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.