or is that somehow?

Everyone read Chris Dillow’s post about the GDP figures.  As ever, he teases out an aspect unlikely to have been covered by the meedja.  This is that the Corporate Surplus has hit a record. The point I want to zero in on is this:

The counterpart to the corporate sector’s massive surplus is, of course, that the public sector is running a record deficit: across all sectors of the economy (which includes foreigners), the surpluses must sum to zero. Since 1987, the correlation between these two balances has been minus 0.55. If we add in households – which ran a huge surplus last year after years of deficit – and financial companies, the correlation approaches one.

Things have to balance out – at some level.  As Paul Cotterill emphasizes in another place, debt is not a thing itself – it is a relation between one person and another.  Now, if you are very little – say, like a household, or Iceland – you can owe all your debt to something external to you, with no circular relationships.  Telling Mr Micawber that his debt is another’s asset means nothing.  But then you are not in a closed system.  When you have an entire system like the UK, you DO have balance, once you deal with the external relation (trade/capital across borders).  The UK government’s debt is mostly a private sector asset.  Nothing has been lost.

If you are very big – like, say, the planet Earth – you can’t have net debt, unless the Martians are owed something.  Just a series of two-way balances.

Without having had a massive trade imbalance, the UK’s massive private debts are largely about one generation owning another.  Iceland’s, on the other hand, are about Iceland owing other powers with (a) a lot of stuff that Iceland needs to buy and (b) considerably more weaponry*.

But this doesn’t mean that debts don’t matter, and Chris’s post reminds us how even if net-net we are all OK, if one sector has all the moolah, another all the debt, and there is no working mechanism to get the stuff from one end to the other, then you can have a nasty crisis if one area is saving determinedly, and the ones that want to spend can’t.   If people can only invest when they have pre-saved, then efficiency is badly hurt – investments will not take place.  This is why we need banking to get working again – it channels.

But if no-one in the private sector wants to do the spending or investing, what do you do then? This post on VoxEu argues that there are moments when Keynesian spending makes a difference, and times when it doesn’t.  In brief, it argues that it is not good having bunches of papers from the past arguing that fiscal spending does not boost growth, when conditions are different from normal.

I argue that in “normal recessions” the New Keynesian model is probably the right way to look at the world. In “abnormal recessions” it is the Keynesian model. Equilibrium models are useful to understand “normal recessions”. These are recessions that maintain an equilibrating mechanism, e.g. a change in interest rate or prices that tend to bring the economy back to its potential output level.

If we accept the previous analysis as representing the underlying dynamics of the recession that started in 2007, the estimates of fiscal policy multipliers obtained from models assuming stable equilibria are pretty much useless (see for example Wieland 2009, Cogan et al. 2009, Fatás and Mihov 2009, Hassett 2009). By allowing government deficits and debts to increase, governments solved a private sector coordination problem and made it possible for private agents to realise their desire of saving more and deleveraging without making the economy unstable. The “multiplier” effect of these government actions is potentially very large, but also difficult to estimate.

This is roughly what I thought pertained in 2008-, and potentially now. The point of this post is to reiterate that:

  • focussing singlemindedly on just one aspect – the government’s debt – can lead to misleading impressions of doom.  Even Chris Giles gets it wrong when he says “Britain is borrowing £2,800 per person this year, more than £1 in every £10 earned in the economy.”.  No, the government is borrowing that much! Tories above all should realise that Britain Is Not It’s Government. “Britain” has £6trn of wealth just for its households.   If ‘Britain’ were borrowing that much off the world every year, we really would be ****ed
  • Even Hume got this wrong.  Public credit did not destroy Britain.
  • Don’t fall for people saying “Non Keynesian effects can work because they have in the past” without asking very closely “and what were the conditions in the past?  Did they include, for example, a working banking system extending loans to small businesses, positive inflation, that sort of thing?  Probably they did.  Now, how do our current conditions compare?”.  You have to be careful.   For example, this paper finds “in presence of demand stimuli fiscal multipliers are zero and even turn negative when financed with distortionary taxation”.  Are we in the presence of demand stimuli?

There is no reason to fly blind using timeless rules of thumb garnered from experiences that might no longer pertain.  It matters far more to look for quite obvious signs of how things are right now.  Are bond yields exploding?  Is inflation soaring?  Are wage settlements flying up or stagnant?  Are firms hoarding or investing cash?  Quite basic stuff.  Better than be like the Knights who say Ni and warn for things that are just not happening now.  It’s better than 100 learned but irrelevant references and citations.

*Once upon a time this was so different.


13 thoughts on “Things balance out – sometimes

  1. The moment has passed for me to write the post I had wanted to, but perhaps you can confirm something I was pondering at the time of the Cadbury takeover. If we run a current account deficit, then do we have to make it up with a capital account deficit? So we export firms in order to balance out the import of goods?

    (I ask, as you know, as someone entirely relaxed about exporting firms. Creating profitable firms may be an area of comparative advantage for the UK. I can think of worse ways to earn a living.)

    1. We have to make it up with a capital accounts surplus. In other words, if we have a current account deficit, sending money overseas to pay for it, money has to return buying our capital goods, land, other assets to make things balance.

      Agree about being relaxed on this. I think our trade deficit is about £30-40bn or so (sorry away from the useful computer). That is 0.5% of our wealth.

      1. A good way of putting it. Or our land. When a foreigner comes over and like a loon pays £30m for some London pad, this is enabling some old biddy to buy £30m of foreign stuff without working …. sorted!

  2. It’s slightly boring thought, isn’t it? Chris says this and that have a correlation of 1, and you think “well, of course, they are identities” and wait for lots ot Worstall?

    1. Dillow boring? cut your tongue out. No, in this case I don’t think so, although what I found interesting was an empirical observation (corporate cash) which I in my inexperience had no idea was discoverable in this way, rather than the logical accounting identities.

      I need to sit down with the ONS figures some time and see what I can get out of them. The income and expenditure identities in particular, breaking them down. For example, real disposable incomes have risen over this recession. I need to get my head round how that happens (mostly cratering mortgage costs). So, no, it maybe reflects badly on me, but I don’t find it boring …

  3. An important component of the current account not captured in the traditional balance of payments is valuation effects. As sterling has depreciated the UK net foreign assets have gained in value relative to foreigners sterling assets. An entry in the current account must also lead to an entry in the capital account and a persistent current account deficit should lead to a weaker currency. However, if valuation effects are not calculated a current account deficit always looks worse than it should.

    1. That is a really good point.

      I so long to sit down with the figures at some point and get them all together in a spreadsheet, going back years. It is not hard – just arithmetic really – but there never seems to be the time, and the ONS website the worst in the known world

  4. I thought it was just me who couldn’t work out the ONS site. Mind you, I just got registered for the UK data archive at Essex university and that seems even harder.

    On the surplus/deficit balance, the state could simply announce that it had reneged on all debt held by pension provision, but that the newly enriched state would now provide ongoing state pensions in the sum of what pensioners would have got if there hadn’t been a reneging on the debt. Heh presto, deficit issue resolved and loads of spare cash left over for the development of export-driven investment. I haven’t crunched the numbers, mind.

    1. And the 30% of gilts held overseas?

      Aaah, that’s where our nuclear deterrent comes in. It all fits together ….

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