The Jefferson Tree - A platform for open debate and discussion of current events and politics...

Article statistics…

  • 152Articles read today:
  • 682Articles read yesterday:
  • 4062Articles read last week:
  • 317280Total reads:

“Let common sense and common honesty have fair play, and they will soon set things to rights.” Thomas Jefferson

Copyright infringement…

All materials and articles on this site are protected by copyright per the original author or blog owner and published with their consent. Any re-blogging or re-publication of this content without the authors permission is illegal and subject to liability and criminal prosecution.

“He who permits himself to tell a lie once, finds it much easier to do it a second and third time, till at length it becomes habitual; he tells lies without attending to it, and truths without the world´s believing him.” Thomas Jefferson
Ralph Musgrave - Ralphanomics

Fiscal space is hogwash.

The phrase “fiscal space” is popular with respectable members of the economics profession and particularly in IMF and OECD circles. E.g. see here, here, here or here. But you can easily find a hundred other examples of IMF and OECD staff and others wittering on about “fiscal space” by Googling. Unfortunately the whole concept “fiscal space” is nonsense: it is irrelevant.

A country with a low debt to GDP ratio allegedly has “fiscal space”: that is, come a recession, such a country allegedly has the option of running a deficit and in consequence running up its debt.

In contrast, a country which already has a high debt to GDP ratio, allegedly cannot implement the above policy, thus, so the argument goes, it cannot escape a recession or has more difficulty doing so. The reason given is that potential creditors are not impressed by entities that are already heavily in debt.

Unfortunately the above argument just doesn’t apply to a country which issues its own currency. Incidentally I’ll deal below just with such countries: Eurozone countries are another matter.

Where a government is already heavily indebted, it is perfectly true that potential creditors may well not lend other than at relatively high rates of interest. But there is a simple solution to that problem: don’t borrow money – just print the stuff and spend it (and/or cut taxes).

As long as the relevant country is in recession, i.e. has ample spare capacity, the additional demand will not be inflationary. Thus the lack of fiscal space is a complete irrelevance.

And there is a second reason for thinking that the whole concept “fiscal space” is irrelevant, as follows.

Where a country DOES HAVE fiscal space, why is that any help? Allegedly the reason is that the country can adopt the classic Keynsian “borrow and spend” method of escaping a recession. But what on Earth is the point of the “borrowing” part of “borrow and spend”?

The purpose of borrow and spend is to impart stimulus. But borrowing (i.e. withdrawing cash from the private sector) has THE OPPOSITE EFFECT!!!!!! That is, the effect of borrowing “anti-stimulatory” or “deflationary”.

The exact extent to which public sector borrowing crowds out and thus negates the intended effect of borrow and spend is of course disputed. But it beggars belief that borrowing has no deflationary effect at all.

As Keynes himself pointed out, “print and spend” is a perfectly viable alternative to “borrow and spend”.

Ralph Musgrave - Ralphanomics

Author: Ralph Musgrave - Ralphanomics

I wrote a book on unemployment recently with James Galbraith, and others. Galbraith is one of Obama's economic advisers. I love the different cultures that exist in this world. I took an interest in them long before the daft word 'multiculturalism' was widely used. I want to see these cultures preserved. I want to see Tibet staying Tibetan, and Britain staying British.

Leave a Reply

 

 

 

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

*