Has the PM been taking tips from his Party Chairman?

David Cameron was in Brussels the other day for a meeting of EU leaders. He was quoted as saying this:

“When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”

As whoppers go, this is Shapps-esque. If only Greece had had a #longtermeconomicplan, all would be rosy now. The sun would be starting to shine once more. To say this is ‘misleading’, doesn’t really begin to cover it. Greece is a member of the Eurozone. We are not. When the crisis hit Greece, its options were much more limited than ours, and ot was forced into accepting a bailout. The conditions attached to this bailout included austerity several orders of magnitude greater than we have seen here. The on Greece’s economy are quite nicely subsidised in this infographic (found here):

Troika

So for Cameron to claim the difference between the two countries today is the ‘tough decisions’ taken by his Government is kind of insulting to both the Greek people and to the intelligence of all of us.

The real reason why the UK is in a lot better shape is firstly because we are not in the Euro and as a consequence of this did not need to go down the fiscal austerity road. Greece did go down that road in a big way, and the results are plain to see. It’s maybe to Cameron’s credit that the Government eased off on the cuts after 2012 (while still needlessly clobbering to poorest), but to admit that would be to admit everything they’ve said in the past five years has been a lie.

What the Tories used to say would happen if the deficit was only halved by 2015

election poster

It’s funny how things change. The Conservatives launched this, their first election poster this week. One of their three boasts is “THE DEFICIT HALVED”. This has now been redefined as a success, but Jonathan Portes has dug up some great quotes from 2011 when they were saying something entirely different:

Mark Lancaster: The Government’s plan to eliminate the deficit by 2015 is in stark contrast to the Darling plan, which was simply to reduce it by half. What assessment has the Minister made of the likely impact of the Darling plan on the level of debt and the cost of servicing it?

Mr Hoban [Mark Hoban, at the time a Minister at the Treasury]: If we had continued with the previous Government’s deficit reduction plan, debt would still be rising in 2015, not falling, meaning that we would have to spend an extra £3 billion in one year on debt interest while still having to make spending cuts. The lack of ambition in the previous Government’s plan put our credit rating at risk, thus threatening the prospect of higher interest rates and putting a brake on the recovery.

Then, only halving the deficit by 2015 as per Labour’s original plans would “put our credit rating at risk, thus threatening the prospect of higher interest rates and putting a brake on the recovery.” Now though, halving the deficit is cause for high-fives all round!

This is not to say that Labour’s plans were better than the Tories, both were stupid to focus on the deficit, which was never a big issue. I just make the point to show how divorced politics and economic reality have become. Failure can be redefined as success at will, and something that once was said could lead to catastrophe is now just a step on a road to long term recovery. It’s rather transparent, so hopefully more people will start to notice.

BBC sees no alternative to cuts

The BBC have a story today on their website called “Will the public accept the cuts to come?” The first sentence is “Whoever wins the election, more cuts are on their way.” Cuts are inevitable, end of discussion. The article then goes on to list all the areas of public spending that could be under threat, and whether the public will stand for what’s coming. While it’s certainly true that all the main parties agree they need to “balance the budget”, and think they need to cut spending by roughly the same amount in order to do so, the question of whether we actually need to balance the budget or to achieve this through cuts to expenditure is far from a settled question. The BBC can argue it is being impartial by saying that all parties agree cuts are coming, by unquestioningly accepting the need for cuts, it’s not really providing readers with a complete picture.

At the end of the BBC’s article, it says “While the economists and analysts of the Westminster village are aware more austerity lies ahead…”. It could try asking some of those economists what they think about the state of the economic debate in the UK, to see how closely the political discussion mirrors the debate in academia. They might be surprised. It would be pretty easy to find some economists (even rather mainstream ones) who would question the entire premise of the BBC’s reporting here, which in my view would be very healthy indeed.

Pain of Austerity Brings No Future Gain

From Heteconomist:

Pain of Austerity Brings No Future Gain.

A really succinct statement of the problem with austerity. In the comments someone has left a very good quote from the economist Robert Solow on the waste caused by leaving resources and people idle.

2010 Ed Balls vs 2014 Ed Balls

Ed Balls’ conference speech last week was notable for the way it committed Labour to pursuing the same austerity policies that have led to such a weak recovery over the last 4 years. The key passage was this one:

“We know there would have been tough decisions on tax, spending and pay restraint in this parliament whoever was in government.

But three years of lost growth at the start of this parliament means we will have to deal with a deficit of £75 billion – not the balanced budget George Osborne promised by 2015.

And that will make the task of governing hugely difficult.

And this goes to the heart of the political challenge we face.

People know we are the party of jobs, living standards and fairness for working people.

But they also need to know that we will balance the books and make the sums add up and that we won’t duck the difficult decisions we will face if they return us to government.

Working people have had to balance their own books.

And they are clear that the government needs to balance its books too.

So Labour will balance the books in the next parliament.

These will be our tough fiscal rules. We will get the current budget into surplus and the national debt falling as soon as possible in the next parliament.

Tough fiscal rules that our National Policy Forum endorsed in July, demonstrating that, however difficult, our party can unite in tough times to agree a radical, credible and fully costed programme for government.

And we will legislate for these tough fiscal rules in the first year after the election and they will be independently monitored by the Office for Budget Responsibility.

So in our manifesto there will be no proposals for any new spending paid for by additional borrowing.

No spending commitments without saying where the money is coming from.

Because we will not make promises we cannot keep and cannot afford.”

Reading this, you have to question whether Ed Balls is an idiot or a liar. In the passage above, there’s a hint it’s the latter. The section I’ve bolded uses quite weaselly language which avoids saying what he thinks, just that other people think a government’s budget is like a household budget. To me this is an admission that he knows perfectly well what he is saying is rubbish, but he believes that’s what other people want to hear, so he’s prepared to pretend he believes it too. Maybe I’m reading too much into this, but as further proof, here’s a passage from a speech Balls gave in August 2010, his famous Bloomberg speech:

“Interviewers look aghast when I tell them that cutting public spending this financial year and pre-announcing a rise in VAT is economically foolish, when growth and consumer confidence is so fragile. ‘But what would you cut instead?’ they demand.

So strong and broad is this consensus that a special name has been given to those who take a different view – ‘deficit-deniers’ – and some in the Labour Party believe our very credibility as a party depends on hitching ourselves to the consensus view.

I am not one of them.

The history of British policymaking in the last hundred years has taught us that on all the other occasions when major economic misjudgements were made, broad-based political, media, financial and popular opinion was in favour of the decision at the time, and the dissenting voices of economists were silenced or ignored.

In 1925, Chancellor Winston Churchill decided to return sterling to the ‘gold standard’ on the grounds that there was no credible alternative which the financial markets would support and that a return to gold would boost confidence and private investment.

He was supported by the broad mass of economic opinion – including the Governor of the Bank of England, Montagu Norman and the leadership of the Labour Party. Only John Maynard Keynes stood out against the consensus at the fateful 11 Downing Street dinner where Churchill made the decision.

But Keynes famously lost the argument and, as he correctly predicted in The Economic Consequences of Mr Churchill, the result was deflation, rising unemployment, the general strike and then Conservative election defeat.

In 1931, two years after the biggest financial crisis of the last century, Labour Prime Minister Ramsay MacDonald said spending cuts were unavoidable to slash the deficit, ease pressure on sterling and satisfy the markets, in the hope of triggering a private sector led recovery.

He wrote: “We are compelled to devise special measures to meet the temporary difficulties. The critics will have to face facts and deal honestly with the interests of the country.”

Labour MPs rebelled, and MacDonald formed a national coalition government with the Conservatives to drive the plan through with broad media support.

Again, Keynes stood outside this consensus, writing that: “Every person … who hates social progress and loves deflation … feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”

And the result of MacDonald’s plan?

The promised private sector recovery failed to materialise. Unemployment soared. Debt rose. Britain faced years of low growth. The parallels with today’s situation are striking.

To me this suggests he knows damn well how damaging austerity has been in the distant and more recent past. Has he now changed his mind? In his 2010 speech, he then goes on to say:

“So the first lesson I draw from history is to be wary of any British economic policy-maker or media commentator who tells you that there is no alternative or that something has to be done because the markets demand it.

Adopting the consensus view may be the easy and safe thing to do, but it does not make you right and, in the long-term, it does not make you credible.

We must never be afraid to stand outside the consensus – and challenge the view of the Chancellor, the Treasury, even the Bank of England Governor – if we believe them to be wrong.

But there is a second lesson too – which is also very pertinent at the present time for the Labour opposition and those of us who aspire to be the next Labour leader: it’s not enough to be right if you don’t win the argument.”

That’s a sentiment to applaud, but one which 2014 Ed Balls has completely abandoned. It seems he thinks he has lost the argument and far from standing outside the consensus, he’s now lining up alongside George Osborne to see who can outbid each other on the consensus (but bogus) concept of fiscal responsibility. He has totally given up on trying to win the argument and is now quite prepared to pretend the earth is flat, believing that enough voters actually do think the earth is flat to benefit him politically. It’s an incredibly cowardly and cynical point of view, and one that takes us all for fools. Whether he is right about the electorate being fools remains to be seen.

Calling bullshit on Labour’s “fiscal realism”

Yesterday we had the launch of the IPPR’s “Condition of Britain” report which I blogged about here. I criticised it for its lack of ambition and its blithe surrender to the ineviabilty of austerity. Indeed, at the launch, IPPR director Nick Pearce referred to austerity as “fiscal realism”. This attitude is pretty typical of Labour people and their hangers-on. I think “fiscal defeatism” would be more accurate. I spotted another example of this defeatism today on the Labourlist blog, in an article written by Labour blogger Emma Burnell. The article is about the IPPR report and starts with this:

“How does social democracy work when there isn’t any money? That is the question that has been taxing those at the top of the Labour Party for some time.”

It’s very common to read articles from “centre-left” people starting with an assertion like this, but my reason for mentioning this article is because of the response in the comments from fellow blogger Peter Martin. I hope he won’t mind me sharing it here:

Who says there isn’t any money? The amount of money in the economy is at least as high as it has ever been on any measure M0, M1, M2 etc. Whichever one you care to choose.

So to accept that “there isn’t any money” is to accept the political opinion, or rather the political propaganda, of the neo-liberals. We might expect to see that phrase on Conservativehome , and perhaps others of the same ilk such as “living beyond our means”, “spending more than we earn” , “spending like a drunken sailor”, “maxing out our credit card”. They are all nonsense. These are not phrases to be used on a Labour website. They are a neo-liberal fabrication to justify the reduction in the social wage. To make us all compete for every job vacancy. To ensure that we’ll take a minimum wage job knowing that if we don’t there will be ten others who will.

Anyone with an ounce of commonsense can see we are living below our means. We have building workers standing idle who could be building houses, hospitals and schools. We have youngsters who have worked hard to achieve teaching qualifications who can’t find a teaching job. Therefore the class sizes in our schools are bigger than they need be. We have young people who could be doing a 1001 things to make a contribution to society instead of festering in enforced idleness.

Every person on the dole represents a waste of resources.

Bravo sir! I think Peter is very good at explaining things clearly and more importantly concisely. It’s quite a rare skill. You can find his excellent blog here.

Last 7 Days Reading List 30/11/13

I’ve decided to do a regular Saturday post linking to some of my favourite articles or blog posts from the last 7 days. Here’s the first list:

The DWP has been in the news this week for various reasons. First up, universal credit and the IT system that is a ticking timebomb. Computer Weekly interviewed a former DWP consultant who explained the departments inability to ensure IT services are procured well:

Disaster at DWP

The DWP’s Work Capability Assessments came back under the microscope, with a number of suicides linked to the loss of benefits being highlighted in the media and on the blogosphere:

Second Suicide Linked To Welfare Reform Reported This Week: RIP Victor Cuff

Information Commissioner rules on the cover up of DWP-related deaths

Also on the DWP, disability rights campaigner Sue Marsh sets out the refusal of DWP to engage with disabled people about cuts to welfare and on the WOW petition campaign which has nearly reached 100,000 signatures:

WOW Petition – Nearly There

Moving on now from welfare reforms and on to the economy in general, which is the stated reason for welfare cuts. Lord Skidelsky wrote a very clear and accessible rebuttal against the arguments for austerity:

Four Fallacies of the Second Great Depression

In a post on ‘debt overhangs’, Bill Mitchell pours a fresh dose of scorn over Excel spreadsheet wizards Rheinhart and Rogoff:

Been searching for a public debt overhang – didn’t get far

More politics now, and I liked this post from Puffles about the difficulties political parties continue to face with how they use social media:

Do Labour party chiefs know how to use ‘priceless’ social media?

Boris Johnson made a widely criticised this week in which he informed us of his views on inequality and IQ. Hopefully a few people will have seen this and realised that maybe voting for someone because they make them laugh might not be the best idea. Two blogs from Chris Dillow on Johnson’s speech are well worth reading:

Inequality and Growth

IQ and Equality

Employment now, and this Buzzfeed article was quite good, highlighting the 9 worst unpaid internships in Britain. I think my favourite is the one at Reading Football club:

9 Of The Worst Unpaid Internships In Britain

Finally, and not related to what I normally blog about, a couple more links that caught my eye this week. First up, a nice interview with Charlie Brooke, talking about his new documentary on video games being shown tonight on Channel 4:

Charlie Brooker on why video game television is so hard to make

Lastly, footballer Ryan Giggs turned 40 this week. I’m not much of a football fan any more, but as an 8 year old boy, the year Giggs made his debut, I was a mad keen Man Utd fan. That he’s still playing at the top level (and for the same club) is an amazing achievement, and I thought this was a nice little interview with the man who first discovered Giggs:

Ryan Giggs, by the milkman who discovered him

On tax avoidance and the purpose of taxation

A large section of the public get very worked up (rightly) about tax avoidance. Huge companies like Google or Vodafone seem to be getting away with paying very little tax despite turning over billions. At the same time, the Government are pursuing cuts to discretionary public spending. People often make a connection between the two and argue that if rich companies and individuals paid all the tax due, there would be no need for any cuts, so a ‘left’ solution to the economic crisis is to go after the tax avoiders/evaders in a big way, and all will be OK. I think this view is misguided. Here’s why.

Firstly, there is an implicit assumption that we need those taxes that have been avoided/evaded to pay for government spending, and if we don’t go after that money, then austerity is unavoidable as the Government doesn’t have enough money. As the UK has its own currency though, this cannot be true. It can create new currency at will and can never run out. There is a risk of inflation of course, as with any type of spending (public or private), but if you don’t think repatriating and taxing a sizeable chunk of money stashed offshore would be inflationary, how could creating a similar amount to spend into the economy be inflationary? The money sitting offshore is largely inert, sitting as excess savings. Money can only be inflationary if it is circulating.

This leads on to the other point I want to make which is about the reason we tax at all. If you ask most people why we have taxes, they will say “to pay for government spending on public services”, but as someone who finds myself in agreement with Modern Monetary Theory (MMT), I don’t think that is really the purpose of taxation at all.

So what is the real purpose of taxation? There are a number of, none of which are to pay for government spending (although confusingly, for a government to spend, it does need to tax):

1. A ‘Chartalist’ view of money (which MMT incorporates) argues that the imposition of a tax by a sovereign government creates a demand for a currency. So because people are required to pay tax in pounds, a minimum level of demand for pounds is assured and people will be willing to do business in pounds so they can obtain enough to pay their tax liabilities. Because pounds have value to those with a tax liability in pounds, they also have value to those who are not taxed in pounds, so it’s not necessary that all users of pounds are taxed.

2. While the government doesn’t need to collect tax before it spends, if it spends without taxing, this will almost certainly cause inflation. We can think of government spending as ‘printing’ money and taxation as ‘unprinting’ money. The tax ‘makes room’ for the government to spend without causing inflation.

3. To correct for ‘externalities’ and discourage ‘harmful’ behaviour. Externalities are costs or benefits generated by an activity which affects non-users of that activity. Examples could be pollution or second-hand smoking. So we might want to heavily tax polluting activities to the point the activity becomes unprofitable or the tax collected is equal to the cost of the clean-up. We might want to tax smoking heavily because it imposes a cost on the health services or gambling because it can lead to crime and contribute to social breakdown.

4. For redistributive purposes. This reason would be why we might wish to take on tax avoidance. Our economy is working as a giant hoover at the moment, sucking up money from the bottom to the top, increasing inequality and leading to more and more people becoming marginalised and stuck in unemployment or low-paid work. Tax is one way of trying to correct for this damaging process.

To sum up then, I am not saying we shouldn’t go after tax avoidance. We absolutely should (although overhauling and simplifying the whole tax system would be more effective in the long run). It’s just that I don’t think it’s an answer to our sluggish economy. Those who avoid/evade tax undermine the tax system by offending people’s sense of fair play. If some are seen to be ‘getting away with it’, it makes maintaining the legitimacy of tax more difficult, and a strong tax base with efficient collection is vital for a functioning mixed economy.

While we need to do something about tax avoidance (preferably through regulation rather than appealing to amoral companies’ morals), we should not oppose austerity by saying “tax the rich more” or “tackle tax avoidance”. Austerity should be opposed on it’s own terms i.e. the government is not running out of money; the markets can’t hold us to ransom, and cutting spending in a recession is a really, really stupid thing to do.

“Are budget deficits or surpluses good or bad?”

Here’s another extract from a recent “Billy Blog” by economist Bill Mitchell on “MMT Budgetary Principles“. The context to this as Bill writes is:

“This is a background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. This blog provides some general principles that should govern the design of a budget.”

Bill is an Aussie, and is writing here for a home audience, but the following extract is equally applicable to the UK economy (or the US, Canada etc). It cuts right through the usual fact-free ruminations about the deficit which we are subjected to on a daily basis.

“Are budget deficits or surpluses good or bad?

The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.

There is nothing intrinsically good or bad about any specific budget outcome.

In response to the 1982 attempt by conservative politicians to pass a Balanced Budget Act in the US Congress, the revered macroeconomist Gardner Ackley said:

“My own position on deficits has always been, and remains,      that deficits, per se, are neither good nor bad. There are times when they are not only appropriate but even highly desirable, and there are times when they are inappropriate and dangerous. During a recession or a period of “stagflation”, deficits are nearly unavoidable, and are likely to be constructive rather than harmful.”

…It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.

That goal is constrained by the availability of real resources that the nation commands – labour, capital, land, etc – but not by the financial capacity of the currency-issuing government.”

Do read the whole thing here. If you want to learn about economics and the current mess we are in, you could do a lot worse than spend a few hours browsing Bill’s blogging back catalogue.

Reinhart and Rogoff on Austerity (Or what they should have said)

The names Reinhart and Rogoff have been heard a lot lately. A widely cited paper they authored which suggested that high debt was associated with low growth was recently found to contain some embarrassing errors which invalidated its findings. That the errors were found by a grad student named Thomas Herndon added another layer of interest to the story.

R & R have been spending a lot of time defending their work since then and yesterday, they were given space in the FT to give their views on austerity. The title of the article is “Austerity is not the only answer to a debt problem”, but they then use the body of the article to prove otherwise and push austerity (although with some qualifications). Warren Mosler, one of the founders of the economic school of thought known as MMT, welcomed their article, but added some amendments of his own to make it a more accurate representation of the actual situation developed economies face. You can read Mosler’s post herebut I found it a bit hard to follow the flow, so I thought I’d reproduce it here as a single body of text with Mosler’s additions in bold:

Austerity is not the only answer to a debt problem

By Kenneth Rogoff and Carmen Reinhart

May 1 (FT) — The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is, likely via the reaction functions of governments and not the high debt per se), then high debt is not a problem. Looking beyond the recent public debate about the literature on debt we have already discussed our results on debt and growth in that context the debate needs to be reconnected to the facts.

Let us start with one: the ratios of debt to gross domestic product are at historically high levels in many countries, many rising above previous wartime peaks. This is before adding in concerns over contingent liabilities on private sector balance sheets and underfunded old-age security and pension programmes. In the case of Germany, there is also the likely need to further cushion the debt loads of eurozone partners as they are ‘users’ of the euro the way US states are ‘users’ of the dollar, and not the actual issuer of the currency like the ECB, the Fed, the BOE, the BOJ, and the rest of the world’s central banks. Some say not to worry, pointing to bursts of growth after the world wars. But todays debts, while they pose no solvency risk for the issuer of the currency will not be dealt with by boosts to supply from postwar demobilisation and to demand from the lifting of wartime controls.

To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched if there remains a choice, that is, as is always the case for the issuer of the currency. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives, as is the case for ‘users’ of a currency in general, including the US states, for example.

Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, (which are confirmation by the CB policy makers who set the rates low that they too believe demand is weak) where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis. Additionally, weak demand can be addressed by tax reductions, recognizing that counter cyclical fiscal policy of currency users, like the euro zone members, requires funding support from the issuer of the currency, which in this case is the ECB.

Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction without a credible long term inflation concern, as for the issuer of the currency inflation is the only risk from excess demand. This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt with regards to solvency (as is necessarily the case for the issuer of the currency) and, to quote Star Trek, pushes governments to go where no man has gone before (apart from war time, when the importance of maximum output and employment takes center stage). The basic rationale of the mainstream deficit doves (not the ultra Keynesian MMT school of thought) is that low interest rates make borrowing a free lunch.

Unfortunately, the mainstream believes ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast (apart from the Central Bankers who voted to lower them this far and this fast, and in some cases provide guarantees to other borrowers), and therefore no one can be sure for how long their current low level will be sustained, as it’s a matter of second guessing those central bankers.

John Maynard Keynes himself wrote How to Pay for the War in 1940 precisely because he was not blas about large deficits even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot and in general should not be brought down too quickly. But interest rates can change rapidly. All it takes is a vote by central bankers.

True, research has identified factors that might combine to explain the sharp decline in rates (in fact, all you have to do is research the votes at the central bank meetings). Greater concern by central bankers over potentially devastating future events such as fresh financial meltdowns may be depressing rates. Similarly, the negative correlation between returns on stocks and long-term bonds, while admittedly quite unstable, also makes bonds a better hedge. Emerging Asias central banks have been great customers for advanced economy debt, and now perhaps the Japanese will be once more. But can these same factors be relied on to keep yields low indefinitely? In the end, it’s all a matter of the central bank’s reaction function.

Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade due to inflation concerns might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause if he does not see the merits of leaving risk free rates near 0 in any case, as there is no convincing central bank research that shows rate hikes reduce inflation rates, and even credible theory and evidence to be concerned that rate hikes instead exacerbate inflation. 

What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.

First and foremost, only governments who fail to recognize that these are merely matters of accounting that don’t themselves alter output and employment must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US. Additionally, for Europe in particular, any reasonable endgame will require a large transfer of public goods productionfrom Germany to the periphery which in fact would be a real economic benefit for Germany. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.

There are other tools. So-called financial repression, a non-transparent form of tax (primarily on savers), may be coming to an institution near you. In its simplest form, governments cram debt into domestic pension funds, insurance companies and banks by removing governmental support of higher rates from their net issuance of debt instruments, particularly treasury securities.Europe is there already and it has been there before, several times. How to Pay for the War was, in part, about creating captive audiences for government debt. Read the real Keynes, not rote Keynes, to understand our future.

One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate. It is therefore imperative for the central bankers to make it clear to the politicians that there is no solvency risk, and that central bankers, and not markets, are necessarily in control of the entire term structure of risk free rates, and that their research shows that rate hikes are not the appropriate way to bring down inflation, should the question arise.

Structural reform always has to be part of the mix. In the US, for example, the bipartisan blueprint of the Simpson-Bowles commission had some very promising ideas for simplifying the tax codes.

There is a scholarly debate about the risks of high debt. We remain confident in the prevailing view in this field that high debt is associated with lower growth but must add that the risk is that of misguided policy response, and not the level of debt per se. Certainly, lets not fall into the trap of concluding that todays high debts are a non-issue as we must be ever mindful of the possibility of excess demand using up our productive capacity. Keynes was not dismissive of debt. Why should we be?

The writers are professors at Harvard University. They have written further on carmenreinhart.com

A vast improvement I think!