Mark Carroll's Journal

Yes, that's a good graph; it is nice that we're still under the 1960 debt level, and I certainly agree that Labour weren't great: especially, if I am anti-austerity, then simple arithmetic suggests that when times appear to be good then one really ought to rein in spending and reduce the national debt.

On this occasion I'm happy for us to agree to differ: I don't especially seek to persuade people and am certainly not a credible economics pundit. But, that doesn't mean there aren't interesting things to learn. It's probably most helpful if I lay out a bit of background of where I'm coming from. It took a few days for me to get the available headspace together.

First, judging by things like long-term gilt prices, the creditors are very far from coming to bang on the door, and from looking at how the markets have responded via similar measures when the US laid on more stimulus, that didn't bother them either. Compared with the size of its economy Greece was left with staggeringly much debt denominated in a currency of which it couldn't print more; you do mention the Eurozone, but I'd suggest more strongly that it makes a massive difference that we're not in that position. Francesco Saraceno has a great low-traffic blog that often discusses the Eurozone situation. Also, letting the currency fall has done great things for countries like Iceland which on paper were in an enormous pickle.

Second, this was an unusual recession: it was a balance-sheet crisis (as described by Richard Koo) wherein the paradox of thrift turns orthodoxy on its head. Simon Wren-Lewis' blog has done a good job of explaining this with reference to the UK and Osborne. In our post-crisis situation (and I wonder if your mention of our being a center of international finance implicitly summons a model element that contradicts this) public spending mostly just moves debt from us to the government at least while demand is depressed while constrained households deleverage.

Either way that debt needs paying, but the economy gets moving far better when people feel as if they have manageable enough debt against their income that they can spend again, then business has income and can keep people employed, and we can collect income tax from them instead of paying them benefits, then with GDP finally improving then debt-per-GDP (which austerity hasn't done much for for many countries) looks far healthier. And, especially given the low rates at which the market is willing to lend to us, we can spend that money on infrastructure, etc. that brings both short-term jobs and decent long-term benefit. I'd rather that than having austerity keep demand depressed (though austerity was rather reduced after the first couple of years which has helped since), then interest on the national debt just compounds while our productive capacity shrinks (years of poor employment has very lasting effects) and we become less able to pay it off.

My story about the debt simply moving and being at low cost admittedly stops being true in more normal times when employment is healthier or non-commodities inflation is rising beyond a few percent or interest rates aren't near-zero or the problem is more supply-side or limited to specific sectors of the workforce. A corollary of this is that if we were to let inflation ride at a good few percent usually then we could use that to deflate household debt and when we were at risk of slowing the economy from reducing spending then we could cut interest rates a bit to compensate without having to spend our way out of that kind of slump. Part of our problem now is that interest rates have already been very low.

I mention those bloggers because what they describe keeps seeming the most credible to me: the graphs seem appropriate, the explanations of why they disagree with, er, those with whom they disagree seem good, and the mechanisms they describe make sense, at least to me. In referring to these, I'm hoping it's useful shorthand for where I'm coming from and why I'm thinking as I am.

Perhaps more familiarly and credibly, I've tended to buy Martin Wolf's take on all this too (he's also written plenty on Greece of course); most of his more interesting recent stuff is behind the FT paywall but I can link to an older summary. I've also been influenced by the occasional paper from sources like VoxEU.

Naturally there are plenty of eminent scholars and writers who strongly disagree with the above, I've just found the rebuttals of their rebuttals generally persuasive. (-: