by From Lars Syll Mainstream economists do not believe that “countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.” Looking at the result from a survey, not a single economist agreed with that statement. If these economists had been right, we would see lots of governments running out of money in 2020 and 2021. After all, tax revenues collapsed, government spending was increased and accordingly public deficits and public debts skyrocketed. Surely, the Greek government, surpassing 200 percent of public debt-to-GDP in 2021, would be in for a repeat of the Euro crisis? Nothing of that kind happened. As we all know by now, a government cannot run out of its own money for technical reasons … In the
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from Lars Syll
Mainstream economists do not believe that “countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.” Looking at the result from a survey, not a single economist agreed with that statement. If these economists had been right, we would see lots of governments running out of money in 2020 and 2021. After all, tax revenues collapsed, government spending was increased and accordingly public deficits and public debts skyrocketed. Surely, the Greek government, surpassing 200 percent of public debt-to-GDP in 2021, would be in for a repeat of the Euro crisis? Nothing of that kind happened. As we all know by now, a government cannot run out of its own money for technical reasons … In the Eurozone, all national governments made their payments on time — all of them. This needs to be explained.
The explanations of mainstream economists seem unconvincing. Krugman (2021), for instance, writes: “But is the Fed really financing the budget deficit? Not really. At a fundamental level, households are financing the deficit: the funds being borrowed by the government are coming out of the huge savings undertaken by families saving much of their income in an environment where much of their usual consumption hasn’t felt safe.” The problem with this is that obviously the Fed does not borrow household savings (or rather saving, since this is about flows). It sells sovereign securities to banks only.
Few issues in politics and economics are nowadays more discussed — and less understood — than public debt.
Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.
But the truth is that public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others have to pay the taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt cancels itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren repay the national debt these payments will be made to our children and grandchildren.
To both John Maynard Keynes and Abba Lerner, it was evident that the state has the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that means that it has to take on debt and (more or less temporarily) underbalance its budget — so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or run down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity, and balanced budgets mean increased unemployment and destabilizing prices, they have to be abandoned.