Saturday, 26 February 2011

Geithner and other advocates of free markets don’t understand free markets.

Geithner says he does not want the U.S. financial sector reduced in size. Well, having spent his working life in this sector and with so many friends in this sector he wouldn’t would he?

But more seriously, his main reason for not wanting this sector reduced in size is that there are opportunities for the sector because of the rapidly expanding middle class in developing countries. There are two flaws in this argument.

First, whence the assumption that it will be AMERICAN banks rather than NATIVE banks that will provide developing countries with the financial services they need? Given that American banks are run by clots, idiots, and crooks, I’d probably prefer a native bank to an American one if I were a developing country citizen.

Second, the size of the financial sector in a properly functioning free market would be determined by the same factors as determine the size of any other sector: supply and demand for the products concerned. Supply and demand based, that is, on genuinely free market prices.

Now the price of credit or loans is one of the main elements here, and the price of credit (i.e. interest rates) are anything but FREE: the price is rigged by central banks, and is currently at record lows! My guess is that this artificially expands the size of the financial sector (though that depends on the elasticity of supply and demand for credit).

Geither clearly thinks “bigger is better”. The notion “optimum size” is perhaps too abstruse for him.

Britain’s CEOs are frustrated train drivers.

In similar vein in a letter to the Financial Times, a long list of Britain’s CEOs want Britain’s rail system improved because this will “create capacity” in the rail system. Plus it will “improve connections between airports” and “help commuter services”.

What are they going to tell us next? That investment in the plastics industry will result in more or better plastics products? Or perhaps they’ll tell us that building more blast furnaces will result in the production of more steel?!?*!!

The optimum size of….. Oh dear - there goes that “abstruse” word again. Anyway, the optimum size of the transport industry should be determined (as in the case of the financial sector) by supply and demand, that is, supply and demand at market prices. The only exception comes where someone can demonstrate that social or environmental factors should override market forces.

Friday, 25 February 2011

Can a central bank go bust?

Note dated 10th Feb 2011. I’ve completely changed and re-drafted the article below, partially as a result of what I learned from Winterspeak’s article on the possibility of central banks going bust (26th Feb 2011). That’s the beauty of blogging: what you learn. (Thanks to Tom Hickey for alerting me to Winterspeak's article.)


Yves Smith and Willem Buiter claim that when winding down QE, a central bank (CB) might make a large loss because the value of the relevant securities has dropped. Moreover, the loss might be so large that the CB will not be able to escape the problem by printing more money if inflation looms: any such money printing operation would simply exacerbate the inflation.

The latter claim is wrong by 180 degrees and for the following reasons.

Any loss made by a CB is profit in the hands of the private sector, the effect of which is likely to be stimulatory and/or inflationary. In this scenario, what the CB needs, far from being more printed money, is the opposite: that is, some form of “money mopping up” tool or deflationary tool.

The traditional deflationary tool used by CBs is interest rate increases – effected by selling government bonds. But what if the CB has taken QE as far as it can and sold ALL its government bonds? It is then in uncharted territory.

It could announce it was willing to borrow at above the going rate, and raise interest rates that way. I’m not an expert on the law governing CBs, but I imagine the law in some countries permits this ploy while others do not. Anyway, that’s a minor technical / legal problem.

The bigger problem is that it is debatable as to whether the latter ploy would be deflationary. Reason is that in order to pay the interest, the CB has to print money, and the net effect is to increase financial assets in the hands of the private sector, which does not sound desperately deflationary to me.

Put another way, private sector entities do not do deals with CBs unless those private sector entities think there is profit in the deal. And making a profit is liable to result in stimulation and/or inflation.

In this situation, the CB could be in a bind or “bust” in the sense that it would need to go cap in hand to the government or Treasury and ask it to collect extra taxes to fund the latter interest payments. After all, there is a big difference between, first, offering the private sector higher interest payments where the money for those payments has been confiscated from the private sector, and second, offering higher interest payments with printed money.


Wednesday, 23 February 2011

If Mervyn King strayed into the political arena, it was because of the illogical division of responsibilities as between central bank and government.

Mervyn King expressed support for the UK government’s policy of front loading government spending cuts. Paul Krugman and Ed Balls (the U.K. Labour Party’s shadow finance minister) accuse Mervyn King of straying into political territory.

Neither Balls nor Krugman offered anything that that might be called a “reason” for their opinions.

This “political territory” problem arises from time to time because of the illogical division of responsibilities as between the Bank of England (and indeed most central banks) one the one hand, and governments on the other. That is, both institutions have a say in factors that influence aggregate demand (AD), which is a nonsense. You might as well have a car controlled by two steering wheels, each controlled by different people.

Central banks are normally responsible for interest rate adjustments, which in turn influence AD and hence employment levels. Thus it can be argued that Mervyn King was in order to pass comment on ANYTHING that influences AD or employment in the aggregate.

On the other hand it could be argued that he was not in order in that he passed comment on the “steering wheel adjustments” being made by government.

A more logical division of responsibility would involve central banks having sole discretion over ALL factors that influence AD: i.e. interest rates PLUS the budget deficit (or surplus). These are very much technical, rather than political questions.

In contrast, government (i.e. political parties) would have responsibility for the much more political questions like the MAKE UP of government spending and what proportion of GDP should be devoted to the public rather than private sector.

Modern Monetary Theory (aka Functional Finance).

The above points about division of responsibility is of particular relevance for Functional Finance (FF), and for the following reasons.

In an FF regime (at least as I see it), interest rate changes are not the main AD adjustment tool. The main tool is Abba Lerner’s so called “money pump”. That is, if more AD is needed, government just creates more money and spends it. And conversely, if inflation looms, government does the opposite, that is reins in money (via raised taxes) and “unprints” or extinguishes money.

This raises the question as to who controls the pump. And the answer is “the central bank”. Central banks are better qualified than politicians to pass judgement on whether AD needs adjusting so as to optimise the inflation / unemployment relationship. In contrast, as pointed out above, the question as to what proportion of GDP should be devoted to the public sector, and the make-up of that spending is very much a political question, and should be the responsibility of political parties.


The crucial importance of foreign bond holders in relation to the U.K.’s deficit and austerity.

According to the Financial Times, Mervyn King in a speech in Newcastle said “households would have to accept a period of austerity because of the need to raise consumption taxes and cut spending to bring the deficit under control.”

Mervyn King actually said nothing of the sort. But then our so called quality broadsheet newspapers have never been vastly more reliable sources of news than Playboy magazine or Asian Babes.

However a large majority of OTHER economics commentators ARE saying something similar to what Mervyn King allegedly said, namely that cutting the deficit requires increased taxes and/or government spending cuts, which allegedly brings austerity.

This is nonsense. I’ve been banging on about this myth for best part of a year now. For the umpteenth time here is the flaw in the flaw in this “austerity” argument.

Reducing the deficit simply involves getting taxpayers to fund a portion of government spending rather than lenders (i.e. those who buy government bonds). And there is no more reason for this to be deflationary, or to involve austerity than switching the tax burden from income tax to a sales tax. (As opposed to tax increases, public spending cuts can play a part, of course.)

A slight problem with this “switch” is that might seem to involve switching the tax burden from the rich onto the poor. But this “problem” can always to dealt with by altering income tax and/or other wealth based taxes.

Foreign bond holders.

There is however a reason why reducing a deficit MIGHT involve austerity. If the portion of national debt held by foreigners has been rising in recent years, that is an effective subsidy of living standards in the country concerned. And if that subsidy were to suddenly stop, that would cause what might be called a standard of living hit or “austerity”. But does ceasing to live on an ever expanding overdraft really constitute “austerity”? Isn’t it more realistic to call this “facing reality”?

This foreign bond holding point is significant for the U.K. The U.K.’s national debt has been rising at a rate that equates to about 6.6% of GDP a year. See here and here.

While the proportion of this held by foreigners has risen by about 50% in the last three years or so (from 20% to 30%).

And those numbers are significant. They equate to a standard of living subsidy amounting to about 2% according to my highly questionable calculations. ((6.6/5) x (30/20) = 2))

But ceasing to rely on foreigners funding an ever expanding national debt is no reason for job cuts or increased unemployment. The only reason to cut employment levels is the threat of excess inflation. That has nothing to do with the deficit.

Moreover, the U.K. seems to have got used to “austerity” so far as living standards go. As Mervyn King said in the above speech “….in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.”

Sunday, 20 February 2011

An introduction to Modern Monetary Theory.

Note. Introducing Modern Monetary Theory in less than 2,000 words or so is not easy. I tried here some time ago here. The article below is another attempt. This summary hopefully reflects the views of most MMT advocates, but it should not be taken as necessarily being an accurate reflection of their views. It’s “MMT as I see it”.


MMT consists essentially of a simple solution to a series of complex economic problems. These are the problems which economists and politicians are currently grappling with: deficits, national debts, inflation, unemployment and so on. Or to be more accurate, MMT is a step forward in solving those problems.

But MMT itself has a big problem: it is so simple that at first sight, it is often rejected precisely because it is so simple. But then E=MC2 is a simple formula. That doesn’t stop Einstein’s theory solving dozens of problems in physics and astronomy.

Anyway, MMT says basically that given excess unemployment, the government / central bank machine should just create more money and spend it. And conversely, given excess inflation, government should do the opposite, that is rein in money (e.g. via increased tax) and “unprint” or extinguish money.

Also, MMT claims that government borrowing is largely a waste of time. That is, the traditional Keynsian policy of having government borrow and spend more in a recession is defective. So in a recession, governments should simply spend more – and forget about borrowing.(For more on the nonsense that is government borrowing, see here.)


Now the knee jerk reaction of 99% of population to the money creation idea is entirely predictable: “inflation”.

However the fact of creating new money does not, repeat not, cause inflation. For example if someone prints a million tons of $100 bills and hides them down a disused mine shaft, there’d be no effect. It’s only when that money is SPENT, that there is an effect, and the effect is to raise demand, which is exactly what is needed in a recession (as long as the increase in demand is not excessive).

As regards inflation, employers do not raise prices unless they find demand for their products EXCEEDS their ability to supply. And if an economy has spare capacity, particularly excess unemployment, then employers CAN meet the extra demand. Thus little inflation is caused by a “print money and spend it” policy in a recession, as long as the amount printed or created is not excessive.

As distinct from the short term, it is possible that the additional money will EVENTUALLY lead to inflation. Well the answer to that was spelled out above, namely that if inflation DOES loom, then the “money printing” process can be put into reverse. Plus there are other and more conventional anti inflationary measures government can take: raised interest rates for example.

Public v. private sectors.

A second possible objection to the above money creation idea is that it increases the proportion of GDP taken by the public sector. That’s a fair point. And there is a simple solution. This is to use part of the new money to reduce taxes, i.e. just leave peoples’ hard earned money in their pockets. Some of that money will then be spent on private sector goods.

As to evidence that households really do spend a significant proportion of windfalls deriving from tax reductions and other sources, see here, here, here and here.

Having dealt with the objections to MMT, I’ll now explain a few more of the advantages.

Crowding out.

First, the total AMOUNT of new money that needs to be created to bring about a given reduction in unemployment is guaranteed to be less (and could be VASTLY less) than the amount of borrowing needed under the conventional “borrow and spend” policy. The reason is that government borrowing increases interest rates which in turn crowds out private sector economic activity.

There is much argument as to the EXTENT of this crowding out, but it is just possible that the above borrow and spend policy has no effect whatsoever as far as reducing unemployment goes, because the crowding out is total.

Or possibly the crowding out is say 90%, in which case government needs to borrow and spend about NINE dollars for every ONE DOLLAR increase in GDP: a complete farce. Noticed the HUGE increase in government borrowing over the last two years combined with a less than dramatic reduction in unemployment?

Of course (and here comes the real farce), governments don’t actually let interest rates rise in a recession. That is, they buy back government debt, i.e. they engage in quantitative easing, or “money printing” of a sort. So the REALITY is that governments are currently implementing MMT, but in an illogical and incoherent manner.

So what exactly are the illogical aspects of our current “MMT on the sly” policies that need to be removed to make it more logical?

Well let’s consider the BASIC purpose of the economy. It’s to provide what the consumer wants, isn’t it? Thus MMT implemented in a logical way simply consists of enabling consumers to purchase more, and that is easily done, as mentioned above, by leaving money in household pockets, rather than confiscating such money via tax. And that can be done for example via a payroll tax reduction and various other measures. (Plus, as mentioned above, public sector spending can be increased.)

In contrast it is very hard to be sure who are the main beneficiaries under a traditional Keynsian “borrow and spend” policy. Under this policy, government borrows money, then spends it, plus it issues bonds to those it has borrowed from. Then it buys back some of the bonds, i.e does some QE. Who benefits from this process? Just try working it out yourself. You’ll probably never get to the bottom of it. Certainly a major effect of Q.E. is to boost asset prices, the stock market in particular. And the main beneficiaries here are the wealthy.

Also, politicians have recently channelled new money into the pockets of Wall Street, rather than Main Street. After all, if you are a politician and some banker has funded your election campaign, you have to pay them back, don’t you?

Is MMT better than interest rate adjustments?

For decades the main tool for adjusting demand has been interest rate adjustments. Thus it is valid to ask why MMT is better. There several reasons. Here are just a few.

First, interest rate adjustments are distortionary: they bring sudden and temporary windfalls for people and business heavily reliant on borrowing, while for others there is little or no benefit. Indeed, savers actually LOSE income as a result of rate reductions.

Second, several studies into interest rates have concluded they are an ineffective way of influencing demand. For example the Radcliffe Report on monetary policy in the U.K. published in 1960 concluded that ‘there can be no reliance on interest rate policy as a major short-term stabiliser of demand’.

Third, the interest rate, that is the price of borrowed money, should be determined the same way as everything else: by market forces. Having government tinker with the price of something is justified given some very good explanation, and assuming there is no alternative to “tinkering”. But there is an alternative to tinkering with interest rates: it’s called MMT.

To summarise, where a government needs to stimulate an economy (or do the opposite – damp down economic activity), there is a way of doing so which is much simpler than existing policies. This simple alternative is MMT. Moreover, governments are already implementing MMT, but in a chaotic and illogical manner.

MMT would make national debts obsolete. MMT would cut out a lot of nonsense, bureaucratic expense, subsidies for the rich, and so on: the list is quite long.

The history of MMT.

Given that the first “M” in MMT stands for “modern” you might think MMT is a new idea. Actually it is several decades old, which makes the title “Modern Monetary Theory” not entirely appropriate.

There is actually an alternative name: “Functional Finance”, but the name “MMT” seems to have gained the upperhand. The word “functional” is very appropriate. The idea behind this word is that there is no reason why government spending needs to equal the total of government income from tax and from borrowing. That is, the purpose of government income and spending should be “functional” in the sense that the only important consideration is the effect of such income and spending on unemployment and inflation.

Keynes was well aware of the essentials of MMT, while a contemporary of Keynes’s, Abba Lerner, advocated MMT in a more open and blunt manner than Keynes. Also, Milton Friedman advocated what amounts to MMT here.

Thomas Edison.

But perhaps pride of place should go to Thomas Edison, the inventor, who tumbled to a couple of the essential ideas behind MMT in 1921. Edison certainly gets the idea, mentioned above, that government borrowing is a nonsense. Plus he gets the idea that any new money should be the property of the people, not of bankers, the rich, or any other group.

Alternatively, see the original New York Times article where Edison sets out his ideas. See the two paras near the end starting “It is absurd to say..”. (Incidentally, Edison in this article also spots the basic flaw in the gold standard! Not bad for a non-economist. But then he was a genius, as we all know.)

Friday, 18 February 2011

Some people just don’t know when they’ve got someone else over a barrel.

There is an old saying which goes something like, “When you owe the bank a little money, you’ve got a problem. But when you owe the bank A LOT OF MONEY, the bank has a problem.”

Many Americans think that the large amount they owe China and other foreigners is a US problem. I suggest that if the US played its cards right, it would become a severe headache for foreigners and a source of profit for the US.

The US, instead of providing its economy with enough stimulus has allowed China and others to come to it’s “rescue” with billions (that the US could perfectly well have printed itself).

What the US should do is create enough new money to bring employment back to where it was, or near where it was prior to the crunch. Maybe it would even be an idea to print a bit MORE money than is really needed so as to bring about an inflation rate of 4% or so.

That would mean the debt to foreigners would decline in real terms at 4% a year: headache No 1 for foreigners.

As to the interest rate offered by the US to those wanting Treasuries, this should be a miserable 1% or so. In fact the Fed could have a big notice over its front door: “We’ll borrow just as much as you are able to lend us, you suckers. We’re open for business 24/7”.

Of course, the reaction of foreigners would be to seek out other borrowers. But if a significant portion of other sovereign borrowers adopted the same policy, the lenders would have nowhere to go.

A possible catch with the above policy is that the Chinese government is not as stupid as the US government.

That is, the best policy for the Chinese to adopt in reaction to the above “1% Treasury” idea would be to cease lending: that is gradually sell off their Treasuries and use the money to buy US goods and services and ship those products back to China. That constitutes a REAL repayment of debt. I.e. the debt is repaid in the form of real goods and services. And that would involve a temporary standard of living hit for US citizens.

Alternatively, foreigners might use the money to invest in US industry. That would involve no standard of living hit for US citizens.

But the Chinese have a phobia about imports. They are determined to export as much as possible, and build up stocks of other countries’ sovereign debt. So there is a good chance they wouldn’t go for the latter rational policy. That is, there is a good chance they’d just plonk their surplus dollars in U.S. banks, who wouldn’t have much use for the money, and who would thus offer a rate of interest even more miserable than the above 1%.

As long as someone behaves irrationally, there is money to be made out of them. Someone somewhere ought to have them over a barrel.

Note added 21st March 2011: Nice to see someone else tumbling to the fact that borrowing money from other countries so as to get out of a recession is totally unnecessary, since the U.S. can print its own dollars. See fourth para here.

Monday, 14 February 2011

“Make work”, the Job Guarantee, WPA, etc: should they be limited to the public sector?


Make work schemes, like the WPA in the U.S. in the 1930s do not make sense. However they involve temporary subsidised work for the unemployed. And temporary subsidised work for the unemployed with EXISTING employers, as distinct from “specially set up employers” like make work schemes, DOES make sense. Plus there is no reason to confine this sort of work to the public sector.

Temporary subsidised work with existing employers actually amounts to something very similar to a totally free labour market, that is a labour market with no artificial interferences like minimum wage laws. While the price that employers pay for such labour can be “free market price”, i.e. very low, obviously the take home pay of the relevant employees must be up to socially acceptable levels.

If you find this article hard going, don’t worry. I estimate the number of people on planet Earth with enough brain and enough genuine interest in the subject to understand the article to be about three!


The idea that there are an almost infinite number of useful jobs the unemployed could do is as old as the stars. Pericles in Ancient Greece 2,500 years ago had the unemployed work on public sector construction projects. And more recently in the U.S. in the 1930s millions were employed on schemes of this sort: the “WPA” for example (which stood for Work Progress Administration).

And then there is the particular form of “make work” currently advocated by some Modern Monetary Theory enthusiasts, namely the so called “Job Guarantee”.

In principle, unemployment can be reduced to zero at the flick of a switch by schemes of this sort. For a very crude illustration, we could tell the unemployed their benefits are henceforth conditional on walking round their neighbourhood keeping it free of litter. Those accepting the work would be deemed to be employed. And those refusing would be deemed to have turned down work, and are therefore not unemployed. Hey Presto: unemployment vanishes.

Incidentally, I’ll refer to WPA, Job Guarantee, and similar schemes below as “make work”, for want of a better phrase.

Limit make work to the public sector?

The advocates of make work normally see it as being limited or largely limited to the public sector.

The reason (normally not set out too clearly by make work advocates) is that no additional demand is required. But there is a catch here, as follows.

Labour employed on make work can be employed alongside other factors of production (OFP) like permanent skilled labour, equipment, materials, etc. Or, secondly, such labour can be employed with little or no OFP. But if OFP IS employed, it has to be ordered up from the rest of the economy. I.E. ADDITIONAL DEMAND IS REQUIRED! Now there is a problem here.

If the economy can take extra demand, there is no place for make work in that employment can be created simply by raising demand. That is, raising demand is a better way of raising employment than implementing or raising the numbers doing make work.

Alternatively if OFP is NOT used, then the only input on make work schemes will be temporary and not very skilled labour: output per head will be hopeless.

Incidentally, make work employees were described as “not very skilled” in the above para not because they don’t possess skills. The point is that people tend to become unemployed when, even if they DO possess skills, there is no demand for those skills locally. Thus any job a person gets, whether make work or not, is LIKELY to involve them working in a RELATIVELY UNSKILLED capacity.

And there is a further nonsense here in relation to OFP. If a make work scheme DOES involve levels of OFP that are up to near those that obtain with normal employers, then what’s the difference between such make work schemes and a normal employer? The answer is “none”.

This nonsense actually obtained, more or less, with some 1930s WPA construction projects, where the amount of construction equipment, matrials, skilled labour, etc was almost up the level normally found with private sector contractors.

To summarise, make work is stuck between a rock and a hard place: use no OFP and be condemned to inefficiency. Alternatively, employ significant amounts of OFP, and accept two bits of nonsense: first make work has an inflationary effect, because OFP has to be ordered up from the rest of the economy. Second, the relevant make work scheme comes to much the same thing as a normal employer.

Make work and inflation.

The above point about make work being inflationary can be summarised as follows. If unemployment is above the level at which labour shortages exacerbate inflation (which I’ll call NAIRU for want of a better phrase), then make work will not be inflationary. But in this scenario, there is no place for make work in that employment is best raised by a straight rise in demand (plus, presumably, an equivalent expansion in the public sector).

Moreover, on a like for like comparison, there is little difference as between the inflationary effect of public and private sector make work. To illustrate, take two make work schemes, both of which the same OFP to unskilled labour ratio. The private sector scheme will be inflationary because any extra demand at NAIRU is inflationary. While in the case of the PUBLIC sector schemes, government will have to increase net spending so as to order up the required OFP. There is not much difference between the two!

Existing employers provide a decent OFP to temporary labour ratio.

As explained above, the problem that really stymies traditional make work schemes is the OFP problem.

There is actually a very simple way, at least in theory, of employing make work labour efficiently with ABSOLUTELY NO NEED for additional OFP. This is to make the unemployed available at a subsidised rate to EXISTING EMPLOYERS (as opposed to “employers” in the sense of “specially set up make work projects”).

If the unemployed (i.e. low priced and relatively unskilled temporary labour) is supplied to EXISTING employers, those employers will be induced to raise the amount of labour employed RELATIVE to the amount of OFP employed. This is for exactly the same reason as if the cost of say computing (or any other input) declines, employers will employ more computing power relative to other inputs.

Note that, as is always the case in economics, it is not the AVERAGE price of an input (or anything else) that is important: it is the MARGINAL price. That is, make a few EXTRA OR MARGINAL employees available to employer at a lower price, and (to repeat) more labour will be employed relative to OFP.

Now we have a piece of magic here: little or no extra OFP is required, yet the “make work employee to OFP ratio” is almost up the standard that normally obtains with existing employers (because it is existing employers who do the employing!). To put that in plain English, it is better to have an unemployed teacher work in some sort of peripheral capacity in a school, than have them do typical “make work” type work, e.g. weeding the flower beds in the nearest public park.

Incidentally, I’ll continue to describe the employees involved as “make work”, despite the fact that from this stage in the argument the assumption is that they are allocated to EXISTING employers rather than to WPA make work type schemes.

Would supposedly marginal employees really be marginal?

How do we ensure that make employees really are “marginal”. That is, how do we ensure that they are the employees that each employer regards as the least productive or most peripheral?

It’s easy. Just limit the TIME that each make work employee stays with a given employer. Employers don’t mind losing employees who are genuinely of marginal use, but they very much DO mind losing their more productive employees. If an employer knows an employee will leave in the near future, the employer will not classify the employee as make work, or claim the make work subsidy in respect of the employee. (Obviously it would be necessary here to have some rules to prevent attempts to “fiddle” the system: for example there is an obvious temptation for employers to fire and immediately re-hire make work employees who have reached their time limit.)

Make work with existing employers = free market!

Astute readers will have noticed by now that the system advocated above amounts to much the same thing a totally free and perfectly functioning labour market (a bit of an unrealistic and theoretical construct, but never mind). That is, a labour market where there are no artificial interferences like minimum wage laws or state funded unemployment benefit systems. In this free (and brutal) market, many of those becoming unemployed just have to take any old job however low paid if they want to avoid starvation. They are likely to move on quite quickly to something better paid as soon as they find it.

The system advocated above comes to much the same thing: certainly the cost of the relevant labour to the employer would be ultra low (or even free). However, take home pay would be up to minimum socially acceptable levels.

No limit to the number of potential public sector make work employees?

An objection that advocates of public sector make work schemes will probably raise is that there is in principle no limit to the number of public sector make work jobs that can be created. This is an obvious and crude truism (pointed out in the first para above – picking up litter, etc).

Incidentally this point applies both to traditional WPA make work schemes AND to “make work with existing employers”.

However, the above truism does not get public sector make work very far, and for the following reason. The marginal product of labour (or any other input) declines with increased numbers employed. I.e. it is true that limitless numbers can be employed on public sector make work schemes, but the bigger the number, the more likely it is that marginal product of the relevant labour is around zero, or even negative, e.g. the collection of non-existent litter – to echo the example with which we started above.

Indeed, the PRIVATE sector is BETTER at employing relatively unskilled labour than the public sector. On that basis, and assuming we want to expand the number of make work people in both sectors to the point where the output of the marginal employee is any specified amount (including perhaps zero), then then MORE make work people would be employed in the private than in the public sector.

The declining marginal product of labour is caused by macro as well as micro factors.

It might seem that the point just above about the marginal product of labour is flawed in that this marginal product point is invariably set out in the text books as being a MICRO ECONOMIC phenomenon. (I.e. where a firm employs increasing numbers relative to a fixed input of capital equipment and materials, the output or “product” of each succeeding person hired will decline.)

In contrast, in the above para, the point is being applied to a MACROECONOMIC scenario.

The answer to this apparent flaw is that there are also MACROECNOMIC forces at work which result in the marginal product of labour declining as unemployment in the aggregate falls. These “forces” are very simple and common sense: first, as unemployment falls, it becomes increasingly difficult for the nation’s employers to find labour that is suitable for vacancies. Second, employers in the aggregate always employ the best labour first. That is, as unemployment falls, lower quality labour becomes employed.

And therein lies the reason why temporary low cost labour raises aggregate employment both in a free market and under the system advocated here.

Simply pointing to the fact that an employment system has similarities to the free market is not a bad argument, but it needs to be strengthened to explaining the reasons, in theory, why the result is an aggregate increase in employment. The reason is thus.

As pointed out above, as unemployment falls, employers have to take progressively poorer and poorer quality labour. When this decline becomes sufficiently serious, employers tend to resort to bidding up the price of an increasing number of skills, until excessive inflation ensues. However, if relatively unsuitable labour is available for free or at a much reduced price, employers will employ more of such labour, rather than bid up the price of more suitable labour. NAIRU is reduced.


Hopefully the above paragraphs have demonstrated two points. The first it is that limiting make work to the public sector does not make sense. Second, there are strong arguments for allocating make work employees to EXISTING employers, rather than specially set up “employers” like the WPA. That is, it is better to allocate an unemployed teacher to a temporary and peripheral teaching post in a school (public OR private sector) than have the teacher pick up litter.

If the above arguments are fool proof, then there is NO case for “specially set up schemes” like the WPA. That is, ALL make work employees should be allocated to EXISTING employers, not specially set up schemes.

Possibly there are weaknesses in the above argument, which might result in it making sense to have WPA type schemes for a PROPORTION of make work employees, while allocating the rest to EXISTING employers.


Saturday, 12 February 2011

The Tinbergen Rule.

The Tinbergen rule was formulated by the economics Nobel laureate, Jan Tinbergen. There seems to be some confusion as to exactly what the rule consists of, but it is often stated as something like “for each policy objective, at least one policy instrument is needed”.

For example to deal with the problem that the elderly need support (a policy objective), some sort of pension policy is needed (a policy instrument).

The Tinbergen rule is stated by Dr. Derick Boyd* very much in the above form, i.e. “there should be at least the same number of instruments as there are targets”.

I suggest Tinbergen made a mistake here (if the above is a fair summary of his rule). Reasons are thus.

It cannot make sense to have more than one instrument address a particular objective because one of the instruments has to be better than the other.

Of course it is always possible that one instrument deals with a particular ASPECT of an objective better than another instrument. But in this case, doesn’t that aspect become a separate objective?

For example, if one pension scheme covers funeral costs and a second one doesn’t, then the former is arguably superior. But “funeral costs” is a separate objective to “costs of supporting the elderly”.

In other words, the principle should state, “for each policy objective, one policy instrument is needed, and one only.”

Thoughts, anyone?

A few minutes of Googling will produce plenty of material on the Tinbergen principle, but here are a couple of “starters”

* The Theory of Macroeconomic Policy, East London Business School, (available on the internet).


Wednesday, 9 February 2011

National Debts are a farce. Governments should cease borrowing.

There are four main reasons, or excuses for national debts, as far as I can see. They are all nonsense.

Number one: buying votes.

The first and most feeble reason for borrowing is that it enables politicians to buy or win votes by not collecting enough tax to cover government spending. Instead, expenditure is covered by borrowing.

This works because voters are more aware of tax increases than increased borrowing. Hence the temptation for politicians to borrow.

The ACTUAL EFFECT of this borrowing is pretty much the same as tax, or rather it has to be arranged so that the macroeconomic effect is the same. That is government spending which is not covered by tax is stimulatory, even inflationary. This has to be countered by some sort of deflationary measure: e.g. extra borrowing. (The word deflation is used in the “aggregate demand reducing” sense here.)

(Incidentally, this article is written only with countries that issue their own currency in mind. Thus the points made are relevant for a common currency area like the Eurozone. But care should be taken in applying the points to INDIVIDUAL COUNTRIES in the Eurozone.)

Borrowing from abroad.

In addition to borrowing from natives, governments normally fund deficits to some extent by borrowing from abroad. This activity is a farce and for the following reasons.

The real purpose of government borrowing, to repeat, is to counter the reflationary or stimulatory effect of government spending which is not covered by tax.

Incidentally, there are of course a large number of economic illiterates who have not grasped the difference between macro and microeconomics, and who think that governments borrow for reasons similar to a household borrowing when the household’s expenditure exceeds its income. These illiterates need to go away and work their way through a basic economics text book.

At any rate, where a government borrows from abroad, demand from domestic sources is NOT constrained as a result. To that extent, nothing is achieved by borrowing from abroad. Indeed, the relevant government WILL STILL HAVE TO BORROW from its own private sector in order to rein in demand (or implement some other deflationary measure). But assuming such a government goes for domestic borrowing in addition to borrowing from abroad it will end up paying twice as much by way of interest!

A total farce!

So what to do? On the face of it, there is no simple solution because it is administratively difficult for a government to issue bonds, while ensuring that those bonds are bought only by natives rather than foreigners. Well the solution is to abolish government borrowing!

Number two: borrowing with a view to stimulus.

Government borrowing also takes place with a view to stimulus. This is the classic Keynsian solution for a recession: governments “borrow and spend”. But there is a huge nonsense here, as follows.

Borrowing, at least to some extent, raises interest rates, which is deflationary. This means governments have to nullify this deflationary effect by the usual interest rate reducing ploy: creating new money and buying government debt. Which raises a big question: what was the point of borrowing in the first place? That is, where is the sense in government borrowing and then buying back the relevant debt?

Or to put it another way, why not just create new money and spend it and forget all about borrowing? Keynes was actually aware that the latter policy was the best and simplest. But he also knew he was surrounded by economic illiterates who would chant “inflation” in reaction to the idea. So he went for the more convoluted borrowing option and kept relatively quiet about the “create new money” option.

Incidentally Milton Friedman regarded the “create new money” policy as a perfectly viable option.

Number three: borrowing to purchase assets.

Governments frequently borrow in order to purchase assets, e.g. build infrastructure. But this makes no sense, and for the following reasons.

Borrowing makes sense (for a household, firm or any other microeconomic entity) where there is absolutely no other way of funding the relevant expenditure. For example when a family buys a house, the capital sum is normally so large relative to the family’s income and total assets, that borrowing is the only option. In contrast, when someone buys a pack of cigarettes, there is no need to borrow.

Now when the government of an average size country spends a hundred million on a new road or some bridges, a hundred million might sound like a big sum. But it’s small change compared to the government’s TOTAL budget. It’s the equivalent of someone buying a bottle of whiskey. There is thus no need for governments to borrow to fund infrastructure projects.

Put that another way, if a government DOES borrow for such projects and gradually pay back the capital sums involved, it will simply pay out each year almost exactly the same total sum as if it funds infrastructure projects out of income. The only difference is that under the “borrow” option it will have to pay interest as well!

Number four: spreading costs across generations.

A plausible sounding argument for government borrowing to fund capital projects is that this spreads the burden across generations because future generations ostensibly have to repay some capital and/or pay some interest. The flaw in this argument is that while various members of the next generation inherit the above liability, others inherit a corresponding asset, namely government debt or bonds. These two net to nothing.

Put another way, the brute physical reality is that it is impossible to build a road this year (2011) without diverting concrete, steel and so on from other uses in 2011 (assuming constant aggregate demand). That is, people living in 2011 have to sacrifice the consumption of other products to have the road built. Or put a third way, it is a physical impossibility to build a road in 2011 with concrete produced in 2050. It is also very difficult to have new born babies, or the as yet unborn build roads and bridges!

The only way for a government to “spread costs across generations” is for it to borrow from abroad, and gradually pay the debt back, as pointed out by Richard Musgrave (no relation) in the American Economic Review*. But if EVERY country does this, the ploy descends to farce.

* Musgrave, R.A. (1939). ‘The Nature of Budgetary Balance and the Case for the Capital Budget’. The American Economic Review, 29 (2): 260-271.


Sunday, 6 February 2011

Austrian economics.

If there is one organisation that promotes Austrian ideas, it’s the Von Mises Institute. One article, entitled “What is Austrian Economics?”, published by this Institute, is concerned only with the HISTORY of Austrian economics. It is not concerned with the ideas currently being advocated by Austrians. So that is worth avoiding, unless you are interested in the history of economic ideas.

Wikipedia claims that one of the main Austrian ideas is a rejection of empirical evidence and maths in economics. That makes Austrian economics sound like something out of the Middle ages. Every other branch of science pays attention to empirical evidence and uses maths where appropriate. Why not economics?

There is no question but that some economists use an excessive amount of maths with a view to making themselves look scientific, and with a view to trying to hide the fact that they have nothing original to say. But some economists use too many WORDS. This is not a reason to reject maths or words.

Wiki then claims that “Austrian economists view entrepreneurship as the driving force in economic development, see private property as essential to the efficient use of resources, and usually (if not always) see government interference in market processes as counterproductive.”

Well, we ALL attach importance to entrepreneurship (with reservations) and private property (with reservations). Plus we all realise that government “interference” CAN be counter-productive, but the same time, it CAN bring benefits. So the “Austrian” claim here is not desperately original or distinctive.

Another Von Mises article entitled “Why Austrian Economics Matters” DOES deal with the ideas CURRENTLY advocated by Austrians. These “current” ideas are set out under the heading “The Core of Austrian Theory”. So let’s run through this “core”.

The first sentence reads “The concepts of scarcity and choice lie at the heart of Austrian economics.” No they don’t. The idea that economics is all about the allocation of scarce resources, as it explains in Chapter One of most elementary economics text books, is what economics is all about. In other words (yet again) this is not a distinctive “Austrian” idea.

The next paragraph claims that “It is not possible to collapse tastes or time schedules onto one curve and call it consumer preference. Why? Because economic value is subjective to the individual.” Total nonsense!

Conventional economics is well aware of the fact that each individual has different tastes and priorities. Moreover, those simple standard supply / demand schedules or graphs SPECIFICALLY take this into account, as is clearly explained in every basic economics text book. That is, central to these graphs is the idea that some people value a given commodity, e.g. apples, much more highly than others.

The third paragraph claims that “Similarly, it is not possible to collapse the complexity of market arrangements into enormous aggregates. We cannot, for example, say the economy's capital stock is one big blob summarized by the letter K and put that into an equation and expect it to yield useful information. The capital stock is heterogeneous.”

Well we are all well aware that the capital stock is heterogeneous. That clearly places limits on the generalisations that can be made about the capital stock. But at the same time, SOME generalisations CAN be made. For example, a reduction in interest rates will tend to encourage more investment in capital stock. (Indeed the latter point is specifically made later in the Von Mises article!).

The next couple of paragraphs claim that anti-trust legislation is a waste of time because governments do not have the necessary knowledge to intervene and improve things. Well that (yet again) is not a specifically Austrian idea. Large numbers of economists would agree that the latter idea has some validity, without calling themselves Austrian.

The article then claims that “Another example is the idea that economic growth can be manufactured by manipulating aggregate demand curves through more and faster government spending considered to be a demand booster instead of a supply reducer or government bullying of the consuming public.”

Well non-Austrians have never claimed that economic growth in the LONG TERM can be increased by “more and faster government spending”. What they DO claim is that when demand by the private sector collapses, as it did during the recent credit crunch, demand can be maintained by having government spend more.

Indeed, had the US government not done this during the recent credit crunch, unemployment in the US would have risen to 20% instead of around 10% according to some estimates. Is 20% unemployment what Austrians want?

And before some Austrian tries to tell us that there are dangers in government pumping money into an economy in a recession because that money may cause excess inflation a few years down the road: well we are all aware of that.

As to “bullying of the consuming public”, what exactly is entailed here? Does anyone know of any examples of the police turning up at peoples’ doors and forcing them to consume more? If so, please let me have details.

The next paragraph claims amongst other things that “Prices provide economic actors with critical information about the relative scarcity of goods and services.” Well, that is basic, simple, year one, elementary, GCSE economics! Can’t Austrians rise above this “statement of the obvious” level?

The article then claims that the redistribution of wealth is wrong. (that’s in a paragraph starting “Austrians have also developed impressive critiques of redistributionism.”) So we have no income tax, capital gains tax, etc and just let the unemployed, the sick and the elderly starve?

Another claim is that taxes “forcibly confiscate property that could otherwise be saved or invested”. Really? So the wealthy never fritter away their income on frivolities like champagne, parties, excessively large houses, cars or yachts?

The article then claims that “deficits financed by the public or foreign bond holders drives up interest rates and thus crowds out potential private investment.” So how come we’ve had record deficits combined with record low interest rates over the last two or three years? How come Japan has had the largest deficits over the last decade or so combined with about the lowest interest rates in the World?

Under the heading “Government Numbers” the article claims that the collection by government of economics statistics should cease altogether.

Several further ideas are put in this article which I could demolish. But I’ve read enough.

As readers will gather, Austrian economics is essentially a collection of unrelated ideas, most of them extreme right wing. The fact that they the ideas are unrelated means that the ideas do not form a coherent whole. But that is not a serious criticism: several other “collections of ideas” which are supposedly related are actually not related, e.g. the ideas that make up Modern Monetary Theory, socialism, Monetarism and so on.

For example, couple of ideas which Austrians sometimes claim to be their own which I do agree with are the ideas that fractional reserve and maturity transformation are undesirable, and ideally should be banned.


Austrian economics can hardly be described as sophisticated. It is a collection of largely unrelated and mostly right wing and extreme right wing ideas. The fact that the ideas are largely unrelated, does not make Austrian economics different form a number of other “groups of ideas” like socialism or monetarism where it is perfectly reasonable to agree with some of the ideas in a collection, while disagreeing with others.

But it does mean that it is the INDIVIDUAL ideas that each need examining on their own merits. And some of the ideas do have merits. Anyone who adheres to the whole collection of Austrian ideas has probably been blinded by political prejudice and has no interest in economics.


Tuesday, 1 February 2011

Reducing the national debt does not involve much austerity.


A proper analysis of the national debt is impossible without splitting it into its component parts, e.g. foreign owned and domestically owned debt. There is also an important distinction between the structural debt, and in contrast, the part of the debt that has accumulated as a result of attempts to bring stimulus.

Reducing the part of the debt that his held domestically does not involve austerity. In contrast, if foreigners SUDDENLY reduced their debt holding, and had it repaid in the form of real goods and services WOULD involve austerity, but at a guess, that is unlikely to happen rapidly.


National debt arises, amongst other reasons, simply because of politicians’ failure to collect enough tax to cover government spending, even at full employment. Politicians’ motive here is to win votes: taxes are unpopular. This is often called the structural deficit, and it will be given this name here.

Where politicians fail to collect enough tax with a view to gaining support from the electorate, and borrow instead, harm is done. Greece is a classic illustration. It strikes me it just has to be possible to get rid of this “dishonest” or “cloud cuckoo land” part of the overall deficit without doing any harm. The only question is how, or what exactly are the mechanics?

Christina Romer (former chair of the US President’s Council of Economic Advisors) puts the structural deficit at 6% of GDP and rising by 2020 unless something is done. Given that Geoffrey Sachs puts the CURRNET TOTAL deficit at 10% of GDP, the 6% figure seems a bit low. But this article is concerned with general principles, not with EXACT figures, so let’s move on.

Second, there is debt which has built up as a result attempts at Keynsian type stimulus.

Is the concept “structural” relevant?

The concept “structural deficit” can be questioned. For example Chris Dillow claims the structural deficit is near impossible to measure with any accuracy, and hence that the concept is not useful. The answer to that is that the fact that a concept cannot be quantified does not stop it being a vital theoretical concept. This sort of thing occurs over and over in science: that is, concepts pop up that are impossible to measure with any accuracy, but which are nevertheless essential for decent analysis. Many nuclear particles spent decades as nothing more than ideas in the brains of nuclear physicists before actually being seen in particle accelerators.

The tools used to reduce deficits reduce both the structural and stimulus deficit.

There is a big problem with the structural and stimulus elements of the debt and deficit, which is that the tools used to influence each category unfortunately influence both. This tends to lead to the idea that the structural deficit cannot be reduced without austerity. I’ll explain.

The best reason I know of for the idea that reducing the structural deficit involves austerity is that paying back government debt holders is the reverse of the classic Keynsian “borrow and spend” policy, which is normally seen as having a stimulatory effect.

So let’s go along with the conventional wisdom here and assume that having government borrow and spend $X in one year has the effect of raising aggregate demand by $X x Y. That means that when the policy goes into reverse, i.e. $X worth of taxes are raised, and used to repay government creditors, aggregated demand will decline by $X x Y.

And that doubtless makes it look as though the structural deficit cannot be reduced without austerity. But austerity by definition is “anti-stimulatory”. It is deflationary (in the aggregate demand reducing sense of the word).

A tool has been used to reduce the structural deficit which unfortunately has influenced the relevant country’s stimulus / deflationary stance. Thus to have an effect on matters structural alone, it is necessary to take measures to nullify the latter effect. It’s a bit like taking a drug which has an undesired side effect, and taking a second medication to nullify the side effect.

And the “medication” required to nullify the side effect is very simple: QE. That is, have the government / central bank machine create new money and buy back some government debt. The effect of that is stimulatory (though to what degree is obviously debatable). And apart from the desired stimulatory effect, national debt is also reduced, which is exactly what is needed, since the ultimate object of the exercise is the reduce the debt.

Conclusion so far: there is no good reason for reducing the structural debt to involve austerity, at least as far as domestic holders of debt are concerned. As to foreign holders, some austerity is possible, but at guess is unlikely to be significant.

Maturing debt does not involve austerity.

Initially, there is no pain or austerity when debt matures. That is, holders of the debt (in the case of the US) just swap their Treasuries for dollars. No real sacrifice is needed by the local population, regardless of whether it is domestically or foreign held debt. Indeed, the local population is at least temporarily better off because it will have to fund less by way of interest payments to former debt holders. (By the way, the US is used here only for purposes of illustration: the argument is just as relevant to other countries that issue their own currency.)


As to the idea that reducing the stimulus deficit results in austerity, well that is true by definition. But there is no point in reducing a stimulus deficit if stimulus is required! That makes as much sense as putting your foot on the brakes if you want your car to go faster. The result will be excess unemployment. And what’s the point of that? Anyone know? Please contact me if you know.

Foreign debt holders.

If foreign holders use their newly acquired dollars to purchase US produced goods and ship them out of the US, that is a REAL repayment of debt: it involves blood, sweat and work by US citizens. It is blood and sweat that could have been used to produce goods for consumption by US citizens. (I’m assuming here for the sake of simplicity that the economy is already at capacity and that anything produced for export must come at the expense of stuff produced for internal US consumption.)

That is a REAL cost or “sacrifice” for US citizens. But foreign holders are unlikely to do this QUICKLY. Certainly the Chinese have an obsession with exporting and building up an absurdly large stock of other counties’ debt. They have become more reluctant of late to hold US debt and have moved into European debt. But that has not dented their enthusiasm for US debt by much. So there is unlikely to be MUCH pain coming from this quarter, though there could be a finite amount of pain. See here and here.

As to the possibility that foreigners suddenly lose much of their faith in the debt AND currency of a country, and dump significant quantities of both, the currency obviously loses value on the foreign exchange markets. That certainly WOULD involve reduced living standards for US citizens. But it also hurts foreign debt holders (one of their assets, US debt, loses value). This is an additional incentive for them not to move quickly on this one.

There is of course there is always the possibility of a stampede for the exit, or “fire sale” of dollars and US debt. But would this lead to a total collapse in the value of a currency in the foreign exchange markets? The simple answer is that that has never happened (far as I know) except where the relevant government is clearly going for a wholesale debasement of the currency ANYWAY (a la Mugabwe or Weimar).

A partial dumping of both the debt and currency of a country certainly means a devaluation of the relevant currency, which in turn means a standard of living cut for residents of the debtor country. But the British pound lost 25% of its value relative to the US dollar in 2008 and has subsequently remained at that reduced value, yet the population of the UK scarcely noticed! There certainly weren’t any Greek style riots in the UK in 2008, 9 or 10. There HAVE been demonstrations in the UK very recently, but these have been aimed at the recently elected Conservative lead government.

To summarise so far, a potential source of austerity comes from a reduction in debt held by foreigners. But this is more likely to be a slow reduction than a sudden reduction, at a guess.

Cutting the INCREASE in foreign held debt.

As distinct from foreigners cutting their debt holdings, there is of course a stage to be gone through first, namely that foreigners cut the rate at which they are currently INCREASING their holdings. “Cutting debt holdings” and “cutting the rate of increase in holdings” are just part of the same continuum, and the effects are the same dollar for dollar.

For example, for the last decade or so, China (and other countries) have shipped billions of dollars worth of goods to the US. Effectively these countries have not asked to be paid for a significant portion of these goods because they have taken US government debt in payment instead. That represents a significant, if temporary, standard of living boost for US citizens.

The actual extent of this boost has been a bit over 3% a year in recent years according to my calculations. So an immediate stop to the INCREASE in foreign held debt would result in US living standards rising by a good 3% less than they would otherwise have risen. That would cause riots in Greece. And it would be more than enough for some politicians to be voted out of office in the US.

But to repeat, (and this is a political judgement), any change here is more likely to be slow rather than quick.

The real obstacles are debt reduction are political.

The REALLY BIG problems involved in debt reduction are political not economic. That is, as pointed out above, debt increases buy votes for the politicians responsible. Thus debt reductions tend to lose votes. Hence Obama’s near silence on the subject (apart from about one worthy sounding generalisation) in his recent State of the Union Address.

Of course voters CLAIM to be concerned about debt. But the claim involves a fair amount of double talk and hypocrisy: tell them what debt reduction involves in terms of tax increases, and they’ll immediately riot (in Greece at any rate). And what is even more ridiculous, is that those tax increases, as long as they are combined with the right amount of national debt buy back, DON’T result in austerity: that is voters are no worse off as a result of debt reduction (with the exception, as pointed out above, of a foreign held debt reduction).


Reducing or abolishing a structural deficit while maintain a constant stimulatory (or deflationary) stance does NOT lead to pain or austerity for the local population AS A WHOLE. (Though of course a particular MODE of debt reduction can always be arranged so that it hurts particular groups and benefits other groups of the local population.)

Reducing or abolishing a structural debt just involves raising taxes and/or reducing public spending by whatever amount we like, and at the same time, buying back some of the debt with new money or “printed money”. So long as the relative amounts of tax increases and money creation etc are correct, the deflationary effect of the former will cancel out the stimulatory effect of the latter. Thus, ideally, there is no net austerity (or simulatory) effect.

Ensuring that the actual sums involved in the latter tax increases, new money creation, etc ARE such that there is neither an austerity or stimulatory effect is difficult, of course. But the point is that there is no reason IN PRINCIPLE for debt reduction to involve austerity.

Advocates of Modern Monetary Theory (MMT) will note the MMT “flavour” here: that is, the actual AMOUNTS collected in tax or spent or borrowed are near irrelevant. The important point is the stimulatory or deflationary EFFECT of $X of tax, $Y of borrowing or $Z of spending.

As to the portion of the national debt held by foreigners, austerity certainly WOULD be involved if they arranged to have their debt repaid with real goods and services, and wanted this done quickly. But if foreigners want their debt repaid, it is more likely they go for a SLOW pace of repayment, at a guess.

Now I’m bound to have got something wrong there. Ideas anyone?

Incidental point: is reducing the national debt important?

The national debt in the UK and US relative to GDP is still less than half the level that existed immediately after WWII (over 200% of GDP). This debt level did not involve any great problems. A similar 200% level obtained in Britain immediately after the Napoleonic wars over a century earlier. Plus Japan’s debt is, or was recently over the 200% level. So the current debt level is not a cause for panic.

On the other hand, it is arguable that national debts are a nonsense for reasons I spell out here. So reducing or abolishing national debts is probably not a bad idea.