Why does the left like public debt? Beats me

I’m in broad agreement with this piece by Chris Dillow.

Jonathan Calder asks a good question: why has political radicalism become synonymous with wanting to see a permanent and massive public debt?
Let me deepen the puzzle. In three ways, the left should be more concerned about government debt than many on the right:
1. The left tends to be more sceptical about the rationality of financial markets. They should therefore take less comfort in the fact that bond yields are low, for fear that market opinion might turn quickly. This argues for cutting public spending in a considered, orderly way, for fear of having to make emergency cuts if sentiment does change. (Of course, governments could monetise borrowing rather than tap bond markets, but the costs and benefits of doing this shouldn’t be a left-right issue).
2. Government debt is analogous to climate change – both are burdens we impose upon future generations. If you’re concerned about climate change – and the left tends to be more so than many on the right – then you should also be concerned about government debt*.
3. Big government is no friend of the working class. What’s wrong with cutting public debt if it means ending the subsidy to arms companies that is military procurement? Why not slash spending on an organization that seems to have degenerated intogang of thugs? Why not nationalize the banks and use some of their profits to reduce government debt?
On these grounds, we’d expect the many on the left to want to reduce government debt. So why aren’t they?
I think it’s because these factors are outweighed by another. What distinguishes left from right is that the left is more sceptical of the right about the self-righting capacity of capitalism. The left therefore thinks that cuts in public spending will not crowd in exports or business investment, but instead depress the economy, which will hurt workers disproportionately.
But this raises a question. What if we had more adequate insurance mechanisms – either more generous unemployment benefits or Shiller-style macro markets – which better cushioned workers from recession? Would some on the left then be less supportive of public debt, because the weight of factors 1-3 would increase relative to the costs of jeopardising economic growth?
* Of course, it could be that climate change is a left-right issue because the left believes capitalism must have all sorts of bad effects, whilst the right believes this is impossible.  But leave this aside.

But he’s arguing the case from a British point of view.  Few countries have been through the idiocy of our populist fiscal rectitude, and so in our case, I can be very sympathetic to Chris’s arguments – it is indeed odd that the left is associated with fondness for public debt when as Milton Friedman points out, public debt in sufficient quantities is one sure way to ensure small government (for him this was a debating point against the left, just as his arguments against realism in economic modelling was a rhetorical move in defending perfect competition – in both cases his disciples have taken his insights rather further than he was intending, the Republicans making straight for small government by jacking up debt as fast as they can – when they’re in office you understand, when they’re opponent is in office the crazy deficit spending just has to stop! – the fresh water economists assuming any damn thing they like (the Great Depression was a spontaneous holiday? – no problem). But I digress. . . .

The thing is, as I’ve argued ad nauseam here and elsewhere general dispositions towards more or less debt are pretty stupid – like general dispositions to higher or lower exchange rates.  It depends on the circumstances, and that’s why we need institutional development like more official independent advice to governments on the fiscal stance, and the quality and cost effectiveness of its capital spending.

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18 Responses to Why does the left like public debt? Beats me

  1. derrida derider says:

    Well, historically not all the left likes public debt – many communist states were notably debt-averse (the USSR in particular was as hard-line on this as any German central banker). But your basic point – that how big a government we should have and how it should be funded are separate issues, and the second should be more a technical than ideological question – is correct.

    I think most on the left would strongly disagree that “big government is no friend of the working class”. They would say that almost every improvement in the relative position of the working class since the nineteenth century has been the result of expansion of a government function, and actually existing states with small governments have always tended towards lots of inequality and class oppression. In fact I think the statement puts its speaker firmly on the right of the spectrum by definition (BTW that’s neither supporting nor opposing the statement – just asserting what “left” and “right” mean).

  2. SJ says:

    Who is this “the left” that wants a “permanent and massive” public debt? How are “permanent” and “massive” defined anyway? Does “massive” mean something like “likely to lead to default”, in which case it’s by definition not “permanent”, or does “permanent” mean something like “sustainable”?

    Sounds like right wing straw man wankery to me.

  3. Nicholas Gruen says:

    Agree DD. The bit about ‘big govt’ not being a friend of the working class I see as kind of rhetorical and is kind of axiomatically true in the way it’s used in the piece as it immediately segues into defence and police spending, which small governments usually don’t stint on either! In other words, one can always pick something in govt that you don’t like to follow up a bit of rhetoric like that.

  4. observa says:

    “The left tends to be more sceptical about the rationality of financial markets.”
    They have every right to be after the GFC if not previous historical episodes. However financial markets can never be rational without real pricing and concomitant real gains and losses (ie real risk) as Austrians well know. Like the MDB claims to water, they can be as large and foolish as men are want to issue, but that won’t change the available water. Fiat money claims on real production likewise, although like water licences they can be hoarded and traded for all manner of things to make men feel wealthy and comfortable, until the day of reckoning when their owners may want to claim their original purpose all at once. Here’s a poignant discussion of that very need for more regular and timely reckoning-

    When you operate in Main Street every day you are acutely aware of that constant reckoning, although for SMEs it’s monthly while for the big end of town(big biz and big govt) they like to stretch it out for 90 days or more, much to our chagrin naturally enough. That makes you acutely aware of the need for real repayment and your intermediary role in the process. It builds an appreciation of the true cost of things, of real borrowing for investment and the difficulty of real repayment over undulating time. Rising costs always come via the big end of town via say steel or Council rates and with the latter rising 22.5% in 4 years, we like our customers don’t find the after tax revenue for reckoning so easily. That’s the very coal face of funny money claims on production, which produces a strong antithesis towards those who get to enjoy it most by being first cab off the rank. So let’s be quite clear here that the right is no homogenous grouping, nor does the vast bulk of it in Main St have much truck with the minority in and around Wall St. We see no reason for central or dispersed bankers to continue to collude with 2-3% theft of real savings per annum, even assuming they get that deliberate targetting correct, which is extremely doubtful under the circumstances. That certainly does make you very averse to total strangers wanting to confiscate what’s left to invest more wisely on your behalf, particularly where they experience no such personal and regular reckoning.

  5. Dave says:

    You are right, SJ. It is just a straw man. Who are these “political radicals”? Can anybody name one?

  6. Rafe says:

    Nicholas, I don’t think that fiscal rectitude is idiotic, because I don’t agree with Keynes of the General Theory and the policy of stimulation that derives from it. The middle of an election campaign is not really the time to revisit these issues but the debt incurred by the stimulis is going to be with us for some time and the debate will only get more intense later.

    DD I don’t think that the position of the working class improved as a result of the expansion of government, or the militancy of the trade unions, it improved as a result of the increasing productivity of the private sector, and that was happening right through the the nineteeth century.

    The expansion of government created more incentives and more opportunities for rent-seeking interest groups (including so-called capitalists of course) to seek influence and favours from the government and the vote-buying motive became a major factor to undermine good government. Consequently big government became a bipartisan policy in most countries, most obviously the US but the non-left persisted with small government rhetoric even while they did the opposite. As someone said, politicians are like magicians, you have to watch their hands, not their mouths.

  7. Arjay says:

    Both the major parties are socialist in their leanings.Both the major parties are controlled by international corportates.We live beneath the nuclear umbrella of the USA which is corporate controlled.

    Large Corps like big spending,high taxing socialist Govts,so they profit from so called free medicine etc.Anything perceived to be free gets abused.So we use three times as much medical facilities and big pharma cleans up.

    Just look at Labors’ schools farce,whereby big business gets outrageously expensive contracts for little result.Local parents are outraged but this is the norm for our Govts.

  8. observa says:

    What Rafe said too but I don’t agree now is not the time, unless of course you’re in a marginal seat and have more pressing issues on your mind. I raised the issue of real vs nominal debt because they’re inextricably linked. There’s a natural tendency for Govts aided and abetted by central bankers to assume debt is a lesser problem for them than we mere mortals because they’ve been used to inflating it away, particularly after the oil shocks of the 70s. That was a fundamental mistake as we’ve seen with the GFC and their moral obligation accepted universally to bailout those who came to believe whole heartedly in their funny money. ie the financial sector that ultimately developed a symbiotic relationship with Govt. As Glenn Stevens commented somewhat uniquely ‘they’ may have taken their eye off the ball with asset prices and hence Govts’ ultimate moral dilemma everywhere when nominal debt suddenly became real debt for us all. They had little political courage or incentive to do otherwise and hence the moral hazard road with taxpayer bailouts. Austrians would say there was an inevitability about that in daring to assume anyone or any elite body could possibly succeed at such a monumental task of economic omniscience.

    This symbiotic relationsip of the Great Moderation lay in a lavish feeding frenzy for both Govt and the finance sector, but it was ahistorically reliant on unprecedented demographics with that Maoist twist of predatory lending via currency exchange control(that funny money again). What started out in the 80s as desirable financial innovation and intermediation to facilitate the need for a BBer generation hitting its prime and its hunger for capital would eventually degenerate into funny money for all, but not until a generation had run its race. Borrowing largely consists of the young tapping the old who lend to fund their retirement and hence the problem now as everyone catches the Japanese disease. The BBers’ savings are largely illusory and they’re living off a much younger developing world population and that’s impossible in the longer term now, whether their debt is private or public and it’s reached monumental public proportions generally. Australia is a special case here because it can dig up real money and naturally Govt wants a big slice of the action to continue on its merry way. More broadly Govts everywhere have been caught with greater structural debt than they dare admit with an aging population on their books. Even Oz voters ditched a Future Fund for flinging money from the balcony in that regard.

    That’s the question really now. How much more real structural debt can we afford at present? I’d strongly suggest aging populations can’t afford any more. Quite the contrary and so any spending promises should be rigorously scrutinised in light of that. A lot of Govt spending has had the tradeoff bar raised dramatically as a result, although its a moot point as to how much Oz can rely on spend now and dig more later.

  9. The European evidence suggests that left govts are associated with lower budgetary deficits but higher levels of investment in human capital. Charles Boix shows this I think

  10. Nicholas;

    I understand your argument for using borrowing to pay for capital investments. But I prefer ‘populist fiscal rectitude’ because of the realpolitik of borrowing for spending. It’s basically never ‘invested’ wisely.

    Given the choices, which are realistically piss-poor spending from borrowings or piss-poor spending from revenue, I prefer piss-poor spending from revenue.

  11. derrida derider says:

    Not surprisingly, rafe and observa, I disagree with you on the merits of big government. But that wasn’t my point – my point was that whether or not you agree with the statement “big government is no friend of the working class” is a useful touchstone as to whether you’re a lefty or righty. And lefties, quite reasonably, are unlikely to be persuaded about the “correct” attitudes to deficits from someone who is definitely an ideological righty.

    And Jacques;
    ” …borrowing to pay for capital investments [is] basically never ‘invested’ wisely.”

    Whereas, presumably, you think spending from current taxes is somehow spent differently. Are you claiming that politicians somehow keep the money in separate buckets?

    The point is that what you’re saying is that the additional spending possible due to debt is wasteful – IOW it IS an argument about the size of government, rather than about how to fund it.

  12. dd — look at my remarks again.

  13. Nicholas Gruen says:

    Jacques, I agree, except where there’s a downturn and deficit financing can save jobs and improve efficiency.

    Here are some propositions for you.

    1) Treasury estimates, probably conservatively that the fiscal stimulus saved 200,000 odd jobs.

    2) While there are some people who disagree, those who disagree about the sign of the effect rather than its magnitude think that the Great Depression was a spontaneous holiday. For our purposes they may be considered to be nuts.

    3) If Treasury is right, then for each $1 in the stimulus, we only pay back around 60-80 cents in the dollar (the rest being made up by taxes paid by capital and labour resources that would otherwise be unemployed).

    4) This means that both the ALP’s world as it is, and the Coalition’s world as it would have been are both mired in waste. The ALP Govt wasted something like 5% of the stimulus, and the Coalition would have wasted something like 4 to 6 times that amount in resources lying idle in the Australian economy.

    5) Even if the amount of waste involved in both scenarios were closer, there is still a case for minimising unemployment because of the social devastation it can cause. (In fact I have no figures, but I wonder how many more suicides we might have? And whether they ought to be factored into the equation the way the deaths associated with the roof insulation scheme have been counted even though it’s not clear that they should be.)

  14. Nicholas;

    I think we’ve had this argument, or variations of it, every week for about a year at this point.

    I would have preferred tax cuts to the cash payments, but the cash payments were quick and effective at the moment of highest uncertainty. OK, that debt is probably a good hedge against risk.

    But the BER stuff is wasteful and didn’t start until well after the GFC began. It only favours one sector — construction — which wasn’t suddenly drowning in surplus capacity. Insofar as private construction fell, the RBA was the body with the longest lever for moving the macroeconomic world and they used it. Where’re the speeches in praise of them?

    The BER has only served to crowd out and inflate private construction, including delaying my parents’ retirement home by months at a cost of thousands of dollars. I don’t see that as a win.

  15. observa says:

    For your interest here’s a pretty good preliminary roundup of the BER Scheme findings-
    A reminder of why we need healthy Federalism and decentralised decision-making and why Sandgropers may well thank Barnett down the track for refusing to hand over their GST revenue for more of Canberra’s spaghetti and meatballs Health Reform adverts.

    In small biz I’m always somewhat bemused at the contradiction in left green quants with their small/local is beautiful meme, vis a vis their flip side love affair with central planning and big Govt all the way up to idolising the UN. The first to grizzle about natural market concentration like Coles and Woollies, yet their ideal solution is apparently a singular Dept of Groceries for us all. Well as long as it’s run by them which I suppose is the perpetual fatal attraction. I’m a committed small is beautiful man and to keep it that way every man should be equal and face a consistent level playing field on price, albeit a carefully constituted one that’s mindful of current environmental realities. Otherwise it’s a plethora of cash for clunkers brainfarts and similar graduazzi greening with no limits to collective indebtness for it all by the looks.

    I have a strong hunch the creators of carbon credit and funny money from thin air are in for a rude shock with the onset of winter in the northern hemisphere. The bond market in the US, coupled with rising unemployment is presaging the end to it all because Govts largely don’t create wealth but redistribute it and therein lies a lesson. At some stage now fast approaching, printing IOUs to the wealthmakers to redistribute that wealth creation, has its limits. After all if your IOUs are no good, in the long run you’ll severely disrupt or bankrupt the very wealthmakers accepting them. Well not unless there’s a real wealth lender of last resort and I can’t see the Chinese stepping up to the plate here. German beer drinkers certainly had qualms about subsidising Greek wine drinkers you’ll note, so why would Chinese be any different?

    Without constant and regular accounting for real wealth creation and distribution as Fekete points out, we’ve built a debt mountain that can’t possibly be repaid, particularly with aging populations. It’s a structural debt like a James Hardie or a BP incurs perhaps unknowingly or unwittingly, but nevertheless very real and in this case with horrendous knock on effects globally. The trick was to recognise the signs back in 2007 and take the harsh medicine then, although that’s easier said than done. It’s going to be a lot tougher now with unprecedented deflation needed to set it all to rights. There’s a nasty fallacy of composition with global Keynesian stimulus and debt, as we’re all about to rediscover. Can’t see any other path to avoid that now, although no doubt we’ll revisit plenty of those old failed remedies along the way. We can all trust in eternal human hubris and folly for that.

  16. Labor Outsider says:

    “This means that both the ALP’s world as it is, and the Coalition’s world as it would have been are both mired in waste. The ALP Govt wasted something like 5% of the stimulus, and the Coalition would have wasted something like 4 to 6 times that amount in resources lying idle in the Australian economy.”

    As I’ve said elswhere, this is the wrong counterfactual. Think of the stimulus as being split into two components. The first, emergency component, that most agree was appropriate for getting cash into consumers’ hands quickly and support confidence. And the second, the infrastructure component that has been released into the economy much more slowly.

    It is the second component that a lot of economists have much more trouble with. First, it isn’t clear at all that the increased spending on school buildings and insulation was economically productive. Second, infrastructure spending wasn’t the only option for additional fiscal stimulus. And third, monetary policy is endogenous to fiscal policy. In the absence of the BER, the RBA would almost certainly have had a looser monetary policy and I’m yet to see a convincing argument as to why monetary stimulus would have been less effective than the additional fiscal stimulus. People have argued that monetary policy has a long lag and thus support would have come too late. But infrastructure spending also has its peak effect on the economy with a lag and besides, the BER has been rolled out over a very long period. So that argument is relevent really only for the first round of the stimulus. The second round of the stimulus is also sectorally targeted, which is arguably unfair. It has been great for the non-residential construction sector, but less useful elsewhere, even accounting for the flow on effects. Looser monetary policy would have been particularly useful for the non-res business sector that are now paying quite high interest rates on debt thanks to both the tightening in monetary policy we have seen and the widening of margins on business lending.

    In short, it simply isn’t the case that under coalition policy idle resources would have been anything like 4 to 5 times larger than under labor policy. You only get that result if you either think RBA policy is independent of fiscal policy, or you think that looser monetary policy would have had little impact on the economy. I don’t think there is any good evidence for either of those propositions.

  17. observa says:

    Well I caught a bit of Joe Stiglitz on the telly today preaching to the converted, interspersed with a bit of spruiking for Labor largesse and the Keynesian cause to applause in all the right Keynesian, big Govt spots. Flicked it off after a few dorothy dixers to get the gist of the cheer squad. Joe was right in his element and lapping it all up, but all I got out of it was a vision of Nero Nixon stuffing her face with the mobile off while Rome was burning. Must have been a fair bit of asymmetric information going down there for me Joe. Christine was apperently enjoying the warm inner glow of some well earned time out among friends after a demanding afternoon writing her memoirs too Joe.

    ‘Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well.’
    Piffle Joe! Markets can easily be constituted to remedy that as I’ve already outlined. It’s just that you’ve been on the public teat so long you can’t or won’t see any alternative to typical LGQ meddling and interference. The same science of muddling through that gives us cash for clunkers and pink battiness for eminent visible hand economists to defend presumably.

    ‘I hope to show that Information Economics represents a fundamental change in the prevailing paradigm within economics. Problems of information are central to understanding not only market economics but also political economy..’
    Well they’ll hardly get the right information with all that invisible funny money claims on production and interest rates set by faceless men in backrooms, not to mention graduazzi greening by the helicopter full. Top it off with taxing the bejesus out of real sweat, endeavour and entrepreneurship and it’s a sure bet where you’d want to be at the top of the claims tree eh Joe?

    Well I could go on but the proof of Joe and Cos pudding is finally in the eating once and for all. All that favourite funny money stimulus, currency manipulation and near zero interest rates of theirs is about to be put to the test. By a superbly sublime act of irony, there’s an Austrian tiger that’s finally fed up with them all holding it by the tail and has begun to growl in defiance-

    When I said- ‘I have a strong hunch the creators of carbon credit and funny money from thin air are in for a rude shock with the onset of winter in the northern hemisphere.’ I had no idea that pro Maoists who’d already quashed Western amateur LGQ’s pipedreams of carbon credit creation were about to take on their funny money too. They’ve obviously been listening to the handful of ostracised Austrians in the Asia Times, while the West has been led by a mob of Keynesian sheep. Here’s a succinct Asia Times, Austrian summary of where these sheep have led their passive flock-

    My sound advice to any Govt after Aug 21st? Beg, borrow and steal any USD, Euros, Pounds, Yen, etc they can lay their hands on, print AUD like Greenspan and turn it into real gold as distinct from paper gold trades. Then prepare for an AUD gold standard before the crash. Funny money is going the way of carbon credit folks.

  18. Butterfield, Bloomfiled & Bishop says:


    monetary policy was always going to be less than optimal because of the credit crunch.

    Even with a government guarantee our banks could not get funding for some time.

    Why is it that it was essentially only first home owners that was responding to lower interest rates.

    If you were a bank with in essence rationed credit whom would you lend to?

    The other interest rate sectors like investors came in with a long lag which was a contrast to either 1992 or 2001.

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