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Deficit increase is the only way to stimulate investment
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- Stimulus is self-financing
Deficit increase is the only way to stimulate investmentMalcolm Sawyer, Professor Emeritus of Economics at Leeds University Business School, May 2012, “Fiscal austerity: the cure that makes the patient worse,” http://classonline.org.uk/docs/2012.05.20_Malcolm_Sawyer_-_the_cure_that_makes_the_patient_worse.pdf The present challenge is how to stimulate investment (and of the ‘right sort’) – the return of the ‘confidence fairy’ cannot be relied upon, nor can the false optimism of the OBR/Treasury macroeconometric forecasting. Low interest rates and quantitative easing have had little, if any, effect on investment. The direct way to stimulate investment is by the expansion of public investment – taken with the evidence that public investment can itself stimulate additional private investment⁷. Let us though be clear – the stimulation of investment, whether public or private, is likely to require effectively an increase in the budget deficit. The funding of the Green Investment Bank is a clear example of this. The increase can be masked by institutional and accounting practices which place the borrowing ‘off balance sheet’ – through, for example, creation of a State Investment Bank which borrows from the financial markets (along the lines of the European Investment Bank). But borrowing from a State backed institution is still needed. Insofar as the stimulation of investment is viewed as a boost to demand while the economy is recovering from recession and not a permanent increase in borrowing and in the budget deficit, it should not be included in the calculation of the structural budget deficit. Investors will still come to the US first –financial crisis in Europe makes US a safe zone for investments Bloomberg 2012 (“Downgrade Anniversary Shows Investors Gained Buying U.S.,” 7/16/2012, http://www.bloomberg.com/news/2012-07-16/downgrade-anniversary-shows-investors-gained-buying-u-s-.html )hhs-ps We are a safe haven for now” for investors because of Europe’s debt crisis, Ryan said in an interview. Rates will rise, he predicted. “We just don’t know when, and I don’t want to tempt fate.” El-Erian of Newport Beach, California-based Pimco, which oversees the world’s biggest bond fund, didn’t respond to a request for comment. Terry Belton, global head of fixed-income and foreign- exchange research at JPMorgan Chase & Co. in New York, said on a July 26, 2011, conference call that a downgrade could boost Treasury yields by as much as 70 basis points in the intermediate term and increase the government’s borrowing costs by $100 billion a year. A basis point is 0.01 percentage point. Instead, the U.S. is on track to pay less interest this year. U.S. Treasury securities paid $454 billion of interest last year, according to the Congressional Budget Office. That’s projected to decline to $442 billion this year and won’t climb above the 2011 cost level until 2015, according to CBO forecasts. Credit Quality Weakening U.S. credit quality, such that the nation more resembles a AA rated borrower, is still likely to drive up 10- year yields by about 60 basis points over time, JPMorgan’s Belton said in a recent interview. “Yield changes during the last year had nothing to do with the downgrade, but it had to do with everything else pushing yields lower,” Belton said. “On the top of that list you have a massive flight to quality out of Europe, and the U.S. is a safe haven.” Investors outside the U.S. owned $5.16 trillion of U.S. government debt as of April 30, compared with $4.7 trillion at the end of July 2011 before the credit-rating cut. “The one thing the Treasury market has above any other government bond market is liquidity,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $109 billion, said in a June 22 interview. “That liquidity premium is not going to disappear no matter how many downgrades Moody’s or S&P give to it.” Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bonds auctionedby the Treasury Department this year as of July 2, as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses. Case—Spending Good—AT: Unsustainable Stimulus is self-financingDennis Leech, Faculty, Department of Economics, University of Warwick, April 2012, “Fiscal Stimulus Improves Solvency in a Depressed Economy,” http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/leech/multiplier.pdf The Keynesian argument for a fiscal stimulus to a depressed economy either by an injection of government spending or a tax cut has been dismissed too readily by some on the grounds that it increases borrowing. We are told that the policy would simply make a bad debt problem worse: that the extra output induced by the stimulus will not yield sufficient additional tax revenue to pay for the extra government spending or to finance the tax cut because the multiplier effect described by Keynes in the General Theory is too weak. However, this view is too pessimistic for two reasons. First, in general, what Is important is not the absolute level of debt but its level relative to gross domestic product: it is the debt/GDP ratio that is the key indicator of solvency. This means that in deciding on the efficacy or otherwise of a stimulus package it Is necessary to consider the magnitude of both components of this ratio and determine their net effect. When this is done, a different picture emerges. Secondly, in any case, there is growing evidence that the multiplier effect in a depressed economy might be more substantial than we sometimes allow. There are grounds for believing that the fiscal multipliers built into existing econometric models are underestimates for present conditions. There is even strong evidence to suggest that, with output well below capacity and interest rates near the zero lower bound, certain types of stimulus might be strong enough to be self-financing.
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