Miserly Politicians don’t understand Debt

By   /   February 14, 2014  /   25 Comments

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Reading a recent Listener article by Guyon Espiner about Labour’s finance spokesperson David Parker, I came away with the overwhelming concern that this man is a miser. As Minister of Finance in a possible Labour-led government, will he direct public policy into a consistently more miserly direction than it is in at present?

 david-parker

Reading a recent Listener article by Guyon Espiner about Labour’s finance spokesperson David Parker, I came away with the overwhelming concern that this man is a miser. As Minister of Finance in a possible Labour-led government, will he direct public policy into a consistently more miserly direction than it is in at present?

In an earlier posting  I noted that “when inequality and miserliness are pervasive, the pace of destabilisation tends to be much faster than when incomes are more equally distributed”. While I didn’t elaborate on the reference to miserliness, now it is time to do so.

Who is a miser? Essentially, a miser is a person who likes making money but only intends to spend a portion of it. The key word is the word ‘intends’.

Misers may think of themselves as being frugal, indeed ‘economical’; but a truly frugal person is an ascetic, not a miser. An ‘ascetic’, certainly as I mean the term, is a person who has little money, does not wish to have much money, and spends (or gives away) the little money that they do have.

Parker, who loved his $5 watch because it was cheap, and who personally wishes he “had made more money” for himself, is not an ascetic. He has not, like St Francis of Assisi, sworn a vow of poverty.

Most economists, like politicians, don’t actually know much about debt. Debt is a visceral real‑world social reality. Liberal economics, which conceives of a machine-like world without debt, nevertheless accommodates the concept with a nice story of inter-temporal exchange.

In the economics’ story, debt arises from a bargain freely entered into. The first parties are the creditors, who intend to abstain from some spending today (spending less than they earn) with the intent of spending more than they earn at some point in the future. The second parties, the debtors, invest the money today.

A typical creditor might be a 40-year-old man, who plans to retire when he’s 65. So he lends $50,000 to a debtor or to an intermediary such as a bank. He (C) abstains from $50,000 worth of consumer spending this year. In our example our debtor (D) agrees to repay our creditor $133,000 in 25 years’ time, assuming a 4% rate of compound interest. The creditor agrees to spend that $133,000; essentially he’s agreed to buy $133,000 of goods and services from the debtor. The requirement to repay essentially obliges the debtor to invest the $50,000 in a business venture that will enable debtor D to deliver $133,000 of goods and/or services to creditor C, on the due date. D benefits if his investment was sufficiently profitable to give him something left-over after delivering the $133,000 worth of stuff he was contracted to supply.

In this happy economics’ story both C and D end up with more consumer goods and services in the future; they share the rewards of the investment made by D but enabled by C. Indeed the whole economy grows as a result of the investment.

The problem is that it often doesn’t happen like this. And the main reason is that creditors tend to be misers. What if C doesn’t really want $133,000 of fun stuff in 25 years’ time? And C’s creditor/miser mates don’t want it either. They just want money; not goods and services that money buys. IF C will not buy D’s produce, then D is obliged to find another buyer so that he can pay C in money. Debtors must sell stuff, but miserly creditors will not buy it.

In public life, misers tend to make miserliness into both a public and a private virtue. They are more convinced than anyone that their behaviour is virtuous, even though miserliness represents the breaking of a contract; it represents a refusal of creditors to be repaid in the only way that debtors, collectively, can repay; by delivering goods and services.

For finance to do its magic, for every saver there must be a borrower. And borrowers can only repay debts, collectively, if savers reduce their level of savings. As Margaret Atwood in her book “Payback” said, debtors and creditors are “joined at the hip”.

In economics, we are encouraged to save now so that we can spend more later. In the real world, many people save now with no intention of spending more later. They, like King Midas, treat money as an end in itself. While economists claim that money is a means to an end (spending), even some economists themselves – because economists are people too – are misers. Miserly economists find it difficult to criticise miserly behaviour.

When both people (the private sector, collectively) and their governments (the world’s governments) collectively want to save more (or borrow less) and spend less, the global economy grinds to a halt. In 2008-10 the global economy did not grind to a halt only because most governments, reluctantly, became substantial borrowers of last resort; and because, in some of the large emerging economies of the world, new borrowers emerged as developed economy borrowers retrenched.

President Obama is not the worst of our political misers by any means. Yet in 2010 he said:

“The hard truth is that getting this deficit under control is going to require some broad sacrifice, and that sacrifice must be shared by the employees of the federal government. After all, small businesses and families are tightening their belts. Their government should, too.”

Admittedly, in a single country the government and the people can both spend less than they earn; by lending to the rest of the world. Sweden has shown us that possibility, for nearly 20 years. But will the Swedes enjoy a big spend-up in the future? Probably not, even though that’s what they have contracted to do. Their intent appears to be to build up foreign monetary reserves for their own sake. Further, for every country which spends less than it earns, another country must spend more than it earns. If the United States wishes to be like Sweden, it’s a pretty big debt rat that other countries will have to swallow.

A worse case, than Obama, of advocacy of public miserliness is Angela Merkel, who, two decades after Margaret Thatcher’s endorsement of thrift as a public-private virtue, points to the austerity of prosperous middle-class Swabian housewives.  (Refer to these two Guardian articles [1] and [2]) (With reference to Margaret Thatcher, Adam Smith was prescient when he said that England was “a nation that is governed by shopkeepers”.)

If we, in the New Zealand private sector, want our government to borrow less, then we ourselves should spend more. In that way, we generate income for each other and thereby revenue for the government. There is a consistent pattern in New Zealand over the last 20 years, of government running surpluses when we run deficits, and vice versa. Unlike Swedes and Germans we are generally happy to open our wallets. Indeed renewed spending is helping to make us a “rock star” economy. Is David capable of loosening up when required to?

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25 Comments

  1. Jenny says:

    (I have been forced by circumstances to take up Intrinsickvalues bad habit, of plagiarism)*

    The Labour Party Has a Hot Air Problem on Climate Change

    If Labour Party conservatives, (like David Parker), are truly worried about debt for future generations, they can start by acknowledging climate change.

    *(But I do give a citation)

    http://www.commondreams.org/view/2014/02/12-4

    • Intrinsicvalue says:

      It’s IntrinsicValue. If you’re going to use my name in vain, please at least get the spelling right!

  2. Jenny says:

    The Labour Party Has a Hot Air Problem on Climate Change

    If Labour Party conservatives, (like David Parker), are truly worried about debt for future generations, they can start by acknowledging climate change
    Jenny

    (I have been forced by circumstances to take up Intrinsickvalues bad habit, of plagiarism)

    But in my defence I do give a citation: http://www.commondreams.org/view/2014/02/12-4

  3. ALH84001 says:

    Well, the Labour government did pay off debt and post nine surpluses in a row. Which is more than the Nats have been doing since 2008. I guess that must count for something?

  4. Murray Simmonds says:

    This all sounds to me to be a logically inconsistent argument.

    You pose some problems (debt; borrowing; poverty; political miserliness) and offer a solution (people should spend more in order to reduce the need for government borrowing).

    But you fail to acknowledge that a fair bit of of societies’ current borrowing practices are driven by the wish that the poor have (as a major “borrowing” group) to merely SURVIVE. That is, they borrow to spend on the NECESSITIES of life, not to spend on life’s little (or not so little) LUXURIES. Their borrowing and subsequent spending is survival-driven, not driven by discretionary spending.

    Perhaps you don’t understand what it is to be poor?? My point is that you have failed to acknowledge that the poor borrow of necessity, not of choice.

    And all of this, including your attempt to define “political miserliness”, is quite irrelevant to the question of whether or not Parker is a man of integrity (which I consider him to be, despite the fact that I have never actually met the guy). Simply associating two points of observation (i.e. that there is a construct of miserliness; that there is a person called David Parker) does not establish a link between the two.

  5. Gosman says:

    Lets be clear here. Are you advocating greater government spending and therefore greater government debt?

  6. Andrea says:

    Quote: “will he direct public policy into a consistently more miserly direction than it is in at present? ”

    How about you ask him?

    And think, for a little, on what it is that ‘misers’ do spend money on. Both every day, and in the longer term acquisition of assets, not liabilities.

    And further think that for each miser there are probably several prudent spenders and a couple of spendthrifts who nicely balance out the miser.

    Then politely remind yourself of those Lovely People who gleefully loaned and spent and crashed the well-being of people who entrusted their savings to them. Bridgecorp. Hanover. Etc.

    I can only hope that Mr Parker will, should he be elected, ensure that financial education is available for all time to every age and income group in this country. It might then be safe to be an investor and wealth-builder without inviting a swarm of free-handed parasites to rob the prudent, thrifty, and even miserly.

    • KJT says:

      The only “wealth builders” are workers who produce tangible products or services. The rest is “smoke and mirrors”.

      And those who steal from the producers.

    • Draco T Bastard says:

      A flaw in the monetary system

      Then politely remind yourself of those Lovely People who gleefully loaned and spent and crashed the well-being of people who entrusted their savings to them.

      When you loan someone money you’re taking the risk that you’re not going to get it back.

      Of course, the real problem is that most loans are repaid and the interest is paid which results in the bludgers at the top living high on the hog on everyone else’s work.

  7. Intrinsicvalue says:

    Actually David Parker doesn’t understand much at all. Which makes him marginally more palatable than Russel Norman.

  8. Marc says:

    What an over simplified and unconvincing post this is, I am afraid. The economy and society are not just made up of debtors and creditors like described here, as one other commenter rightly states. Some have no discretionary income and simply spend it on necessities. It comes in with a wage packet or benefit, and it goes straight out again, to cover basic utility, food, housing and transport costs.

    And debtors that run businesses or so will not simply borrow and repay, in the process of what they may be doing, they will employ others, and those will also earn and spend. Finance and money control are complex matters, and so is the economy.

    When too many creditors and consumers do save, interest rates can be reduced, or when they spend too much, they can be raised. Other instruments are there to generate growth, exchange controls and more. Trade with other nations is also changeable, and dependent on what happens globally.

    We will still need to see what the slowing of the quantitative easing will bring, and slowing growth in China, India and a few other places, also with credit bubbles having been created there, leave a lot of stuff to be worried about. New Zealand is just like a tiny piece of wood drifting on the ocean, being the global economy, that is a more realistic view of things.

    I have my own doubts about Parker, but I feel this post does discredit him for the wrong reasons, as it is based too much on superficial impressions and on speculation.

  9. Andrew R says:

    Are you arguing modern monetary theory, crudely that private (dis)spending plus public spending equals zero?

    • Draco T Bastard says:

      Keith Rankin: The Global Debt Crisis

      These charts show, for every year from 2001 to 2010, private sector surpluses matched by public sector deficits. This means the private sector (firms and households together) are net savers (ie net lenders), meaning they attempt fewer goods and services than their incomes entitle them to. (These private surpluses accumulate to create a “global savings glut”.) For the private sector to succeed in its attempts to run large surpluses, the public sector must comply by running large deficits.

      That does seem to be what the data is telling us.

      The economy, contrary to what most economists and politicians think, is a Zero Sum Game. Succinctly summed up in that old saw:
      You can’t have your cake and eat it too.

  10. Stuart Nash says:

    Astounded by this post actually. I know David Parker reasonably well, as his office was across the corridor from mine during the last term and we were both in Labour’s economic team. I can personally attest to the fact that he is a very intelligent and principled politician who understands what needs to be done to transform the NZ economy; to create jobs, wealth and a future for all NZers. He is passionate about fairness and equity for all – and is extremely widely read about the politics and policies needed to return the country to prosperity. I believe that he will be a very good finance minister as his mix of pragmatism and ideology is what has been missing under English’s watch.

    • Draco T Bastard says:

      I can personally attest to the fact that he is a very intelligent and principled politician who understands what needs to be done to transform the NZ economy; to create jobs, wealth and a future for all NZers.

      Oh, good. So that would mean that he’s going to:
      1.) Stop the private banks creating money
      2.) Have the government create money and spend it directly into the economy
      3.) Ban foreign ownership
      4.) Have the government make prudent loans to the private sector (mortgages and business) at 0% interest
      5.) Stop trying to get the private sector to do the necessary R&D and have it fully funded by government through creating the necessary money
      6.) Set taxes at a level high enough so that the government never runs a deficit

      Because if he and Labour aren’t going to do any of that then I can assure you they don’t know what they’re doing.

      • Marc says:

        The answer will NOT come before the next election, if at all, from a Labourite like Nash, we tried this before!

        • Stuart Nash says:

          If I didn’t think I had at least some of the answers then I wouldn’t’ be trying to solve the problems

  11. Countryboy says:

    @ Stuart Nash …
    Ah yes . I’m sure David Parker’s a fine fellow but will he acknowledge ‘ The Great New Zealand Institutionalized Lie ‘ ? If he does not , then he’s more full of shit than a Mumbai sewer .
    I’ve seen financial magicians come and go , usually with our money , so what’s different about Dave ? I’ve also heard the blather , felt the warm nor west winds of jabber and seen the kids go hungrier as our county’s become emptier but for corporate rulers who become wealthier . Stop me if I’m becoming too lyrical . It’s a miracle that I’m not hysterical . ( Jesus ! I can’t stop )
    You write that you’re ‘ astounded ‘ while I bake safely in my cynicism .
    Fifty three thousand people earn our export income , from the Land , and that’s that . Has David Parker rounded up those agrarian souls to stand shoulder to shoulder to forge ahead to make a better Nu Zild ? Doubt it .
    The Wondrous Chris Trotter wrote once about the sub state . Go there , that’s where our money is . Down in there amongst the rats and their disease spreading fleas . David Parker had best shut his yap unless he starts to yap to a different tune because all lap dogs have the same bark .

    • Marc says:

      Countryboy, most these “folks” would not know the meaning of “country”, let alone where you or I come from, and would not know what an udder and teats are, that make a bulk of our exports.

      There lies just a little bit of our problem, but there are even much larger ones, as we know. Stuart the Nash tries to walk on the large foot prints an ancestor left, but he cannot quite fit the shoe size, I am afraid.

      • Stuart Nash says:

        Interesting comment Marc. It is always others who bring up ancestors long gone, but whom I am incredibly proud of. Walter was a legend in the true sense of the word, and I am not trying to emulate him at all, but I do carry the very same belief system and will always endeavour to do the best for this country and the Labour party: like he did.

  12. Stuart Munro says:

    Well I personally haven’t seen David Parker screw up yet – I’ll give him a chance. But this is no time to mess around – we do not need another epiphenomenal government like the tail end of the Clark era. NZ’s problems are coming to a head and for good or ill the incoming government is going to have to work its tail off.

    I’m a bit bemused to find at the age of fifty that if I had three wishes the first one would be to reverse everything parliament has done in my lifetime. Our MPs have been a sick joke when it comes to preserving and growing the important features of our society. Ten years ago I used to joke that politicians were less popular than child molestors. If anything it’s got worse.

    Labour in particular has many broken promises to keep.

  13. Countryboy says:

    @ Marc . I would agree and that’s the difference ‘ They ‘ exploit .
    The entire Machiavellian / confederate methodology depends upon fomenting misinformation and so profiting from that . The segregation of the Urban from the Rural is a way of dividing thus profiting thus ruling .
    Put more simply ; they’re lying , cunning cunts and they’d tell us anything so long as they made a dollar for doing nothing , at our expense . The politician who unites the Rural with the Urban will create a new bench mark in New Zealands political landscape . And will cause more than a few sphincters to twitch . @ Marc . Well done . You’ve bravely come forward .