Columnist Samuel Brittan (1933-) disagrees with conventional wisdom that budget deficits are something always to be avoided. On the contrary, he argues, Western countries require deficit spending to offset the deflationary effects of a global savings glut.

[T]o most people’s surprise, Keynes’s [vision of] chronic savings surplus has come back thanks to China’s phenomenal savings rate. …. This was 49 pc of China’s own GDP and 28 pc of global savings (… at purchasing power parity). Germany also had a savings surplus, but Germany is now a much smaller part of the world economy.

The world was kept in balance by the US, which developed an abnormally low savings ratio, acting as a consumer of last resort in the company of other smaller economies …. The boost in US consumption was aided and abetted by the Federal Reserve’s low interest policy …. It was also enhanced by large budget deficits incurred by a supposedly strait-laced Republican Administration. ….

If Western countries begin slashing their deficits, as conventional opinion so loudly demands, what will supply the offset to Chinese savings? Most of the suggested answers are non-starters. It is no use lecturing the Chinese to consume more. Indeed the Chinese authorities are now reining back domestic demand for fear of inflation. It would be best to take Chinese policy as given and for the rest of us to adapt. ….

I can only reply to the masses of messages that the first priority of a new British Government should be to reduce the fiscal deficit: “I beg to differ.” As the Bank of England Governor, Mervyn King, has just reminded us, UK output, is some 10 pc below its previous trend. If the recent upturn in UK inflation turns out not to be a blip but a more lasting response to sterling devaluation, the appropriate reaction would be to edge up interest rates but let the Budget deficit run. The fact that this would be the opposite of the conventional wisdom only reinforces my belief that it would be right.

Samuel Brittan, “The Great Piggy Bank of China”, Financial Times, 22 January 2010.

Brittan’s newspaper columns and other writings are posted at www.samuelbrittan.co.uk . The site is well worth visiting. This is a writer who has become wiser with age. I hope he will be with us for many years to come.

[T]he normal antidote to both an international and a national savings surplus is a reduction in interest rates. But with policy rates already near zero in the major economies, there is little further for them to fall.

Some central banks are trying to reinforce the effects by direct creation of money – so-called “quantitative easing”. Unfortunately, instead of being dropped by helicopter this cash is being injected into the banks that have a thousand and one excuses for not passing it on in loans to businesses or households. ….

Tax cuts and public spending have the great advantage of not adding to private debt. Of course they add to public debt, but for governmental authorities that can print their own money that is not the same thing.

Samuel Brittan, “Simple truths about the economy”, Financial Times, 13 November 2009.

The full column will be posted here in a week or so.

The always calm Samuel Brittan describes current obsession with tax increases and spending curbs as ‘hysteria’, since deficit spending is precisely what is needed.

[The UK Treasury shows public sector debt] rising from about 30 per cent of GDP at the beginning of this decade to 65 per cent in the current financial year. The pace of increase begins to slow down in the coming decade; but debt is put at 76 per cent and still rising slowly in 2013-14. ….

Debt ratios of this size are historically far from unprecedented. In the early Victorian period the ratio was nearly 200 per cent and almost reached that level again in the early 1920s. In 1956 it was just under 150 per cent. ….

The danger of premature tightening was illustrated in the US in 1936-37, when the ending of a war veterans’ bonus and the introduction of social security taxes helped push the US back into recession when recovery from the Great Depression was far from complete.

The big error of the current discussion is to confuse the budget balances of individuals and companies with the government budget balance, which needs to be in deficit so long as attempted savings exceed perceived investment opportunities.

Samuel Brittan, “A cool look at the current deficit hysteria”, Financial Times, 2 October 2009.

This column will eventually be posted here.

Update: Paul Krugman is known for his shrillness,  but he conveys much the same message very calmly in a 2nd October NY Times column. Krugman eschews the word ‘hysteria’,  describing “the complacency now setting in over the state of the economy” as “foolish and dangerous”. ‘Hysteria’, to my ears, seems harsher than ‘foolish and dangerous’.