Should governments run permanent surpluses? (2)

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Last week I showed that Australia’s net gov­ern­ment debt to GDP ratio is noth­ing to pan­ic about when com­pared to the rest of the world. We’re cur­rent­ly at under 12 per cent, where­as most OECD nations have ratios of 50 per cent and above.

But maybe that’s one rea­son Australia’s econ­o­my is rel­a­tive­ly strong.

I also showed that most coun­tries aren’t like busi­ness­es in that most coun­tries have a net neg­a­tive equi­ty posi­tion — their lia­bil­i­ties exceed their assets — which is a sit­u­a­tion that would have most com­pa­nies on their way to being declared bank­rupt.

But maybe most coun­tries are head­ed for bank­rupt­cy. That, after all, was the alarmist tone of Australia’s Nation­al Com­mis­sion of Audit about the trend in Australia’s pub­lic debt, which will rise from 12 per cent to 16 per cent of GDP on a “busi­ness as usu­al” sce­nario over the next decade.

So how to decide?

This is why econ­o­mists devel­op mod­els: to try out var­i­ous hypo­thet­i­cal sit­u­a­tions and see what hap­pens. I’m a stri­dent crit­ic of how the main­stream devel­ops its mod­els, with mad assump­tions like the one I point­ed out last week by Robert Bar­ro: that peo­ple leave bequests to enable their dis­tant rel­a­tives to pay tax­es:

A net­work of inter­gen­er­a­tional trans­fers makes the typ­i­cal per­son a part of an extend­ed fam­i­ly that goes on indef­i­nite­ly. In this set­ting, house­holds cap­i­talise the entire array of expect­ed future tax­es, and there­by plan effec­tive­ly with an infi­nite hori­zon…”

That sort of non­sense puts an imag­i­nary rab­bit in an imag­i­nary hat, and then expects us to applaud when it’s pulled out of the hat by an imag­i­nary invis­i­ble hand.

What I pre­fer to do is build a rea­son­able repli­ca of the mon­e­tary world in which we actu­al­ly live, and see what hap­pens if var­i­ous mon­e­tary set­tings are changed, which is why I devel­oped the open-source pro­gram Min­sky.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.