Monday, December 7, 2009

A fresh take on deficits

We often hear that deficits are getting out of control and that we have to cut spending drastically, regardless of how much need there might be for that spending. But is it really necessary? Stephanie Blankenburg thinks not:

What to do about Britain's national debt and its annual government deficits in the here and now remained less clear. Had deficit spending not been once and for all discredited at the end of the 1970s? Was John Maynard Keynes really about budgetary spending in times of crisis or did he not rather regard fiscal expansion as a secondary tool to be employed, where absolutely necessary, alongside long-term monetary policies (low long-term interest rates) to keep business cycle fluctuations under control?

All true and valid. But for a hands-on perspective on current national debt and government deficits, it is well worth keeping in mind two basic points. First, the current deficit hysteria – to use Samuel Brittan's term – has no historical grounding. Britain's national debt currently runs at about 40% of GDP. Depending on who you believe and what parts of bank debt are counted as national debt, it is predicted to either stay close to 40% or increase to anywhere between 60% and 100% over the next few years. Between 1918 and 1961, UK national debt averaged well above 100%, remaining closer and, at times above, 200% for the best part of this period. What was achieved? Fascism was defeated and the foundations of a modern welfare state were laid. Since the mid-1970s, UK national debt has oscillated between 30% and 40%, at the beginning of the 1990s falling to below 30% for a few years. What was then achieved? Finance-led corporate capitalism rose to power, leaving behind an all but destroyed manufacturing sector in the UK, rising income inequality and, eventually, a financial sector in tatters. And last, not least, wars are being lost.

From the Guardian. Trouble is, it may be hard to sell the public on this idea, given the pathological fear of deficits that's been drummed into us for the last few decades.


cherenkov said...

Suppose your debt is at 100% or 200% of GDP. How much government revenue is going to interest payments rather than program spending? How does it make sense to waste that much money? By controlling your debt you lay the foundation for sustainable spending on other priorities. If Blankenburg can't comprehend that then I'm not going to place much value on anything else he has to say.

cherenkov said...

Actually, I'll add something else: after the second world war the debt to GDP ration dropped very rapidly due to factors that are unlikely to occur now: rapid economic growth and unexpectedly high inflation. It was getting that debt under control that made Britain's "modern welfare state" possible.

nitroglycol said...

All other things being equal, I agree with your first point. But there are times when going into debt can be the lesser evil. You have to consider the impact on future revenues, for instance; if going into debt to build hydroelectric dams is going to create jobs now and lead to future revenues later, you might be better investing in the dams even if you have to go into debt to do so.

Consider this analogy: many households have mortgages that are at 100% or more of their household income. Obviously this can be problematic at times (see the example of the last few years) but it's far from unusual, and many families would be unable to invest in a house without doing this. Ditto with businesses, I suspect.

That said, your second point (about the conditions in postwar Europe being unlikely to return soon) is a good one, so perhaps countries should be a bit more careful about how they use debt now. But no sense throwing out the baby with the bathwater.