Robin Matthews is professor at universities in London and Moscow; consultant with international companies; writes on business, economics; and finance: creative imagination techniques in management.
George Osborne Austerity: Catch 22
George Osborne Austerity: Catch 22
Singling out the interest costs of public debt, as George Osborne does, misleads perhaps deliberately perhaps unconsciously; emphasising costs, ignoring benefits from the original government spending on which interest is based. His agenda is to reduce the size of the state, a political, rather than an economic judgement, according to James Buchanan, the original guru of the Public Principles of Public Debt, judgement rooted in distrust of government.
Why treat debt as a public enemy as Mr Osborne does?
Buchanan and Hayek distrusted the state and public debt because a big state, they thought, reduces freedom and the scope of individual choice.
The situation now is different.
The state is a threat, but austerity is a different issue.
Technological change will inevitably increase the ratio of services in production and the main provider of services, including welfare, and education, is the state. So the size of the state must increase unless society is able to tolerate mass unemployment.
This must be funded by debt, as is the case with business. Debt provision is (one) rationale for having a financial sector. Or it can be funded by tax, an unpopular option for the rich and the financial sector, both powerful and married together.
Why treat public debt as a public enemy? It’s a useful alibi for austerity. More likely, the reason is that the financial sector restricts the chancellor’s options more than perhaps he cares to admit.
Even rumour that austerity measures are to be slackened and the rate of public debt reduction will decline, leads to a one way bet that the city cannot lose; selling government debt (bonds), leads to a fall in bond prices and rise in yields, therefore the interest cost of government debt; losses to seller, gains to the buyer, the same people; gains to buyer include gains to the fall in the bond price, plus a management fee for undertaking the process.
This is the Milo Minderbander principle.
In Joseph Heller’s novel Catch 22, Milo Minderbander buys cotton and sells it at a lower price and makes a profit. Buy bonds and sell them at a lower price and profit from the transaction.
This is another way of seeing the too big to fail problem (affectionally TBTF).