Balancing the budget

I like Chris Dillow's economics blog, and I largely agree with this piece on the causes of the crisis.  But his point (4), which he has made several times before, is based on an circular argument, and it's wrong to boot:

The fact that the government was running a fiscal deficit before the crisis was not its fault. It was instead a simple accounting identity. If foreigners and companies are net savers, then other sectors must be net borrowers. This was partly the household sector, but also the government.

But there's no magic economic equation that makes it impossible for governments to reduce their debt in times of  economic prosperity.  Their tax take rises and their social security spending falls, so they have a surplus.  The surplus can be used to cut taxes, or to increase spending, or to reduce the national debt.  The mechanics of reducing debt are not difficult: the government redeems bonds as they mature without issuing new ones.  Or if there aren't enough bonds maturing, it can buy them back in the market.  And if government debt reduction makes it unattractive for companies to save domestically, then they will make investments overseas.

Dillow expands his argument thus:

My chart shows the story. It shows that the public sector’s financial balance is very largely the mirror image of the corporate sector’s one. This shouldn’t be surprising, because for every borrower there must be a lender, and so across all sectors of the economy (which includes foreigners) net borrowing must be zero. The fiscal deficits of the mid-00s were, then, counterparts of a corporate surplus.

So argument is:

1. net government borrowing + net corporate borrowing + net foreign borrowing = 0
2. the chart shows that net government borrowing + net corporate borrowing ~= 0
3. which is to say that net foreign borrowing = 0
4. so net government borrowing has to be the mirror image of net corporate borrowing

ho hum.  Net foreign borrowing is net lending to foreigners by corporates minus net lending by foreigners by the government.  If this number is otherwise zero, then reduction of the government's debt will make it positive.  The only way that could not happen is if all the money previously lend to the government were lent to the household sector instead.  Dillow does not attempt to make the case that that would happen.

So the argument amounts to little more than saying that the government did not reduce its debt, therefore it could not have done so.

It is true, as Dillow says, that reducing debt would have made the UK economy less prosperous.  That's the intention of a Keynesian stabilization policy - you spend money in bad times to encourage economic activity, and save money in good times, in the expectation that you will dampen growth. 

Gordon Brown's "golden rule" was that he would balance the budget over a six-year cycle.  Of course, there's no rule of economics to say that growth has to follow a six-year cycle.  In practice as chancellor he was a net saver from 1988 to 1991, having taken office in 1987, and a net borrower for all eight years in office thereafter as chancellor and prime minister (not including the massive borrowing of 2010, for which the current coalition government can hardly be held responsible).

The true reason why democratic governments seldom run balanced budgets is not economic but political.  Repaying debt might be the right thing to do, but it's taking money away from electors to give it to foreigners.  The electorate may well react by voting in the opposition, who will inherit a healthy government balance they can use to get themselves re-elected.