mean, probably because you want to put these things together, if we say, "Look, we could use some inflation." Ken and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what fhe basic logic says.
It's very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better –
I come to this story because of a recent article written by Krugman in the New York Times. In this case, the argument is far more moderate, and it is therefore the kind of argument that might gain traction/support. In this case, he is discussing the lack of support for ozone regulation by the President Obama. Here is his argument:
It sounds considerably more reasonable than the alien invasion thesis. However, sitting underneath the apparent reason is some very problematic thinking. What he is suggesting is that this regulation will induce companies to spend on new equipment, and this will raise employment whilst creating a positive social outcome. I do not know the details of the ozone regulation, but will assume for the sake of argument that it would indeed create a positive social outcome. Assuming this, Krugman therefore presents a very seductive argument.
As some of us keep trying to point out, the United States is in a liquidity trap: private spending is inadequate to achieve full employment, and with short-term interest rates close to zero, conventional monetary policy is exhausted.
This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken windows fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.
And now you can see why tighter ozone regulation would actually have created jobs: it would have forced firms to spend on upgrading or replacing equipment, helping to boost demand. Yes, it would have cost money — but that’s the point! And with corporations sitting on lots of idle cash, the money spent would not, to any significant extent, come at the expense of other investment.
However, Krugman is making a major error in thinking that the US operates in a closed system. It does not. One of the underlying drivers of the problems in the US economy is that companies are choosing to invest overseas rather than the US. There is global competition, and the US economy is operating within a highly (hyper) competitive environment. As such, whilst the policy might indeed stimulate some activity in the economy, it would do so at increasing the costs of doing business in the US. His proposal presents an opportunity to create jobs now, but with a potential to destroy jobs later. Of course, I am not saying that this single regulation would directly cost jobs, but rather it would contribute to the overall regulatory burden which determines the cost of doing business in the US in comparison with other countries. If the burden is too high, then companies are given incentives to continue to invest overseas.
Perhaps the most astounding comment in this context is the idea that 'higher productivity can be a bad thing'. This is an argument that has a long lineage, for example with the 19th century 'Luddites' who broke machinery that they saw as destroying their jobs. In fact, whilst particular segments of society might lose jobs due to improved productivity from new processes or innovations, the overall efficiency of an economy is improved and our ability to enjoy more goods and services is improved. For example, if we followed this idea, the innovations of the railways, or the use of electricity in manufacturing should have been prevented, as they would 'cost jobs'. However, each of these innovations spurred huge economic growth. The same can be said of any improvement in productivity. In the very short term, the improvement may cost jobs, but will later produce more employment and greater wealth. Again, in the context of global competition, Krugman regrets the kind of innovations that might make the US more competitive, and which will improve living standards.
Another revealing comment is that in which he discusses companies having 'idle cash'. What does he mean by this? Implicitly, he means that companies must invest their cash regardless of whether the company can see any good opportunities for investment. If they won't invest, Krugman's answer is to make them invest in something that will not increase their profits, but which will eat into the cash pile. In doing so, when a company does see an investment opportunity to expand their business, they will have x amount less cash to invest in the opportunity to expand their business. His answer is to force companies to invest to meet the regulation at a cost later of having less cash to invest in the expansion of their business at a later time, and therefore less opportunity to create more employment.
There are other problematic arguments in the short quote given above, which are just as worrying. The idea that thrift is a bad thing, for example. However, without thrift, where is the money for investment to come from? Without savings, where is the capital for investment? In fact, when looking at each of the statements made in his argument, it is possible to find some very, very unusual thinking. I find it quite extraordinary that economists such as Krugman are actually taken seriously. The really shocking part is that, even after the alien invasion argument, people will still support his views and ideas. I mean, really, investing resources and labour into pointless defences against aliens that do not exist is a good thing? Maybe investing our resources into activity that improves our quality of life might be a better thing?