The Debt Delusion – Living Within Our Means and Other Fallacies

JWeeksDebtDelusionJohn Weeks has a new book out, The Debt Delusion, which takes a progressive line in debunking a number of what he terms the myths that surround fiscal policy.

Weeks is an Emeritus Professor of Development Studies at SOAS, and coordinator of the Progressive Economy Forum. He is heavily critical of austerity and proposes an ‘anti-austerity’ agenda on tax and spending for today’s policymakers.

Weeks has long been critical of mainstream economics in general, not least in his previous book for the layman, Economics of the 1%.

Summing up his proposed fiscal policy framework, he writes (p.182-3):

“we have the alternatives to austerity. National governments should set spending and taxation targets to avoid the extremes of recession and inflation. By keeping within the Goldilocks Zone, lodged safely between recession and inflation, democratically elected governments can implement the political and social goals set by their citizens. The economic management principle might be briefly summarized as “balance policies, not budgets.” The first step in this approach involves the government specifying its spending plans. Then the government sets tax targets to arrive at and stay in the Goldilocks Zone.

This policy sequence reverses austerity budgeting, which attempts to trim public expenditure to match public revenue. That, the austerity doctrine, takes a country into the inflation zone or leaves resources unnecessarily idle (usually the latter), which comes as an unplanned and perhaps unanticipated outcome. Anti-austerity turns austerity sequencing upside down – first, political debate in a democratic society determines spending priorities, what activities government should deliver to its citizens, the time scale of delivery, and the level of provision. These priorities dictate the expenditure necessary to fulfill them. With spending levels set, the next step involves identifying the level of tax revenue to keep the economy within the Goldilocks Zone, that benign territory between an unacceptable inflation rate and unnecessarily idle resources.

In this approach to spending and taxation, the public budget automatically contributes to the solution of avoiding extremes. When recession threatens, budgets tend towards deficit, softening the decline of the national economy. Inflation produces the mirror image – rising tax revenues that weaken private spending. Progressive taxation provides the important mechanism that facilitates the benign balance between recession and inflation.”

Here are a few more key points made by Weeks in his very readable book that stood out for me:

  • Budget surpluses are rare historically in the post war period among rich world countries, not least the UK and US. Rather than suggesting persistent malfeasance on the part of governments, this record points to something intrinsic about the functioning of national economies.
  • Austerity is a political choice. TINA (There Is No Alternative) does not apply to it.
  • Likening the government to a household that lives ‘within its means’ is misleading. Households go into debt as do governments. The context within which that debt is accumulated is important to consider, such as whether or not the liability of debt is used to purchase assets.
  • Governments go into debt to invest and to stabilize the economy during recessions.
  • Government debt accumulates especially when the private sector (households and businesses) pay down debt in slowdowns or recessions.
  • A government with its own national currency can borrow from itself, though this can become problematic in poorer countries with undeveloped financial systems.
  • Governments should manage the public finances to balance flows of expenditure with flows of income in the economy as a whole, in order to achieve low unemployment and inflation.
  • Growing out of debt, such as in the post-war period, has historically been much more effective than austerity for reducing the public debt share as a percentage of GDP. The UK began this period with a public debt share of GDP of 256%, largely due to financing two world wars, but sustained economic growth had reduced it to 60% of GDP by 1969. By this time, the debt itself was 17% larger than in 1946 but the much larger economy had reduced the public debt ratio dramatically.
  • There are genuine choices to be made between funding public goods and services publicly or privately, such as health, education or pensions. One form of provision may not necessarily be cheaper than the other. Furthermore, there are political decisions to be made on provision which consider the issue of equity.
  • Whether public goods and services are means tested or provided universally, to poor and rich alike, must consider issues of social cohesion or divisiveness (George Osborne’s “strivers versus skivers”), cost effectiveness, and reducing the inequality generated by private markets.
  • Taxes, rather than being a ‘burden’, are the ‘price we pay for civilization’. In this context, it is vital to see individuals as members of a society rather than as isolated atoms.

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