A recent blog by Professor Bill Mitchell on how we view government debt should be enlightened reading for people with an interest in macroeconomics. More importantly though, it should be mandatory reading for neo-liberal politicians.
Professor Mitchell uses an article written by Liberal Federal Member, David Coleman, to make his point. Coleman wrote, “The greater the debt, the greater the proportion of government revenue that’s spent paying off interest bills.”
Technically, he is correct but the comment is simplistic and mis-guided. As Mitchell points out, Japan is now paying a negative interest rate on its bond issuance and has no problem selling those bonds. Neither would Australia. Even if it did, it could still spend without taking on debt.
But the real point Coleman’s article overlooks is twofold. As Professor Mitchell demonstrates, “The government debt holdings are part of the wealth portfolio of the non-government sector, held presumably because the assets are risk free (where the currency issuer is the national government) and provide a safe haven in times of uncertainty.” He adds, “The interest payments represent income to the non-government sector, which helps underpin its subsequent spending.”
Coleman says, “The greater the interest bill, the less capacity to reduce tax”. This is true, but again, simplistic. With a sovereign currency issuer, taxation is never needed to pay for government spending.
Taxation may be necessary to control inflation by limiting the spending power of the private sector. Proper targeting of taxation helps to re-distribute the purchasing power of the rich to the poor. It can also direct spending away from undesirable resources such as tobacco.
In brief, taxes limit the spending power of the private sector and facilitate increased government spending on projects that increase GDP, employment opportunities and social equality.
If there is idle capacity (unemployment), as exist now, then the government could increase total interest payments to the non-government sector (issue more debt) and cut taxes to stimulate overall spending, if it thought that the non-government sector would respond and take advantage of the increased productive resources that the increased debt would generate.
Thus far, the private sector shows no willingness to do this. It is afraid to take on risky investments. It cannot see sufficient demand or encouragement to adopt an expansion portfolio.
So, in view of the latest consumer sentiment here and that shown in recent surveys in the UK, Europe and the US, it is unlikely to show a willingness in the foreseeable future. All of which paints a depressing picture for a world still receding from the impact of the GFC now eight years passed.
Neo-liberal politicians are both blind and deaf to this simple logic and deserve to be thought of as idiots in the macroeconomic sense, if not for other reasons as well.
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