There is no excuse for the government failing to run deficits as large and for as long as required to cater to the accumulative desires of capitalists and thus sustain production at the highest possible level. There is no reason the government shouldn’t run a permanent deficit, if the long-term savings rate of the private sector is greater than zero, as it seems to be in some countries. If the deficit begins to lead to inflation – if people change their savings propensities – the government can always control the inflation by reducing its spending or increasing taxation. It is in complete control of the purchasing power of its currency. The only way a government can lose control over the value of its currency is if it loses the ability to impose taxes in that currency.--Alexander Douglas, (2016) The Philosophy of Debt p. 127-8 [emphasis in original!]
I very much admire Alex Douglas' book (I happily provided a blurb for it). It's full of astute analysis and proves an important normative framework with which to evaluate good systems of debt from bad systems of debt and the duties/obligations of agents in these. I used his framework in a recent (Dutch) editorial in order to address Greek debt crisis. (It is really extraordinary that Douglas also published a very fine book on Spinoza shortly before.) Some other time I hope to explore the many significant features and complexities of the book's normative framework (indebted to Hume and Anscombe). Today, while everybody is distracted by electoral matters, I just want to note two political features of Douglas's book that are on evidence in the quoted paragraph. (The paragraph presupposes some of his unorthodox views on money.)
First, Douglas's policies are really directed at sovereign countries that are in "complete control" over features of their currency. He is explicit about that (see pp 95-6). This means that Douglas's policy prescriptions are not entirely apt for countries that have pooled or pegged their currencies in various ways.
Second, in the quoted passage, Douglas assumes that governments operate in politics-free environments. For while it may be true that formally a 'government can always control the inflation by reducing its spending or increasing taxation,' this is not always true in practice. Few governments are really eager to reduce spending or increase taxation, especially in bad economic times or ahead of an election. So, the notion of 'can' and 'ability' at stake here is a bit awkward. It surely is a real possibility and ability, but it may be very hard to implement in practice. (And this is connected to the familiar possibility that if people don't believe that a government will reduce spending or increase taxation, then inflation expectations and inflation may well turn out to be hard to avoid or more stubborn when they materialize.) This is not an isolated bug in his system, but a feature: he regularly expects that governments will know what to do (if they don't operate under false beliefs about nature of debt and money, which as it happens, are widespread if Douglas is right), and that they can do so in unconstrained fashion (see also p. 118: "all the government then needs to do to stabilise prices is claim back the excess IOUs by raising taxes or issue fewer IOUs by reducing spending").*
Oddly enough, in these two ways (focus on sovereign governments that operate in relatively politics-free environment for analytical purposes), Douglas's approach is very similar to Holmstrom's approach discussed last week. This, despite the fact that they have completely incompatible understandings of the nature of debt, money, and the financial system. For example, Holmstrom takes (information insensitive) collateral as intrinsic to the whole system of debt. Douglas barely discusses collateral and when he discusses it all it is mostly in the context of (immoral) extractive debt-regimes (of the past). In addition, Holmstrom thinks that debt itself makes for very fine collateral for debt, whereas Douglas is very critical of the financialization of the economy.
Anyway, some other time I return to this book to explore some of its normative subtleties.
*My two examples concern inflation, but these are just examples of the feature I am calling attention to.
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