High public debt = low economic growth ?

Kennyboy66

An accepted wisdom for George Osbourne and backed up by empirical evidence from economists Reinhart and Rogoff who are the authors of the book on the history of financial crises, This Time its Different.


Except - they got there numbers wrong in their spreadsheets.

Doh !

http://www.guardian.co.uk/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause

Generali

Go on. Vote for more debt and more Government spending next time.

You'll be sorry.

antrobus

Kennyboy66 wrote: »

....http://www.guardian.co.uk/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause

The key sentence here being "In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff." Which is to say, nothwithstanding any methodological errors in their original research, their conclusions may still be correct.

Besides, it's pretty obvious that there is a limit to how much money a sovereign state can borrow before it has a negative impact on growth. See Greece for example. The only question would be what that limit is. R&R think it's 90%. Perhaps they're wrong, perhaps it's 100%, or even a 120%. I'm not so sure I want the UK run by people who want to use the country as an experiment to test out where the limit is to be found.

wotsthat

Generali wrote: »

Go on. Vote for more debt and more Government spending next time.

You'll be sorry.

Who should we vote for?

They'll all increase debt and, whatever they say, politicians have an allergic reaction when it comes to cutting spending.

Kennyboy66

Generali wrote: »

Go on. Vote for more debt and more Government spending next time.

You'll be sorry.

It would though nice to be able to formulate policy on evidence that was correct.

"Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand."

According to those bolshie commies the IMF yesterday.

I personally wouldn't vote for more debt, but have consistently said that cutting investment while increasing transfer payments (UK state pensions) is the economics of the madhouse.

Generali

Kennyboy66 wrote: »

I personally wouldn't vote for more debt, but have consistently said that cutting investment while increasing transfer payments (UK state pensions) is the economics of the madhouse.

Probably.

The problem IMHO is that there is more than one sort of recession/depression. Sometimes they're of the sort that Keynes saw and offers policy responses to, other times they're of the sort that libertarians predict and offer policy responses to.

IMHO, the current mess could be called a Libertarian recession. Big cuts in interest rates after the dot com bust pushed huge amounts of money into housing and banking/finance and created massive surpluses of both. As a result, many economies have large amounts of potential output that simply aren't required (who needs another lot of investment bankers, ask the Irish or Spanish if they need any more houses).

Government deficits in these circumstances merely reduce the amount of cash available to invest in areas of the economy that could produce things that people want to buy. This process is known as 'crowding out' and works on the basis that each pound can only be lent once. If the Government borrows it to spend, a business can't borrow it to employ people.

I call it a Libertarian recession as Libertarians recognised a potential problem with a Keynesian response to a recession: you create inflation but only in some parts of the economy. This misdirects investment so you end up with a bubble (inflation in a narrow part of the economy) which leads to oversupply in that part of the economy.

CLAPTON

Generali wrote: »

Probably.

The problem IMHO is that there is more than one sort of recession/depression. Sometimes they're of the sort that Keynes saw and offers policy responses to, other times they're of the sort that libertarians predict and offer policy responses to.

IMHO, the current mess could be called a Libertarian recession. Big cuts in interest rates after the dot com bust pushed huge amounts of money into housing and banking/finance and created massive surpluses of both. As a result, many economies have large amounts of potential output that simply aren't required (who needs another lot of investment bankers, ask the Irish or Spanish if they need any more houses).

Government deficits in these circumstances merely reduce the amount of cash available to invest in areas of the economy that could produce things that people want to buy. This process is known as 'crowding out' and works on the basis that each pound can only be lent once. If the Government borrows it to spend, a business can't borrow it to employ people.

I call it a Libertarian recession as Libertarians recognised a potential problem with a Keynesian response to a recession: you create inflation but only in some parts of the economy. This misdirects investment so you end up with a bubble (inflation in a narrow part of the economy) which leads to oversupply in that part of the economy.

It's difficult to see whether there is significant 'crowding out' at the moment.

It appears that some smaller companies can't get funding but that seems more to do with the FSA/FCA 'risk' methodology and recapitalisation than any actual lack of cash.

Many of our larger companies are, in fact awash with cash.

Generali

CLAPTON wrote: »

It's difficult to see whether there is significant 'crowding out' at the moment.

It appears that some smaller companies can't get funding but that seems more to do with the FSA/FCA 'risk' methodology and recapitalisation than any actual lack of cash.

Many of our larger companies are, in fact awash with cash.

It's probably fair to say that the big companies with lots of cash aren't literally holding pound notes, they've lent the money on in some way via a bank most likely.

Then the bank has a choice: lend to the Government who will pay it back or to a company that might. Realistically that's Hobson's choice and is classic crowding out.

People are crying out for houses to be built yet can't borrow the money to build them.

Kennyboy66

Generali wrote: »

It's probably fair to say that the big companies with lots of cash aren't literally holding pound notes, they've lent the money on in some way via a bank most likely.

Then the bank has a choice: lend to the Government who will pay it back or to a company that might. Realistically that's Hobson's choice and is classic crowding out.

People are crying out for houses to be built yet can't borrow the money to build them.

This is nothing to do with crowding out - the BoE is stuffing cash down the throats of banks but the capital rules make first time buyer mortgages exceedingly unattractive.

If you have sufficient deposit you can borrow at ludicrously low levels - no end of sub 2.5% deals if you have 40% deposit.

CLAPTON

Generali wrote: »

It's probably fair to say that the big companies with lots of cash aren't literally holding pound notes, they've lent the money on in some way via a bank most likely.

Then the bank has a choice: lend to the Government who will pay it back or to a company that might. Realistically that's Hobson's choice and is classic crowding out.

People are crying out for houses to be built yet can't borrow the money to build them.

In a crowding out situation, one would expect high interest rates as people/companies compete for available funds.

This doesn't seem to be happening, so I feel that it's rules and regulations that are preventing lending rather than actual shortage of cash within the banking sector.

Graham_Devon

Generali wrote: »

Probably.

The problem IMHO is that there is more than one sort of recession/depression. Sometimes they're of the sort that Keynes saw and offers policy responses to, other times they're of the sort that libertarians predict and offer policy responses to.

IMHO, the current mess could be called a Libertarian recession. Big cuts in interest rates after the dot com bust pushed huge amounts of money into housing and banking/finance and created massive surpluses of both. As a result, many economies have large amounts of potential output that simply aren't required (who needs another lot of investment bankers, ask the Irish or Spanish if they need any more houses).

Government deficits in these circumstances merely reduce the amount of cash available to invest in areas of the economy that could produce things that people want to buy. This process is known as 'crowding out' and works on the basis that each pound can only be lent once. If the Government borrows it to spend, a business can't borrow it to employ people.

I call it a Libertarian recession as Libertarians recognised a potential problem with a Keynesian response to a recession: you create inflation but only in some parts of the economy. This misdirects investment so you end up with a bubble (inflation in a narrow part of the economy) which leads to oversupply in that part of the economy.

Nothing to do with the subject - but just wanted to chip in and show some appreciation here for that post - learnt a lot.