Stimulus spending, austerity and public debt: James Galbraith

7 Replies to “Stimulus spending, austerity and public debt: James Galbraith”

1. I am confused where do the statements come from and who agrees or disagrees with who?

   1. From James Galbraith.
      I agree with some of his points but not others. My comments are preceded by a ~ sign.

2. How about stating the issues correctly? When asked about stimulus spending, Galbraith replied that he was “not a fan of the concept of stimulus”. He spoke about a Strategic Plan for Long term Growth. His objection to stimulus was that it was peceived as short term. What he advocates is a long term plan that gives private investors confidence to invest on the back of a long term govt program. after all, most govt infrastructure expenditure is carried out by private operators.

   Galbraith has often commented that one of the great weaknesses of the capitalist system is underinvestment in public services. many public services need to be provided by govt and a time of economic downturn is an appropriate time to ramp up an infrastructure program. He makes clear that the timing of his statement is to underscore that now is certainly not the time to cut public spending. Attempts by Tea Party radicals to slash spending risk repeating what the US govt did in 1936-37, cutting expenditure and reversing a slow economic recovery in the US into a double dip recession.

   The returns to govt for their investments are indirect. Economic growth creates incomes on which people pay taxes, which enable govt to pay down its debt. But it has to invest first, and invest in such a way that it stimulates private investment.

   Much of the present US deficit comes from the big issue for the US govt, collection of taxes. When taxes and social contributions collected by govt are calculated as % of GDP, the US collects the third lowest % in the OECD, behind Chile and Mexico, and pays out one of the lowest % for social benefits. The simple answer to sorting out the US deficit is to retract some of the tax perks given to the highest income earners in the US. As Warren Buffett commented, the people who benefit most from the size and strength of the US economy should contribute more to maintaining the economy that gives them their opportunities.

   1. Hi David,
      Galbraith replied that he was “not a fan of the concept of stimulus”….. because it tended to imply that the spending was short-term in nature. He felt it would only be effective if part of a long-term program lasting 10 to 20 years; so that the private sector would adjust their hiring and capital investment programs. He did not say that the private sector would fund the program — merely that they would make investment/hiring decisions based on the long-term plan.
      “economic downturn is an appropriate time to ramp up an infrastructure program” — I agree wholeheartedly.
      “The returns to govt for their investments are indirect.” That is where we disagree. Government can make indirect investments in the hope of enhancing tax revenues, but the link is often tenuous; especially after special interest groups have spruiked their favorite programs. My argument is that infrastructure spending as part of a fiscal stimulus program should focus on direct, market-related returns; so that you are creating direct revenue streams that can be used to pay the debt incurred — and assets that can be sold in order to repay debt or fund further projects. Examples would be toll-roads and bridges, automated port facilities, national broadband networks (as in Australia) and high-speed rail networks (as in China). The aim is to ensure that all public debt is represented by saleable assets. The ideal would be to create an infrastructure development corporation, partly funded by the private sector, that can pursue development projects on an on-going basis which, on completion, are parceled up and sold to private investors. If you rely on indirect revenue streams, you run the risk of accumulating a mountain of private debt with no direct accounting for the extra revenue. This does not mean indirect investments (e.g. academic research or new education facilities) should not be made by government, simply that they should be funded out of current tax revenues and not with public debt.
      Austerity cuts will have no impact on overall spending (aggregate demand) if the proceeds are used to fund infrastructure investment — and at the same time will improve the fiscal balance sheet as it is now gaining a saleable asset.
      Similarly, raising tax revenues will not detract from overall spending if the funds are used for infrastructure investment.
      As to what is a fair tax system, I will leave that until another time.

   2. The whole idea is to create a sustainable stimulus program. If you build revenue-generating assets, there is no such thing as a debt limit: your net debt is zero. That means that you can fund a long-term development program without running into a brick wall, with bond-markets refusing to fund further debt increases.

      1. Colin, you still talk of a stimulus program when Galbraith talked about a plan for long term growth. As I mentioned, Galbraith has previously observed that reliance on private enterprise inevitably results in rundown of non income generating assets like bridges and roads. So a long term plan needs to include non income generating assets as well. The implementation of that long term plan can be focused into economic slack times so it is not competing for resources at times of high demand, uses resources when they are underutilised and happens to provide stimulus when the economy needs it.

         The issue of debt cannot be attributed solely to spending. In the case of the US it is intimately entwined with tax revenue. The growth in US govt debt can be traced to tax perks since the 1980s, given largely to high income earners. The political regimes that gave those perks cut the revenue base while doing little to cut the cost base – in fact, threw in the odd war to increase the cost base. So if anyone wants to get righteous about debt, they need to get equally righteous about the need to collect enough tax revenues to pay for that debt.

         In relation to Australia, we had a succession of good years in which there were many tax cuts. During the same period, audits of infrasture by engineering bodies showed a huge and growing backlog in development and maintenance of infrastructure, but the politicians in control of the purse strings gave greater importance to present day tax cuts than to future needs, in the knowledge that the long livespans of infrastructure assets means that they can be used for decades after they have passed their useful life. So Sydney residents complain about a transport system that should have had a long term plan that started about 40 years ago. Instead, what we now have are complaints about inadequacies.

         So the issues are not as simple as running a balance sheet and profit and loss on public expenditure. Govts must often spend money on things that society needs that have no direct economic return, but improve quality of life – like recreation facilities and a solid education system available to every child.

      2. David, Thank you for raising these issues. We seem to agree on the need for a long-term growth plan– and the need to raise sufficient tax revenues to cover expenditures. The only point we seem to disagree on is whether non income-producing assets should be funded out of debt or out of current revenue. I agree that government should not neglect “things that society needs that have no direct economic return, but improve quality of life – like recreation facilities and a solid education system available to every child” — but believe they should be funded out of current revenues. We need to preserve the fiscal balance sheet by only using debt to fund direct, income-producing assets. That way we maintain net debt of zero and leave no millstone around the necks of future generations.

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