Let’s abolish the national debt.

Note dated 28th Feb 2010. I've put the arguments below in more succinct form here.



When Gordon Brown announced in October 2009 that he intended reducing the national debt by £16bn via the sale of public assets, my response was to point out that ten times that much could easily be wiped off this debt just by getting the Bank of England to shred the gilts in its possession.

“Not Very Gay Gordon” has obviously been reading this blog, because he has gone quite on the £16bn asset sale.

Anyway, this is an even better idea: let’s abolish the national debt! Here’s how.

First as regards the portion of the national debt held by foreigners, the UK holds about $200bn of US national debt. So we sell that and pay off the foreign holders of UK national debt.

As regards the rest, we just print the necessary amount of money and buy back the debt, or “quantitatively ease” it, if you want jargon.

Those who found themselves in possession of cash instead of gilts would NOT for the most part run out and spend it. Why were these people holding gilts? Because they wanted to save: they regarded said gilts as part of their stock of savings. Likewise, they would regard the cash that replaced their gilts as savings. Their initial response would be to dump the cash in a bank deposit account. Then some of the cash would tend to boost the price of other assets: housing, shares, etc.

Also, banks would find themselves in possession of additional funds which theoretically they could lend, and that would have a reflationary effect. But banks just aren’t lending very much at the moment: they have surplus funds sitting doing very little with central banks.

At any rate, the above wheeze would boost demand to some extent. If the boost was just sufficient to bring us back to full employment and no more, there would be absolutely no reason to worry about the somewhat expanded money supply.

On the other hand, if it looked as though demand was being boosted too much and causing inflation, then government would have to raise interest rates and raise taxes to pay for said interest payments.

But hang on. In order to effect the above interest rate rise, the “government – central bank machine” has to bid funds away from the private sector: that’s HOW it effects the interest rate rises that it announces from time to time. Does the latter not amount, at least to some extent, to re-creating the national debt? The answer is “not really” – and for the following reasons.

Note that PURPOSE of the above “bidding away from the private sector” is NOT to fund government spending. The PURPOSE is to effect a deflationary stance, i.e. raise interest rates and taxes. That is, the PURPOSE is simply to confiscate money from the private sector and shred it. Obviously the capital sum “borrowed” will have to be paid back, though that could be after a number of years by which time inflation will have eroded its value.

To summarise, two forms of shredding take place here. 1, government grabs more tax with which to pay the above interest, and 2, the value of the above capital sum is eroded.

“Government – central bank machines” can print money. They can equally well do the opposite: shred it.

This might appear to involve some sort of cost or loss of real wealth for the private sector. That is debatable. All that happens is that government confiscates money which were it to be spent would cause excess inflation. That is, it confiscates money which the private sector could not effectively spend if it wanted to. So in what sense is this money a form of wealth?

Finally, it should be said that ideas of the type set out here were first set out by Abba Lerner. And as Keynes said to James Meade in 1943: “Lerner's argument is impeccable, but heaven help anyone who tries (to) put it across to the plain man at this stage of the evolution of our ideas."

Those interested in these ideas should Google “Modern Monetary Theory” and “Abba Lerner”.

The above national debt abolition plan would not work quite as smoothly as set out above. There are a number of problems and potential hitches, but they are minor hitches and are surmountable.

The (un)economic arguments for immigration.

Those who advocate immigration would do themselves a big favour if they spent more time studying the subject before opening their mouths.

For the umpteenth time in as many months an article has just appeared in one of the UK broadsheet newspapers (The Times) claiming that immigrants can solve or help solve our ageing population problem.

The flaw here is that immigrants themselves grow old (would you credit it?). Thus this policy requires a never ending exponential population increase, and the extent of this increase is staggering. One study estimates that a twenty five fold increase over a hundred years would be needed. That is what I call a reductio ad absurdum. (See 2nd last para, p. 24 here.)

One possible escape from this absurdity is to claim that while it would be nonsensical to use immigration alone to deal with the ageing population problem, a little immigration can at least help. This is a bit like arguing that while it is daft to burn one’s furniture to keep the house warm, nevertheless it could makes sense to burn just a little furniture each day.

Well thanks, but I’ve no intention of burning my furniture (not even a little at a time).

England already has more people per square kilometre than China (though if one includes Scotland and Wales it works out at a slightly lower population density than China).

And to add insult to injury, the Chinese have just realised that their laudable “one child per family” policy will bring them the same ageing problem, but quicker than would otherwise be the case.

But I know the solution to that: people migrating from England to China!

The new international currency: kilowatt hour tokens !

I am grateful to Robert Hahl for drawing my attention to the new currency or quasi-currency: kilowatt hour tokens.

This unit of currency is the same the world over – indeed it’s the same the universe over. Inflation cannot erode its value. Though if someone invented some ultra cheap source of power, this currency would lose its value somewhat. But this is unlikely to happen. Like gold, power is a universally accepted commodity. It’s the perfect currency.

This idea is original and humorous. It’s ideas like this that can cause ostensibly more sophisticated ideas to come crashing down. I don’t think kilowatt hour tokens will drive other currencies out of business, but this is a cute idea and merits some thought.

The dreaded deflation.

Deflation horror stories were all the rage a month or two ago, but seem to have subsided. Fashions change so quickly.

Of course these deflation horror stories for the most part failed to distinguish two entirely different meanings of the word deflation: 1, falling prices, and 2, inadequate demand (i.e. excess unemployment). At any rate, where the distinction was made, it seems that falling prices were in themselves a precursor to the end of civilisation as we know it. I never lost any sleep over this.

In the US between 1866 and 1897 output rose by 4% a year while prices fell by 2% a year according to an article by Samuel Brittan in the Financial Times. The sky didn’t fall in the US in these years did it? And what is wrong with an output rise of 4% a year?

And in the UK between 1870 and 1896, wholesale prices fell by 50 per cent, while Britain’s economy also grew by 4 per cent each year, according to an article by Ian King in The Times. Was the sky in a state of permanent “fall in” in this period in the UK? I don’t think so.

In 2000 Clinton’s economic advisors predicted wiping out the US National Debt by 2015!

The following passage is taken from “Functional finance and the US government budget surpluses in the new millennium” by L. Randall Wray, Professor, University of Missouri—Kansas City.

According to President Clinton's 1999 and 2000 State of the Union addresses, we are on a course to run federal government budget surpluses for the next 15 to 25 years. On current projections, these surpluses are so large that all the publicly held debt of the US government would be completely eliminated by 2015.

The President actually proposed that some portion of the surplus be “set aside” to be held in Social Security trust funds. For example, if a budget surplus of $100 billion were to accrue in one particular year, $100 billion worth of government bonds held by the public would be retired, while perhaps $60 billion worth of new government debt would be created to be held in the trust fund. This would be described as “saving” 60% of the budget surplus to be used later when baby boomers retire.

The President’s analyses have been well received. A number of prominent economists, including at least six Nobel winners circulated an open letter after the 1999 State of the Union address dubbing the president's plan "good economics" and stating that "Although no one can predict how large the budget surpluses will turn out to be, we can be sure that saving them by reducing outstanding government debt is an excellent way to ease the burden on future workers of supporting an aging population."

Lawrence Summers, now Secretary of the Treasury, and Janet Yellen, chair of the President's Council of Economic Advisers, assured us that the president's proposal to "lock away" most of the projected budget surpluses in the Social Security Trust Fund is based on "sound accounting" and that it will extend Social Security's solvency through 2055.

David Broder's Washington Post article (February 7, 1999) proclaimed the plan to be "the greatest gift to our children" because it will "help grow the economy" by "raising national savings."

Little did they know . . . .

Chinese Premier, Wen Jiabao, learns from Goebbles.

Goebbles (Hitler’s propaganda minister) suggested that if you want to tell a lie, tell a whapper – i.e. don't tell a small lie. People often don’t notice “whapper” lies (for very roughly the same reason as they often “can’t see the wood for the trees” - though the "wood and tree" idiom is not quite the right one!).

Wen Jiabao has claimed that efforts by other countries to get China to revalue its currency are an attempt to contain China’s development. Jiabao’s REAL motive for an undervalued currency probably has more to do with the fact that that an undervalued currency puts purchasing power into the hands of the country’s political elite rather than into the hands of its citizens. And politicians in those ironically named “communist” countries have an even bigger distain for ordinary citizens than Marie Antoinette had for HER subjects.

An undervalued currency results in a big build up in a country’s foreign currency reserves, which (big surprise) the elite politicians in the country concerned control. I.e. they can use these reserves to further their political aims (e.g. put political pressure on other countries or buy lots of lovely foreign manufactured military hardware, etc).

In contrast, a currency revaluation puts purchasing power into the hands of ordinary citizens: e.g. it enables them to go on foreign holidays, or purchase foreign produced consumer goods more easily.

And not only that but the idea that a revaluation would stymie China’s development is bunk. China’s development has come primarily from, first, applying Western technology, and second, from its OWN savings (unlike many developing countries, which have relied on FOREIGN capital.) Revaluing would result in Chinese manufacturers selling fewer consumer goods to the US, and more to Chinese citizens. This of itself would have zero effect on Chinese development.

The other very old trick that Jiabao is playing here is justifying his claims by reference to an external enemy.

It’s a pity that China’s leading politician is the same sort of lying shyster as leading politicians elsewhere on planet Earth.

Prof. Dani Rodik re-invents Selective Employment Tax?

If you’re looking for daft taxes, the so called “Selective Employment Tax” implemented in the UK in 1966 takes some beating. This tax was “selective” in that it was biased in favour of manufacturing and against services.

The rationale was always obscure. Allegedly the UK Labour government of the day was worried about well qualified school and university leavers rejecting manufacturing jobs and taking service sector jobs: like those well paid “service sector jobs” that Labour governments themselves create in ever expanding numbers.

There was also the argument that more manufactured output is exported than is the case with services. Plus there was the argument that output per head expands faster in the long run in manufacturing than in the services sector. Ergo the more manufacturing you have, the faster is economic growth.

The latter argument has re-surfaced in an article on the “Vox” site entitled “Making room for China in the world economy” by Prof. Dani Rodrik. He advocates some sort of bias in favour of manufacturing for China: an over valued currency or some sort of subsidy for manufacturing.

To illustrate the flaw in the above “output per hour” argument, let’s start with a closed economy and consider computing. Output per head in this industry (in terms of computing power manufactured per worker-hour) has expanded by about a hundred fold in the last twenty years. But does this mean that it makes sense for everyone to spend half their income on personal computers?

The latter conclusion is to go back to pre-Say economics. Jean-Baptiste Say’s big insight was that the value of products is determined by what the customer wants to pay for them, not by the cost of production (though doubtless plenty of ancient Egyptians tumbled to this one).

I.e. at the margin, worker-hours should be devoted to producing whatever the consumer pays the most for.

Turning now to open economies, the first problem is that the pro-manufacturing argument applies not just to China, but to half the rest of the world. Now if half (or the whole) of the rest of the world have pro-manufacturing subsidies, the subsidies all cancel out! At least the above mentioned “export” argument is severely dented.

The next flaw in the pro-manufacturing argument is the fact that it measures GDP on the basis of how much is produced as measured in terms of the producing country’s own currency. The big weakness here is that if the currency is undervalued, those doing the production are paid less for their efforts than if the currency had a realistic value on world markets.

To illustrate, revalue the Yuan, and ten million Chinese farmers will be able to purchase the TV set or the PC they previously could not afford. This is because the revaluation will cut exports by Chinese electronics goods manufacturers, thus the latter will look for alternative customers. Plus the revaluation makes the Yuan worth more in terms of dollars, thus these manufacturers are likely to find Chinese farmers’ Yuans an acceptable substitute for US households’ dollars.

Rodik's argument is a good illustration of a common mistake in economics: targeting what is sometimes called an “intermediate objective”. The fundamental economic objective is maximising real wages per hour of work (within environmental constraints). The above argument targets PRODUCTION. Production is not the fundamental objective: the fundamental objective is CONSUMPTION.

As Dani Rodrik points out, his ideas fall foul of World Trade Organisation rules. My answer is that there is method in the WTO’s madness – though doubtless large numbers of unemployables screaming students might beg to differ.