Economist John Weeks says his new book, “The Debt Delusion: Living Within Our Means and Other Fallacies,” applies to the coming economic crisis caused by the coronavirus outbreak.
This is a rush transcript and may contain errors. It will be updated.
Greg Wilpert: It’s The Real News Network. I’m Greg Wilpert in Arlington, Virginia. Economies around the world are beginning to feel the massive impact that the Coronavirus pandemic is having. The US stock market has collapsed to the level it was at three years ago, and jobless claims in the United States shot up by 33% relative to the previous week.
In response to the crisis, governments around the world are planning economic rescue packages. For example, the Trump administration is proposing $1 trillion for which it would provide $500 billion in direct payments to households and another $500 billion in loans to businesses. Where will this money come from?
How governments can deal with the economic crisis and with spending priorities more generally is an issue that a recently published book titled The Debt Delusion: Living Within Our Means and Other Fallacies proposes to address. To discuss the book, I’m joined by its author, John Weeks, he’s a Professor Emeritus of Development Studies at the University of London and coordinator of the London-based Progressive Economy Forum. Thanks for joining us again, John.
John Weeks: Thank you for inviting me along.
Greg Wilpert: So, I want to tie your book into the recent policy proposals for dealing with the Coronavirus pandemic. However, before we get into that, we need to lay out some of the main arguments in your book about the debt delusion. Now your book outlines five main myths that we have to deal with debt. The first one is that we must live within our means, that governments must balance their books, we must tighten our belts, never go into debt, taxes are a burden, and that there is an alternative.
Now we can’t get into each one of these, but it seems to me that the first four are variants of each other, about not going into debt because it could lead to economic problems. So before we get into discussing why this is a myth, let’s focus on why mainstream economists and many in governments make that argument. In other words, why should governments avoid debt according to that?
John Weeks: Well, I think that there’re several reasons, given the technical reasons, they aren’t actually technical reasons, they’re ideological arguments presented as technical reasons. I will give an example. There is the argument that increased public debt will increase public borrowing, which increase public debt but by the public sector borrowing that drives up interest rates. It leaves less space for the private sector to borrow.
Now, on one level that is an empirical argument. On the other level it’s an ideological argument because it basically says, and even if it’s true, why is it the problem? Maybe that’s a good thing. So, but in fact it’s not true. The interest rates at historic low, they’ve been at a historic low for 10 years, they’re even lower now than they were a month ago. And the possibility that increased government borrowing and increased government deficit will reduce the private sector is fanciful at best. On the contrary, the more likely outcome would be nothing, government expenditure for the private sector to spend. In fact, that’s exactly what the Trump administration hopes. And the reason I might also mention the stimulus in Europe of 1.7 Trillion euros, which a foreign counter of a total economy about twice the size of the United States. Though they’re divided, it’s not an aggregate stimulus. It is one country, not country.
Speaker 2: But I mean another argument though is that it’s unsustainable that that burden will become too difficult for countries to, for governments to eventually pay off. What’s your response to that argument?
John Weeks: Well, first of all, I think it’s worth noting before I get into a political explanation of it, that the financial times of London, meaning businesses, papers just had leader lead article in which it argued that not only was the Vinny steps sustainable, but more striking enough that the Italian debt was sustainable. The Italian debt is about 120% of GMP and they made the technical argument which the financial times knew 10 years ago when it was arguing from less depth on the technical argument was that servicing and debt is not determined by how big the debt is, but how much it costs to service it. And so when the interest rates are very close to zero, the actual cost of the insurance costs of servicing a debt is quite small, quite manageable and the numbers vary from country to country, but in most countries the servicing of debt is well below 2% GMP.
And I might just add to that to everyone out there who says, Oh, 2% of GMP, well that’s as big as you hear different things depending on the country. That’s what we spend on education. That’s where we spend on roads, whatever everybody will have it to be. That interest payment goes primarily to, in developed countries, to pension funds. Some of it, a substantial portion goes to wealthy people, but majority of it goes to pension funds. So if there’s anybody out there who has a pension who’s watching, you should cheer when you hear that the government is paying more interest on his debt because your pension fund is probably heavily invested in U.S. Government bonds.
Speaker 2: That brings me to another issue that you bring up in your book, which is that of course a large chunk, and you just now in your answer just now also kind of allude to it, a large chunk, if it’s not going to the pension funds goes to other people who are wealthy. That is the interest payments go to people who are wealthy, making them potentially more wealthy and thereby wouldn’t that increase inequality in the country? In other words, if the government goes into greater debt, it essentially enables a greater inequality. Is that wrong?
John Weeks: In appearance form, that’s correct. There are two points to make. One, we shouldn’t exaggerate that, as I said, one of the largest, I think the largest single source, obviously this depends on the country. This would be true for the United States and for Britain and for Germany. It wouldn’t be true for Bulgaria, but the four most large countries, the single largest, yet hold older public yet are pension funds and while people who receive pensions are there, in some cases their incomes are above the average thinking on the United States, the social security fund is primarily in public bonds and so, transfers of interest payment to the social security system would not make income distribution worse.
Second of all, there is a problem that you can easily solve with higher marginal tax rates, so you can work out easily enough how much of the government interest is going to the wealthy, say the richest 10% or 25%, whatever you have to choose and began to raise taxes for those recipients accordingly. We’re talking about a relatively small portion of GMP I must say. If the overall interest is 2% of GMP, well, the wealthy portion of the population will be well below 1% and that’s to be easily handled through a very modest increase in tax rates on the wealthy.
Speaker 2: Mm-hmm (affirmative). Now, but that brings us to the fifth myth that you talk about in your book, which is that taxes are a burden. Now, this one probably feels very logical to most people. I mean, we see our gross pay on our paycheck and we see that the government takes a significant chunk out of that pay, usually between 20 and 30% depending on your income tax bracket and your personal circumstances. Now, isn’t this a burden to the individual and isn’t that money that we cannot spend and that’s in effect taken out of circulation?
John Weeks: Let me say first of all, that people that pay US tax, and even though I live in Britain, I receive social security so I pay US tax. I would pay US tax, but I have to pay a British tax instead. There’s a joint tax agreement and the British tax is about 30% and 20%. Now, should I groan about it? Let me give an example. In Britain, there’s something called the National Health Service. If we didn’t have the National Health Service and that is funded by taxation. If we didn’t have a National Health Service, I would have to have private health insurance. That private health insurance would be an expenditure instead of the taxation and actually it turns out then that National Health, the taxes I pay on the National Health are much lower than they would be if I bought private insurance, I mean I’m not speculating about that.
I’ve done the work in Missouri and it is a fact. If you wanted to get private health insurance in Britain for a person my age in the 70s, it would be $1,000 a month, $1,500 a month. Now for National Health, I’m probably paying $300 or $400 a month.
Now, if they cut my National Health expenditure and said, okay, just you’ve got $300 or $400, go out and spend it yourself anyway you want to, well, I have to spend it on healthcare because I have health issues, would I save any money? Absolutely not, I wouldn’t save any money. I would end up spending more money and many things that we do are the same way. You think about schools, well they just give people money and let them pay for their own schools. It will be far more expensive than if the government paid for it. I mean, and we don’t say let people build their own roads. I guess a few far out people on the right do argue that, but very few people do. So what you want to always think when you say taxes are a burden, how are my taxes being used and if I didn’t have the service associated with those taxes, what would it cost me?
Speaker 2: Hmm. Now the last method you explore in your book is that there is no alternative. The Tina principle that Mark Good saturate coin. Now this Smith rather, it can easily become rather complicated I would say because there are so many alternatives one could consider, but let’s focus on just one that is the role of central banks or of the federal reserve in the case of the United States. That is, you’re, to a large extent, it seems your argument in your book is centered around the role that the central bank could be playing in creating alternatives. Now talk about how central banks’ roles have been limited into not creating an alternative and why that’s a mistake?
John Weeks: The first point I want to make is, the important thing about the central bank is when a government has its own currency. So the US has the dollar, Britain has the pound, the Chinese have a currency, the Japanese have a currency, European Union, the members of the European Union do not have their own currency. There is a common currency among them. That is the big difference because of institutional reasons, doesn’t have to be this way, but because of the institutional reasons, that means that the Finnish government, American government, the Japanese government can bought all from themselves and while many of the European governments cannot borrow from themselves, they are prohibited from doing that.
So when you have your own currency, you can borrow from yourself and that means that in effect, you borrow from yourself, you pay your interest to yourself and it’s costless. In the case of the United States, about 27% of the national debt is held by the Federal Reserve system and another large portion is held by the Social Security system as I mentioned, but the part held by the Federal Reserve system is just recycled back into the US government. So, that’s the first point.
Second point I would make is that central banks, it could be the Federal Reserve system, Bank of England, should be responsive to government policy, they should not be independent. That is everyone should presume. No. If those organizations are truly independent, then they can make decisions which are contrary to the democratic decisions raised and pass through our Congress. So it’s quite important that the role of the central bank be complimentary to fiscal policy as implemented through the Congress and through the Executive.
Speaker 2: My final question is, and it seems like the Federal Reserve is actually perhaps coordinating to some extent with the Trump administration and especially considering that the Trump administration has now submitted a bill or proposal to Congress for addressing the economic crisis and the Federal Reserve would be involved presumably to some extent. Now, and the rescue package is over a trillion dollars or about a trillion dollars right now for the United States and as you mentioned, 1.7 trillion for the European central bank, what do you make of those proposals?
John Weeks: Well, the first was you’re quite right about the European central bank. Though I think that the sum that they said is 720 billion, 750 billion Euro and the 1.7 is actually a fiscal expenditure. Now, I might just say the difference between the two a fiscal expenditure is, for example, when Trump administration, it says everybody’s going to get $1,200 or everyone’s going to get $2,000 whatever it happens to be. While the monetary stimulus comes by the Federal Reserve system purchasing back US government bonds or having sold US government bonds to cover the expenditure previously transferred those funds to the US government. Now it buys those bonds back and so it purchases them with money too. Bank X holds bonds and sells bonds to the Federal Reserve system and the Federal Reserve system gives money to that bank. That bank then has hoped we’ll use that cash to lend out and in a what’s called a fractional reserve system, if they got a billion dollars, they can then have a very large multiple of that.
Now, that will only happen if banks find a demand for loans. If businesses don’t want to borrow because the economy’s depressed, then the bank money just sits idle. So much more important, well, I’m certainly not opposed to the Federal Reserve system, the Europeans central bank expanding credit by purchasing bonds, you must keep in mind that it is absolutely essential to that is a fiscal response that increases demand, that expenditure by businesses and by people, which then puts businesses in a position to say, Oh, we need to borrow money in order to expand production. So you might say the really important impetus here is the fiscal expansion and the monetary expansion is, you might say permissive.
Speaker 2: Okay. Well, we’re going to leave it there for now. Hopefully we’ll come back to you once we have a clear idea as to exactly how these economic rescue packages look like and then maybe we can dig a little bit deeper as to what we can expect from them and what they could be doing. But we’ll leave it there. I was speaking to John Weeks professor emeritus of development studies at the University of London. Thanks again, John for having joined us today.
John Weeks: Thank you.
John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.