Economic growth as a magic money tree

I saw that Ed Conway wrote an interesting article on the UK economy and the UK government’s budget – he argues the magic money tree exists. It seems that Conway is developing his idea about the macro-economy although Conway is still wrong about government debt. Conway said:

But yes, there is a way to make a government deficit disappear and grind down a national debt, without austerity and massive increases in tax rates or slashes in public services. You don’t even have to force the Bank of England to print billions of pounds of cash or inflate away the debt. You just use your magic money tree. Or, to give it another name, economic growth. Contrary to what you might have thought, the best way to erode away government debt is to get your economy to grow that bit faster.

Although Conway thinks that the UK needs to decrease the government debt in nominal/real terms, I say (as usual) that government debt is good because government debt provides financial assets for non-government sector. But Conway is right to say that economic growth can be a magic money tree. Conway wrote:

After all, if the economy generates more gross domestic product that means more income shared among everyone (GDP is simply the sum of everyone’s income), which means more income tax and corporation tax for the Government. …

Public investment – spending on roads, rail, broadband and so on – is currently the first thing to get the chop when the deficit needs to go down. It was slashed to almost unprecedented lows under George Osborne. While Philip Hammond pledged to raise it in the coming years, the existing plans are nothing compared with what either Labour or the Lib Dems were proposing in the election. …

On the other hand, borrowing to build a road, or a new house, or better broadband, is an investment which future generations should benefit from.

So Conway understands the GDP of a country is simply the sum of the incomes of the people, and that the higher economic growth becomes, the more people/corporations pay their income/corporate taxes to the government. Then the government’s budget position will be improved by rise in the government revenue, Conway suggests.

In addition, the government’s debt-to-GDP ratio will be decreased if the growth rate is significantly high. Two years ago, Nobel laureate Amartya Sen pointed out the fact that strong economic growth was the efficient way to reduce government debt, saying:

“There is, in fact, plenty of evidence in the history of the world that indicates that the most effective way of cutting deficits is to resist recession and to combine deficit reduction with rapid economic growth. The huge deficits after the Second World War were easily tamed with fast economic growth in the postwar years (I will come back to this issue later). Something similar happened during the eight years of Bill Clinton’s presidency of the United States, when Clinton began with a huge deficit and ended with none, thanks largely to rapid economic growth. Again, the much-praised reduction of the Swedish budget deficit during 1994–98 occurred in a period of fairly fast growth of GDP. Despite political deadlocks and a largely non-functional Congress, the United States has been much smarter than Europe, on this occasion, in making use of this central understanding. The ratio of deficit to GDP has fallen in the US thanks to economic growth, which – rather than austerity – is of course the well-tried way of achieving the desired result. …

No less importantly, the public has not always been scared stiff by the size of the public debt. The public debt-to-GDP ratio was very considerably larger in Britain in every year for two decades, from the mid-1940s to the mid-1960s, than it has been at any time since the crisis of 2008. …

And armed with good public services and a flourishing market economy, Britain steadily reduced its debt-to-GDP ratio through economic growth, while establishing the welfare state and a huge array of new public services.”

(By the way, MMT supporters already know that it is meaningless that we use the debt-to-GDP ratio for the indicator of the budget position. That is because a sovereign government can print money to pay the debt it has – thus it can never go bankrupt as long as the debt is domestic-currency-denominated.) The important point made by Sen was that we need economic growth, and austerity is anti-growth – if we have a strong economy, we can easily reduce the government debt (regardless of whether the government debt is good or not). Also, there was no public anxiety about the UK government’s debt during the 1940–1960 period despite the fact that the UK government’s debt was much larger than that today; therefore the British public should not be frightened by the size of the government debt.

Thus Sen’s argument was in line with Conway’s one. Conway also make a good arguement that a government’s investment on infrastructure not only boosts its economy (creates a magic money tree via economic growth) but also benefits future generations. Thus it seems that Conway is dispelling the misconception that a government’s deficit spending runs up debts on future generations’ credit cards.

If you look at America, the Trump administration seems to know that a magic money tree exists. Treasury Secretary Steven Mnuchin made an argument that the admin’s tax cut plan would increase the economic growth and the government revenue, embracing their tax-cut plan. He said:

The plan will pay for itself with growth

Of course Mnuchin was wrong to say that implementing the tax cut plan would spur the US economy to faster growth. The reality is that the decrease of the US corporate tax will not help significantly the country to increase its real output – it’ll just worsen the income inequality. But Mnuchin was right to suggest that the economic growth was a sustainable source of the revenue for the government. Thus we need to spur the economy to faster growth by investing enormous amounts of money in infrastructure, education and research. Also, granting massive subsidies to the domestic industries (farming, fishing, manufacturing etc) will stimulate economic growth. We need economic growth.