March 11, 2010


In Defense of Deficits (James K. Galbraith, March 22, 2010, The Nation)

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in "net financial wealth." Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don't like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over--a house or factory or company--that will then become the property of the bank. It's easy to see why bankers love private credit but hate public deficits. [...]

We also hear, from the same people, about the impending "bankruptcy" of Social Security, Medicare--even the United States itself. Or of the burden that public debts will "impose on our grandchildren." Or about "unfunded liabilities" supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that "just like the family, the government can't live beyond its means." But it's not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.

Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors' prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt--and shred the bills. Since it is the source of money, government can't run out.

It's true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation--though with the world in recession, that's not an immediate risk. Wasteful spending--on unnecessary military adventures, say--burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don't control the currency in which they owe debts--as Argentina owed dollars or as Greece now (it hasn't defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is "out of money," he's talking nonsense--dangerous nonsense. One wonders if he believes it.

The History of England from the Accession of James II, Vol. 4 (Thomas Babington Macaulay)
Such was the origin of that debt which has since become the
greatest prodigy that ever perplexed the sagacity and confounded
the pride of statesmen and philosophers. At every stage in the
growth of that debt the nation has set up the same cry of anguish
and despair. At every stage in the growth of that debt it has
been seriously asserted by wise men that bankruptcy and ruin were
at hand. Yet still the debt went on growing; and still bankruptcy
and ruin were as remote as ever. When the great contest with
Lewis the Fourteenth was finally terminated by the Peace of
Utrecht, the nation owed about fifty millions; and that debt was
considered, not merely by the rude multitude, not merely by
foxhunting squires and coffeehouse orators, but by acute and
profound thinkers, as an incumbrance which would permanently
cripple the body politic; Nevertheless trade flourished; wealth
increased; the nation became richer and richer. Then came the war
of the Austrian Succession; and the debt rose to eighty millions.
Pamphleteers, historians and orators pronounced that now, at all
events, our case was desperate. Yet the signs of increasing
prosperity, signs which could neither be counterfeited nor
concealed, ought to have satisfied observant and reflecting men
that a debt of eighty millions was less to the England which was
governed by Pelham than a debt of fifty millions had been to the
England which was governed by Oxford. Soon war again broke forth;
and, under the energetic and prodigal administration of the first
William Pitt, the debt rapidly swelled to a hundred and forty
millions. As soon as the first intoxication of victory was over,
men of theory and men of business almost unanimously pronounced
that the fatal day had now really arrived. The only statesman,
indeed, active or speculative, who did not share in the general
delusion was Edmund Burke. David Hume, undoubtedly one of the
most profound political economists of his time, declared that our
madness had exceeded the madness of the Crusaders. Richard Coeur
de Lion and Saint Lewis had not gone in the face of arithmetical
demonstration. It was impossible to prove by figures that the
road to Paradise did not lie through the Holy Land; but it was
possible to prove by figures that the road to national ruin was
through the national debt. It was idle, however, now to talk
about the road; we had done with the road; we had reached the
goal; all was over; all the revenues of the island north of Trent
and west of Reading were mortgaged. Better for us to have been
conquered by Prussia or Austria than to be saddled with the
interest of a hundred and forty millions.370 And yet this great
philosopher--for such he was--had only to open his eyes, and to
see improvement all around him, cities increasing, cultivation
extending, marts too small for the crowd of buyers and sellers,
harbours insufficient to contain the shipping, artificial rivers
joining the chief inland seats of industry to the chief seaports,
streets better lighted, houses better furnished, richer wares
exposed to sale in statelier shops, swifter carriages rolling
along smoother roads. He had, indeed, only to compare the
Edinburgh of his boyhood with the Edinburgh of his old age. His
prediction remains to posterity, a memorable instance of the
weakness from which the strongest minds are not exempt. Adam
Smith saw a little and but a little further. He admitted that,
immense as the burden was, the nation did actually sustain it and
thrive under it in a way which nobody could have foreseen. But he
warned his countrymen not to repeat so hazardous an experiment.
The limit had been reached. Even a small increase might be
fatal.371 Not less gloomy was the view which George Grenville, a
minister eminently diligent and practical, took of our financial
situation. The nation must, he conceived, sink under a debt of a
hundred and forty millions, unless a portion of the load were
borne by the American colonies. The attempt to lay a portion of
the load on the American colonies produced another war. That war
left us with an additional hundred millions of debt, and without
the colonies whose help had been represented as indispensable.
Again England was given over; and again the strange patient
persisted in becoming stronger and more blooming in spite of all
the diagnostics and prognostics of State physicians. As she had
been visibly more prosperous with a debt of a hundred and forty
millions than with a debt of fifty millions, so she, as visibly
more prosperous with a debt of two hundred and forty millions
than with a debt of a hundred and forty millions. Soon however
the wars which sprang from the French Revolution, and which far
exceeded in cost any that the world had ever seen, tasked the
powers of public credit to the utmost. When the world was again
at rest the funded debt of England amounted to eight hundred
millions. If the most enlightened man had been told, in 1792,
that, in 1815, the interest on eight hundred millions would be
duly paid to the day at the Bank, he would have been as hard of
belief as if he had been told that the government would be in
possession of the lamp of Aladdin or of the purse of Fortunatus.
It was in truth a gigantic, a fabulous debt; and we can hardly
wonder that the cry of despair should have been louder than ever.
But again that cry was found to have been as unreasonable as
ever. After a few years of exhaustion, England recovered herself.
Yet, like Addison's valetudinarian, who continued to whimper that
he was dying of consumption till he became so fat that he was
shamed into silence, she went on complaining that she was sunk in
poverty till her wealth showed itself by tokens which made her
complaints ridiculous. The beggared, the bankrupt society not
only proved able to meet all its obligations, but, while meeting
those obligations, grew richer and richer so fast that the growth
could almost be discerned by the eye.
In every county, we saw
wastes recently turned into gardens; in every city, we saw new
streets, and squares, and markets, more brilliant lamps, more
abundant supplies of water; in the suburbs of every great seat of
industry, we saw villas multiplying fast, each embosomed in its
gay little paradise of lilacs and roses. While shallow
politicians were repeating that the energies of the people were
borne down by the weight of the public burdens, the first journey
was performed by steam on a railway. Soon the island was
intersected by railways. A sum exceeding the whole amount of the
national debt at the end of the American war was, in a few years,
voluntarily expended by this ruined people in viaducts, tunnels,
embankments, bridges, stations, engines. Meanwhile taxation was
almost constantly becoming lighter and lighter; yet still the
Exchequer was full. It may be now affirmed without fear of
contradiction that we find it as easy to pay the interest of
eight hundred millions as our ancestors found it, a century ago,
to pay the interest of eighty millions.

"No Man whatever having lent his Money to the Government on the Credit of a Parliamentary Fund has been Defrauded of his Property . . . The Goodness of the Publick Credit in England, is the reason why we shall never be out of Debt. . . . Let us be, say I, a free Nation deep in Debt, rather than a Nation of Slaves owing Nothing."
-Anonymous English pamphleteer (1719)

Posted by Orrin Judd at March 11, 2010 7:58 PM
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