public debt

Public Debt. I can’t Believe we are Still There

Published by Anonymous (not verified) on Fri, 26/01/2018 - 5:19am in

The crisis is supposedly over, as the European economy started growing again. There will be time to assess whether we are really out of the wood, or whether there is still some slack. But this matters little to those who, as soon as things got slightly better, turned to their old obsession: DEBT! Bear in mind, not private debt, that seems to have disappeared from the radars. No, what seems to keep policy makers and pundits awake at night is ugly public debt, the source of all troubles (past, present and future).

Take my country, Italy. A few days ago this tweet showing the difference between the Italian and the German debt made a few headlines:


The ratio increased, so DEBT is the Italian most pressing problem. Not the slack in the labour market. Not the differentials in productivity. I can’t stop asking: why aren’t Italians desperately tweeting this figure?


This shows the relative performance of Italy and Germany along two very common measures of productivity, Multifactor productivity and GDP per capita. I took these variables (quick and dirt from the OECD site), but any other measure of real performance would have depicted a similar picture.

So what? The public debt crusaders will argue that precisely because of debt, Italy has poor real performance. The profligate public sector prevented virtuous market adjustments, and hampered real convergence.  The causality goes from high debt to poor real performance, they will argue. Reduce debt!

Well, think again. Research is much more nuanced on this. A paper by Pescatori and coauthors shows for example that countries with high public debt exhibit high GDP volatility, but not necessarily lower growth rates. High but stable levels of debt are less harmful than low but increasing ones. In a recent Fiscal Monitor the IMF has shifted the focus back to private debt (which, it is worth remembering is the root cause of the crisis), arguing that the deleveraging that will necessarily continue in the next few years will require accompanying measures from the public sector: on one side, renewed attention to the financial sector, to make sure that liquidity problems of firms, but also of financial institutions) do not degenerate into solvency problems. On the other side, the macroeconomic consequences of deleveraging, most notably the increase of savings and the reduction of private expenditure, may need to be compensated by Keynesian support to aggregate demand, thus implying that public debt may temporarily increase in order to sustain growth (self promotion: the preceding paragraph is taken from my book on the relevance of the history of thought to understand current controversies. French version available, Italian version coming out in March, English version coming out eventually).

In just a sentence, the causal link between high debt and low growth is far from being uncontroversial.

Last, but not least, it is worth remembering that Italy was not profligate during the crisis; unfortunately, I would add.  Let’s look at structural deficit (since 2010; ask the Commission why we don’t have the data for earlier years), which as we know washes away the impact of cyclical factors on public finances.


The Italian figures were slightly worse than the German ones, but not dramatically so. And if we take interest expenditure away, so that we have a measure of what the Italian government could actually control, then Italy was more rigorous (Debt obsessive pundits would use the term “virtuous”) than Germany.

The thing is that the Italian debt ratio is more or less stable, in spite of sluggish growth (current and potential) and low inflation. It is not an issue that should worry our policy makers, who should instead really try to boost productivity and growth. Said it differently, it is more urgent for Italy to work on increasing the denominator of the ratio between debt and GDP than to focus on the numerator. And I think this may actually require more public expenditure and a temporary increase in debt (some help from the rest of the EMU, starting from Germany, would not hurt). It is a pity that the “Italian debt problem” is all over the place.

Savings are NEVER needed for investment

Published by Anonymous (not verified) on Thu, 07/12/2017 - 10:48pm in

 With acknowledgement to  PublicDomainPictures. 

With acknowledgement to PublicDomainPictures. 

Yesterday I spoke to a group of important economists about my book The Production of Money - but omitted to make one important point. So am making it here. 

Savings are not needed for investment. Ever. There is absolutely no need for example, for the Chancellor to rattle the tax collection box, or cut government spending - to build up savings, before the government is able to invest. No need whatsoever. 

To understand why, think of your own investments. When you (and I am assuming you are not a Saudi princess) set out to buy a new home that costs say £500,000 - you do not have that money in your bank account. You may have some savings for a deposit - a downpayment on your commitment to pay. But you do not have £450,000 in your bank. All you have is a contract. A Promise To Pay. That promise - its called money - may deliver a new roof over your head, somewhere secure to live, and perhaps a place to expand your family. 

Its the same when you travel to a white goods store to buy a washing machine. All you have is your credit card. If you're a regular gal (or guy) there is no money for the machine in your credit card account. All you have is a card which effectively says: the bank thinks that ........(insert name here) will uphold a Promise To Pay.  You hand over your card, the seller of the washing machine stamps and acknowledges it, and then - she hands it back to you. You have not engaged in barter. You have not handed over any money. 

Instead you have handed over your Promise to Pay. And that is what we call 'money'. 

Its a wonderful thing. It gives you purchasing power (that is, if your bank trusts your Promise To Pay). And it gives the white goods store a sale. That helps the store make a profit, and probably helps the store or washing machine factory to employ a new member of staff. 

Of course the important thing is that you, the buyer must have income. And for most of us, that means having a job - because employment generates income. Not just for you, but also for the Chancellor (in the form of tax revenues). 

The Chancellor of course, has the biggest credit card of all. Not only is he backed by British employees - but he is virtually guaranteed income from 31 million taxpayers. And so his 'credit card' - gives him enormous powers of expenditure. Powers to purchase infrastructure, like flood defences against climate change, but infrastructure that is both social and capital investment. But investing the Chancellor is helping to create jobs (many in the private sector) which, hey presto - provides him with even more (tax) income from construction workers, nurses and teachers. 

That is the magic of the Magic Money Tree. 


The deficit & the IFS: a black hole between a rock and a hard place?

Published by Anonymous (not verified) on Tue, 31/10/2017 - 9:53am in


UK, public debt

 Image with acknowledgement to Google Search

Image with acknowledgement to Google Search

Anyone familiar with the austerity obsession of EU leaders will know that the boundary between fiscal virtue and profligate sin lies at minus 3%.  A budget balance below the ominous minus 3 sends the offending government to the fiscal headmasters of the European Commission, who enforce the dreaded “excessive deficit procedure”.  Demonstrably absurd, dysfunctional and a major explanation of the long delayed and tepid recovery of the euro zone (see our report), the 3% austerity solution is too lenient by half for the Institute for Fiscal Studies (literally, numbers in charts below).

In its latest true-to-form report, “Between a rock and a hard place”, the IFS discovers to its horror that the Tory Chancellor badly missed his borrowing target and is unlikely to balance the central government’s budget.  Apparently gobsmacked by the report, the Guardian reproduced many of the IFS charts, sounding the alarm of a “new budget black hole”, its default moniker for a fiscal deficit (a singularly misleading cosmological metaphor as a trip to the NASA website shows).

An inspection of British government statistics suggests that for all the fiscal high crimes and misdemeanours over the last seven years, the Tory Chancellor is not “between a rock and a hard place” with government finances.  The chart below shows annualized borrowing over twenty years by month (ie., the moving sum of twelve months borrowing).

After an almost continuous monthly decline over the last three years, public borrowing, both for the central government and all governments (Maastricht measure), has fallen to about the level just prior to the Great Financial Crisis of 2008.  Adjusting for inflation over those twenty years annual borrowing would show a substantial reduction compared to 2007-2008.

Annualized Public Sector Borrowing, Sept 1997 - Sept 2017, billions

  Office for National Statistics   

Notes: Annualized borrowing is borrowing for the twelve months including the current month.  The Maastricht measure includes local government. 
Source: Office for National Statistics

The second chart, the budget balance as share of GDP, reinforces the conclusion that the Chancellor rests not between a rock and a hard place, but in a considerably softer location (fiscally speaking).  At the end of this September the annual equivalent fiscal deficit as a portion of GDP fell to less than 2%, its lowest level since the last quarter of 2002.  It may not matter for very long, but the British general government deficit (Maastricht measure) is well below the 3% requirement, and lower than for almost half of the other 27 EU member governments.

Mr Hammond’s fiscal transgressions derive from the same source as the IFS’s balanced budget fantasies.  The transgression against sound fiscal policy, commonsense and the welfare of the population arises because he and his predecessor George Osborne sought and seek to do what the IFS urges and the Guardian seems to endorse, to balance the fiscal books.

Quarterly Public Sector Borrowing, 1998Q1 – 2017Q3, billions

  Office for National Statistics .    

Notes: Annualized borrowing is borrowing for the twelve months including the current month.  The Maastricht measure includes local government.  GDP for 2017Q3 estimated as the previous quarter plus a nominal increase of 0.3%.
Source: Office for National Statistics.  

The roughly continuous and extremely slow decline in public borrowing is the by-product of an ideological project consciously planned and implemented by Conservative politicians since May 2010.  This project was and is to shrink the public sector, and, in doing so, destroy the welfare state. 

Complimentary ideological is the propaganda from the Institute for Fiscal Studies.  Without explaining why a balanced budget is either necessary or desirable, the IFS provides apparently independent endorsement of public sector downsizing.  While the IFS report mentions tax increases as an “option” for achieving the unnecessary and reactionary goal of a balanced budget, the language used betrays an ideological preference for expenditure cuts (see “Policy Options for the Budget”).  Expenditures are stigmatized as “giveaways” and tax increases as “takeaways”.  The specific policy suggestions call for further cuts (see discussion of working age benefits).

While the Daily Mail may ignore or excuse the deficits of Conservative governments, not so for the neoliberals of the right and centre.  These fiscal reactionaries play a long game and organizations such as the IFS are key utensils in that game.  Consistently preaching the necessity of balanced budgets lays the basis for political attack on a future Labour government.  The inevitable IFS attacks on a Labour Chancellor for unsound fiscal policy would seem all the more credible and non-ideological after critiquing Mr Hammond for the same sins.

Indeed, this last summer in the run-up to the general election the IFS deputy director heaped ridicule on the Labour Manifesto, accusing it of “pretending that everything can be paid for”.  Most of the Guardian economics writers have little patience with the balanced budget mythology.  In contrast, those who edit and write the news section faithfully transmit the propaganda generated by the Institute for Fiscal Studies in its reports and policy briefings, enhancing that ideology with emotive phases such as “black holes”.

Herein lies a lesson for progressives.  Conservative Chancellors have not met the targets they set for deficit reduction.  It is quite possible that they never intended to meet them.  As long as the Treasury failed to achieve its targets, it could argue for continued austerity – further destruction of the public sector.

The lesson is that no progressive, especially no progressive politician, should ever criticize Tory Chancellors for failing to meet budget targets.  Doing so is a de facto acceptance that the target should have been achieved.  That is endorsement of the core lie of the austerity doctrine.


It's the demand, stupid! The role of weak demand on productivity growth

Published by Anonymous (not verified) on Mon, 06/10/2014 - 12:52pm in

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.


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

Published by Anonymous (not verified) on Sun, 28/09/2014 - 11:05pm in

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.


Atkinson, A.B., "Public economics in an age of austerity", January 12, 2012

Moving past the 90 percent threshold: Focusing on growth

Published by Anonymous (not verified) on Tue, 23/04/2013 - 9:33pm in

Now that the proposition of a 90 percent threshold (of public debt-to-GDP above which countries' economic growth would significantly slow) associated with the work of Carmen Reinhart and Ken Rogoff has been refuted, it's important that the debate now turn to the critical issue of how best to achieve growth moving forward.

On this point, one important aspect to keep in mind is that the uses toward which public debt is directed and the composition of public debt tend to have a significant impact on a country's economic growth.

A recent study by the IMF entitled "Public Debt and Growth" appears to support this view. The study, which examined the public debt dynamics in over 30 countries, found that, although the elasticity of growth with respect to public debt is -0.02, the elasticity of other variables that positively impacts growth offsets this number. For instance, as Iyanatul Islam has noted, the study shows that the elasticity of growth to initial years of schooling is above 2.0.

In other words, it's quite likely that public debt directed toward productive uses has the effect of supporting growth by cancelling out some of the negative effects associated with high public debt that impede growth.

These are the sort of issues policymakers should be discussing moving forward. I think it would go a long way to help us get out of the economic doldrums we're facing today.


Manmohan and Jaejoon, Public Debt and Growth, IMF, July 2010