This is 'fabulous' as it is a very clear illustration of a point I have made several times. It illustrates just how intellectually bankrupt a large swathe of academic economics actually is. I will just start by putting the quote in a usable format:It is unclear how he can slash the budget deficit from 8.5pc of GDP last year to 5.3pc to meet the compromise target agreed with Brussels after a bruising confrontation.“It is frankly impossible, given that it would aggravate the recession and this would crush state revenues,” said Jesús Fernández-Villaverde from the University of Pennsylvania.
- Cutting borrowing will make the recession worse
- If the recession is worse, then state revenues will be lowered
- Therefore, if borrowing is cut, state revenues go down
- If state revenues go down, then payment of existing debt becomes impossible
- I am borrowing 200 units of new debt per year
- I have to pay 100 units per year from tax revenue to service my existing debt
- The 200 units create activity in the economy as the borrowed money is used for consumption of goods and services
- The activity in the economy from the borrowing of 200 units sees 50 units of the borrowed money returned to me in tax revenue from the tax on the consumption of the 200 units
- If I do not borrow at all, the tax revenue from activity in the economy will only be 50 units
- If I cut borrowing to 100 units I will only see 25 units of tax returned to me from the 100 units borrowed
- Cutting my borrowing to 100 units means that I have the 50 units + 25 units of tax revenue from the borrowing
- If I only receive 75 units I can not pay for my existing debt, which requires 100 units
- Therefore I will continue borrowing 200 units so that I can pay for my existing debt which gives me the 50 units of no borrowing tax revenue + 50 units of tax revenue from the borrowing and consumption of 200 borrowed units
- If I do not borrow 200 units I cannot pay my existing debt.
- If I borrow 200 units, I increase my existing debt.
- If I cannot pay for my existing debt without borrowing, how will I pay for next years greater debt and greater annual servicing costs?
And this is a solution? Really?
Note: This is a bit of rushed post, but I hope it all makes sense. If there are any errors in the logic, please feel free to point them out. Also, if (and I apologise in advance if I think it is no better) you can offer an even simpler and clearer explanation, I may use it as a post, with full credit to the author (as anonymous, or by name according to your preferences, so let me know). I really think this is one of the most fundamental examples of just plain odd thinking in economics. As such, getting it as clear and logical as possible would be great. I still feel that my explanation is not quite there, or might not quite hang together.
Update, 30 March 2012: A very good explanation from Carrew below, which integrates the fundamental problem of dishonest politicians.TheFatBigot (I really like this name) also weighs in with some good points about GDP and the underlying foundations of revenue, as does MR. Anonymous has picked up on the rather distorting economy as a medical patient metaphor, and proposes a more apt variant. In the case of Carrew and TheFatBigot, they offer some very good explanation. However, although very good, and somewhat simpler, but I am still looking for the 'killer explanation' that skewers this dangerous economic thinking (something which those less interested in economics might grasp with ease). Further efforts would be welcome.
Update, 2nd April 2012: There are some more good thoughts and explanations below. An anonymous poster has had a good go at it as well. Perhaps between the various comments and my own explanation, someone can provide a good synthesis that takes the good points from all? As ever, I am impressed with the readership of the blog.
Lemming: Apologies, I found a comment from you which escaped the approval process for some reason. I am not sure how long it sat unpublished, but apologies if it was a long time.