Sunday, 15 June 2014

Alittleecon's MMT table.

I like this table recently published by Alittleecon setting out the differences between conventional economics and Modern Monetary Theory. However I have two or three minor quibbles with it. Under the paragraphs of Alittleecon’s which I don’t entirely agree with, I’ve put a paragraph of my own (spanning both columns) with my suggested alterations to Alittleecon’s ideas. Scroll down….


Monetary Theory

Budget deficits are bad

Budget deficits are neither good nor bad and are required where the spending intentions of the non-government sector are insufficient to ensure full
utilisation of available productive resources.

Budget surpluses are good

Budget surpluses are neither good nor bad and may be harmful in some circumstances if they involve a drag on growth in situations where there are idle

Budget surpluses contribute to national saving

There is no sense to the concept that a currency-issuing government saves in its own currency. Saving is an act of foregoing current spending to enhance future spending possibilities and applies to a financially-constrained non-government entity. The government never needs prior funds in order to spend
and thus never needs to “save”.

should be balanced over the business cycle

Budget should be allowed to adjust to the level of net spending required to achieve and sustain full employment given the spending decisions of the non-government sector, irrespective of the state of the business cycle.

Budget deficits drive up interest rates because they compete for scarce private saving

saving is not finite and is related to income. Spending always brings forth
its own saving because saving rises and falls with income movements, which
are directly related to movements in spending.

“Private saving is not finite”. I’m baffled. So is it “infinite”? A better paragraph in the right hand column would read: “The government / central bank (gcb) only needs to artificially raise interest rates when it has spent too much into the private sector, and thus needs to constrain private sector spending. Gcb can do that by in
effect “bribing” private sector entities not to spend: by offering them interest of money lodged with gcb.
And that’s commonly known as “national debt”. Thus “budget deficits drive up
interest rates” where such deficits are excessive, but not otherwise.

markets determine funding costs of government

bank sets interest rate and can control any segment of the yield curve it
chooses. The costs of government spending are the real resources that are
utilised in any particular public program.

The central bank ALONE does not have complete control of interest rates: it needs to cooperate with government to bring about, for example, an interest rate reduction. E.g. if there’s a reduced demand for a country’s bonds from “bond markets”, then interest rates will initially rise. The central bank can counter that by printing money and buying back bonds (QE). But that’s a bit stimulatory / inflationary (though not HUGELY SO, if the recent bout of QE is any guide).  Thus the latter stimulatory / inflationary effect would need to be countered by having government raise taxes (and/or cut public
spending). But note that if the “countering” was done competently,
there’d be no effect on GDP.

deficits mean higher taxes in the future

deficits never need to be paid back. Every generation can freely choose the
level of taxation it pays.

Budget deficits MAY MEAN higher taxes in the future, but that’s of zero relevance because the only circumstance I which a rational government would raise taxes would be where demand was excessive and inflation loomed. Thus the tax
increase (much to the surprise of the uninitiated) would have precisely zero
effect on real living standards.

government will run out of fiscal space (money)

Fiscal space is more accurately defined as the available real goods and services available for sale in the currency of issue. The currency-issuing government can always purchase whatever is for sale in its own currency. Such a
government can never run out of its own currency.

deficits equals big government

Budget deficits may reflect large or small government. Even small governments will need to run continuous deficits if there is a desire of the non-government sector to save overall and the policy aim is to maintain full employment
levels of national income.

spending is inflationary

spending (private or public) carries an inflation risk. Government spending
is not inflationary while real resources are idle (ie.
There is unemployment). All spending is inflationary if it drives nominal
aggregate demand faster than the real capacity of the economy to absorb it.

bonds to the private sector reduces the inflation risk of deficits

There is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit $-for-$ with bond issuance relative to a situation where it issues no debt. The inflation risk is embodied in the spending rather than the monetary arrangements that are
associated with it (bond-issuance or not).

burdens are linked to inherited budget deficits in
the form of debt that have to be paid back.

Intergenerational burdens are linked to the availability of real resources. For example, a generation that exhausts a non-renewable resource imposes a burden on the next generation. A future generation cannot transfer real resources back in

is used to control interest rate

is used to control interest rate

issuer of currency is at risk of default

issuer of currency is never at risk of default. The issuer of a currency can
always meet any liabilities it incurs in that currency.


currency. The taxpayer does not fund anything. Taxes are a device to free up
real resources so our agent, the government can
instigate a socio-economy program for our collective benefit.

make rational decisions based on self-interest

are complex and rarely predictable, reason and emotion are inseparable.



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