Wrong diagnosis wrong cure

Written By: - Date published: 9:13 pm, September 7th, 2011 - 6 comments
Categories: Economy - Tags:

Respected Financial Times journalist  Martin Wolf  argues that the last thing we need in a world of excess saving is for creditworthy governments to cut their borrowing. He presents evidence that shows that fiscal deficits are helpful not because they return the economy to swiftly to health but because they promote the painfully slow healing of deleveraging.

He says:

It is inconceivable that creditworthy governments would be unable to earn a return well above their negligible costs of borrowing, by investing in physical and human assets, on their own or together with the private sector. Equally, it is inconceivable that government borrowings designed to accelerate a reduction in the overhang of private debt, recapitalise banks and forestall an immediate collapse in spending cannot earn a return far above costs.

Wolf refers to an objection that growth slows sharply once public debt exceeds 90% of GDP. Our public debt at around 30% of GDP is nowhere near that of some of the eurozone countries.

In an article in today’s DomPost, not online, Conor English of Federated Farmers says: “If debt is the problem, why borrow more”. But the problem the world faces is not too much debt but too little demand, and the main danger is stagnation as in Japan or worse deflation.

If the diagnosis is wrong then the so-called cure of asset sales to pay off debt,  and fiscal retrenchment instead of investment for growth is also wrong. We should be investing now, not selling off control of our future.

6 comments on “Wrong diagnosis wrong cure ”

  1. Colonial Viper 1

    But the problem the world faces is not too much debt but too little demand, and the main danger is stagnation as in Japan or worse deflation.

    Hi Mike.

    The main danger the world faces is IMO a resource and energy depletion driven collapse of the economy.

    A situation which is compounded secondarily by ‘peak debt’ / ‘peak credit’ / crony-cartel capitalism.

    Too little (consumer) demand which you identify as a root problem does indeed result in no one willing to take on more debt…even if they are credit worthy to do so – not many of those left around actually.

    Two additional points

    1) Western labour would not have to take on more debt to increase their demand as consumers, if they were being paid adequately.

    2) There is actually growing middle class demand globally. Just not from OECD countries.

    • aerobubble 1.1

      The world economy needs to change direction and will. Rightwing governments
      would like, or believe, the market will respond. Unfortuately in their zeel to
      embrace neo-liberalism they forgot what Adam Smith and Karl Marx said.
      Their zealotry is delusional. Government historically have to re-engage with
      the economy after a long time (30 years) of being disconnected from it.
      Governments need to list those goals that are assets and those goals that
      are burdens. Like the private automobile is a burden. Now the rightwing
      governments don’t like the idea and so are dithering, so leading inevitably
      to a much larger interventionist government later in the play. Because
      on current threads our way of life is unsustainable and even catacylsmic.

      The solution is to take money off those who are incapable of using it,
      or unwilling to use it, or just too damn stupid to see light for how
      far their heads are up thier collective behinds (think tea party and
      anyone who voted republician – or would have if they lived in the US).
      Redistribute the money back to the poorest, lock the process in
      and leave it alone.

    • Georgecom 1.2

      Fully agree that the issue of resource constraints and limits of growth are absolutely central to our future economic & social interests.

      On credit and debt it seems to me that the problem isn’t actually too much credit or too much debt or too little demand. It’s certainly all of that but is about how demand is maintained within an economy and how credit and debt are used to underpin or undermine that demand. Obviously govt pump priming infinitum to maintain economic demand is not sustainable nor is long term govt spending above any level of economic growth sustainable.

      The postwar period of economic growth roughly balanced production and consumption, productivity with wages rise and expanding demand. In the US wage rises were linked to productivity increases, in NZ with things like wage relativities and general wage orders. Economic growth and economic demand existed in rough symetry. The 1970s stagnation brought an end to steadily rising economic growth whilst the neo-liberal project of the 1970s/1980s dismantled the links between production & consumption – growth and wages. It facilitated the rise of financial capital as a source of ‘wealth’ seperate from production and allowed wealth to become concentrated at the upper reaches whilst surpressing wage levels. Credit increasingly became the method of maintaining demand.

      Seems to me that some resumption of economic growth linked to rising wages is a necessary aspect of any sustainable economic future for western economies.

  2. Mike Smith 2

    I’m not arguing with you CV – I agree your diagnosis is out in front. But the problem we face here is still dealing with those who have been running the same argument for the last twenty-five years and see the present situation as another opportunity to run the same failed programme and compound inequality.

  3. Afewknowthetruth 3

    ‘But the problem the world faces is not too much debt but too little demand, and the main danger is stagnation as in Japan or worse deflation.’

    CV beat me to it with respect to resource depletion -especially oil. Without cheap and abundant resources industrialism grinds toa halt.

    So let’s focus on the other aspect. If the industrial nations were to make a recovery (say because of geater extraction of oil from tar sands, or fracking, or deep sea drilling, opening up of the Arctic etc.) and if demand were to increase, all that would happen is we would bring about faster acidification of the oceans and a faster collapse of the global environment in general.

    Humanity is in a trap from which orthodox economics can offer no escape. Indeed, othodox economics simply ensures that everything gets worse.

    So the problem the world faces is being tied to a completely dysfucntional economic system -and apparently irrevocaby tied to a dysfunctional economic system until it destroys itself and the planet we live on.

    The other problem the world faces is politicians who refuse to accept reality and continue to promote the system which is destroying everything.

  4. Draco T Bastard 4

    Sounds like Mart Wolf is agitating for more government borrowing so that the rich have an even bigger unearned income. After all, who are the governments going to borrow form?