Neither Ed Balls nor George Osborne understand deficits.

The above two individuals are engaged in contest to see who can dispose of the deficit the quicker. Here is a simple explanation as to why the contest is pointless (which in turn is a simple exposition of Keynes’s basic ideas which in turn are much the same as Modern Monetary Theory).

If the private sector doesn’t spend at a rate that brings full employment, a solution is to get the public sector to spend more, or “net-spend” to be more to be exact. That is, the extra net spending can take the form of more public spending or reduced tax, or a bit of both. Whichever option is chosen, household incomes and bank balances rise, and (revelation of the century), that causes household spending to rise, which raises demand.

In short, the deficit needs to be whatever brings full employment. Or as Keynes put it: “Look after unemployment, and the budget will look after itself.”

Ergo AIMING FOR ANY SPECIFIC AMOUNT OF SURPLUS OR DEFICIT IN TWO OR THREE OR FIVE YEARS TIME IS FATUOUS. IF THE PRIVATE SECTOR IS IN SUBDUED MOOD IN THREE YEARS TIME, THE DEFICIT WILL NEED TO CONTINUE. IF NOT, IT WON’T, OR AT LEAST THE DEFICIT WON’T NEED TO BE AS LARGE.

As to the alleged problem that a continuous deficit leads to an ever expanding national debt, that’s not true in that the debt is continually being eaten away by inflation. But if the debt DOES RISE relative to GDP, won’t creditors demand an elevated rate of interest? Well if they do, there’s a simple solution: DON’T BORROW!!!!!

That is: print money instead. Indeed Keynes (famous economist who political leaders and their advisors apparently haven’t heard of) said that printing was a perfectly viable alternative to borrowing.

And of course whenever the words “print” and “money” appear in the same sentence, a host of economic illiterates appear from nowhere and start chanting “inflation”. Well the answer that is that if a deficit is needed, that means demand is inadequate, and inflation (demand pull inflation at least) is not going to become excessive when demand is inadequate.

 

 

 

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