The 99% Organisation’s London Group Chair, Paul Bradford, took time out to pose a few challenging questions to Mark.
Here are his questions, and Mark’s answers.
PB: We are now looking at a huge level of government debt post the crisis, well above the level at the time the book 99% was written. But we are not the only country in this situation. Where will the money come from if just about every country needs to borrow?
MET: The simple answer, for countries with their own central bank – like the US, UK, Japan, et cetera – is that the government can issue bonds, and the central bank can buy those bonds using money created electronically in any quantities they like. This is known as Quantitative Easing (QE).
In the UK, for example, the government (technically, the Bank of England) created almost £500 billion of QE in the aftermath of the Global Financial Crisis. The total is far higher now.
For countries like ours, finding the money is not a problem. Countries without their own central bank are in a more difficult position.
But for us, debt hysteria is actually much more dangerous than the debt itself.
PB: Won’t this level of borrowing result in an increase in the cost of debt? Funds will be in short supply, lending will be deemed riskier, so won’t lenders expect more?
MET: Not when the lenders are the central banks. Even though we have much higher debt now than we had in 2010, our borrowing costs remain near all-time lows. Countries with their own central banks control their own borrowing costs. As they say on Wall Street, “don’t fight the Fed.”
PB: If the lending shortfall is to be met by the Bank of England, isn’t this the same as printing money, and won’t this lead ultimately to inflation?
MET: It is effectively the same as printing money – although it is done electronically, not with cash. But it need not result in inflation.
The simplest way to think about inflation is to say that it happens when too much money chases too few goods; conversely, deflation results when too little money is available to purchase too many goods.
When QE is spent buying government bonds, no money is spent buying goods and services. Whether the government then decides to spend or not is then a political choice. In the UK, after QE, we chose austerity, and inflation remained below target for much of the time.
PB: You talk as if a government can borrow and print as much money as it likes. But surely there must be a limit – I am sure you would agree that governments can’t pay for a millionaire lifestyle for everyone! So what does limit the government’s ability to borrow and print money – and how will we know when we reach that limit?
MET: Technically, it can print as much money as it likes. What it cannot do at will is to increase the capacity of the economy to produce goods and services. And that is important because if the government printed and spent money beyond the capability of businesses to provide goods and services, that would result in inflation.
So the reason that we cannot all have a millionaire lifestyle is not fundamentally that there is not enough money; it is that the economy does not have the capacity to produce millionaire levels of products and services for everyone.
And the limit would be when government spending starts to drive an unacceptable level of inflation. As we have seen over the last 40 years, managing inflation is possible, even though it is not an exact science. Right now, it is probably not what we should be worrying about.
PB: So, if the constraint is the capacity of the economy to produce goods and services, what can and should the government do to safeguard and then increase that capacity?
MET: You can think of capacity to produce output as the product of available hours to be worked by the population times the potential level of output per hour. (They are not independent, so if you tried getting everyone to work 168 hours per week, you would not increase capacity). The most important way to increase capacity is to increase potential output per hour worked, and that means two things: 1) putting people into situations where they can be productive (typically in the right firm) and helping them to be as productive as possible once they are there. Right now that means stopping lots of viable businesses going under and preventing unemployment from rising. And later it means supporting investments in productivity – eg automation.
PB: Won’t taxes ultimately have to go up to bring down the level of debt we will inherit?
MET: Not necessarily. The rate of debt:GDP will fall whenever the percentage growth rate in the economy is higher than the sum of the deficit and the interest service charge (both as a percentage of the existing debt level). So, a period of high growth will bring down the level of debt.
It may, however, be desirable for taxation to rise to enable government spending – for example on the NHS, on education, and on greening the economy – without running the risk of excessive inflation.
PB: Could we be in for a period of deflation if the oil price stays low and consumer confidence does not recover for months or years after the crisis (so people choose to save rather than spend)?
MET: There is certainly a possibility of creating a deflationary environment if too many households and businesses have seen the health of their balance sheets weakened during the crisis and the government imposes austerity. In that circumstance, all sources of demand would be suppressed, and we would have too little money chasing the goods and services that could in principle be provided.
This, however, would be an entirely self-inflicted problem given that – as explained above – there is no reason for the government ever to have a shortage of money. Deflation is a result of poor policy choices. There is simply no excuse.
PB: Conversely if companies go bust because of the crisis, when we eventually come out of the lockdown could not inflation go up because supply cannot meet demand?
MET: This is a very real risk. If the support package to businesses is too weak, otherwise viable businesses will go to the wall. And if that happens, a rapid bounce back in supply is unlikely and stagflation (the combination of stagnation and inflation) could result.
On the other hand, if the support package is well-targeted, then businesses will mothball and – rather like the Nordic countries after their July shut-down, or France after August – spring back into life as demand returns.
The government must protect both demand and supply to ensure a rapid rebound.
PB: Thank you
MET: Thank you