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description= 15 posts published by Lars Syll during July 2017;
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bsolute advantage what has changed since ricardo s days is that the assumption of internationally immobile factors of production has been made totally untenable in our globalised world when our modern corporations maximize their profits they do it by moving capital and technologies to where it is cheapest to produce so we re actually in a situation today where absolute not comparative advantages rules the roost when it comes to free trade and in that world what is good for corporations is not necessarily good for nations the balanced budget paradox 18 jul 2017 at 18 44 posted in economics 10 comments the balanced budget paradox is probably one of the most devastating phenomena haunting our economies the harder politicians usually on the advise of establishment economists try to achieve balanced budgets for the public sector the less likely they are to succeed in their endeavour and the more the citizens have to pay for the concomitant austerity policies these wrong headed politicians and economists recommend as the sole solution one of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external it is owed by one person to others that is what makes it burdensome because it is interpersonal the proper analogy is not to national debt but to international debt but this does not hold for national debt which is owed by the nation to citizens of the same nation there is no external creditor we owe it to ourselves a variant of the false analogy is the declaration that national debt puts an unfair burden on our children who are thereby made to pay for our extravagances very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them abba lerner the burden of the national debt 1948 few issues in politics and economics are nowadays more discussed and less understood than public debt many raise their voices to urge for reducing the debt but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society and there are no limits to all the especially macroeconomic calamities and evils a large public debt is supposed to result in unemployment inflation higher interest rates lower productivity growth increased burdens for subsequent generations etc etc people usually care a lot about public sector budget deficits and debts and are as a rule worried and negative drawing analogies from their own household s economy debt is seen as a sign of an imminent risk of default and hence a source of reprobation but although no one can doubt the political and economic significance of public debt there s however no unanimity whatsoever among economists as to whether debt matters and if so why and in what way and even less one doesn t know what is the optimal size of public debt through history public debts have gone up and down often expanding in periods of war or large changes in basic infrastructure and technologies and then going down in periods when things have settled down the pros and cons of public debt have been put forward for as long as the phenomenon itself has existed but it has notwithstanding that not been possible to reach anything close to consensus on the issue at least not in a long time horizon perspective one has as a rule not even been able to agree on whether public debt is a problem and if when it is or how to best tackle it some of the more prominent reasons for this non consensus are the complexity of the issue the mingling of vested interests ideology psychological fears the uncertainty of calculating ad estimating inter generational effects etc etc in classical economics following in the footsteps of david hume especially adam smith david ricardo and jean baptiste say put forward views on public debt that was more negative the good budget was a balanced budget if government borrowed money to finance its activities it would only give birth to crowding out private enterprise and investments the state was generally considered incapable if paying its debts and the real burden would therefor essentially fall on the taxpayers that ultimately had to pay for the irresponsibility of government the moral character of the argumentation was a salient feature either the nation must destroy public credit or the public credit will destroy the nation hume 1752 later on in the 20th century economists like john maynard keynes abba lerner and alvin hansen would hold a more positive view on public debt public debt was normally nothing to fear especially if it was financed within the country itself but even foreign loans could be beneficient for the economy if invested in the right way some members of society would hold bonds and earn interest on them while others would have to pay the taxes that ultimately paid the interest on the debt but the debt was not considered a net burden for society as a whole since the debt cancelled itself out between the two groups if the state could issue bonds at a low interest rate unemployment could be reduced without necessarily resulting in strong inflationary pressure and the inter generational burden was no real burden according to this group of economists since if used in a suitable way the debt would through its effects on investments and employment actually be net winners there could of course be unwanted negative distributional side effects for the future generation but that was mostly considered a minor problem since lerner 1948 if our children or grandchildren repay some of the national debt these payments will be made to our children and grandchildren and to nobody else central to the keynesian influenced view is the fundamental difference between private and public debt conflating the one with the other is an example of the atomistic fallacy which is basically a variation on keynes savings paradox if an individual tries to save and cut down on debts that may be fine and rational but if everyone tries to do it the result would be lower aggregate demand and increasing unemployment for the economy as a whole an individual always have to pay his debts but a government can always pay back old debts with new through the issue of new bonds the state is not like an individual public debt is not like private debt government debt is essentially a debt to itself its citizens interest paid on the debt is paid by the taxpayers on the one hand but on the other hand interest on the bonds that finance the debts goes to those who lend out the money abba lerner s essay functional finance and the federal debt set out guiding principles for governments to adopt in their efforts to use economic especially fiscal policies in trying to maintain full employment and prosperity in economies struggling with chronic problems with maintaining a high enough aggregate demand because of this inherent deficiency modern states tended to have structural and long lasting problems of maintaining full employment according to lerner s functional finance principles the private sector has a tendency not to generate enough demand on its own and so the government has to take on the responsibility to make sure that full employment was attained the main instrument in doing this is open market operations especially selling and buying interest bearing government bonds although lerner seems to have had the view that the ideas embedded in functional finance was in principle applicable in all kinds of economies he also recognized the importance of the institutional arrangements in shaping the feasibility and practical implementation of it functional finance critically depends on nation states being able to tax its citizens have a currency and bonds of its own as has become transparently clear during the great recession emu has not been able to impose those structures since as hayek noted already back in 1939 government by agreement is only possible provided that we do not require the government to act in fields other than those in which we can obtain true agreement the monetary institutional structure of emu makes it highly unlikely not to say impossible that this will ever become a system in which functional finance is adapted to functional finance the choices made by governments to finance the public deficits and concomitant debts was important since bond based financing was considered more expansionary than using taxes also according to lerner the purpose of public debt is to achieve a rate of interest that results in investments making full employment feasible in the short run this could result in deficits but he firmly maintained that there was no reason to assume that the application of functional finance to maintain full employment implied that the government had to always borrow money and increase the public debt an application of functional finance would have a tendency to balance the budget in the long run since basically the guarantee of permanent full employment will make private investment much more attractive and a fortiori the greater private investment will diminish the need for deficit spending to both keynes and lerner it was evident that the state had the ability to promote full employment and a stable price level and that it should use its powers to do so if that meant that it had to take on a debt and more or less temporarily underbalance its budget so let it be public debt is neither good nor bad it is a means to achieving two over arching macroeconomic goals full employment and price stability what is sacred is not to have a balanced budget or running down public debt per se regardless of the effects on the macroeconomic goals if sound finance austerity and a balanced budgets means increased unemployment and destabilizing prices they have to be abandoned now against this reasoning exponents of the thesis of ricardian equivalence have maintained that whether the public sector finances its expenditures through taxes or by issuing bonds is inconsequential since bonds must sooner or later be repaid by raising taxes in the future robert barro 1974 attempted to give the proposition a firm theoretical foundation arguing that the substitution of a budget deficit for current taxes has no impact on aggregate demand and so budget deficits and taxation have equivalent effects on the economy if the public sector runs extra spending through deficits taxpayers will according to the hypothesis anticipate that they will have to pay higher taxes in future and therefore increase their savings and reduce their current consumption to be able to do so the consequence being that aggregate demand would not be different to what would happen if taxes were raised today ricardian equivalence basically means that financing government expenditures through taxes or debts is equivalent since debt financing must be repaid with interest and agents equipped with rational expectations would only increase savings in order to be able to pay the higher taxes in the future thus leaving total expenditures unchanged the ricardo barro hypothesis with its view of public debt incurring a burden for future generations is the dominant view among mainstream economists and politicians today the rational people making up the actors in the model are assumed to know that today s debts are tomorrow s taxes but one of the main problems with this standard neoclassical theory is however that it doesn t fit the facts from a more theoretical point of view one may also strongly criticize the ricardo barro model and its concomitant crowding out assumption since perfect capital markets do not exist and repayments of public debt can take place far into the future and it s dubious if we really care for generations 300 years from now at times when economic theories have been in favour of public debt one gets the feeling that the more or less explicit assumption is that public expenditures are useful and good for the economy since they work as an important and often necessary injection to the economy creating wealth and employment at times when economic theories have been against public debt the basic assumption seems to be that public expenditures are useless and only crowd out private initiatives and has no positive net effect on the economy wolfgang streeck argues in buying time the delayed crisis of democratic capitalism 2014 for an interpretation of the more or less steady increase in public debt since the 1970s as a sign of a transformation of the tax state schumpeter into a debt state in his perspective public debt is both an indicator and a causal factor in the relationship between political and economic systems the ultimate cause behind the increased public debt is the long run decline in economic growth resulting in a doubling of the average public debt in oecd countries for the last 40 years this has put strong pressures on modern capitalist states and parallel to this income inequality has increased in most countries this is according to streeck one manifestation of a neoliberal revolution with its emphasis on supply side politics austerity policies and financial deregulation that has taken place and where democratic redistributive intervention has become ineffectual today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn t increase too much and too fast if the public debt gdp ratio becomes higher than x the likelihood of debt crisis and or lower growth increases but in discussing within which margins public debt is feasible the focus however is solely on the upper limit of indebtedness and very few asks the question if maybe there is also a problem if public debt becomes too low the government s ability to conduct an optimal public debt policy may be negatively affected if public debt becomes too small to guarantee a well functioning secondary market in bonds it is essential that the government has access to a functioning market if turnover and liquidity in the secondary market becomes too small increased volatility and uncertainty will in the long run lead to an increase in borrowing costs ultimately there s even a risk that market makers would disappear leaving bond market trading to be operated solely through brokered deals as a kind of precautionary measure against this eventuality it may be argued especially in times of financial turmoil and crises that it is necessary to increase government borrowing and debt to ensure in a longer run good borrowing preparedness and a sustained government bond market the failure of successive administrations in most developed countries to embark on any vigorous policy aimed at bringing down unconscionably high levels of unemployment has been due in no small measure to a viewing with ala...
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