Tuesday, 17 November 2015
Lerner was a friend of Keynes’s. Lerner is often said to be the founding father of Modern Monetary Theory. There isn't much difference between the two men’s ideas: just a difference in emphasis here and there.
Here are some excerpts from Lerner’s book “The Economics of Control” (published in 1944). MMTers will hopefully like these excerpts, as will a few other folk I suspect.
The excerpts are from the end of chapter 23 and beginning of chapter 24.
On national debt.
“…the size of the national debt (when held by citizens of the country) is a matter of almost no significance beside the importance of maintaining full employment. The national debt is not a burden on posterity because if posterity pays the debt it will be paying it to the same posterity that will be alive at the time when the payment is made.”
Lerner’s point there is essentially the same as Keynes’s famous phrase “Look after unemployment, and the budget will look after itself.”
On the subject of national debt being a private sector asset, Lerner says, “The greater the internally held national debt, the greater the amount of private property held by members of society, either directly as private individual owners of government bonds, or indirectly through the corporations and banks that own the bonds…”.
“The purpose of taxation is never to raise money but to leave less in the hands of the taxpayer. . . . taxation should never be imposed merely as a means of raising money for the government on the grounds that the government needs the money. The government can raise all the money it needs by printing it if the raising of the money is the only consideration.”
The latter point is technically correct and MMTers often repeat it. But personally I’m wary of it: it gives the impression that MMTers think a country can do a Robert Mugabe and get away with it.
Lerner was keen on the idea that we should look at EFFECTS, not numbers.
“The rational procedure is to judge all actions only by their effect and not by any vague notions of their propriety or impropriety. “By their fruits shall ye know them.” The effects of a tax are two fold. It increases the money in the hands of the government and, by decreasing the money left in the taxpayer’s hands, it makes him spend less. The first effect is unimportant…..The important effect is the second, and the question of taxing or not taxing should be governed entirely by whether the effect on spending by the individual taxpayer is desired or not…”
Personally I’d go further and say that money in the hands of a money issuer (e.g. government / central bank) is meaningless. To illustrate, a central bank can create a trillion, trillion, trillion dollars at the click of a computer mouse whenever it wants. That reduces each dollar to a nonsense.
Warren Mosler, a leading MMTer summed it up best when he said that central banks should be likened to the umpires in a tennis match. Umpires produce points (dollars) from nowhere and as appropriate. And they WITHDRAW points (dollars) when they think appropriate.
To illustrate the above “effect” point, suppose government wants to spend an extra $1bn next year and suppose it decides to get that from tax rather than borrowing, how much extra tax should it collect? The obvious answer, i.e. $1bn, is the wrong answer. The correct answer is that government should collect whatever amount negates the inflationary effect of spending an extra $1bn. The actual amount needed to do that “negation” will be very different as between where the tax is collected from the rich as distinct from the less well off.
On confusing macro with micro.
It would be nice if Western politicians had read and understood this passage at the start of the 2007/8 crisis.
“The level of economic activity is affected by the spending, taxing, and borrowing activities of the government. In a purely capitalist economy these activities will for the most part have the effect of accentuating cyclical fluctuation in economic activity. The government budget will be drawn up in the image of the budget of a business or a corporation. When times are good the revenue from taxes will be high and the government, federal and local, will believe it proper to undertake socially beneficial activities in excess of the current revenues by borrowing more for these activities on the strength of the expected continuation of the high tax yields. This will result in a net increase in total demand because the government spends the whole of the proceeds from taxes and loans, while the citizens contract their expenditure by only a part of the increased tax payments (except perhaps the very poor) and perhaps by only a very small part of the money loaned to the government.
In bad times the government will feel that it is proper to retrench, and not to go in for the luxuries of government spending on defence or parks or roads. It will be considered "unsound finance" to increase its debt in times of declining revenue from the taxes out of which the debt must be serviced. Attempts will even be made to reduce the national debt by raising higher taxes to repay some of the debt and bring it into a better "balance" with government tax revenue. The effect of such a policy of "sound finance" will be to reduce incomes still further, both by the decrease in government spending of borrowed money and by the decrease in private spending because of the higher taxes whose revenue serves to repay debt. The depression will be deepened by much more than this net direct decrease in government and private spending. This is because the decrease in spending acts just like a decrease in investment. Income must fall as much as will reduce the gap between income and equilibrium consumption by an amount just equal to the net direct reduction in spending.
……In the end the government is forced, against its will, to stop this and actually do something to improve the economic situation.”