I entered into a heated US debate last week on whether the recovery has been surprisingly slow and, if so, whether the policies of Barack Obama’s administration bear responsibility for that outcome. In particular, I was responding to a post by John Taylor of Stanford University, a distinguished macroeconomist and adviser to Mitt Romney, who had argued that the recovery was exceptionally weak.

Prof Taylor has responded to my reply. In this response, he makes four points.

First, he argues that if we exclude the recoveries in 1973, 1981 and 1990 from the analysis, the gap between the average US recovery and the current recovery becomes even bigger. Read more

Martin is on book leave until October

I have argued in previous posts that the policy of letting the government deficits offset the natural post-crisis austerity of the private sector makes excellent sense, provided the country in question has a solvent government. I have argued, too, in the most recent post, that the objections to this policy are not decisive. What matters is making the best of bad alternatives.

Yet let us also look at alternative ways of accelerating deleveraging. Broadly there are two: capital transactions and default. The latter, in turn, comes in two varieties: plain vanilla default and inflationary default. Read more

In the previous three posts in this series, I have argued that large fiscal deficits are a more or less inevitable concomitant of post-financial crisis deleveraging by the private sector. Moreover, I have argued, substituting a solvent debtor (the government or taxpayers, in general) for insolvent (or illiquid) private ones is feasible and desirable in an economy going through a balance-sheet recession. It is therefore quite possible to get out of debt by going into it, because they are not the same debtors. And the distribution of the debt, not its level, is what matters.

Needless to say, arguments can be made against this point of view and alternative policies considered. But, before considering those arguments and alternatives, it is crucial to stress one point: no pain-free escapes from the consequences of a huge credit boom and consequent private sector debt overhang exist. We are trading off bad alternatives. Read more

The role of fiscal deficits in deleveraging

“You can’t get out of debt by adding more debt.” How often have you read this sentence? It is a cliché. I am going to argue that, to a first approximation, this obvious, even banal, statement is the reverse of the truth, which is that the only way to get out of debt is to add more debt. What matters is who adds the debt and in what form. To put it more bluntly, it depends on who these“you” are.

As I have done in two previous posts on the theme of “balance-sheet recessions”, I am going to focus on the US, because it is the most important country now going through the post-crisis deleveraging process.

Let us start with an obvious and crucial fact: at the world level, net debt is zero. For an individual country, net debt is how much foreigners have lent to residents less how much residents have lent to foreigners. In the case of the US, net debt at the end of 2011 was 44 per cent of GDP, roughly an eighth of gross debt. Read more