The Deficit Myth criticism – second try

Julian Jessop was previously Chief Economist at the Institute of Economic Affairs, which he describes as “the [we ought to know – Koch Brothers funded] educational charity and free-market think tank” – and, remarkably, he is also of ‘Capital Economics’, one of whose members has already had a first try (commented on yesterday). He has penned a critique of the Deficit Myth, also in the Telegraph – this time from August 1st.

So this is the second go that somebody from Capital Economics has had in the last two months. I deduce that the book must be important…

Julian Jessop starts off by calling the book “a frustrating muddle of tortuous logic” – so doubtless we can look forward to see cogent and well argued factual demolition coming up… Still, he does agree that government creates money – yet suggests:

In particular, the cost of government borrowing does not depend solely on the risk of default. It also depends on factors such as expectations for inflation, as well as the opportunity cost of diverting resources from the private sector.

I don’t think that Modern Monetary Theory (MMT) ever suggests that the cost of public borrowing depends solely on the risk of default – indeed it suggests that borrowing is not strictly necessary at all.

He goes on:

Money itself may not be a “scarce resource”, but the same cannot be said of the goods and services that it is expected to buy. Otherwise, any country with its own currency could use its “magic money tree” to pay for world-leading healthcare, education, and so on.

This is a specious backward and illogical argument. Money isn’t a scarce resource so can be used, up to the limit of available resources to pay for whatever society needs. If society wants “world-leading education” (whatever that is – although I think most would agree it is not what the UK has now) then it can indeed spend, just like “any [other] country with its own currency” in an endeavour to achieve it. As we know, when we are actually spending substantially less on education than we used to, then those recently lost resources are mostly still, in fact, available for purchase. With a now larger UK population there is no rationale whatsoever to consider that there is any reason why we cannot spend more – and now.

Then the article suggests:

…unlimited monetary financing of public spending could simply lead to higher inflation, or crowd out private spending in other ways.

“Could” seems to be a lot of work here. And we know government spending doesn’t crowd out private spending but encourage it. The defence and health sectors prove that and all private business loves supplying government because government in wanting things and thus creating money never defaults….

He continues:

It is simply not true that deficits are necessary for economies to grow, or to pay for good public services. Many countries, notably in Scandinavia, have run budget surpluses for long periods and still enjoyed sustained increases in living standards.

This is fact-lite. Deficits may not always be necessary for an economy to grow (or as I’d prefer, for economic activity to flourish) but are in the vast majority of cases. This is simply because if the government doesn’t run a deficit, then by the facts of double-entry book-keeping (unless that is another taboo?) the non-government private sector has to run a deficit and, year-in year-out, be paying money to government. As the private sector is not in charge of money creation, whereas the government sector is, surely even Mr Jessop sees how this might be problematic. He’d be in the sector paying more tax to government than government is spending on him. He seems to want that. Really? And he was formerly at the Institute of Economic Affairs, which have the same office address as the Taxpayers’ Alliance.

The example of countries “notably in Scandinavia” is presumably a reference not just to Norway’s Sovereign Wealth Fund, which is one of the very few in the world, but to the fact that Denmark and Sweden have run in recent years small budget surpluses. As far as I can detect these are driven largely by balance of trade surpluses (where effectively money is created in the private sector by export receipts and so enabling the private sector to pay more to the government. Of course not everyone can run a trade surplus. Other countries necessarily have to run compensating trade deficits.). I don’t think we can be sure that 2020/1 will be one where these Scandinavian surpluses continue. And if not, it is unclear whether or not the author considers that these countries should be continuing with them in order to preserve their “sustained increase in living standards”?

In addition, deficits are usually financed by conventional borrowing, not money printing. This is true even now during the pandemic. Bond purchases by central banks have helped to keep long-term interest rates low, but direct monetary financing of deficits is mostly still taboo.

“Mostly taboo” is an odd reason not to spend. Taboo to whom exactly? And as for deficits being “financed by conventional borrowing… even during the pandemic”. If only (possibly?) because nobody has £350billion kicking around just waiting to lend to the government, Covid-19 UK borrowing has been financed by Quantitative Easing. That seems to count as the author’s “conventional borrowing”, but it is not conventional, or really even borrowing, when the government is lending to itself.

MMT also comes with a lot of unhelpful baggage. …risking higher inflation and a loss of fiscal discipline. 

We know MMT deals with inflation through taxing and increasing economic activity so that’s fairly simple. But ‘Fiscal discipline’ is another of those expressions like ‘sound money‘ that sounds great but means nothing, unless, that is, you think self-flagellation is the optimal way to run government finances. And that may be especially true if the self in flagellation falls predominantly on the powerless.

The conclusion is telling:

….MMT is being used to support a “big state” agenda with little thought for the constraints in the real world. In practice, it would mean that the government plays a much larger role in the allocation of resources, in good times as well as bad. Higher public spending would also still mean higher taxes, even if the rationale is to prevent overheating rather than balance the books.

Unfortunately, then, MMT is another illustration of the adage that if something sounds too good to be true, it probably is.

Whereas it is of course the case, not that MMT is too good to be true, but that it actually is true.

In denying that, I begin to detect that Mr Jessop might perhaps have not properly understood.

Either that, or maybe he has a rather conventional outlook and a financial, subsidiary purpose.


  1. Neville -

    Interesting points – I have the book but haven’t had time to read it yet.

    I was expecting second time round, that the spelling of criticism in the title would have been corrected! Shades of Richard Murphy…

    1. Peter May -

      Oh dear! Still, if the ‘i’s were missing at least the ‘t’s were, I hope crossed…Now corrected – thanks

  2. Mel -

    “opportunity cost of diverting resources from the private sector”, “Money itself may not be a “scarce resource”, but the same cannot be said of the goods and services that it is expected to buy”, “public spending could simply lead to higher inflation, or crowd out private spending in other ways”, “risking higher inflation and a loss of fiscal discipline”, “government plays a much larger role in the allocation of resources”

    These are all issues that the MMT scholars have dealt with, specifically and in great detail. I rather think that this book report was cobbled up by cribbing all the MMT questions, and then ignoring the answers that the MMT developers have provided.

    A propos of nothing, I fail to see how a government that runs a perpetual surplus, every year squeezing a profit out of its citizens, could ever not be a “big state.”

    1. Peter May -

      Good point.

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