Tuesday, May 25, 2010

Negative feedback.

On the subject of deficits and national debts, the leading article in The Times, 25th May, trots out a piece of nonsense that has appeared regularly over the decades.

This is the idea that when government borrows and spends so as to stimulate an economy, there may be little effect because households realise that government borrowing is just tax deferred; hence households will not take part in the “stimulation”. That is, they will save so as to meet the future tax liability, hence neutering the stimulation.

This has always struck me as an example of the totally unrealistic nonsense that some academics erect so as to keep themselves employed. Is it really plausible that the average household keeps a careful eye on government borrowing and tailors household spending with a view to likely tax payments in two or three year’s time?

Where is the evidence?

Of course the CURRENT crisis could be a bit different given the recent unprecedented levels of borrowing and money creation. But as regards the last fifty years, where is the evidence?

Moreover, it is equally plausible that households have a better grasp of functional finance than economists who have been fed a fair amount of nonsense from economics text books.

That is, it is possible that households have grasped the point that government will try to keep employment at the maximum that is compatible with acceptable inflation – and stuff the deficit, the national debt, interest rates, etc. If the latter happen to rise, so be it. And if they happen to fall, so be it. Thus high government borrowing now is NOT, REPEAT NOT, a reason in itself to assume austerity to two or three years time.

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