Ritchie on budget surpluses

Most amusing:

Oh heaven help us is all I can say. The last thing this country needs right now is a budget surplus.

The trouble with George is he has never studied either economics or accountancy.

So, let us turn our minds to the Keynesian macroeconomics that the Murphmeister is so fond of.

In a recession allow that deficit to balloon out so as to offer fiscal stimulus. OK, we’ve done that.

So, what happens when the economy comes back on track? Some might say that you need to run a budget surplus to pay back all that was borrowed in the recession. But that’s not actually the Keynesian point. Instead, you’re supposed to be doing macroeconomic management. And a roaring boom is just as bad a thing to have as a recession is (not least because roaring booms tend to produce recessions at some point).

And thus during a boom you have to be practising fiscal austerity. That is, run a budget surplus. Not because you need to pay the debt back but because you need to be cooling the economy as part of your macroeconomic management.

And this is utterly absurd. First we do not need a surplus: when the government has control of its currency it can run a deficit equivalent to debt multiplied by the interest rate and sand still – so £30+ billion a year of deficit is balance right now.

You can see what he’s doing here. He’s setting up the argument that we should use Keynesian economics in the recession, spend lots of cash on his friends, then we should abandon Keynes in the boom so that his friends still get lots of cash spent on them.

31 comments on “Ritchie on budget surpluses

  1. Is he saying what i think he’s saying here:
    “when the government has control of its currency it can run a deficit equivalent to debt multiplied by the interest rate and sand still”
    Let the value of the currency decrease at the same rate as the borrowing rate you’re using to fund the deficit.
    Er…won’t lenders catch on & not lend money for nothing?

  2. Notwithstanding his criticisms of George Osborne, it is depressingly the case that the Sage of Downham Market reserves the right to himself to comment, blog, write books, deliver or contribute to seminars, and appear on radio and TV to pontificate, about practically the entire spectrum of human knowledge and endeavour, without having studied the vast majority of it.

    The previous two Labour Chancellors studied History and Law, not economics.

  3. Keynes thought deficit spending in recession should be matched by such saving.

    Of course Keynes was much more sensible than his “followers” choose to be in his name.

  4. Murphy would lob Keynes under the bus as soon as look at him. He is – as are most leftists – intellectually dishonest and prepared to sacrifice anyone or anything in the pursuit of the greater good (or personsal advancement).

  5. He seems to be simply a proponent of high spending in all circumstances.

    His view of taxation seems to be that it is unecessary, as the state can spend as much as it likes with no problems: I’m not sure why he thinks taxation is then a good idea, except that he thinks that it promotes engagement between the poorer classes and the state (and so the personal allowance should not be raised, as not paying tax means you don’t care what the state does – so presumably those on low incomes apparently aren’t interested in things like benefits), and it allows the state to exert control over large businesses and rich people (which must be a good thing). But anyway, as the state can do what it likes, spending should not be fettered in any way.

    The reference to Keynes is simply convenient: it allows you to justify what you’ve already decided to do anyway. So if Keynes says spending is good in certain circumstances, then when those circumstances apply that fact should be used as suppport for increased spending. When they cease to apply, you simply cease your references to Keynes and start referring to something else which supoprts spending (I’m no economist, but an argument such as “the economy is booming, so obviously we can afford to spend more” would seem likely).

  6. This is how Keynesianism is always actually practised though; any government actually attempting to run a surplus will be accused of not spending money on schools’nospitals and other Good Works. That’s why even if you accept the theory, there will inevitably be an overheating and last minute panic when it’s much too late.

    I mean, that’s ignoring the fact that we know the theory is entirely wrong anyway, but even if it were right, it would never be properly implemented.

  7. Pellinor said “His view of taxation seems to be that it is unecessary, as the state can spend as much as it likes with no problems.”

    I think he sees tax as a way of taking money off “rich” people, so as a good in itself.

  8. Yes, wealth distribution seems to be important to him. I’m not sure why he thinks one needs to take money away from rich people, though, if government can freely give money to the poor ones in the form of benefits.

    The reductio ad absurdum of saying that spending is unfettered is to pay everyone in the country benefits of say £1million a year (perhaps reduced by actual income on say a 50:50 basis to reward effort). Then all are rich, inequality is massively reduced, and the world is a happy place – and no problems are created. Unless one can see a problem with everyone getting £1m a year for doing nothing, in which case his arguments might start to look a little frail.

  9. I have much the same objection as bis – a deficit is a deficit and eventually the bondholders aren’t going to like it. Thus reducing yields to zero or less, as seen already in many countries.

    I’m reminded of the stink kicked up in, i don’t know, the early 2000s when it looked like Australia was going to completely pay off the federal debt. There was all sorts of bleating about “the collapse of the national bond market”. Benchmarking, price-setting for everyone else, etc. I never bought it.

    What part of we don’t need the money don’t you understand?

  10. Well, there’s always going to be enormous bleating of that kind because without the bond market, the financial sector would be forced to just earn whatever profits it could from the free market, rather than having the government shovelling money into their gaping cuckoo mouths as currently happens.

  11. “The trouble with George is he has never studied either economics or accountancy.”

    This statement is a bit of a hoot, given that Ritchie has boasted for years that he has refused to acquire any formal schooling in the Dismal Science. Not that it matters, given that he did study accounting and has yet to grasp any number of its most basic principles.

  12. Seems like George knows more about both economics and accountancy than Ritchie. Certainly have access to plenty of experts and be able to listen to what they explain. George that is, I know the other doesn’t like dissenting (ie right) responses.

  13. Bloke in Spain,

    What makes you think that a government which issues or prints its own money needs to borrow at all? As Keynes pointed out, in a recession government can BORROW OR PRINT. What on earth the point of borrowing is, I have no idea, but it’s one option. And as to the tired old idea that money printing necessarily results in inflation, it won’t as long as the economy is not at capacity.

    Pellinor,

    “His view of taxation seems to be that it is unnecessary, as the state can spend as much as it likes with no problems..” I’ve no idea who “he” is, but I doubt anyone is daft enough to think that.

    Ian B,

    Re your claim that surpluses result in all sorts of disasters like “overheating and last minute panic..” Bill Clinton ran a surplus without any such problems.

  14. Ralph, I didn’t say that. I said the opposite; generally we find governments don’t run (enough) surplus, hold interest rates too low, keep spending too much, and the economy then overheats causing a late panic rise in interest rates and a crash.

    As to why they borrow rather than print, it’s purely in order to keep shovelling money into the bankers’ big cuckoo mouths, as I said above. If they stop borrowing, banking would have to become a free market industry instead of the current state oligopoly thing, and since they’ve now got the governments to borrow so much that it can never be paid off, they can keep the whole borrowing scam going forever.

    At least until we finally hang them from the lampposts, anyway.

  15. Also, of course creating money (by whatever means) causes inflation. Which is why we have had continual unremitting inflation for the past century.

  16. Ian B

    “I mean, that’s ignoring the fact that we know the theory is entirely wrong anyway, but even if it were right, it would never be properly implemented.”

    Indeed. Australia sort of end up following it, surpluses through the good times and increased spending when the downturn hit, however once the taps were turned on, it’s looking almost impossible to turn them off again.

  17. He’s being very Cheney-esque, isn’t he? Deficits don’t matter, and all that. Is he secretly a neo-con?

    And Ian B is right: back before the crash, not a single major political figure was arguing for running a surplus. Quite the opposite, they were all screaming for the money to be spent on their own pet projects. That’s why a sovereign wealth fund would never work in the UK (will be a laugh trying to see Scotland run one should they win independence), far too many vested interests will insist the money is spent 10x over on pet projects.

  18. however once the taps were turned on, it’s looking almost impossible to turn them off again.

    This is why it’s important that, assuming a stimulus is required, that the money goes into projects and ventures that can easily be stopped, even halfway to completion, when they have served their purpose. Instead, much of it gets spent on stuff which is impossible to reverse, e.g. more staff in an existing organisation.

  19. this whole infrastructure thing bugs me……the M25 widening plan lasted from 2005 9well into the boom) until 2009 ( well into the bust). What was the benefit to the UK ecomomy of all these construction companies digging swathes through middlesex and herts? The Crossrail thingie has being going on forever now, and what are the benefits to the UK?

    The dis-benefits of both enterprises were very clear – longer travel times for a lot of people – many hundreds more highly paid people than were involved in the digging and whatever those creative digging people do for the rest of the day apart from drinking tea and watching tractors.

    Can anyone specify the exact benefits of the M25 widening programme?

  20. If I think back to econ101 I seem to recall that Keynes believed that over the business cycle government spending ought to be neutral. That means deficits and surpluses cancel each other out. So in theory you could be a Keynsian and believe in small government I suppose.

    Governments can easily force people to loan them money. What you do is you require all banks to hold thier capital in particular assets that are apparently highly liquid, then you include massive liquidity requirements that also require highly liquid assets.

    Why do you think that after the crisis the FSA/BOE imposed these requirements on banks at the exact same time that the Treasury needed to sell loads of gilts. I am sure it is merely a coincidence.

  21. The neutral over the business cycle thing used to be largely maintained in Aust by what was called the “automatic stabilisers” of government policy. The idea was that in good times, income went up and benefits (e.g. unemployment, family benefits) went down. In bad times the opposite. The surplus/deficit thing happened without needing any policy changes at all.

    This only works if the labour market is flexible so they can gain and shed staff (with the government forming the safety net), something that was much improved here over the 80s and 90s, and by both parties, plus asset selloffs to retire existing debt, and also allow those companies to run more efficiently than a government enterprise.

    Matthew L is correct that Kevin Rudd and Julia Gillard have “fixed” this through a combination of massive (and in my view useless) GFC stimulus spending, rapid increase in costs that are hard to adjust like government staff – that one isn’t just their fault btw – and new entitlements, e.g. national disability insurance and increased education spending. So for now its deficits as far as the eye can see.

  22. The only thing that would have made the Aust system even simpler would have been to index tax brackets to inflation. At that point most of the government could have packed up and gone home, job done. But it’s much more gratifying for governments to appear cut taxes year on year while they’re in surplus (when all they’re doing is returning bracket creep). Howard/Costello were the guilty ones here.

  23. “this whole infrastructure thing bugs me……the M25 widening plan lasted from 2005 (well into the boom) until 2009 ( well into the bust).”

    If you think the M25 widening plan was completed in 2009 I suggest you try travelling anti-clockwise from Jct 26.

    The M25 has taken over from painting the forth bridge as something that will never be finished.

  24. “The M25 has taken over from painting the forth bridge as something that will never be finished.”
    Always preferred the tPratchett/Neil Gaimen explanation.
    It was laid out in the shape of a demonic symbol & serves as a gateway to Hell.

  25. Ralph Musgrave: “He” is Richard Murphy, the person Tim’s original post is about :-)

    I may be slightly over-stating his position: he may not think that the state can spend completely freely, but I’ve not yet come across him saying that something cannot be afforded. So he seems to recognise no practical limits, even if he accepts that there is one in theory.

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