Steve Keen visits Solvent Land (2)

OK,  I cheated.  I did the easy bit in my post last week.  There is an issue around the ability for governments to run deficits, and this comes in two flavours –

  1. running a deficit to boost an ailing economy (something which is less likely to happen if we make finance simpler by stopping commercial debt) and
  2. running a permanent deficit because it is always good to boost the economy (which is true according to Steve Keen).

I deliberately ducked the much harder questions around what money is and whether we need banks and governments running deficits simply to exist. Continue reading

Steve Keen visits Solvent Land

Following on from Hyman Minsky’s visit to solvent land, I would like Steve KeenDebunking Economics book cover to visit as well.

He is known for Debunking Economics and predicting that there would be a financial crisis when so many of the world’s economists were basking in a prolonged period of growth and (as Gordon Brown put it) the “end of boom and bust.”

But what would he see in solvent land?

In his most recent posts about world economies, Steve Keen seems to have been concentrating on two things:

  1. The correct response to a downturn is for a government to run a deficit to provide a boost to the economy.  This is in stark contrast to the way in which the EU has required Greece to respond to its Euro crisis by severe austerity measures.  See his blog post on 23 June 2014.
  2. Governments should always run deficits (and not surpluses) or they will stifle economic growth (a lecture in Vienna which last a little over an hour)

These two requirements seem to say that solvent land which has no commercial debt, will not work.  A government cannot run a deficit in solvent land because it, like everyone else, cannot borrow money commercially and therefore is not able to run a deficit.

But let’s stop to think for a moment:

  1. “The correct response to a downturn is to run a deficit.”  This means you only need deficits if you have hit a downturn.  But a main reason for removing commercial debt is to avoid the cycle of debt expansion which leads to a downturn in the economy.  Minsky put forward his “theory of financial instability” which says something like (my synopsis of part of the process) –

    during the good years everyone gets used to growth and profits and expects it to go on.  So the financial institutions come up with more ways of lending money to fuel the growth we are all experiencing.


    Then something (possibly minor) goes wrong and we realise that assets are overpriced (because it was too easy to borrow to buy them) and we realise we are in debt and we are in a financial crisis because even if we sold the assets we bought when they were overpriced we would still be in debt.

    So if we do not have debt, we do not have something built-into the economy which will lead to boom and bust.  And if we do not have a downturn, we do not need governments to run deficits to be able to get us through them.

  2.  And so we come to the second problem, that “governments should always run deficits”, or stifle growth.  Whilst Steve Keen’s graphs are convincing, is this a price worth paying for an economic system which:
    • does not automatically lead us into recession;
    • safeguards the poorest in society from the most expensive lending;
    • avoids governments borrowing so much that they lose the ability to pay for basic services such as education and health

    Even when we have said all that, Steve Keen’s own analysis back in May 2014 (in a talk which lasts around 15 minutes) suggests that governments should avoid running permanent surpluses as this is what will stifle growth.  His “balanced government spending” scenario does not look so bad to me.

    And if we are really living in solvent land, governments will need to have doubloons in the vault (because they can only spend what they have already received in taxes).  This also means that they could build up a surplus over time which could be spent when the economy is not as strong.  In other words we would be asking governments to “save for a rainy day” rather than “borrow in the hope we will be able to afford it in the future.”