Saturday, 19 December 2009

What I said on the radio

They asked me about November's record budget deficit of £20.3 billion, about which George Osborne has said that "Gordon Brown is maxing out the nation's credit card".

My response, briefly:

  • Sometimes it's appropriate to run up your credit card to tide yourself over a problem - the recession definitely qualifies. Government spending is a pretty mainstream response to help mitigate an economic downturn.
  • Spending cuts and tax rises might make a small difference, but the thing that will really cover the debt is economic growth. The UK's tax take is especially countercyclical and will rise sharply when GDP growth and profitability return.
  • The return of VAT to 17.5% in twelve days will make some impact in itself (raising about £12 billion), but might be more valuable as a credibility device: the government showing investors and markets that they are serious about getting the deficit under control.
If you're interested, the recording is here.

1 comment:

Tom Hickey said...

The obvious solution is to attack unemployment and a real output gap at the cause, namely, nominal aggregate demand falling below the real output capacity of the economy, especially when there is also a CAD. Since it is evident that business is not going to invest in such an environment, it is left to government to pick up the slack. Only government can close the gap between nominal AD and real capacity through fiscal policy, increasing spending, reducing taxes, or a combination of both.

A sovereign government that is the monopoly provider of a non-convertible floating fx currency of issue is not financially constrained and is always capable of purchasing good and services that are for sale, without taxing or borrowing to finance spending. Moreover, there is no possibility that a sovereign can "run out of money," "go bankrupt," "become insolvent," or "default on its own debt." This is like saying that basketball or football are limited because the scoreboard will run out of points. Ridiculous. And this isn't theory based on assumptions, it is how the contemporary fiat system has worked since August 15, 1971, when US President Nixon closed the gold window. making obsolete most economic thinking based on monetary and financial principles that applied previously under a convertible fixed rate regime.

When nominal aggregate demand is equal to the real output capacity of the economy, there is price stability along with full employment (excluding frictional). If AD exceeds real capacity, inflation results. If AD is below real capacity, deflation results and both prices and wages fall, or unemployment rises due to price stickiness. The sovereign government can maintain the economy at real capaciity with price stability through appropriate fiscal policy, taking up slack in AD by increasing spending or reducing taxes, and dampening down AD by cutting discretionary spending or increasing taxes.