Friday, May 18, 2012

David Cameron’s deficit fixation.

Congratulations to Martin Wolf for attacking David Cameron’s fixation with the deficit in today’s Financial Times.

It would be nice if the so called economists advising Cameron had studied economics – Keynes in particular. Keynes said (quite rightly) “Look after unemployment, and the budget will look after itself”.

However, Martin Wolf is wrong to argue that “With long term government borrowing as cheap as in living memory….now is the time for government to borrow.” (Actually those are the words of Jonathan Portes, director of the National Institute of Economic and Social Research, who Martin Wolf quotes.)

The reason Wolf and Portes are wrong is thus. Even if interest rates were relatively high (because say of a reluctance by creditors to lend to government), that would be no reason to hold back on stimulus assuming stimulus was clearly justified (i.e. because the economy was obviously working at below capacity).

Given relatively high interest rates and a need for stimulus, the government / central bank of any monetarily sovereign country can simply print and spend money instead of borrow and spend money, as both Keynes and Milton Friedman pointed out.

I’ve already referred about fifty times on this blog to the latter point made by Keynes and Friedman. Clearly I’ll just have to go on repeating it till I’m blue in the face.


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