Mario Seccareccia - Why Governments Should Run Deficits Now

What do nearly all governments have in common these days? They all are struggling to reduce fiscal deficits. Clearly, they are not listening to the advice from Mario Seccareccia, who says: Fiscal deficits? That's what we should be aiming for.

In this INET interview, Mario Seccareccia describes what he calls a "new consensus" on macro policy. The consensus relies on central bankers to run the economy, to lower the interest rate in a slump and increase the interest rate when inflation is mounting. Fiscal policy is seen as fallback, something to be avoided and employed only in the event when monetary policy has lost its grip.

Mario Seccareccia, Professor of Economics at the University of Ottawa, takes issue with the new consensus; instead, he proposes to stabilize the economy through fiscal policy. The government steps in when private spending slacks and retreats in a boom when inflation is looming, to get steam out of the system. That's functional finance.

Our economy, Seccareccia says, is credit-driven -- you have to go into debt in order to grow. When firms undertake investment, they borrow, and governments should do the same, he suggests. They should borrow, not for consumption, but for productive investments in education, health care, and infrastructure.

Enjoy the video!

Comments

0

Our economy is 'credit-driven'? Surely he means debt-dependent. Most of the credit that banks lend is not productive and doesn't lead to growth. Instead it's pumped into speculation and blowing up bubbles in commercial and residential property.

Rather than trying to counter the boom-bust cycle by screwing up government finances, what if we just removed the underlying cause? The root cause is the money supply that the economy runs on consists entirely of credit issued by banks. The senior bankers who decide how much credit to issue have completely one-sided incentives (bonuses, commission, the opportunity of promotion) which leads to them lending more and increasing the money supply right up to the point where the public become over-indebted and we have the kind of collapse that we saw in 2008.

As long as we leave control over money supply in the hands of short-term profit-seeking banks, then the health of the economy will depend on the mood-swings of bankers.

Irving Fisher had an answer to this in the 1930s - a few small changes to the banking system that would produce a stable money supply (and banks that could be allowed to fail). We've updated this to take account of the fact that all money now is electronic. For anyone interested a paper on this can be downloaded here:

http://www.positivemoney.org.uk/our-proposals/submission-independent-ban...

0

There is no greater evil then the intentional debasement of a country’s currency. This is what you are proposing on the assumption that a direct correlation exists between surplus private sector and deficit public sector. This is not always the case. The public sector has control of the money supply and with endorsements for larger public sector deficits, there is little chance for a free market price structure to reflect real prices. The citizens are usually the small creditors of the public debt and a comparison in value between private surplus and public deficit can hardly be made. Increasing the deficit only favors the public sector at the expense of the citizen.

0

Great thoughts, however notice how US and some other governments have already increased spending to enormous levels, and they have already ran huge deficits and yet the economy is not booming. Besides it is in danger because of those very deficits, and what is going t happen indeed if governments fail financially and become not credit worthy?

Running deficits and increasing spending is great for as long as we know how to eventually bring those deficits back into surpluses. During the normal economic times it is not a big problem. Economy recovers, incomes grow, taxes grow, government expenses decrease and all is well.

But this time its different. The system is not ment to grow because the population is just about to start aging rapidly and then decline. Aging population requires increased spending on healthcare, lower incomes, and lower government revenues over the long run. Running deficits under such circumstances is probably a good idea for as long as we know where to get the money. Otherwise could be a tricky game.

Also inflation US not always a good thing whenever debts and deficits are the issue. If cutting spending to reduce debt is not always an option, inflation makes the currency weaker and encourages exports, which promotes growth.

0

Granted, deficit spending can be an appropriate tool for fiscal policy supported by both theory and empirical experience, but this argument appears dangerously myopic in our current environment. Deficit spending is not the only fiscal tool available, as tax policy may have much greater purchase for the long-term stability of the economy, as well as greater impact in the near-term under present conditions.

A more serious critique will focus on deficit spending in practice. The problem is an age-old conundrum raised by Hayek. The public sector is generally not efficient because there are no price signals to give feedback on project success or failure. Yes, bureaucratic agencies can get lucky, and there are certain needs for public goods, but the rule is once a public project gets funded, it never gets defunded, no matter how much it succeeds or fails. Failure becomes an agency excuse to double-down. Let’s see what we got with the last $800 billion stimulus injection in the US: one-third spent on saving public sector union and UAW jobs of questionable productivity; pie-in-the-sky green energy R&D; Cash4Clunkers; bullet trains to nowhere; ethanol subsidies that drove up food prices, etc., etc. Now we’re tapped out and the Keynesians want more borrowing and spending?

Sorry, but economic activity is a function of risk-taking investment and productivity as much as consumption demand. We find ourselves in a solvency crisis marked by unrealistic asset prices in houses, financial assets, and even consumption goods. Not all sectors and actors in the economy participated in the debt binge, many were prudent and now hold liquid funds, and yet they must sit on the sidelines and wait for prices on capital assets and goods to become realistic again. Our monetary and fiscal policies seem deliberately designed to keep the fantasy of unrealistic prices alive while perpetuating anti-investment and anti-growth policies. That spells continued disaster that no deficit spending will cure.

Unfortunately, ending this spending binge will entail its own serious withdrawal symptoms, which will cause the spenders to just demand more. Enough is enough, we need Schumpeter’s creative destruction.

0

Granted, deficit spending can be an appropriate tool for fiscal policy supported by both theory and empirical experience, but this argument appears dangerously myopic in our current environment. Deficit spending is not the only fiscal tool available, as tax policy may have much greater purchase for the long-term stability of the economy, as well as a greater impact in the near-term under present debt crisis conditions.

A more challenging critique will focus on deficit spending in practice. The problem is an age-old conundrum raised by Hayek. The public sector is generally not efficient because there are no price signals to give feedback on project success or failure. Yes, bureaucratic agencies can get lucky, and there are certain needs for public goods, but the rule is once a public project gets funded, it never gets defunded, no matter how much it succeeds or fails. Failure becomes an agency excuse to double-down. Let’s see what we got with the last $800 billion stimulus injection in the US: one-third spent on saving public sector union and UAW jobs of questionable productivity; pie-in-the-sky green energy R&D; Cash4Clunkers; bullet trains to nowhere; ethanol subsidies that drove up food prices, etc., etc. Now we’re tapped out and the Keynesians want more borrowing and spending?

Economic activity is a function of risk-taking investment and productivity as much as consumption demand. We find ourselves in a debt-driven solvency crisis marked by unrealistic asset prices in houses, financial assets, and even consumption goods. Not all sectors and actors in the economy participated in the debt binge, many were prudent and now hold liquid funds, and yet they must sit on the sidelines and wait for prices on capital assets and goods to become realistic again. Our monetary and fiscal policies seem deliberately designed to keep the fantasy of unrealistic prices alive while perpetuating anti-investment and anti-growth policies. That spells continued disaster that no deficit spending will cure.

Unfortunately, ending this spending binge will entail its own serious withdrawal symptoms, which will cause the spenders to just demand more. Enough is enough; perhaps we need Schumpeter’s creative destruction.

0

The previous comment says that "we need Schumpeter's creative destruction". I can accept that: there are plenty of products on the market right now that are of dubious social merit. But, more importantly, Schumpeter would have said there needs to be a sector in the economy willing to incur debt as a way to finance investment into productive initiatives. As Schumpeter always argued, the growth of debt is necessary to support a growing economy. Although Schumpeter would have probably preferred the private sector to accomplish this, there is no reason the public sector could not fulfill this role when the private sector is unable to do so. This is exactly what Mario Seccareccia is saying. Again, I repeat, in order for the economy to grow, the amount of debt must grow is tandem. Mario Seccareccia is correct that the government sector is the only sector of the economy that can accomplish this at the moment. Remember, the US business sector does not seem willing to undertake this role (businesses are sitting on record levels of cash and there is little incentive for them to resume investing) and the household sector is in a process of deleveraging (it's trying to pay down debt rather than add to it).

0

Keynesianism = Socialism

"Some people would argue that [public sector investment] is more productive than the private sector". Ha! Then why aren't the Soviet Union, Cuba, and Zimbabwe prosperous?

Government healthcare? The government has destroyed the healthcare industry(libertarianmonarchy.com/healthcare.htm). What we need is to privatize the healthcare.

Government education? The government has created a giant education bubble that will burst in the next few years.(libertarianmonarchy.com/education.htm) You have millions of students being taught nonsense and graduating with worthless degrees.

You don't need "debt" to have growth or savings. The best way to save is through long-term investment. If you build productive capital with your savings, instead of lending it out for consumption, then society will become wealthier. Investment in capital can clearly create savings because it can increase future productivity. We have an economy mired in debt. When the government bond bubble bursts it will unleash a catastrophe worse than the Great Depression.

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
  • Allowed HTML tags: <a> <blockquote> <br> <cite> <code> <dd> <div> <dl> <dt> <em> <h2> <h3> <h4> <img> <li> <ol> <p> <span> <strong> <sub> <sup> <table> <tbody> <td> <tr> <ul>
    Allowed Style properties: display, float, height, margin, margin-bottom, margin-left, margin-right, margin-top, width
  • You may insert videos using embed codes like these:
    • [video_large:KoqLu5CKx-o]
    • [popupvideo_mini:KoqLu5CKx-o right]
    • [lightboxvideo_mini:KoqLu5CKx-o]
    • [text_popupvideo:KoqLu5CKx-o nostart noicon|Click here to open the video.]
    • [text_lightboxvideo:KoqLu5CKx-o|Open this video in a lightbox.]
    To learn more, please click on the "More information..." link below.

More information about formatting options