Friday, 27 April 2012

Three MMTers and Milton Friedman say government borrowing is pointless.

The plonkers running Western economies have for the most part not grasped the distinction between micro and macroeconomics: in particular they think government, plus government income, spending and borrowing can be treated the same way as a household’s income, spending and borrowing.

In fact the two are as similar as chalk and cheese. (Incidentally, I’ll use the word “government” in the sense “government and central bank combined”).

Micro and macro borrowing.

Borrowing can make good sense for a microeconomic entity, like a household or business. For example, where such an entity wants to make an investment that makes sense, and the entity does not have enough cash, it will borrow. Nothing wrong with that.

However a country that issues its own currency (a “monetarily sovereign” country / government), is totally different. This “entity” has a limitless supply of cash: it can print the stuff. Borrowing is totally pointless. (Same goes for the Eurozone as a whole – though INDIVIDUAL COUNTRIES within the EZ are a different kettle of fish.)

New Economic Perspectives and Friedman.

The New Economics Perspectives site has just published an article by Dan Kervick (who I regard as very clued up) arguing that government borrowing is pointless. This argument is not new, but it’s good to see someone joining the “borrowing is pointless” chorus.

Milton Friedman in 1948 argued for a zero government borrowing regime. See paragraph starting “Under the proposal…” (p.250) here.

Friedman’s arguments were, first, that borrowing might be justified in war time when government spending relative to GDP is very high, and collecting very large amounts of tax might be impractical. However, so argues Friedman, this point is invalid in peace time, ergo borrowing is not justified in peace time.

Second, Friedman debunks the argument that borrowing is justified because, in his words, it is “less deflationary” than getting a similar amount of money via tax. As he rightly points out, simply printing money is even less deflationary.

Warren Mosler

Warren Mosler also argues for a zero borrowing regime. See second last paragraph here.

He does not give any detailed reasons, far as I can see. He says that “No public purpose is served by the issuance of Treasury securities with a non-convertible currency and floating exchange rate.” That is true, but that simple statement needs bolstering with some more detailed arguments, which I attempted to set out in a paper entitled “Government borrowing is near pointless”.

My Reasons

It is not possible to accurately summarise all the arguments in the latter paper. But briefly the main arguments are thus.

1. A popular argument for borrowing is the Keynsian “borrow and spend with a view to stimulus” argument. However, Keynes himself pointed out that printing money was a perfectly good alternative to borrowing it. But even that is too charitable an attitude towards borrowing. Reason is thus.

Where a government issues its own currency and borrows units of its currency, it is borrowing something which it can create itself in limitless quantities: similar to, and as pointless as a dairy farmer buying milk in a shop.

2. There is borrowing with a view to the purchase of assets, like infrastructure investments. One flaw in that argument is that infrastructure investment spending is small compared to total government spending, thus such spending can perfectly well come out of income.

Another possible excuse for borrowing to fund infrastructure is that the borrowing spreads the cost over the generations that benefit from such spending. That argument is nonsense because it is just not physically possible to consume real resources like concrete or steel produced in 2030 to construct roads and bridges in 2012.

3. Government borrowing smooths out the erratic timing of government expenditure and income from taxation? Sorry: just another flawed argument.

To illustrate, if all corporation tax is paid in January, government will on the face of it be short of funds towards the end of each year, which for “borrow” enthusiasts means government will have to borrow.

Not true: suppose the government just prints money towards the end of the year, would that be inflationary? The answer is “no”, because corporations know perfectly well that a significant chunk of their cash is going to disappear in January. That money is not “spendable” money. In fact the deflationary effect of abstaining from spending that money will pretty much cancel out any inflationary effect of government printing and spending money late in the year.

4. Given the hopeless arguments for government borrowing, what are the REAL REASONS for such borrowing? Well, the real reason is moral hazard, skulduggery, corruption - call it what you will.

To be specific, voters attribute tax increases to governments and politicians to a far greater extent than they attribute interest rate rises to governments and politicians. Thus it always pays incumbent politicians to run up national debts, and leave the consequent mess to their successors to sort out. 

And finally.

So if three MMTers (Warren Mosler, Dan Kervick and me) all say the same, namely that government borrowing is pointless – not to mention Milton Friedman - I challenge anyone to contradict us!!!!


P.S. (28th April). Another MMTer with similar views is Bill Mitchell. He said, “A sovereign government within a fiat currency system does not have to issue any debt and could run continuous budget deficits (that is, forever) with a zero public debt.”

H/t to “Peter” on the New Economics Perspectives site.



  1. Nice Ralph. I just downloaded that Friedman paper and will take a closer look tonight.

  2. (Cross Posted at NEP)
    Please make it stop.

  3. Government borrowing is not about borrowing as such though as a balance sheet transaction it is borrowing in accounting sense regardless of economic or political background. Government borrowing is about providing a public function of a risk-free instrument for savings with some inflation driven yield. Whether this function is misused or not is a separate discussion. Anyways saying that government borrowing is pointless is way too much of a stretch. It is a pointless argument because it has clear political motivation and no political views can be called pointless.

    Does it qualify for a contradiction? :)

  4. Hi Ralph: Very interesting post. It definitely opened my eyes to a different perspective. You actually wrote a comment a week or so back on one of my blogs Going to your profile and then reading this here is interesting and gives a better feel for what you meant. I still tend to be worried about inflation down the road, but I do see how an increase in base money does not immediately translate into inflation. I am actually going to this article on my blog for a healthy point of contrast. I have read quite a few of Cullen's posts at Pragmatic Capitalism over the years, and am just starting to get a feel for what MMT actually means. Now, if you really want to get into a good debate with some people, go to the Telegraph's finance section and comment on some articles with a link to your old blog the printingmoneyisgood - you will quickly get quite a fair amount of attention!

    1. By the way, for a non-economist, is it fair to say that there are three basic theories of broader macro thought today:

      1) Keynesian
      2) Austrian (Mises Institute for example)
      3) MMT

      I am NOT an economist, so this may well be quite overly simplistic, so if you read these comments would be curious as to a reply. Also, is "monetarism" considered a separate school of economic thought or no?

    2. I wouldn't like to put an exact figure on the number of "theories". You could say there are three main theories, ten lesser theories, and five hundred mini-theories!!!!

  5. OK, this is my third comment in a row, but just had one curious thought. I would strongly suspect that you and Mish Shedlock from the globaleconomicanalysis blog would disagree on a number of things, but it appears you'd both share quite a distaste for fractional reserve banking as well as a Keynesian approach to things (although you don't seem like the kind of chap who would throw insults like "Keynesian clowns" or "idiots" the way Shedlock does).

    1. Yes, Mike Shedlock opposes fractional reserve. I’m surprised at your claim that he opposes Keynes: I’ve never noticed that in his writing, but I don’t follow him closely. So I could easily be wrong there.

  6. Ralph - its like his favorite insult!:

    That's just one of his many - "Keynesian clown" is one of his favorite terms.

  7. Ralph
    Thanks a lot for sticking with this point.
    While slightly amazed that Dan has never read Friedman's framework for economic stability, I am also reminded of my own reaction when my Dad, an early monetary reformer, pointed out that, indeed, Friedman supported government debt-free money issuance.
    What is out there as a proposal today that trumps Friedman's framework proposal or even his Program for Monetary Stability, as a vehicle for overcoming Minsky's hypothesis?
    I say the Kucinich Bill, but that's an aside.

    I take issue with the definition of monetary sovereignty adopted by MMTists. Monetary sovereignty is what allows those nations to come into the position that MMT describes as sovereign.

    Also, even among Warren, Bill and others, there is another equal claim that, due to the 'endogenous' nature of the money supply, public debt-issuance is necessary as a means to control the interest rate regime in the effort of the GUV-CB to control monetary inflation. So, we're still issuing debts as monetary policy.

    This to me avoids and ignores the reality that in a truly monetarily sovereign nation, the GUV would be issuing the money fully and directly without issuing any debt, rather than in conjunction with private bankers who issue $-denominated bank-credit as a debt for ALL of our economic activity.

    I see this as a flaw in the MMT construct.

    The Kucinich proposal clarifies the acts of a sovereign government when it comes to money. It does not issue debt. And it does issue all the money.


    1. “What is out there?” There is Positive Money - they advocate abolishing private bank created money. I don’t agree with everything Pos Money says, but I think they are roughly on the right lines. Certainly privately created money contributes to the instabilities which Minsky addressed.

      There is also Modern Monetary Theory. That tends to advocate simply creating new central bank money and spending it in a recession, rather than fiddle with interest rates.

      Re the Kucinich bill, I can’t remember the details of it, but last time I looked I remember concluding that Kucinich was fumbling his way in roughly the right direction.

      I think you are quite right to have spotted that Warren Mosler, etc continue to think that interest rates should be manipulated by central banks, which might seem inconsistent with their claim that there should be no government debt. That apparent inconsistency occurred to me as well some time ago. My answer to it is thus.

      If a central bank wanted for example to raise interest rates under a “no debt” regime, it would just wade into the market and for example offer to borrow at above the going rate. The “debt” it would then owe those it had borrowed from would be of a very different nature to “debt” in the normal sense of the word. Debt in the normal sense of the word is incurred in order to do something with the money borrowed. In contrast, the above so called debt incurred by a central bank would be incurred with the specific purpose of DOING NOTHING with the relevant money.

      Having said that, I don’t even think that interest rate manipulation should be the main tool for regulating demand. My reasons are here:

      Re the “issue” you have with MMTers’ definition of monetary sovereignty, I side with MMT here. MMT adopts what I think is the normal definition of the phrase: it refers to a country (like the US, UK, Japan, etc) which issue their own currencies (as distinct from countries in the Eurozone).

      In contrast, your definition (if I’ve got it right) includes the idea that just the central bank issues money (and not private banks).

      I suggest the above two ideas are quite separate and thus should not be conflated or included in the same definition. That is, one can have a monetary regime that is sovereign in the MMT sense, and which does nor does not let private banks create money. Also, a Eurozone country (assuming Eurozone laws allow it) could permit or not permit private banks to create money.


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