Analysis by Keith Rankin.
From an interview with Geoff Bertram, on The Panel, RNZ 22 May 2020
Wallace Chapman: “Are we setting up our future generations, our future children, to be born into a life of national debt?” [He mentions the on-line Fabian Society discussion, held on 23 May, and introduces Geoff Bertram.]
Wallace Chapman: “Need we be concerned about this massive debt that we are getting into?”
Geoff Bertram: ” I don’t think we need to be for a number of reasons. First off, we have lived with, for decades, a set of ideas about public finance that are intensely conservative. They lead to the Budget Responsibility rules, the idea that the government should be a small part of the economy, the idea that budgets should always be balanced, and most importantly, the idea that we can never print money to fund a deficit under any circumstances. Those three propositions go out the window now. You are looking at a situation where the economy has crashed; the only agency you have to pick it up and get it back on its feet is government. … The budget stimulus itself is completely manageable. … The old austerity story that most of the media tell and indeed the government itself has been telling – with the budget responsibility rules – isn’t the story we should have in our heads. … Government has an important role stabilising the economy, and in the face of a major downturn, expansionary fiscal policy is exactly what needs to be done. What happens to the money supply is a secondary concern. … “
Wallace Chapman: “Can’t we compare the analogy of a house? So, if I have a house, I have a budget for that house, and I have to even up the expenses and the incomings; I can’t be spending more than the household earns.”
Geoff Bertram: “That’s the analogy that’s completely wrong. Government is not a household.”
Wallace Chapman: “How so?”
Geoff Bertram: “Well it doesn’t have to have money in advance, it doesn’t have to have the funding in hand before it goes and buys something. If you are a household and you want to buy something, you have to have cash or you get a loan from the bank or the hire-purchase company before you can make the transaction. If you are government, you write the cheque, that’s it.”
Geoff Bertram, at Victoria University of Wellington, was my best economics’ lecturer; both from his breadth of knowledge and insight in economics, and, generally, as a teacher and communicator.
It was so refreshing to hear a view on the media that reflects economics, without the bourgeois continence that comes with so much financial commentary and policymaking these days.
Counter-Cyclical Spending: the Advantage of being a Large Organisation
The above discussion contains two main ideas – ‘counter-cyclical spending’ and ‘printing money’ – and how they relate to each other.
In a short radio interview, it can be very difficult to make fully-nuanced points; its really a matter of getting out the main message as simply as possible, something Geoff Bertram did very well.
So let’s consider the difference between a household and a government. In some respects they represent the opposite ends of an organisational spectrum, with businesses and non-government non-profit organisations in the middle. One of the important distinctions is size; the smaller an organisation generally the less able is it to spend without having prior income.
For the most part, households spend pro-cyclically, meaning they spend more when their incomes are higher, and less when their incomes are lower. (This tends to be true of businesses as well.) Nevertheless, even small households have credit facilities, such as credit cards, pre-arranged overdrafts and flexible mortgages. Additionally, households can negotiate credit facilities on an ‘as-required’ basis (such as hire-purchase). And, many households have past savings to draw on; sometimes quite substantial savings.
These households can, to some extent, spend countercyclically. This means, to spend more when household incomes are lower, and to spend less when household incomes are higher. Indeed, such spending is guided by changes in interest rates. When household incomes are lower, then interest rates should be low, encouraging households to save less (including withdraw more from past savings) and to borrow more (especially to borrow using already available credit lines).
The key message here is that deficit spending (preferably quick deficit spending making use of credit facilities already in place), at the appropriate phase of the economic cycle, has a stabilising impact on the wider economy in which these households exist.
While interest rates represent one incentive to practice countercyclical spending, the wider knowledge that such spending is stabilising for one’s community and society will also motivate some people to follow such a spending strategy. In other words – when people become ‘we’-focussed rather than ‘I’-focused, which is the mindset which we understand the Covid19 restrictions are all about – people may behave in a way that can best be described as ‘community altruism’. Countercyclical community altruists spend more when other people are spending less, and they spend less when other people are spending more.
Businesses can follow similar strategies, using their credit lines to invest at times when sales are low. Generally, bigger businesses can do this more easily than smaller businesses, because they have deeper pockets and more developed (and often cheaper) credit lines. While most businesses do not behave this way, there are some which do so; some of these do so by being smart rather than being altruistic. Such countercyclical businesses buy assets when they are cheap and sell assets when they can get a good price for them. (While these latter businesses do, incidentally, help to stabilise ‘the economy’, they may also aggravate inequality; already-rich businesses are the best placed to become even richer this way.)
How should governments behave? The neoliberals (who Bertram might call ‘extreme financial conservatives’) intimate that governments should behave procyclically, like the households Chapman referred to. Further, in this regard, four of the five parties in the New Zealand are essentially neoliberal (New Zealand First is the only exception). These four parties worship the neoliberal sacred cow of ‘fiscal responsibility’.)
The alternative is ‘old-fashioned Keynesian’ policymaking, as Geoff Bertram put it. The emphasis here is countercyclical fiscal policy. Labour (as in the biggest party of government in New Zealand) sometimes uses countercyclical rhetoric, and, as the principal party of government, has indeed agreed to expand its outlays during the Covid19 emergency. However, its willingness to do so remains very measured.
Bertram states that only governments can act in a sufficiently countercyclical way to get economies out of a ‘major downturn’. While he is correct, countercyclical spending by other parties still helps; further, countercyclical spending by a wide range of government and non-government parties able to do so generally smooths out the boom-bust business cycle, minimising the incidences of major downturns.
The message is, in troubled times, deficit spending is good; indeed, it is very good. ‘Deficit’ is not a dirty word.
Big governments are generally better placed than small governments to do this. In particular, when there is a global economic emergency, enlightened governments behave countercyclically to support the global economy, and not just to support the national economy. (This is where New Zealand First, and nationalist parties in other parts of the world, fall down.) Thus we saw, after the 2008 global financial crisis (the GFC), the Chinese government – and to a lesser extent the governments of the other BRIC countries (Brazil, Russia, India) – spent on investment projects sufficiently to get the world economy out of what some economists call the ‘great recession’.
Another reason why governments should take the lead in deficit spending is that governments – with their very large balance sheets – can generally borrow at lower interest rates (lower financial costs) than other parties. This is, for the most part, because governments have the reserve power of taxation. Creditors favour lending to governments at times when many households and businesses are practically insolvent.
Financing Government Deficits
The second main point that came up in the interview related to ‘printing money’. This is not a useful term, because it is used too easily in a pejorative way; further ‘printing money’ is a somewhat out of date term, as is the expression ‘writing a cheque’.
I find it most helpful to think of money as a social technology, a man-made medium that circulates through the economy as a lubricant. It makes no sense for any machine (in a sense, ‘the economy’ is a machine) to operate with less than the optimum amount of lubricant; further, while there is no reason why anybody would want a machine to be over-lubricated, the costs of over-lubrication are substantially lower than the costs of under-lubrication.
Essentially, Geoff Bertram was saying that the Government has no credit limit with the country’s Reserve Bank. So, when a government ‘writes a cheque’ using its account at the Reserve Bank, the Reserve Bank will not bounce the cheque. It is not only governments that have this special privilege; so do registered trading banks. But governments can make most use of this facility, because governments have ‘customers’ with substantial and immediate spending needs; new money lent to governments can be injected directly into circulation in the wider economy.
New money is created whenever a bank acquires a promise; it means that the bank’s balance sheet expands on both sides of its ledger. There is no necessary requirement for a bank to shrink its ledger tomorrow, having enlarged its ledger today.
The promise may be a new promise – which counts as a new loan; especially in our context, a new loan to the government. Or it maybe an existing promise – a bond – that is already in circulation.
For the most part, the (notionally independent) Reserve Bank of New Zealand buys existing bonds when it wishes to increase the amount of money in circulation. The sellers of those bonds – usually financial businesses – lend this new money to the government (creating new government bonds) through a competitive tendering process. In a depressed economy, interest rates will be very low.
(The other way the Reserve Bank increases the money supply is by lowering its interest rate, thereby incentivising the commercial banks to lend more to businesses, households and other organisations.)
It’s a somewhat convoluted financial mechanism, in New Zealand at least, to create money. The net effect, however, is that the government borrowing from the Reserve Bank creates new money, and injects it into circulation by spending it or by paying benefits to households. When there is ‘fiscal space’ – as in a major downturn or a pandemic – the government can draw on its overdraft facility, to the extent that it needs to.
In an economic emergency, this ‘government borrowing’ / ‘money printing’ is not in any way inappropriate or irresponsible. It is what a government must do. Further, when the economy does revive, taxation revenue automatically increases, meaning that most likely some of that government borrowing will be paid back; indeed as other new money is created due to increased private borrowing from banks, private debt can supplant government debt. But never will all that government debt be paid back, because a responsible government itself never wants to be the agent of economic depression; no government wants the economy that it rules over to have too little money in circulation.
Money and debt are matters that – like people having sexual relations – enable sustained and flourishing intergenerational societies. Yet – like sex – they can be matters of prurience, misunderstanding, and ignorance. We do ourselves a great disservice when we hold these attitudes towards important day-to-day matters of normal life.
PS Follow this link for a chart and comments, relating to Japan’s history of budget deficits, and its resulting government debt.