...a structural dearth of investment opportunities; even in the boom of 2007, firms had a large surplus. If this is the case, then a permanent large corporate surplus means permanent large government borrowing...government borrowing is - to a large extent - out of the government’s hands.But this is an odd argument. It starts from the premise that:
government borrowing + corporate borrowing + household borrowing - net foreign lending = 0Which is true, because by definition these things must add up.
From this, Chris infers that the government has no control over its borrowing, because after corporates, households and foreign investors have made their choices, the government will be stuck with whatever's left over.
This is untrue, however. It implies that all other actors have free choice and the government has none. In fact, the levels of borrowing are a negotiation between all the four parties in the above equation.
Imagine a simpler economy, with the only actors you and me. In just the same way, your net borrowing from me, plus my net borrowing from you, must also add to zero. If I lend you a tenner (-10), you've borrowed a tenner (+10).
This does not mean that if I want to lend, you have no choice but to borrow. What it means is, if you don't want to borrow, I'll have to reduce the interest rate I'm asking. Perhaps all the way to zero. Perhaps I'll even have to pay you a few pence to hold onto my money. Or perhaps, if you won't take it at any price, I'll just have to keep the tenner in my pocket.
In exactly the same way, if the government does not want to borrow, nobody can force it to. If companies want to save and there are not enough borrowers at current interest rates, those interest rates will just have to fall.
If market interest rates are at zero, and banks still can't lend the money out, companies will have to keep their money in deposit accounts instead. Or under the mattress.
If we do end up in such an extreme situation, it won't be much good for the economy. Money velocity will fall precipitously. This is Keynes's paradox of thrift, and is a reasonable argument for the government to keep borrowing and spending. But there are two alternatives to the situation we're now in:
- First, if the government has to spend money it could choose to spend on investment instead of consumption. This would have the same effect on circulation of money but would build a lasting wealth-creating asset base for the future.
- Second, as an alternative to borrowing at zero interest rates, the government could create higher inflation. This would force the real interest rate below zero, reducing the incentives for companies to hoard money and, eventually, stimulating private investment.