Monday, December 5, 2011

“In the Black Labour”: are fiscal conservatism and social justice compatible?

This paper entitled “In the Black Labour” published by “Policy Network” leaves room for improvement. It argues that the political left in Britain should be fiscally conservative so that the left gains credibility with voters. (h/t to Stumbling and Mumbling).

Advocates of Modern Monetary Theory, Bill Mitchell and Rodger Mitchell in particular often rail against the way in which self-styled “progressives” have adopted the economic illiteracy of the political right. Mitchell and Mitchell are correct. (The two Mitchells are not relatives, by the way.)

The “black Labour” paper is of course correct to say that the political left in the UK needs to come clean with voters as to what it intends doing about the deficit and debt. But it is wrong to say (p.4) that “one option might be a commitment to deliver a surplus on the public finances towards the end of a concrete timescale such as the lifetime of a single parliament.”

Any country or political party which “commits” itself to a surplus at some point in the future needs to study some economics.

First, there is a very simple reason why most governments will run deficits most of the time (which in practice is what they have actually done over the last century or more). The reason is this. Given the 2% inflation target, the monetary base and national debt will contract in real terms at 2% a year unless they are topped up. Assuming for the sake of simplicity that both are to remain constant as a proportion of GDP, they’ll have to be topped up every year. And that “topping up” can only come from a deficit.

And not only that, but assuming some sort of economic growth in real terms, even more “topping up” will be needed to keep the base and debt constant as a proportion of GDP. That’s quite a lot of deficit.

Second, as Keynes correctly observed “look after unemployment, and the budget will look after itself”. Put another way, “committing” oneself to a particular level of deficit or surplus five years hence is PLAIN DAFT. If there is a fit of irrational exuberance, a surplus will be in order. Conversely, if the private sector continues to act in a conservative fashion, i.e. continues to deleverage and save (save up money, that is), then a deficit will be in order.

That elementary lesson in deficits and debts will doubtless leave a lingering doubt in the minds of the fiscally conservative, namely that if the deficit persists, then the debt will on the face of it continue to rise. Well the answer to that is as follows. If the markets continue to be willing to purchase debt at a rate of interest that is equal to or less than the rate of inflation, then more fool the markets. The UK (or any monetarily sovereign country) can continue to sell the markets bum steers – I mean debt.

Alternatively, if the markets want a significantly positive rate of interest, then we just stick two fingers up at the markets and fund the deficit with printed money rather than borrowed money. As I’ve said dozens of times on this blog, both Keynes and Milton Friedman pointed out that a deficit can be funded with EITHER printed money OR borrowed money: whichever is most appropriate.

Presumably I’ll have to point this out another trillion times before the message gets thru.


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