I promise I will get bored of this soon. But I thought posterity needed to know that I have attended two events on this subject in the last week. The first at the IoG has a higher suit ratio than I had ever witnessed, but was correspondingly high quality. It’s Chatham House, so I cannot really comment in detail. A brief conclusion: knowing MORE about debt tends to lead one AWAY from simple-minded comparisons of Britain in 2010 with either:
- Greece in 2010 or
- Britain in 1976
Why? Well, our debt is on a relaxed maturity – it is not all about to fall due. Unlike, say, Northern Rock two years ago. This matters, particularly for comparisons with 1976.
Instead of trying to walz Chatham style around Martin Weale’s presentation, here is a NIESR piece which starts by dismissing concerns about debt-downgrades, but then goes on to worry about our low savings, and consequent low levels of ‘produced capital’. I must admit to parting ways with Weale on this, if only because Figure 2 in his chart seems to bear little obvious relationship with whether a country is NOW going to prosper or suffer:
The jist of the argument seemed to be that only by saving can tomorrow be prosperous, and large government debts correlate with low saving. Land has no net value, and our wealth is therefore too low. I find it hard to agree. Sure, a country needs increased capital, but selling claims on its huge supply of land surely achieves that as well. How has the US built such extraordinary technological capital in the last 20 years if the savings ratio is the dominant constraint? I don’t want to dismiss savings, but something seems to be missing.
Other speakers pointed out that only occasionally is the fiscal position the determining factor in the cost of debt. We have a global savings market, various competitors for the funds, the question of how much the private sector is saving or borrowing, all these other factors. Just asserting that ‘we need to get borrowing down to keep rates down’ is too simple minded.
One question I longed to ask but had no time for: why does everyone think they can beat the gilt market? Because if it is OBVIOUS that when QE ends it will fall, heavily, then surely it would be shorted to that level already? People are way too cavalier about efficient market hypothesis. QE may have surprised the markets on the way in – a sudden #75-200bn infusion does that – but a gradual ending ought not to have such a sharp effect, particularly since the whole market has ‘learned’ what QE is, and knows that it will end.
Conclusion: like Free Exchange point out, Britain’s ratios are not alarming.
The other event was a radio programme due to be broadcast shortly, with other economists and a couple of great history professors. I don’t want to give away too much, but the programme hinged on a comparison between our current position and the massive post-Napoleonic debts. In the course of the recording I found myself needing to refute several Right Wing assertions.
1. The Victorians could enjoy an industrial revolution, captive export markets, super-thrifty people. We can never grow like they did. So we really are doomed unless we get cutting soon.
Our post war decline actually saw higher growth than during our Victorian pomp. If that growth translates into the cash size of the economy increasing at 5% per year, outstanding debt as a ratio of GDP will halve in 14 years.
2. Having high debt consigns you to low growth
As I argued in a recent blogpost, this does not really work for the UK. By which I mean – much of the high-debt/low growth correlation for the UK comes from the historical fact of the Victorian period, when low growth was hardly because of crowded out investment (in fact, low rates at home drove our plentiful savings abroad). Other, naive interpretations of a correlation are easy to suspect.
3. The government got way too big in the last few years. Big governments don’t grow.
No. I had a go at this too. If the government disposes of #300bn, and the private sector of 700bn, and then the private sector suddenly panics by 10%, going down to 630bn, is it really an accurate characterisation to talk of the government growing from 30% to 33% of the economy? No. And if the government grows to £330bn, partly in order to stop demand cratering so fast, the net short term result is a larger economy. Long long term studies suggesting that our productivity is then fatally undermined should not be an argument against such cyclical movements being sane. And I would like to know the R-squared . . .
Finally, on the issue of private debt, I had to echo Willetts point earlier; this is mostly an intergenerational transfer. Repeat afterme. Britain has high gross debts. But we don’t owe it to the Martians. In fact, you mostly owe it to your Dad. This can be disruptive – see 2007-9 (and also post Napoleonic War) – but it is not Iceland (external debtors). It deserves recognition, and is another good argument for wealth taxes, IMHO.