Sunday, September 27, 2009

Deficits and Keynes

Two interesting reads. In both cases, people not normally identified with the left make an argument for deficit spending.

Richard Posner, who is difficult to categorise but sometimes identified with libertarian thinking, writes: How I Became a Keynesian. An extract:

But for a confidence-building public-works program to be effective in arresting an economic collapse, the government must be able to finance its increased spending by means that do not reduce private spending commensurately. If it finances the program by taxation, it will be draining cash from the economy at the same time that it is injecting cash into it. But if it borrows to finance the program (deficit spending), or finances it with new money created by the Federal Reserve, the costs may be deferred until the economy is well on the way to recovery and can afford to pay them without endangering economic stability. When investors passively save rather than actively invest, government can borrow their savings (as by selling them government bonds) and use the money for active investment.

From Samuel Brittan's speech to the Spectator Conference a couple of weeks ago:
I am in the delightful position of disagreeing with the consensus wisdom on economic policy. This states that the most important, if disagreeable, task of whatever government is in power after the next election will be to slash the public sector deficit.
The basic fallacy is known as the fallacy of composition: the belief that what is true on the small scale must be true on the large. Shakespeare's Polonius said "Never a borrower nor a lender be." Margaret Thatcher advised young people not to get into debt (except of course to buy a house!) Even accepting these homilies at their face value, they do not necessarily apply to the Government of the whole country.

The big error of the present economic discussion is to treat national budgets as on a par with the budgets of individuals or firms, which need to balance except for narrowly defined investment projects. Even if you also favour a balanced budget at the national level, it is at most a second order rule to give way if it impedes the achievement of broader economic objectives.

In fact the public sector balance has an entirely different function: that of offsetting gross disequilibria in the national and international economy. If attempted savings exceed investment opportunities, public sector deficits are needed for as long as necessary to fill the gap - a job which will otherwise be done by stagnation and unemployment. When economic recovery has reached a certain stage, the time may come to roll back public sector borrowing. But we have certainly not reached that stage yet and it is far too early to rule out a second or even third leg of the recession.


dearieme said...

It's a bit bloody late to be a Keynsian - ten years ago we needed the sort of Keynesian who told Brown to pay down debt in the good times so that borrowing would be practical in the bad.

Peter Risdon said...

True enough. Though saying "I wouldn't start from here" is of limited help.

Stephen Fox said...

Hmm...'gross disequilibria in the national and international economy' - would that be like running out of cash?
While I'm at it, when is anyone in the government or the city going to say 'don't worry, we're printing more money'?
Instead we get QE.

I know, I'm far too ignorant and stupid to understand...