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> > By the mid-1920s, interest on [British] government debt was absorbing 44% of all government expenditure, [...] That definitely sounds like an issue. Without

by khafra 6y ago

> > By the mid-1920s, interest on [British] government debt was absorbing 44% of all government expenditure, [...] That definitely sounds like an issue. Without the debt, they presumably could have cut taxes in about half. That's not an issue if, by taking on the debt, the government allowed the economy to grow sufficiently faster. The conservative analogy to a household budget doesn't make sense. Analogizing to a startup where you're best off taking on debt for more capital, to increase growth, also don't make sense. But it's an open question, which of these makes the least sense.

eru 6y ago
> That's not an issue if, by taking on the debt, the government allowed the economy to grow sufficiently faster. Perhaps. Though that's a big If. Most government expenditures in practice are more like consumption than investment. (In Britain's case, the expenditure was sui generis: the first World War.) You also have to worry about crowding out (https://en.wikipedia.org/wiki/Crowding_out_(economics) https://en.wikipedia.org/wiki/Crowding_out_(economics)): whatever resources the government uses, the private sector can't use. So the yardstick for 'sufficiently faster' is not some absolute positive return, but the comparison to what the private sector would have done with the resources. > The conservative analogy to a household budget doesn't make sense. Analogizing to a startup where you're best off taking on debt for more capital, to increase growth, also don't make sense. But it's an open question, which of these makes the least sense. Please explain. As far as I can tell, making the household budget analogy work is almost the definition of competent monetary policy. So that analogy is more of an 'ought' than an 'is'. The 'startup analogy' is perhaps more apt for small open economies. Though even there the total amount that foreigners are willing to lend the country as a whole is probably finite and limited by the country's total future earnings. Those total future earnings have to pay back the debt; either directly in the private sector, or indirectly via taxes. Now, IF you have incompetent monetary policy, then indeed the household budget analogy breaks down. Incompetent monetary policy means that total nominal spending in the economy is not stabilized, and so fiscal stimulus MIGHT make sense. (Interestingly, the conceptually simplest way to have competent monetary policy is to have no monetary police. Ie leave note issuing to a private laissez faire financial sector. That tends to stabilize total nominal spending in the economy. See the Canadian experience https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for a close enough approximation in the real world.)
- atq2119 6y ago
  Crowding out in the sense of preventing the private sector from using resources would only happen hand in hand with inflation, which an earlier commenter already identified as the real limit of deficits. Crowding out in the traditional sense of discouraging the private sector from investment is really a function of interest rates. For a government that runs its own, free-floating currency, interest rates are a policy variable independent from deficit and debt. That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound". There is also the question of whether monetary policy should even try to make the household analogy hold. This is ultimately a political question, and especially in a democracy there a good reasons why it shouldn't.
  - eru 6y ago
    > That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound". The zero lower bond is not a problem. You can still do unlimited QE, independent of interest rates. Or you can do what Singapore does and not use interest rates as a policy instrument at all (they use foreign exchange rates; the US could use eg a basket of commodity prices, if they wanted to).

by khafra 6y ago

eru 6y ago

> That's not an issue if, by taking on the debt, the government allowed the economy to grow sufficiently faster. Perhaps. Though that's a big If. Most government expenditures in practice are more like consumption than investment. (In Britain's case, the expenditure was sui generis: the first World War.) You also have to worry about crowding out (https://en.wikipedia.org/wiki/Crowding_out_(economics) https://en.wikipedia.org/wiki/Crowding_out_(economics)): whatever resources the government uses, the private sector can't use. So the yardstick for 'sufficiently faster' is not some absolute positive return, but the comparison to what the private sector would have done with the resources. > The conservative analogy to a household budget doesn't make sense. Analogizing to a startup where you're best off taking on debt for more capital, to increase growth, also don't make sense. But it's an open question, which of these makes the least sense. Please explain. As far as I can tell, making the household budget analogy work is almost the definition of competent monetary policy. So that analogy is more of an 'ought' than an 'is'. The 'startup analogy' is perhaps more apt for small open economies. Though even there the total amount that foreigners are willing to lend the country as a whole is probably finite and limited by the country's total future earnings. Those total future earnings have to pay back the debt; either directly in the private sector, or indirectly via taxes. Now, IF you have incompetent monetary policy, then indeed the household budget analogy breaks down. Incompetent monetary policy means that total nominal spending in the economy is not stabilized, and so fiscal stimulus MIGHT make sense. (Interestingly, the conceptually simplest way to have competent monetary policy is to have no monetary police. Ie leave note issuing to a private laissez faire financial sector. That tends to stabilize total nominal spending in the economy. See the Canadian experience https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for a close enough approximation in the real world.)

atq2119 6y ago
Crowding out in the sense of preventing the private sector from using resources would only happen hand in hand with inflation, which an earlier commenter already identified as the real limit of deficits. Crowding out in the traditional sense of discouraging the private sector from investment is really a function of interest rates. For a government that runs its own, free-floating currency, interest rates are a policy variable independent from deficit and debt. That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound". There is also the question of whether monetary policy should even try to make the household analogy hold. This is ultimately a political question, and especially in a democracy there a good reasons why it shouldn't.
- eru 6y ago
  > That even competent monetary policy cannot be relied on to make the household analogy work was proven empirically beyond any reasonable doubt via the famous "zero lower bound". The zero lower bond is not a problem. You can still do unlimited QE, independent of interest rates. Or you can do what Singapore does and not use interest rates as a policy instrument at all (they use foreign exchange rates; the US could use eg a basket of commodity prices, if they wanted to).