Thomas Herndon is the grad student over at UMass Amherst who co-wrote the paper refuting the results of Reinhart/Rogoff. He's the David compared to the mainstream academics' Reinhart-Rogoff Goliath, right?
Well, maybe not so fast.
Today Herndon wrote a piece in Business Insider where he rebuts RR's claim that their result was essentially the same as his.
But then he said this:
| "There is not one word in our paper which suggests that a high level of government indebtedness is never a problem. It would be absurd to think that governments never have to worry about their level of indebtedness. The aim of our paper was much more narrowly focused. We show that, contrary to R&R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth." |
With that comment he may have just resurrected Reinhart/Rogoff and the entire austerity movement. That's because they're gonna say, as long as you feel that debt can be a problem, why wait for it to become a problem? Why not just keep it low all the time or better yet, eliminate it completely?
This is EXACTLY the argument that is continuously employed so ineffectively by people like Paul Krugman. It's also the argument used by every single member of the Democratic Party, including Obama. By agreeing to the false belief that debt is a problem they open up a huge hole that the Austerians can drive a truck through. From there, they're simply able to frame themselves as the grown-ups; the people who represent fiscal responsibility.
The fact is, debt in and of itself is never a problem (as long as we're talking about a fiat money system), it's merely a choice. By allowing debt to rise you may risk inflation at some point. That's a choice. On the other hand keeping debt low or eliminating it via austerity or fixing the quantity of money via a gold standard or some regime of convertibility means deflation. That's also a choice.
Why is deflation (and high unemployment), the current choice, better than inflation? I say it's not. Why do we treat it as the "grown up" way to address this supposed problem?
As long as we keep agreeing to the Austerians' assertions about debt, at whatever threshold, we lose the debate, pure and simple.
The fact is, the discussion should not be about debt at all. The level of debt is irrelevant in a fiat money system. We should be talking about jobs, standard of living and the general welfare of the citizens in our society and we should be doing whatever it is we need to do, within our physical and intellectual constraints to achieve that. That means people, brains, energy, water, land and air, etc.
To hell with the the debt! Stop saying it matters, no matter what level. It doesn't.
15 comments:
Everyone is a conservative these days. The only liberals left are in MMT.
Who needs sovereign debt anyway? Just "print and spend" interest-free fiat into circulation and use it to payoff the National Debt as it comes due.
Inflation risk? Then slap leverage restrictions on the banks to create deflation to compensate.
The solution to public debt debate problems is to change the perception of public debt to private savings.
You're right, Paulo.
"Inflation risk? Then slap leverage restrictions on the banks to create deflation to compensate."
If you maintain a full-employment fiscal policy with a low or zero base interest rate, whilst running a large current account deficit, and at the same time you cap asset price inflation and speculation through regulation, institutional/structural reform and capital/collateral requirements, then I think inflation might appear through a fall in the exchange rate.
However, other countries would have a choice, when faced with this situation - either try to depreciate their own currencies, or attempt an "internal devaluation", so as to keep their exports going - or else adopt more demand-enhancing domestic policies.
Then why have taxes at all? Seems like a useless deadweight on productivity.
Bernardo - see "taxes drive money" in Wray's primer:
http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html
Taxation as three chief purposes. The first is to create demand for the currency. The second is to control inflation. The third is as a disincentive for the behavior that is taxed. All are necessary tools in fiscal policy.
"I'll be the first to say it: The [fiat?] debt doesn't matter at all...at any level."
You're too late Mike! By over 300 years. :)
Another convert?
http://coppolacomment.blogspot.com/2013/01/government-debt-isnt-what-you-think-it.html?spref=tw
Y,
There shouldn’t be much inflation stemming from devaluation.
Assuming there is room for stimulus, a dose of stimulus will pull in imports and necessitate a devaluation, all else equal. That means the price of imports rises. But that’s only a once and for all change which is required to get exports and imports back into balance. Inflation consists of CONTINUOUSLY rising prices. And there is no way that devaluation brings continuously rising prices (unless it causes a wage price spiral).
"Then why have taxes at all? Seems like a useless deadweight on productivity."
The relative difference between the richest and poorest matters...taxes are the only tool I can think of that can reduce the difference.
In the net, money flows in one direction...like electricity.
"Taxation as three chief purposes. The first is to create demand for the currency. The second is to control inflation. The third is as a disincentive for the behavior that is taxed. All are necessary tools in fiscal policy."
Tom - Depending on the circumstances, do you think it is conceivable that taxes that are too high can reduce demand for the currency? It's a double edged sword.... no? High taxes reduce the supply of currency more than low taxes do but may also reduce incentive to work, save and invest. On the other hand, if taxes are deemed to be too high, a cut in taxes that increases the after tax return on capital could increase demand for the currency even though the supply of currency has been increased by way of the tax cut.
Yes, Ed,and it cuts both ways. If taxes are too low and the deficit is too high relative to non-govt saving desire, then the risk is inflation and currency devaluation. But if the deficit is too low wrt non-govt saving, then demand leakage results in economic contraction and the currency is not as desirable as when the economy is strong. So it is important to get fiscal policy — balance of spending and taxation — right. Clearly, the more spending desired, the higher taxes would need to be. Reduction in spending can permit lower taxation but if the lower spending results in ineffective policy, then the benefit of lower taxes is foregone. With govt involved, economic policy necessarily results in a managed economy, and this pertains to both monetary and fiscal policy. So it's not just a matter of taxes, but of getting the mix right wrt to changing context, since the private sector leads under an endogenous money regime and govt responds.
There are other degrees of freedom, and they're always growing.
One general category is more national goals. If there's something worthwhile being reached for, people will scramble to participate in and benefit from it.
WWII and the MICC is an arbitrary example. We actually need FAR MORE COMPETITION in that space. Doing less is not an option.
I, for one, don't think the DoD or MICC is a problem. Our curtailed imagination and audacity is the problem, and the relative uniqueness of the MICC is just a symptom.
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