public debt
Podcast Failures: Friedman and Chile, Hume and Public Debt
I listen to a few podcasts during my commute. Two that I often appreciate are Know Your Enemy, associated with Dissent Magazine,* a series of interviews on mostly right wingers by Matthew Sitman and Sam Adler-Bell, and Past, Present and Future, a series of monologues by David Runciman, sponsored by the London Review of Books. Both are always entertaining and informative. I'm not a specialist in most of the subjects they discuss. However, two recent episodes (or at least I listened to them recently), one from
each, dealt with economic issues, and they did leave a lot to be
desired, to say the least.
Very briefly, the issue with the interview with Jennifer Burns about her biography (in many ways, from this interview, and the one with Tyler Cowen, it is hard not to see it as a hagiography; more on that as soon as I read the book; it's been ordered. I hope that's just a perception and that the book provides a more balanced view of his contributions and political views) of Friedman is that the hosts accepted almost all of her very monetarist interpretation of the Allende government, and her whitewashing of Friedman's relation with the Pinochet regime (see on that this and this). In all fairness, at least one of the hosts (sorry, not sure that was Matt or Sam) questions (around 1:16) the validity of her interpretation of the relation of Friedman with the regime. But there seems to be a complacent view according to which inflation in Chile was caused by excessive monetary printing driven by the expansion of the welfare state.
The role of the US sanctions, and Nixon's infamous instruction to "make the economy scream" are never cited. And the lack of dollars was at the center of the depreciation of the currency, inflation and the collapse of the economy. Let alone that the Pinochet period wasn't that good (yes they do claim that it created the basis for future growth, a typical conservative trope, that I should write about; in another occasion). I also recommend this post by Tom Palley. On a general evaluation of the regime see this piece by Jim Cypher in Dollars & Sense.
The issues with Runciman's podcast are considerably more problematic. They don't entail a misrepresentation of the ideas of a crucial intellectual, in this case, David Hume. In fact, Runciman is relatively correct when it comes to Hume's essentially negative views of public debt (which were not all that different than those of Adam Smith, at least according to Donald Winch**; btw it was called public credit at that time, so nothing weird about it). He makes to much of Hume's drastic solution, default, for public debt, and its comparison with suicide, for the nation not the individual. And he does recognize that events essentially proved Hume wrong.
But then he commits all of Hume's (and modern mainstream economics). Presumes that the only way out of debt is to run persistent surpluses, printing money and reducing its value in real terms (endorsing a Monetarist view of inflation; it's amazing how pervasive it is), and default. He misses that debts can fall as a share of income (GDP), that is, the ability to repay, if the economy grows faster than debt (the rate of interest), and that most debt consolidations actually happened that way, while running deficits. He also gives Argentina as an example of a country that has defaulted without noticing the differences between debt in domestic and foreign currency. It's a mess. Worse, in an environment in which many conservatives want to promote default in the US he suggest that talking about it would be reasonable. He is out of his depth, should apologize and invite someone to explain the problems with his analysis.
Again, I'm only commenting on these two episodes, because they do seem off, when compared to the quality of both podcasts in general.
* I published almost 20 years ago on Dissent. Because of this I did search their online archive and my piece, and my name was misspelled. Also, it was published in the Winter of 2004, and not of 1984. In the original magazine it was spelled correctly. Oh well.
** See Donald Winch, "The political economy of public finance in the 'long' eighteenth century," in John Maloney (ed.), Debt and Deficits: An Historical Perspective, Cheltenham: Edward Elgar, 1998.
Masochistic Germany is a problem for all of us.
[Note: this is a slightly edited ChatGPT translation of an article for the Italian daily Domani ]
Recently, the German Minister of Finance, the liberal Christian Lindner, announced his intention, while preparing the budget law for 2024, to return to “fiscal normality.” This means reverting to the fiscal rule suspended in 2020 (the Schuldenbremse or debt brake), which mandates reducing the debt to below 60% of GDP. With the exception of defense, all ministries are supposed to face reduced allocations. Particularly noteworthy is the fact that the Ministry of Family Affairs, led by the Green Party’s Lisa Paus, will likely not be able to finance the child poverty reduction program which was a central focus of the government’s social protection agenda.
Lindner, a hawk who has been pressing for a swift return to budget discipline since the coalition government with the Greens and Social Democrats took office, likely has a dual objective. Internally, he aims to demonstrate his ability to steer the policies of the contentious and indecisive traffic light coalition. Externally, he seeks to influence the European debate on the rule that will replace the Stability Pact, showcasing his country as an example of fiscal probity.
Germany is pushing for the new European fiscal rule to be only a slightly revised version of the current one (suspended until the end of 2023), prescribing a swift return to public debt at 60% of GDP. The urgency for a large part of the German political class to close the chapter of Covid and return to an economy governed by frugality is striking.
This haste is puzzling for two reasons. Firstly, the German economy is facing a conjunctural crisis, with two consecutive quarters of (slightly) negative growth formally putting it in recession. Regardless of this, Germany has not yet recovered the activity levels of 2019 and ranks at the bottom among OECD countries in terms of growth since the pandemics. This under performance can be attributed to contingent factors, such as the impact of the War in Ukraine and the rising energy prices, which affected Germany more than others due to its geographical position and industrial specialization. However, there are also more structural factors, such as the struggling sectors where German firms are unable to keep up with technological innovation and competition from emerging countries. A notable example is the automotive industry, where German companies, leaders in combustion engines, lag behind in electric vehicles, in which China has gained a significant advantage. Under such circumstances, reducing public support to the economy through self-imposed austerity appears particularly self-harming.
Secondly, the myth of budget discipline so widely spread among German policy makers seems particularly incomprehensible because, even before the pandemic, the many years of past frugality, both public and private, were already taking their toll. Since the early 2000s, Germany has pursued a growth model driven by exports, based on domestic demand compression. Between 2000 and 2019, German business investment was significantly lower than the Eurozone average. Although the difference is less significant for public investment, it is only because public capital has grown at very low rates throughout the Eurozone. Germany had an average net public investment of zero between 1999 and 2015, while the Eurozone as a whole saw positive figures (albeit insufficient and declining during the sovereign debt crisis years). The Covid period, with its recovery in public and private investments, now seems to already be over. The result of this investment compression, especially in the public sector, is a capital deficiency that will constrain German growth in the coming years. The aging population will exacerbate this issue by reducing the labor force. Many studies associate the future aging population with further reductions in investment, labor productivity, and consequently, potential growth.
Even before the pandemic, there was a consensus among German economists that to address the infrastructural deficit accumulated since the early 2000s, Germany needed to engage in a massive investment program of around 40-50 billion euros annually for a decade. But in reality, the needs are much higher. After the pandemic, it became clear to everyone that the focus should not be limited (not just in Germany) to physical infrastructure alone. Social capital (education and healthcare, for example), which suffered greatly during the years of austerity, is equally important to ensure balanced growth. In 2018, a report coordinated by Romano Prodi estimated the EU’s annual social investment deficit at 100 billion euros. Last, but not least, the massive investment needs related to ecological transition and decarbonization of the economy will further increase the total amount.
In short, when considering the need to renew a crumbling infrastructure, the ambitious and indispensable climate objectives of the EU, the social capital deficiency (especially in healthcare, one of the ministries hit hardest by Lindner’s announced cuts), the additional investments needs become colossal. A group of economists I collaborate with for the European Public Investment Outlook series estimates these needs to be between 600 and 800 billion euros over the next decade, which is equivalent to 1.6% to 2.1% of GDP each year. It is evident that these figures are in no way compatible with the “debt brake” and the announced contraction of public spending. Ironically, during his inauguration speech, Chancellor Scholz spoke of the “government of investment”…
Things become even more complicated, making Lindner’s announcements even more baffling, when considering the timeline of investment needs. As my German colleagues argue, infrastructure investments can be spread over an extended period, allowing for modulation based on the need for counterciclicality (more investments during slowdowns and fewer during booms) and avoiding bottlenecks. However, decarbonizing the economy requires, due to the delays accumulated in previous years, that investments be made as soon as possible. These are mainly private investments (in transportation and thermal conversion of the building stock); but, as the German colleagues point out, for this massive effort to succeed, it must be accompanied and partly financed by the government through subsidies and tax incentives.
In conclusion, faced with a changing world, Germany seems to be turning backward, heedless of the fact that the old ordoliberal doctrine has proven to be woefully inadequate in preparing the country for future challenges. One might be tempted to comment that it’s their problem, not ours. However, that would be utterly mistaken. In the coming months, the debate on the reform of the Stability Pact will intensify. A German leadership stubbornly clinging to the past will be a problem for all of us.
It's the demand, stupid! The role of weak demand on productivity growth
I couldn't resist the title.
Last week I was invited to give a short talk on what I thought was the most pressing policy issue facing the world economy today.
So I presented the findings from a very interesting paper entitled "Explaining Slower Productivity Growth: The Role of Weak Demand Growth" by Someshwar Rao and Jiang Li.
The paper examines the link between demand and productivity growth in both Canada and OECD countries. This issue has been an interest of mine ever since I read these lines in a book by Alan Blinder several years ago:
Economic slack...discourages business investment because companies that cannot sell their wares see little reason to expand their capacity. In consequence, the nation gradually acquires a smaller, older, and less efficient capital stock.
[A]lthough the state of the national is far from the only factor, who doubts that a booming economy provides a better atmosphere for inventiveness, innovation, and entrepreneurs than a stagnant one? As the cliché says, a rising tide raises all boats...From 1962 to 1973, our generally healthy economy experienced only one mild recession, an average unemployment rate of 4.7 percent, and productivity growth that averaged a brisk 2.6 percent per annum. [Between 1974 and the mid-1980s] the economy [was] frequently...out of sorts. We...suffered through two long recessions and one short one, with an average unemployment rate of 7.3 percent and a paltry average productivity growth rate of 1 percent. This association of high unemployment with low productivity growth is no coincidence.
Surveying these concomitants of high unemployment -- lack of upward mobility for workers, sluggish investment, lackluster productivity growth -- suggests an ironic conclusion: the best way to practice supply-side economics may be to run the economy at peak levels of demand. (1986:36).
This still makes lots of sense to me.
Verdoorn's Law
During my talk I described the paper as lending support to the well-known findings of economist Petrus J. Verdoorn, who several decades ago published research showing a positive relationship between labour productivity growth and real output growth.
In retrospect, I probably shouldn't have discussed this since it led to a number of questions on Verdoorn and his research, which shifted the focus away from the paper and the real purpose of my talk, which was to drive home the point that there is considerable evidence that productivity growth shouldn't be viewed as solely a supply-side phenomenon.
Specifically, the paper supports the -- in my opinion, common sense -- view that a slowdown in domestic and external demand is detrimental to growth in labour productivity, real incomes and economic activity because of the negative impact of weaker demand on scale and scope of economies, formation of physical and human capital, innovation and entrepreneurial activity.
Here are the paper's main findings:
Our major findings is that 93 percent of the fall in average labour productivity growth between 1981-2000 and 2000-2012 can be attributed to the drop in real GDP growth between the two periods...In addition, our new empirical research shows that a slowdown in growth of domestic and external demand also impacts negatively some of the key drivers of productivity growth, such as, gross fixed capital formation, M&E investment (including ICTs) and R&D spending, thus leading to lower trend labour productivity. (2013:14)
I concluded my presentation by discussing some of the policy implications outlined by the paper's authors. At this point, I was hoping my comments would get the attention of the government policy analysts and economists in the audience.
First, I suggested that it would be prudent for governments to ensure that deficit and debt reduction measures are gradual in nature so that their negative impact on domestic demand would not be excessive.
Then, I explained that it's always a good idea for governments to spend on productivity-enhancing public investment, even during a period of economic slowdown, as it contributes to both today's demand as well as future productivity growth.
References
Blinder, A., Hard Heads, Soft Hearts, (Mass: Perseus Books)
Rao, Someshwar and Jiang Li, "Explaining Slower Productivity Growth: The Role of Weak Demand Growth", International Productivity Monitor, Spring 2013.
Anthony Atkinson on the public debt and intergenerational equity
It's been a long time since my last post. Much of my spare time has been spent reading and thinking about the best way to think about the economy. In the end, I've come to the conclusion that it's the big picture that matters.
Take the question of the public debt. Much of the discussion in the popular press relating to the national debt focuses on the liabilities of the government and actuarial concerns (dealing with "how to pay it off"), but it rarely discusses the link between public debt and private wealth, wealth distribution and intergenerational equity.
Anthony Atkinson, I believe, summarized it best here:
Much of the rhetoric of fiscal consolidation is concerned with the national debt as a burden on future generations [...] One lesson of the public economics literature on the national debt is that we have to look at the full picture. We pass on to the next generations:
- national debt,
- state pension liabilities,
- public financial assets,
- public infrastructure and real wealth,
- private wealth,
- state of the environment, and
- stocks of natural resources.
We need to look at the overall balance sheet, where assets as well as liabilities are taken into account. This does not mean that the position is a healthy one. If we consider the difference between the assets of the state and the national debt, expressed as a percentage of the total national wealth, then in the 1950s the net worth of the [UK] state was negative, but it was becoming less negative, and turned positive in the 1960s [...]
The direction of change since the 1970s has however been in the wrong direction [...] In effect the process of privatisation, with the proceeds used largely to fund tax cuts, transferred wealth from the state to the personal sector. We saw that it was at the end of the 1970s that personal wealth began to rise faster than income. The worsening of the public balance sheet is the other side. Personal wealth has risen faster than national wealth since the 1970s because, in effect, assets have been transferred from the public to the private sector. We are passing on more privately to the next generation but less publicly.
Reversing this pattern can be achieved not only by reducing the national debt, but also by increasing public assets.
Now, to say that more wealth is being passed on privately rather than publicly does not mean that it's being passed on equitably.
For instance, when the government sells-off public sector assets such as parks and decommissioned military bases, the government can use the proceeds to pay down the debt, but the assets get transferred to the purchasers of those assets in the private sector, who, most of the time, don't have the same class and socio-economic profile as that of the whole population (i.e., the former "owners" of those assets).
So here's the bottom line: paying down the debt by selling off public assets to the financial interests has contributed immensely to the wealth inequality that is being discussed these days.
And the corollary to this statement is that there's still lots of wealth "out there" that could be used for public purposes and has the potential to be passed on to future generation in a more equitable manner. It hasn't disappeared, it's just changed hands.
Reference
Atkinson, A.B., "Public economics in an age of austerity", January 12, 2012