Thread by @EmergingRoy

The contributions below by @adam_tooze @michaelxpettis provide wonderful insights on debt, and fiscal policy that are extremely relevant in the contemporary global scenario. I’d like to add a few observations… #EconTwitter 🧵 1/12

https://twitter.com/michaelxpettis/status/1611943014322311173

Debt is a transfer. So are taxes. The difference is that debt is theoretically “amortised” while taxes are not. But consols -“perpetual debt” -are assets that pay interest but are not amortised. They can be bought and sold by debt holders. How is this different from a tax? 2/12

Consols are bought willingly, taxes are levied using coercive power. When repayment is not a factor then, clearly, the same set of public expenditures can be financed by both instruments so what’s to choose between them? 3/12

As I have shown in my work on fiscal space, taxes are best used to fund expenditures that are “exhausted” in the year that they are undertaken. This includes all kinds of welfare transfers but also expenditure on merit goods like education 4/12

When a teacher educates a child this year, you do not sack teacher because there are more to be educated next year. But the teacher’s output that was paid for this year is “exhausted.”Given the recurrence and the implicit or explicit social contract that mandates recurrence 5/12

Using taxes to fund this expenditure in perpetuity is preferable to borrowing every year to fund it. This is also true of “regrettable necessities” -stuff that Govt. spends on because of the way humans behave and are organised..Police, justice, foreign affairs etc..6/n

What then of pandemics, recessions etc? If these are taken to be (1) temporary and (2)generating benefits beyond the period in which finances are used to direct resources to them then debt finance is preferable.
7/n

There are of course distributional consequences which need a separate thread. For here, the point is that in steady state, the choice of fiscal instrument to finance particular types of spending depend on the temporal nature of that spending. What, then, of.. 8/n

Growth, aggrandising War, etc? Here conventional debt accounting is relevant. Public spending to grow an economy/attack or defend aggrandisement whether through public investments, transfers (eg export subsidies/conscription), or consumption- offers a “Grand bargain” 9/12

A “grand bargain” in which society is promised future returns to public financing that is deployed in the present. This is where r<g etc becomes relevant and is the focus of fiscal economists from emerging economies, like me.
Which, finally, raises the @gamblingondev ? 10/12

Even if r<g, what are the odds of winning the development/war gamble? The Nazis clearly felt it was a no brainer but history proved them wrong. British consols were great value as Britain prevailed in WW2
But for development transformation gambles the prognosis is bleak 11/12

And, as Ghana learnt recently, borrowing from external agents hurts more, akin to borrowing from the gambling mafia! Better to impoverish your own family(misspent domestic debt), should the gamble go wrong! 12/12.