"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Saturday, April 16, 2011

On Deficits and Debts

“Public Deficits” and “Debt “ became the new bad guys in the neighbourhood that threat the sacred economic stability. What can be done? Main stream pundits assert that Evil can be defeated only with a painful cut of public expenses ( MORE TAXES??? Thats not even an option….) while disobedience would be severely punished by the judge of last resort, the MARKETS. The result of such approach is that country after country, no matter the colour of its party, is being trapped in the net of Austerity programmes. CUT.. CUT… CUT,..

The above narrative is orchestrated and supported by the vast majority of experts, lobbyists, managers…., academics, bankers ,or generally speaking the financial/economic establishment. How short can memory be??? Let me remind you that practically the financial establishment members owe their career, position, bonuses (and in some cases, freedom… ) to a massive injection of public support that saved the financial system from bankruptcy. If we have deficits today is due to their faults, mistakes and in some cases, corruption.

From a moral perspective the term “opportunism” is an understatement for the above sudden change of mind. Moreover, from a more mundane economic standpoint, such measures could be disastrous to the economy as private demand is still weak, the natural outcome of a painful deleveraging process, lower real salaries unemployment and other factors. However, the real interesting issue is the inner contradiction of the argumentation against public debt.

The main argumentation against deficits goes like this: “Balance” between incomes and expenses is a virtue for itself, overspending is unmoral : What is valid for our small family should be valid for the “big” family, the nation. Luckily, we don´t have to wait to a future Kingdom of Heaven for justice: Financial markets take care of the bad guys , punishing any unmoral overspending. End of argument.

But,,, hey ,,, wait a minute : What are financial markets? Even by the most conservative commentators, financial instruments are a tool to transfer resources ( i.e. money) between those who have and those who need ( for investment or spending) . So the very heart of any financial market is the balance between thrift and over spending. In a modern economy there is no way from the simple equivalence that one´s savings is equal to the dissaving (or indebtedness ) of someone else. So there is nothing unmoral in overspending only in not returning the money to the lender.

Therefore, making use of financial markets as a tool to control policies lacks of any serious foundation. You can argue that markets are not willing to lend to governments under given conditions, but the deficit by itself is not the problem as long as you can pay the principal and interest. Thus, the main concern of our dear economic establishment is not the deficit and debt per se but how it will be financed. Since the normal and natural way to finance public expenses ( or repaying debts ) is , by the end of the day by taxes, the real concern is a tax hike that will affect, normally , those who earn more and enjoy the priviliges of the current social and economic system. Since nobody likes to pay, the Debt quasi moral debate, and especially its “solution” are a mere deviation from the important debate about taxes and income distribution.

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