Following on from his recent Vox column, which Philip linked to previously, Andrew Scott has some more sensible things to say about deficits and debts in the long run here.
All perfectly sensible stuff – and particularly for countries that retain some control over the price of their currency, but the key question is for what is the borrowing being used. If it’s being used to close current fiscal deficits and shore up technically insolvent banks while knifing into capital expenditure – and remaining in a sub-optimal currency union, the outlook is less cheery.
The US and the UK are facing significant infrastructure deficits. The Obama administration’s USD 780 bn – even if much less than economists such as Paul Krugman would like – is focused on this deficit. Some estimates indicate that the UK is facing a GBP 500 bn infrastructure bill over the next decade. The UK will struggle, but the detrimental fiscal impact of its bank resolution measures is limited and I reckon some combination of government commitments and funding and private sector financing will get them through.
Proportionately, Ireland may be confronting a smaller infrastructure deficit, but it exists – and needs to be addressed. The deadweight costs of the approach to bank resolution will extend into the medium and long term. And the current approach to financing infrastructure investment via the semi-states is gloriously inefficient.
It looks like one step forward and two steps back for poor old Paddy – and it seems that neither the wit nor will exists to address the problem.
@Kevin
Thanks for this very useful link. Am I right in thinking that the implication of the argument is
a) fiscal adjustment over a longer time span;
combined with
b) credible commitments to fiscal prudence in the medium to long term.
A Begg-Lane plan?
And if this is so, doesn’t it open up space for investments along the lines of those discussed in the recent Martin Wolf inspired threads?
Ah, the UK and US can do it, so can we argument?
It’s a good thing the UK has never had to go cap in hand to the IMF… personally I prefer the Reinhart and Rogoff view – you don’t see the train coming until the caboose has passed over you.
If it had always been easy for countries to borrow and spend at their own pace, we wouldn’t be having this discussion. That they haven’t and that they have gone bust is the norm, not the exception. So I don’t believe that we can take our ease reaching a particular fiscal position – a plan is not enough without credibility; credibility comes from goal, timeframe and milestones.
Having said all that, the argument for fiscal control committees being the credible alternative to government (political) fiscal planning is not much different to the argument for eurofederalist fiscal constraint – the maastricht criteria as the goal, eliminating structural deficits as a milestone on the way… the point being that as a currency ‘needs’ an independent central bank, an economy may ‘need’ an independent fiscal policy. The question then becomes one of who is best placed to provide it in the eurozone…
He uses historical data… however I’d question if this applies in the case of the US as Demographics
1) Serious leveling off in amount of babies made
2) Old people living longer (and often not fit for highly productive work… i.e. retired)
Globalisation
3) Pressure on low grade jobs which can be outsourced
I wouldn’t like to bet on the US in the long run…
Cyberian
Old people only live longer if they can get clean water and food.
No I am not making a joke. These things will be costing more while incomes decline. A lot of these old people will not live to their potential, as is normal in “uncivilized” societies.
The USA, like most countries is a club, where insiders get the best deal.
The old “economics” has been revealed as threadbare. Roll on the new. Try von Mises and Hayek.
5 replies on “Debt as a buffer”
All perfectly sensible stuff – and particularly for countries that retain some control over the price of their currency, but the key question is for what is the borrowing being used. If it’s being used to close current fiscal deficits and shore up technically insolvent banks while knifing into capital expenditure – and remaining in a sub-optimal currency union, the outlook is less cheery.
The US and the UK are facing significant infrastructure deficits. The Obama administration’s USD 780 bn – even if much less than economists such as Paul Krugman would like – is focused on this deficit. Some estimates indicate that the UK is facing a GBP 500 bn infrastructure bill over the next decade. The UK will struggle, but the detrimental fiscal impact of its bank resolution measures is limited and I reckon some combination of government commitments and funding and private sector financing will get them through.
Proportionately, Ireland may be confronting a smaller infrastructure deficit, but it exists – and needs to be addressed. The deadweight costs of the approach to bank resolution will extend into the medium and long term. And the current approach to financing infrastructure investment via the semi-states is gloriously inefficient.
It looks like one step forward and two steps back for poor old Paddy – and it seems that neither the wit nor will exists to address the problem.
@Kevin
Thanks for this very useful link. Am I right in thinking that the implication of the argument is
a) fiscal adjustment over a longer time span;
combined with
b) credible commitments to fiscal prudence in the medium to long term.
A Begg-Lane plan?
And if this is so, doesn’t it open up space for investments along the lines of those discussed in the recent Martin Wolf inspired threads?
Ah, the UK and US can do it, so can we argument?
It’s a good thing the UK has never had to go cap in hand to the IMF… personally I prefer the Reinhart and Rogoff view – you don’t see the train coming until the caboose has passed over you.
If it had always been easy for countries to borrow and spend at their own pace, we wouldn’t be having this discussion. That they haven’t and that they have gone bust is the norm, not the exception. So I don’t believe that we can take our ease reaching a particular fiscal position – a plan is not enough without credibility; credibility comes from goal, timeframe and milestones.
Having said all that, the argument for fiscal control committees being the credible alternative to government (political) fiscal planning is not much different to the argument for eurofederalist fiscal constraint – the maastricht criteria as the goal, eliminating structural deficits as a milestone on the way… the point being that as a currency ‘needs’ an independent central bank, an economy may ‘need’ an independent fiscal policy. The question then becomes one of who is best placed to provide it in the eurozone…
He uses historical data… however I’d question if this applies in the case of the US as Demographics
1) Serious leveling off in amount of babies made
2) Old people living longer (and often not fit for highly productive work… i.e. retired)
Globalisation
3) Pressure on low grade jobs which can be outsourced
I wouldn’t like to bet on the US in the long run…
Cyberian
Old people only live longer if they can get clean water and food.
No I am not making a joke. These things will be costing more while incomes decline. A lot of these old people will not live to their potential, as is normal in “uncivilized” societies.
The USA, like most countries is a club, where insiders get the best deal.
The old “economics” has been revealed as threadbare. Roll on the new. Try von Mises and Hayek.