Public debt after the pandemic

Another extract from my book-in-progress, Economic Consequences of the Pandemic

Over the course of the Covid-19 pandemic, governments around the world have issued huge amounts of public debt, much of which has been purchased by central banks. In the US, for example, Federal public debt increased by $3 trillion over the course of 2020 (this is about 15 per cent of US national income)

while the monetary base (money created directly by the Federal Reserve) increased by around $1.6 trillion. This money was used to buy government bonds along with corporate securities in open market operations (what is now called Quantitative Easing)

Update Important but complicated: the Treasury has been overfunding its spending needs by issuing securities, and then depositing the excess proceeds at the Fed. To accommodate this, the Fed has increased its secondary market purchases of Treasurys. Netting out the Treasury account, the Fed’s balance sheet is $5.6 trillion rather than $7.2 trillion. Moreover, the post-COVID balance sheet expansion was $1.7 trillion, not $3.0 trillion. (…) Presumably, the latest stimulus package ($900 billion) will draw down much of the Treasury account. If I have it right, this has been accommodated in advance by Fed purchases. End update

These policies represent a complete repudiation of assumptions which were considered unquestionable by the political class until relatively recently: that budgets should be balanced, and that public debt is always undesirable.

Even the most widely-accepted modifications of these assumptions are now problematic. A standard view is that budget balances should be stable over the course of the economic cycle. If measured appropriately, this entails a stable ratio of public debt to national income.

But where should this ratio be set?

Read More »

Monday Message Board (a day late)

Back again with another Monday Message Board.

Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please. If you would like to receive my (hopefully) regular email news, please sign up using the following link You can also follow me on Twitter @JohnQuiggin, at my Facebook public page   and at my Economics in Two Lessons page


A new sandpit for long side discussions, conspiracy theories, idees fixes and so on.

To be clear, the sandpit is for regular commenters to pursue points that distract from regular discussion, including conspiracy-theoretic takes on the issues at hand. It’s not meant as a forum for visiting conspiracy theorists, or trolls posing as such.

Scarcity and plenty

[Warning: half-formed thoughts ahead]
One of the most striking characteristics of the 21st century economy (divided into goods, human contact services and information) is that even very poor people have access to information-based services that were almost unimaginable 30 years ago. Given free wifi and a second-hand phone, someone lining up at a food bank can blog about the experience, and possibly attract readers all around the world[1]. Or they can entertain themselves with an endless supply of free books, news media, music and videos. That’s great, but it doesn’t change the fact that people in both rich and poor countries are going hungry.

Economics has traditionally been about scarcity. But now we have one part of the economy where scarcity remains dominant, and another, growing part, where it has just about disappeared. That raises a lot of different issues.

First, while we are accustomed to think of things like economic growth and inflation rates as objective facts, they are actually based on index numbers, which are the products of theoretical models. Those models don’t work well when an increasing part of the economy consists of information services that are becoming radically cheaper all the time. As a result, much of the debate about the desirability or otherwise of growth is misconceived.

A positive implication is that we can anticipate improving standards of living, because of ever-increasing access to information services, without economic growth in the 20th century sense of steadily increasing throughput of materials and energy, and correspondingly increasing environmental damage. T

A negative implication is that real incomes (that is, incomes deflated by a consumer price index) can increase, even as basic needs like food and housing become less affordable, because the price of inforamation related services is falling fast. I can’t find much that’s readily accessible on this – pointers would be appreciated. One notable fact is that the proportion of disposable income spent on food, which fell sharply between 1960 and 1998, has remained almost static since then. The price of food seems to have risen a little faster than the CPI over this period.

I haven’t talked yet about human contact services. Scarcity is just as relevant here as in the goods economy. Governments are heavily involved in funding and providing these services, and the quality of services is hard to measure. As a result, the kinds of services people get aren’t determined simply by their capacity to pay.

A question to which I don’t have an answer. Is there some way to exploit the massively increased productivity of information services to allow more, and more equal, provision of basic goods? This question underlies a lot of discussion about Universal Basic Income and similar ideas, but is rarely posed in a satisfactory way, let alone answered.

As you can tell, I’m struggling with some complicated problems here, so any thoughts welcome.

fn1. In the early days of blogging, thehomelessguy [Kevin Barbieux] did exactly this. His most recent site is here.

The 21st century economy

Last year, getting started on my book I posted some facts and claims about the 21st economy. The key points (slightly elaborated)

(1) Most economic activity in the 20th century, including ‘primary’ industries like agriculture and mining and services such as wholesale and retail trade, was fairly directly related to the production and distribution of manufactured goods

(2) This is no longer true: around half of all employment is now related to human services, information services and finance, and these are at most indirectly related to goods production.
On the basis of (1), the 20th century economy could properly be described as ‘industrial’. The economy of the early 21st century is harder to classify. Information technology and communications play a central role in the economy and society, and are the main focus of technological progress, but don’t employ all that many people. Service industries employ most people, but it’s critical to distinguish between services that are part of the industrial goods economy and human services like health and education. So, neither ‘service economy’ nor ‘information economy’ captures the whole picture. ‘Post-industrial’ carries too many implicit assumptions, as does the use of the ‘post’ prefix in general.

But that’s just semantics. The key point for the book is how the pandemic changed the different parts of the economy, and to what extent those changes will be sustained. A general observation is that the changes most likely to be permanent are those that reinforce processes that were already underway. So, some thoughts

The goods economy

The pandemic exposed the vulnerability of the global (goods) trading system, a point emphasized by the fact that China was (and remains) the world’s largest producer of surgical masks. In the early days of the pandemic, supply chains for goods of all kinds were disrupted, leading to calls for a greater degree of self-sufficiency. The supply problems are less severe now, but it seems unlikely that we will return fully to the complex global supply chains, characterized by “just in time” delivery that were the most distinctive feature of late C20 globalization. As I argued last year, these complex chains were already under threat as the neoliberal consensus broke down, reflected in Trump’s trade wars, Brexit and more recently China’s largely undeclared trade war with Australia.

The human services economy

The human services sector has been hardest hit by the pandemic, in multiple ways. The burden of dealing with the pandemic has fallen hardest on workers in health, aged care and education. Non-essential services involving human contact, like restaurants, have borne the economic brunt of lockdowns. The process has exposed the disastrous effects of decades of wage stagnation and labor market reform. People holding multiple insecure jobs, without sick leave, have been forced to work even when they are ill, ensuring the spread of the disease. The patchwork nature of much modern employment has created significant difficulties in providing assistance to workers displaced by the pandemic.

The information economy
  • The information economy has been the big gainer from the pandemic. Reliance on information technology the expense of both the physical goods economy and service activities centred around human contact.

Again, this is an acceleration of pre-existing trends, but in many instances we’ve seen a qualitative rather than a merely quantitative change. Most strikingly, at the beginning of a year holding a meeting virtually using Zoom or one of its rivals required a fair bit of organization (often, more than flying all the participants to a single location), it’s now become the default*. That’s unlikely to change, and it implies a permanent reduction in demand for business travel and accommodation (at least relative to the pre-existing trend). By necessity, the regulatory obstacles to things like telemedicine have been removed, and are unlikely to be restored.

The information economy is different in crucial respects, which will be spelt out in more detail below. First, information is inherently a public good: it can be shared without being diminished [econ jargon- nonrival], and it is hard, though not impossible to lock up [econ jargon- nonexcludable]. That makes any kind of pricing problematic. Second, information technology is characterized by rapid capital-saving innovation. A modern smartphone has more computing power than a 1990s supercomputer and (thanks to the information encoded in software) does a vast range of things that a supercomputer could not. Even allowing for the R&D embodied in the smartphone, the capital requirements of the information economy are much smaller than those of the physical goods economy. That means much reduced investment demand, which in turn pushes interest rates down.

More to come on all this, but for now I’d very much appreciate comments and criticism

  • Just as the Internet went from being a tool for nerds in the 1990s to a (near) universal communications platform in the 2000s]

China’s grievances, for anyone to read

A few weeks ago, the Chinese embassy leaked a list of grievances against the Australian government to the Nine Newspapers. I’ve seen lots of references to items in the list, but searching for the whole thing produces very little. It turns out that Nine published an image of the list, but did not convert it into text, and no other media organization appears to have bothered to do so. In the interests of producing an accessible document, I spent the five minutes required to do this.

Here’s the list

— foreign investment decisions, with acquisitions blocked on opaque national security grounds in contravention of ChAFTA/since 2018, more than 10 Chinese investment projects have been rejected by Australia citing ambiguous and unfounded “national security concerns” and putting restrictions in areas like infrastructure, agriculture and animal husbandry.

— the decision banning Huawei Technologies and ZTE from the 5G network, over unfounded national security concerns, doing the bidding of the US by lobbying other countries

— foreign interference legislation, viewed as targeting China and in the ‘ absence of any evidence.

— politicization and stigmatization of the normal exchanges and cooperation between China and Australia and creating barriers and imposing restrictions, including the revoke of visas for Chinese scholars.

— call for an international independent inquiry into the COVID-19 virus, acted as a political manipulation echoing the US attack on China

— the incessant wanton interference in China’s Xinjiang, Hong Kong and Taiwan affairs; spearheading the crusade against China in certain multilateral forums

— the first non littoral country to make a statement on the South China Sea to the United Nations

—siding with the US’ anti-China campaign and spreading disinformation imported from the US around China’s efforts of containing COVID-19.

— the latest legislation to scrutinize agreements with a foreign government targeting towards China and aiming to torpedo the Victorian participation in B&R

— provided funding to anti-China think tank for spreading untrue reports, peddling lies around Xinjiang and so-called China infiltration aimed at manipulating public opinion against China

— the early dawn search and reckless seizure of Chinese jounalists’ homes and properties without any charges and giving any explanations

— thinly veiled allegations against China on cyber attacks without any evidence

—outrageous condemnation of the governing party of China by MPs and racist attacks against Chinese or Asian people.

-an unfriendly or antagonistic report on China by media, poisoning the atmosphere of bilateral relations

Fighting on two fronts, and losing on both

My latest piece in Inside Story, and also the Canberra Times, is headlined Punching above our weight looks like getting us knocked out (CT slightly varied). The key point is that having picked a fight with China, the government is alienating potential allies through its climate donothingism. Key para

Australia is a lightweight, and we are fighting out of our class. If we want to succeed on issues like our trade dispute with China, we can’t afford to poke our potential allies in the eye by suggesting, as Scott Morrison has repeatedly, that our climate policy will be determined by our own national interests and not by our obligations to the rest of the world.

That point has been illustrated again by an article in the New York Times on China’s boycott of Australian coal. The government would doubtless have liked a story along the lines “Plucky Aussies bullied by Chinese dictator”. Instead, it’s more like “Climate cheats get well-earned comeuppance“. The opening para “China is forcing Australia to confront what many countries are concluding: The coal era is coming to an end.”

We are fighting on two fronts and losing on both.

There’s been a lot of publicity for Morrisons. exclusion from the speakers list at the recent climate summit and resistance to our push for Matthias Cormann as head of the OECD. One thing that hasn’t attracted much attention is an earlier insult we delivered to the OECD when we appointed a climate denier, Alex Robson, as our Ambassador to the OECD. Robson was closely associated with the IPA, and contributed to their denialist volume Climate Change: The Facts I engaged in a dispute with him in the ANU magazine Agenda, but can’t now locate his piece.

Ergodicity economics and rank-dependent utility

Slightly behind the pack, it seems, I’ve suddenly started hearing about “ergodicity economics”, presented as an alternative to expected utility (EU) theory. Commenter James asked me about it here, and I also received from a colleague a copy of a paper in Nature, by Ole Peters, who appears to be the main developer of this idea. The essential idea of ergodicity is that the long-run distribution of outcomes for a dynamic process should match the uncertainty of the process at any point in time. You can get something more precise in Wikipedia. Expected utility starts with preferences over uncertainty at a point in time. Peters argues that things are better understood in terms of evolution over time. I haven’t followed all of the details of this argument as yet.

What piqued my interest is that the discussion involves a lot of discussion of probability weighting and particularly the idea that extreme low-probability outcomes may be overweighted. The most famous expression of this idea is the cumulative prospect theory put forward by Kahneman and Tversky in 1992. Their original prospect theory applied the same weighting function to all events, which raises a number of difficulties. These were resolved using the idea of rank-dependent probability weighting which I proposed in a paper in 1982 (under the name ‘anticipated utility’ and now usually called rank-dependent utility or RDU) .

The underlying reasoning is that, in a dynamic process repeated over time, taking low-probability extreme risks will (very probably) catch up with you. I’m pretty sure I made an argument of this kind in support of RDU back in the 1980s, but I haven’t been able to locate it for now.

This is one of many independent rediscoveries of the rank-dependent approach, with a variety of motivations. I think this reflects the fact that the RDU is, in some sense, the natural generalization of EU.