Public versus private debt. Where Brown DID go wrong

Sir_Humphrey

I thought I'd start a new thread to set out my views on this to try to refine some of the arguments on this issue.

For economic growth to occur, credit is required. This involves getting into debt.

Now, this credit can be extended to individuals, companies or government. From the mid-1990s onwards, there has been a big increase in credit to companies and in particular individuals. This has now crunched.

As a result, government needs to step in to maintain demand. This inevitably means running a deficit (i.e borrowing and racking up debt). Failure to do so will lead to greater economic contraction, making it harder for companies and individuals to pay down debt. This can lead to debt deflation, which is pretty disastrous.

So, if borrowing needs to increase, where is my criticism of Brown? My criticism is not of govt borrowing as such, but him letting both public (govt) and private borrowing balloon at the same time. If you compare this to Germany since the mid-1990s, Germany had to borrow to refinance unification. The big difference is that Germany did not allow private borrowing to get out of control at the same time, and maintained reasonable growth. France did the same, only much less successfully. An insight here must be that to maintain personal debt at a reasonable level and maintain growth at a reasonable level, Government must step in by borrowing.

Of course, the way Germany and France do this without going bankrupt is to have significantly higher progressive taxation (particularly in the good times). And that is the error that Brown, and the majority of the UK electorate have made. If you want good public services for the whole population (eg health and education) for the long term good of the economy, the price to pay is less money for immediate consumption for the relatively well off.

In the end Brown was only doing what he thought (correctly) would be popular with voters.

nickmason

Sir_Humphrey wrote: »

For economic growth to occur, credit is required. This involves getting into debt.

Is this true? I recognise that credit can fuel faster growth - gearing - but not sure that it is a prerequisite for growth.

Generali

Sir_Humphrey wrote: »

I thought I'd start a new thread to set out my views on this to try to refine some of the arguments on this issue.

For economic growth to occur, credit is required. This involves getting into debt.

Now, this credit can be extended to individuals, companies or government. From the mid-1990s onwards, there has been a big increase in credit to companies and in particular individuals. This has now crunched.

As a result, government needs to step in to maintain demand. This inevitably means running a deficit (i.e borrowing and racking up debt). Failure to do so will lead to greater economic contraction, making it harder for companies and individuals to pay down debt. This can lead to debt deflation, which is pretty disastrous.

So, if borrowing needs to increase, where is my criticism of Brown? My criticism is not of govt borrowing as such, but him letting both public (govt) and private borrowing balloon at the same time. If you compare this to Germany since the mid-1990s, Germany had to borrow to refinance unification. The big difference is that Germany did not allow private borrowing to get out of control at the same time, and maintained reasonable growth. France did the same, only much less successfully. An insight here must be that to maintain personal debt at a reasonable level and maintain growth at a reasonable level, Government must step in by borrowing.

Of course, the way Germany and France do this without going bankrupt is to have significantly higher progressive taxation (particularly in the good times). And that is the error that Brown, and the majority of the UK electorate have made. If you want good public services for the whole population (eg health and education) for the long term good of the economy, the price to pay is less money for immediate consumption for the relatively well off.

In the end Brown was only doing what he thought (correctly) would be popular with voters.

What's the mechanism for higher taxes on rich people reducing debt levels? I don't see why that would be.

Sir_Humphrey

Generali wrote: »

What's the mechanism for higher taxes on rich people reducing debt levels? I don't see why that would be.

If government bore the burden of debt, then higher taxation on the well off and the rich would allow paydown of govt debt in the upswing of the business cycle.

nickmason

As I understand it - and slightly paraphrasing - you argue that "busts" require government expenditure to soften the downturn. Because that might be out of debt, rather than money put away (I recognise that to put money away is politically difficult, especially if you've called the end to "bust") you have argued that individuals shouldn't be indebted, as at that point both individuals and the state would be indebted and a bad thing.

Ergo you argue that the government - which is in your eyes the only body that can spend our way out of recession - should have the monopoly on debt.

This argument is rather full of holes, or at least debatable points:
1) is boom and bust that bad a thing?
2) "if you want good public services for the whole population for the long term good of the economy" has some pretty severe assumptions in it.
3) does government spending really solve the problem?
4) more acutely than (3) - if there is a limited amount of credit available, is it more beneficial for the government to use that to level out these peaks and troughs, or should it be available for private enterprise to generate growth?

I think the reason your argument feels good to you and not to me comes back to the age old idea of whether government spending is better than private investment. As a growth and liberty junkie, I'd go with the latter. You go for the former.

PS - I think it's rather sad if Gordon was doing what he thought was popular with voters. That might be acceptable in opposition, but in government there are greater responsibilities.

Sir_Humphrey

nickmason wrote: »

Is this true? I recognise that credit can fuel faster growth - gearing - but not sure that it is a prerequisite for growth.

Thanks for picking up on that. I should have said a level of growth that can sustain increasing populations and a decent standard of living. Some growth would be possible without credit, although such growth would be very puny.

Alan_M_2

I understand that the French and Germans have a different frame of mind with regard to home ownership.

I assume the overwhelming amount of lending to the general populous (in the UK) is for housing or housing related purchases, therefore when a nation as a whole isn't obsessed with home ownership, the willingness or requirement to borrow these large sums doesn't exist. Therefore, the rampant house inflation we've had doesn't occur to the same extent as it has in the UK (or USA for the matter). Consider it a self fulfilling prophecy.

A little like comparing apples and oranges....or have I missed something fundamental?

Sir_Humphrey

nickmason wrote: »

As I understand it - and slightly paraphrasing - you argue that "busts" require government expenditure to soften the downturn. Because that might be out of debt, rather than money put away (I recognise that to put money away is politically difficult, especially if you've called the end to "bust") you have argued that individuals shouldn't be indebted, as at that point both individuals and the state would be indebted and a bad thing.

Ergo you argue that the government - which is in your eyes the only body that can spend our way out of recession - should have the monopoly on debt.

This argument is rather full of holes, or at least debatable points:
1) is boom and bust that bad a thing?
2) "if you want good public services for the whole population for the long term good of the economy" has some pretty severe assumptions in it.
3) does government spending really solve the problem?
4) more acutely than (3) - if there is a limited amount of credit available, is it more beneficial for the government to use that to level out these peaks and troughs, or should it be available for private enterprise to generate growth?

I think the reason your argument feels good to you and not to me comes back to the age old idea of whether government spending is better than private investment. As a growth and liberty junkie, I'd go with the latter. You go for the former.

PS - I think it's rather sad if Gordon was doing what he thought was popular with voters. That might be acceptable in opposition, but in government there are greater responsibilities.

I am not arguing for govt to monopolise debt. The balance of private and public investment is one of political value judgement. However, I would argue that for individuals, it is a case of public investment versus private spending, as spending on Chinese consumer goods does not constitute investment. Public invetssment in education and health benefits the workforce of that country and improves productivity.

I also dispute the link between economic liberty and political liberty. Sweden according to the Economist is the most democratic country in the world, but has high taxation levels.

Wookster

nickmason wrote: »

I think the reason your argument feels good to you and not to me comes back to the age old idea of whether government spending is better than private investment. As a growth and liberty junkie, I'd go with the latter. You go for the former.

Its the role of the state. Who spends more efficiently? The government (anyone for a 'job for life' in the civil service?) or the private sector where if you don't make the grade you eventually go bust.

Its the age old capitalism vs socialism argument.

Sir_Humphrey

Wookster wrote: »

Its the role of the state. Who spends more efficiently? The government (anyone for a 'job for life' in the civil service?) or the private sector where if you don't make the grade you eventually go bust.

Its the age old capitalism vs socialism argument.

Private individuals waste far more money than govts, as the recent comsumer boom demonstrates.

At the risk of going Aristotelian, virtue in this case is the mean of the extremes of Capitalism and Socialism.

Count_Dante

France has a bigger public debt and bigger unfunded public liabilities than the UK, and no inclination to reign them in. They are not bankrupt yet.

Assuming that earnings remained the same, what would increasing the higher tax band from 40% to 50% actually raise in tax? Possibly there would be advantages, but there are surely better ways of balancing the books.