Summary: I have plenty of respect for Steve Keen, but don’t agree with his debt jubilee idea. He argues that the process of paying off debts is deflationary, and that if we want to get the debt reduction process over quickly and return to normal levels of aggregate demand, we need stimulus, with debtors being made to use the stimulus money they receive to pay down their debts.
Strikes me the bureaucracy involved there is a problem. But more fundamentally, it’s the PROCESS OF PAYING OFF DEBTS that is deflationary. Thus if debtors who seriously want to remain indebted are allowed to do so, there is no deflationary effect. As to debtors who WANT TO reduce their debts, they will do so AUTOMATICALLY given stimulus. Thus there is no need for any sort of special “debt forgiveness” scheme.
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There has been a big rise in private sector debt over the last decade or so. Paying off this debt will have a similarly big and long lasting deflationary effect. So Keen wants the “paying off” to be speeded up with a “debt forgiveness” program or “debt jubilee”.
The essence of his argument is under the heading “A Modern Jubilee”. In contrast, the paragraphs PRIOR to that heading contain the technicalities and evidence to back his argument. His argument, as I understand it, is essentially as follows.
The accumulation of private debts is an important contributor to aggregate demand (AD), and in particular the ACCELERATION in the growth of this debt is the vital factor.
I have no quarrel with that.
He then claims that the LEVEL of private debt accumulation over the last ten years or is unprecedented, and that paying it off will involve such a degree of AD reduction that the only solution is a debt jubilee.
Now that argument would be valid if the only source of AD or potential AD was debt accumulation. But it’s not: government and central bank can perfectly well make up for any lack of AD by boosting private and/or public spending.
Indeed, Keen’s proposal is to do EXACTLY the latter, but channel a portion of the extra money towards debt reduction. He says:
“A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.”
First, I’m not sure that QE alone would have the required stimulatory effect, because QE has a negligible effect on private sector net financial assets. But that is a minor quibble: it’s not of crucial relevance to the basic argument here.
So let’s just assume that stimulus is implemented, and the net effect is to channel money into everyone’s pockets (debtors, creditors, you name it).
Bureaucracy.
The first problem with requiring debtors to use their newly acquired stock of money (stimulus money) to pay off their debts is the ENORMOUS amount of bureaucracy involved.
For example, just assuming debtors are induced to write out checks to their creditors, what’s to stop those debtors (where they want to maintain their level of debt) quietly incurring a similar amount of debt from other creditors (or even re-financing via the SAME ORIGINAL CREDITOR/S a few months later)?
Stimulus plus jubilee equals stimulus.
The second problem is this. As far as ultimate effects go, there is very little difference between Keen’s idea and a straightforward dose of stimulus (SDS) WITHOUT any specific attempts to have debtors pay off their debts.
To illustrate this point, I’ve listed below the six changes that Keen claims would result from his jubilee idea. Plus I’ve put comments in orange below after each.
1. Debtors would have their debt level reduced;
Same applies to SDS to the extent that debtors think the best use they can make of a cash windfall is to pay off their debts. In contrast, to the extent that they see fit to MAINTAIN their level of debts (and assuming their creditors are happy with that) I see no good reason to pay off the debts.) Moreover, simply MAINTAINING a debt at a constant level does not have a deflationary effect: it’s the PAYING OFF of debts that has the deflationary effect. So if a set of debtors want to maintain their indebtedness, where is the harm?
2. Non-debtors would receive a cash injection.
Same goes for SDS.
3. The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
To the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.
4. Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.
5. The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off;
Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.
6. Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent.
Same again: to the extent that debtors see fit to pay off their debts, exactly the same applies to SDS.
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The idea that government should act as employer of last resort (ELR) is as old as the stars. And one of the main groups pushing ELR is based at the University of Missouri-Kansas City (UMKC). Unfortunately there is a large amount of muddled thinking on this subject, for example in this paper by Pavlina Tcherneva of the above university.
I’m frustrated at this because the UMKC lot favour Modern Monetary Theory (as do I), plus they favour ELR, and I favour ELR – thought I don’t agree with them on exactly what form it should take.
The flawed arguments Pavlina puts for ELR are as follows.
1. Trickle up and down.
ELR is desirable in that it involves trickle up whereas, traditional demand management involves trickle down, (p. 2 & 3).
The flaw in that argument is that while traditional demand management often involves trickle down (which I deplore), it does not HAVE TO. For example, the VAT reduction earlier in the recession in Britain is an example of traditional demand management done in a trickle up manner.
Thus trickle down is not an INHERENT CHARACTERISTIC of traditional demand management. Ergo the trickle-up characteristics of ELR are not an argument for ELR.
2. Poverty.
Traditional demand management does not deal well with poverty (p.3). True. However – and this is a bit of a statement of the obvious – countries in the West typically spend about 10% of their entire GDP on anti-poverty measures even in the middle of economic booms. For example in Britain, about HALF THE WORKFORCE get some sort of in-work benefit regardless of whether the economy is at capacity or in a recession. Raising aggregate demand (AD) raises AD. That’s it. That solves some problems, not others.
Blaming AD increases for not dealing adequately with poverty is like blaming internal combustion engine carburettors for not cleaning your clothes. Carburettors perform a specific and very limited role. Same goes for adjusting AD. Neither AD increases nor carburettors solve every problem under the sun, nor do they even solve a particularly large range of problems.
Moreover, the relatively low wages normally paid on ELR type schemes mean that ELR does not deal too well with poverty either.
3. Raising AD can exacerbate inflation.
Pavlina claims that traditional methods of boosting AD tend to be inflationary. Well, sure. So what do we conclude? That all jobs dependent on demand should be destroyed and replaced with ELR jobs – jobs which by their very nature are never going to be fantastically productive?
A better and more precise statement of the above “inflation” point is that raising AD where the economy is nowhere near capacity will not exacerbate inflation too much, whereas once the economy reaches capacity (or NAURU to put it another way), the inflationary effects of any further rise in demand are serious.
Thus there is no harm at all in using a straight rise in AD to deal with unemployment given spare capacity. Indeed, this is a FAR BETTER way of reducing unemployment than ELR because regular jobs (public or private sector) are more efficient than ELR jobs.
Of course it is extremely difficult to know exactly when the economy is at capacity or what level of unemployment corresponds to NAIRU. Nevertheless, it is a good idea to get the theory behind ELR right, and in particular to understand the very different role that ELR plays as between where the economy is above and below capacity.
4. ELR as an automatic stabiliser.
Pavlina claims (p.5) that ELR is a good automatic stabiliser.
The answer to that is that in as far as the wage paid for ELR work is no different to unemployment benefit, and in that that is the ONLY cost of ELR schemes, ELR is no better as a stabiliser than unemployment benefit.
On the other hand if ELR pays a wage HIGHER than benefits, that reduces the incentive to seek regular work, which gives rise to problems dealt with below. Plus if ELR schemes involve costs other than the cost of ELR labour, that also gives rise to problems dealt with below.
5. ELR promotes growth?
Pavlina claims that ELR work promotes growth.
She says, “Growth, in other words, is a by-product of strong employment, not the other way round. How do we launch a virtuous cycle? One of the most effective ways is through direct job creation in the public sector…..One modern proposal inspired by Keynes and Minsky is the job guarantee (ELR), in which the public sector provides a voluntary job opportunity, in a community project that serves a public purpose, to anyone willing and able to work but unable to find private sector employment.”
So hundreds of thousands of people engaged in not desperately productive public sector type work will boost growth? I think not. Of course there will be a finite effect on growth, but it won’t be spectacular.
I use the phrase “not desperately productive” because that is often the REALITY of ELR type employment. In the 1930s, the WPA was commonly said to stand for “we piddle around”.
Alternatively, if ELR jobs REALLY ARE productive, why would the regular public sector not already be doing the work concerned? Put another way, if ELR jobs really are about as productive as regular jobs, why bother with ELR - why not just expand the regular public sector? Looks like ELR is in check mate there.
Anyway, let’s look at the ways in which ELR might promote growth a bit more closely.
Let’s concentrate first on the wage paid for ELR work, and let’s assume the wage is the same as benefits. In this case, no extra aggregate demand (AD) ensues. So to that extent, “strong employment” will do precisely nothing to bring an economy “out of recession”.
The only exception to the latter point would come where ELR jobs improved the EMPLOYABILITY of ELR people. Unfortunately the empirical evidence is that employability is not improved very much on these schemes which are concerned with public sector type work: PRIVATE SECTOR type subsidised employment is a different matter – employability does seem to improve. Which is one reason I favour extending ELR to the private sector.
ELR pays a regular wage.
In contrast to the above “wage equal to benefits” scenario, let’s consider the other extreme: where the wage paid is the same as in the regular economy for given skills and experience. In this case those doing ELR work have NO MOTIVE to find regular jobs. So ELR reduces aggregate labour supply, which means AD has to be reduced. In fact it will have to be reduced so much the ELR scheme is no longer a net creator of jobs.
And for evidence to back the latter point, consider the fact that we’ve had a VAST EXPANSION in public sector spending relative to GDP over the last century, plus these jobs pay the standard rate for given skills etc. The result has had no discernible overall effect on unemployment.
Pay on ELR schemes could of course be somewhere between the above two hopeless extremes. But any such compromise would probably just combine the hopelessness of both extremes, the net result being a hopeless compromise.
Other factors of production.
As distinct from pay, let’s now concentrate on the skilled permanent labour, capital equipment and materials required for ELR schemes (i.e. “other factors of production” (OFP)).
If ELR schemes employ no OFP at all, then no extra AD ensues. So there again, “strong employment” has no effect on AD: it won’t bring an economy “out of recession”.
On the other hand if such schemes DO EMPLOY significant amounts of OFP, there is a problem, as follows.
If the economy is working at below capacity, the best cure for unemployment is a straight rise in AD, not ELR. So let’s assume the economy is working at or near capacity.
In this scenario, ordering up extra OFP for use on ELR schemes cannot be done because the economy is at or near capacity: the result will be excess inflation. I.e. to make OFP available for ELR means reducing the OFP available for the regular economy, which destroys jobs in the regular economy. ELR is in check mate again.
Conclusion so far: the idea that extra AD can or should come via ELR schemes is badly flawed. And that is NOT TO SAY that ELR does not FACILITATE a rise in AD. Indeed, as I argue here, ELR in the form of subsidised temporary jobs with existing employers should improve the inflation / unemployment relationship, which in turn makes possible a rise in AD.
6. Can ELR jobs be made voluntary?
Pavlina claims that ELR jobs should be voluntary. Now there is a problem there, which is that anyone who voluntarily moves from unemployment to a ELR job ipso fact believes they have moved to a more attractive situation or scenario. That means that the RELATIVE ATTRACTIONS for them of regular employment must have declined. I.e. aggregate labour supply is reduced. And that in turn means that ELR jobs will at least to some extent be at the expense of regular jobs.
In other words Pavlina has not cottoned onto Calmfors Iron Law of Active Labour Market Policy which states that if ALMP type employment is not to be at least partially at the expense of regular employment, there has to be an element of compulsion. (Lars Calmfors is a Swedish economist.)
There is absolutely no question but that people who want ELR to be voluntary have their hearts in the right place. I’m sure they are all socially concerned, kindly people. Unfortunately to do good in this world, TWO CHARACTERISTICS are required. First, generosity, and second, having your head screwed on.
7. The purpose of economic activity.
Pavlina claims, “The difference between the non-profit JG model and conventional fiscal policies is that the former is a long-run program that has an explicit objective to deal with the problem of unemployment directly, rather than treating it as a by-product of growth.”
The problem with that statement is that employment creation is not the basic economic objective. The basic objective is to maximise wealth creation WHILE MINIMISING the amount of work or “employment” needed to create that wealth.
Indeed, economic nirvana would consist of robots doing all the work, while human beings did whatever they pleased all day long: socialising, reading books, playing or listening to music. I know several people who have spent decades living on social security benefit for fraudulent reasons. They lead a very pleasant, easy going life-style. They could doubtless give lessons on how to lead a life of leisure to the “everyone must work” brigade.
Conclusion.
There is not a cat in Hell’s chance of the human race ever understanding labour markets (to be cynical or realistic – take your pick).
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Rajan had an article in the Financial Times earlier this week entitled “Sensible Keynsians know there is no easy option.” The first paragraph reads:
“In the long run we are not dead, we will still be recovering from the Great Recession. We should therefor weigh stimulus policies not just their immediate effect but on their consequences over time. Sensible Keynesians recognise this. They bet that reviving growth through government spending today outweighs the future loss of growth as the debt taken on to fund current spending is paid back.”
Readers with a grasp of Modern Monetary Theory should immediately see the flaws there. They don’t really need to read any further.
Borrowing OR printing money brings stimulus.
The above suggestion that stimulus necessarily means more debt is nonsense. As Keynes, Milton Friedman and others pointed out, stimulus does not need to be funded by extra debt. It can perfectly well be funded simply by printing money. You’d think a self-styled “Professor” writing an article about Keynes would be acquainted with Keynes’s ideas.
Indeed, where a monetarily sovereign government borrows and spends, and then does QE, the end result comes to the same as the government / central bank machine printing money and spending it. Perhaps Rajan hasn’t heard of QE. (Incidentally, I’ll use the word government here in the sense “government and central bank combined”.)
In that a government goes for the “print” option, there is no “loss of growth” (as Rajan claims) when the debt / money is paid back. Reasons are as follows.
Two senses of the word “debt”.
There are actually two senses in which the word “debt” as used above can be taken. First, the result of QE is that the central bank is left holding government debt. And this is essentially a nonsense: it just amounts to one part of the “government machine” owing money to another part of the machine. Those so called debts can be torn up any time. They are to all intents and purposes meaningless bits of paper or meaningless book keeping entries.
The second sense is thus. In a fiat money system, money is a debt. And money created by the central bank is supposedly a debt owed by the central bank to holders of such money.
However, the word debt does not really apply here. As Willem Buiter put it, “These monetary (base money) ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable…”
But that does not alter the fact that the money printed during a recession may prove a source of inflation come the recovery. If so, some sort of deflationary measure will be required: like raising taxes and reining in and “unprinting” some of the money.
However, and contrary to Rajan’s suggestions, that does not involve a “loss of growth”: it simply prevents excess inflation. Indeed, excess inflation probably results in a lower GDP all else equal than obtains where the 2% or so inflation target that most countries aim for is achieved.
The “real debt” option.
To repeat, Keynes, Milton Friedman etc, pointed out that governments aiming for stimulus have two options: borrow money or print it. Let’s now consider the borrow option.
According to Rajan, paying back this debt involves a “loss of growth”.
Of course it is true that ALL ELSE EQUAL paying back debt is deflationary. But no government with its head screwed on would impose unnecessary deflation. Put another way, paying back debt (as in the above first “money” option) makes sense if the economy is overheating and inflation looms. And as in the case of the above “print money” option, the only net effect is to keep inflation under control: there is no “loss of growth”.
But if the debt IS NOT paid off, is that a problem? Certainly the word “debt” has nasty connotations or overtones. And for simpletons (i.e. Republicans, followers of Rogoff and Reinhart, and the Peterson Institute, etc) connotations and overtones are all they understand.
The REALITY is that if the real or “inflation adjusted” interest paid on debt is negligible (as for example it is in Japan, the US, and UK and various other countries), then such debt comes to much the same thing as money (or monetary base to be exact). That is, monetary base is in theory a debt owed by the central bank on which the CB normally pays no interest.
In contrast, if a significant real rate of interest IS BEING PAID on a country’s debt, that’s more of a problem. But escaping this situation is child’s play. Such a country just needs to print money and buy back the debt. Of course the effect of that could easily be too inflationary. But if inflation IS INDEED a problem, all such a country needs to do is get some of the money for the “buy back” from raised taxes. And as long as the inflationary effect of the money printing equals the deflationary effect of the extra tax, then there is no net effect inflation-deflation-wise.
Closed versus open economies.
In that our hypothetical country is a closed economy, the latter buy-back would result in no “loss of growth” or loss of living standards: all that takes place is a re-shuffling of assets and liabilities between different citizens of the country concerned.
In contrast, where a significant portion of the debt is held by foreigners AND in as far as foreigners take their money out of the country concerned, then then the country’s currency loses value on the forex market. And that certainly results in a standard of living hit for the country’s citizens for a while. But any such hit will be minimal and temporary.
I expanded on the latter point, see here.
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P.S. (25th May 2012). Chris Giles (economics editor of the Financial Times) makes the same mistake as Rajan. That is, he claims that the money or debt used to fund stimulus necessarily needs to be repaid and that this is some sort of problem. See his final sentence here.
P.P.S. (2nd June). Just noticed this blog post which also casts doubt on Rajan’s abilities.
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I’ve just been through a BoE attempt to justify QE. It’s drivel.
After a few hundred words explaining what QE is, their first suggestion as to why QE might actually stimulate economic activity is that, “Direct injections of money into the economy, primarily by buying gilts, can have a number of effects. The sellers of the assets have more money so may go out and spend it.” (p.9).
“Can have”… “sellers of the assets… may spend it”??? What are they on about? The people running the economy ought to have a good idea as to whether “sellers of assets ACTUALLY WILL go out and spend”. Phrases like “May spend” and “can have” just aren’t good enough.
Plus I can think of a very good reason why “sellers of assets” WILL NOT “go out and spend”.
People hold Gilts (directly or indirectly as part of their pension fund) because that is a chunk of their wealth that they regard as their SAVINGS!!!!! Yes: S-A-V-I-N-G-S. If that chunk is converted to cash, the most reasonable assumption is that they will still regard said chunk of their wealth as savings. I.e. the WON’T go out and spend it. Doh!!!
The stock market.
The BoE continues, “Or they may buy other assets instead, such as shares or company bonds. That will push up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more.”
“May go out??” Why not look at the actual evidence here? This study found that in recent years consumer spending rises by one HUNDREDTH of a dollar for every dollar increase in a consumer’s stock market assets. So boosting stock market prices is an absolutely brilliant way of boosting consumer spending, isn’t it?
Moreover, even if boosting stock markets DOES significantly boost consumer spending, where is the justice in largess towards the wealthy, while the less well-off don’t get to increase their consumption of consumer goodies? Oh I forgot: politicians, central bankers and the wealthy are all in cahoots. Silly me.
The BoE continues, “And higher asset prices mean lower yields, which brings down the cost of borrowing for businesses and households. That should provide a further boost to spending.”
We’re suffering from the aftermath of a credit crunch caused by excessive and irresponsible borrowing, and all that central banks can come up with is trying to encourage more borrowing. Central bank staff clearly need psychiatric help.
Presumably central bank’s suggested treatment for someone just involved in a car crash would be to put them into another car and have them drive at 60mph into a concrete wall.
Reserves.
Next comes a real peach. The BoE claims “In addition, banks will find themselves holding more reserves. That might lead them to boost their lending to consumers and businesses.”
First, there goes that word “might” again: i.e. “we haven’t a clue”.
Second, anyone with a grasp of how the banking system works (and that evidently does not include central bank staff) knows that reserves are near irrelevant to commercial banks’ decision to lend. Or as Don Kohn (Former FRB Vice Chair) put it:”I know of no model that shows a transmission from bank reserves to inflation”.
Or as Vitor Constancio (ECB Vice President) put it: “The level of bank reserves hardly figures in banks’ lending decisions; the supply of credit outstanding is determined by banks’ perceptions of risk/reward trade-offs and demand for credit”.
As to the actual evidence, we’ve had an ASTRONOMIC and UNPRECEDENTED increase in bank reserve over the last two years. And the effect? Banks are more reluctant to lend then they were in the good old days when we had Captain Mainwaring type bank managers. What can you do in response to all this, but laugh?
Next, the BoE claims, “More generally, the Bank of England’s purchases of both government and corporate bonds also increase the total demand for those types of assets, pushing up their prices. This is another way in which the Bank’s actions will make it cheaper for companies to raise finance.”
No doubt QE does “make it cheaper for companies to raise finance”. But what in Heaven’s name is the point of boosting an economy purely via one particular form of economic activity, that is lending to companies? You might as well boost an economy just by boosting sales of cars, baked beans, central heating systems and massage parlours.
Central banks staff (and other smartly dressed economic illiterates mingling around the centres of power in the world’s capital cities) need to be reminded that the basic purpose of economic activity is the produce what the CONSUMER WANTS. That’s “what the consumer wants” either as expressed by consumers with their credit cards etc, and as expressed by consumer / voters at election time when they vote for a significant proportion of GDP to be allocated to public spending.
I.e. given a recession, what needs boosting is consumer spending and public spending. And the empirical evidence is that when consumers come by a windfall or their income increases, the do actually spend a significant proportion of the money concerned. See here, here, here or here.
Note that I didn’t use words like “may” or “might” or “can”. I cited EMPIRICAL EVIDENCE as to what consumers ACTUALLY DO.
As to public spending, if this cannot be increased quickly come a recession, then bureaucrats running government departments and local governments need to be given lessons on how to expand or contract their spending and the numbers they employ within a month or two. The actual SIZE of the increased spending does not need to be huge. 5% would do the job.
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P.S. (same day). Error. When first putting the above post online, I said that the above mentioned study into the effect of a stock market rise on consumer spending found a one dollar rise in share prices gave rise to a thousandth of a dollar of extra consumer spending. The figure is actually a hundredth.
P.P.S. (25th May 2012). The above post is not supposed to imply that QE is useless: it’s just some of the BoE arguments for QE that I object to. The basic argument for QE is that it negates a weakness in fiscal policy: crowding out. That is, if government borrows and spends, the borrowing will tend to raise interest rates, which to some extent thwarts the desired effect of the spending. QE (or simply having the central bank keep interest rates constant when a fiscal boost is implemented) helps ensure that crowding out does not occur. Least that’s how I see it.
Mariana Mazzucato (professor of economics and other stuff) has made an amazing discovery, namely that investment is needed for economic growth.
At least that is the basic and only message in a recent Guardian article of hers.
She says “Growth requires investment”. You could have knocked me down with a feather.
And her final paragraph reads, “So if growth is really on the agenda, the focus should be on the productive investments needed to rebalance Europe, and mechanisms that allow that to happen.”
I have news for Prof. Mazzucato.
Investment is NOT NECESSARILY REQUIRED for growth: not where a firm already has enough invested. As to which firms do need to invest, and which don’t, we don’t need professors of economics to sort that one out. If we just increase demand, businesses which benefit from investment will do so automatically – else they’ll get driven out of business by their competitors.
As to what the mysterious “mechanisms” are that would “allow that (investment) to happen”, I’m mystified and Mazzucato doesn’t tell us. Though I do have one suggestion: if economics professors did more thinking before speaking on this subject, that would be helpful.
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Dean Baker said recently that he couldn’t see the difference between Modern Monetary Theory (MMT) and Keynes. Which is fair enough because the differences are not great. So I’ll try to set out some differences.
Failure to understand MMT, far as I can see, is actually a failure to fully grasp two points: first, the difference between macro and micro, and second, the difference between a monetarily sovereign country and a non-monetarily sovereign country. (A monetarily sovereign country is one that issues its own currency.)
And the list of household name economists who do not fully understand the latter two points is truly amazing. The list includees Brad De Long, Lawrence Summers, and Martin Wolf, as I’ll show below.
The above claim that failure to fully understand the significance of monetary sovereignty is an important element in failure to understand MMT is supported by the fact that MMTer Rodger Mitchell constantly bangs on about monetary sovereignty and constantly finds examples of economists who trip up because they don’t fully get the significance of it.
To say there are differences between MMT and present day Keynsians (or at least people who are not strongly opposed to Keynes’s ideas) is not the same as saying there is a difference between MMT and the actual ideas put by Keynes himself. I won’t dwell much on the latter, as I’m not a Keynes expert.
1. Micro and macroeconomic entities are different.
Re the difference between macro and micro, DeLong and Summers are concerned here about whether a government deficit will in the long run be self-financing.
That concern makes no sense. MICROECONOMIC entities must in the long run be self-financing. For example, a household’s outgoings cannot in the long run exceed its income, else it goes bust.
In contrast, GOVERNMENT’S outgoings can exceed its income till the end of time. (Incidentally I’ll use the word government in the sense “government and central bank combined”).
Indeed, the US and UK’s government’s outgoings ACTUALLY HAVE exceeded income decade after decade for the last seventy years at least.
And the reason government can do this that it can print and spend money. Of course there are limits to how far government can indulge in this practice if excess inflation is to be avoided. But there is no question but that governments of monetarily sovereign countries can do this.
2. Government borrowing is pointless.
A microeconomic entity, if it wants to spend more money than it actually has, must borrow (as indeed must non-monetarily sovereign countries, like Eurozone countries).
In contrast, a monetarily sovereign country does not need to borrow: it can simply print money and spend it.
Keynes said that in a recession, government should either borrow extra money and spend it, or print extra money and spend it. Personally I doubt that Keynes actually meant what he said when suggesting that government should borrow. He was politically very astute, and knew what the reaction of economically illiterate politicians would be to anything they didn’t like the sound of. I suspect Keynes knew what the reaction of politicians would be had he put too much emphasis on the “print and spend” option. He thus tended to advocate “borrow and spend”.
In contrast, MMTers are not bothered about the reaction of economic illiterates. MMTers tend to blurt out the truth, as they see it: namely that it is pointless for a government that can print infinite quantities of currency whenever it wants to borrow the stuff. Certainly Abba Lerner (often said to be the founding father of MMT) did not advocate that government should borrow and spend in a recession. He favoured the print and spend option. (He did advocate government borrowing, but only as means of controlling interest rates – not a policy I personally approve of.)
3. Effect is all that matters.
As Lerner stressed, the important consideration in connection with a change to government spending is not the numbers involved but the ACTUAL EFFECT of that change. That might sound like a statement of the obvious, but plenty of present day Keynsians (never mind Austrians and others) don’t get it.
A classic example concerns the multiplier. Plenty of present day Keynsians (e.g. Alberto Alesina and Francesco Giavazzi) think there is merit in a recession in channelling government spending towards areas which have a decent multiplier. Reason being that one gets a bigger effect employment-wise than from low multiplier type spending.
The thinking behind this is of course that “money is saved” in the process. And the flaw in that argument is that printing and spending more money costs nothing in real terms. Or as Milton Friedman put it, “It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances.” (That’s from Ch 3 of Friedman’s book, “A Program for Monetary Stability”.
In other words, there is no point distorting the economy towards high multiplier areas, because there are no REAL COSTS involved in ignoring the multiplier.
The above “multiplier myth” is another example of failure to see the difference between macro and micro.
4. “Fiscal space” is hogwash.
A popular idea currently doing the rounds and adhered to by many self-styled Keynesians (particularly in the IMF and OECD) is that when a country borrows too much it runs out of “fiscal space”. That is, such a country loses the ability to effect stimulus because it cannot borrow any more.
Well the answer to that is, as pointed out above, a monetarily sovereign country does not need to borrow in order to effect stimulus – a point that MMTers have grasped, but which others apparently have not.
Martin Wolf and Jonathan Portes (head of Britain’s National Institute of Economic and Social Research) are examples of economists who adhere to the idea that high interest rates demanded by potential creditors limits and country’s ability to effect stimulus.
For more on the nonsensical “fiscal space” idea, see here.
5. The purpose of tax is to counteract inflation, not to collect revenue for government.
The above is a point often made by MMTers. It’s a bit of a semantic point. But the point certainly contains an underlying truth. It derives, logically, from the statement that inflation is the only constraint on the deficit or on government spending.
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Congratulations to Martin Wolf for attacking David Cameron’s fixation with the deficit in today’s Financial Times.
It would be nice if the so called economists advising Cameron had studied economics – Keynes in particular. Keynes said (quite rightly) “Look after unemployment, and the budget will look after itself”.
However, Martin Wolf is wrong to argue that “With long term government borrowing as cheap as in living memory….now is the time for government to borrow.” (Actually those are the words of Jonathan Portes, director of the National Institute of Economic and Social Research, who Martin Wolf quotes.)
The reason Wolf and Portes are wrong is thus. Even if interest rates were relatively high (because say of a reluctance by creditors to lend to government), that would be no reason to hold back on stimulus assuming stimulus was clearly justified (i.e. because the economy was obviously working at below capacity).
Given relatively high interest rates and a need for stimulus, the government / central bank of any monetarily sovereign country can simply print and spend money instead of borrow and spend money, as both Keynes and Milton Friedman pointed out.
I’ve already referred about fifty times on this blog to the latter point made by Keynes and Friedman. Clearly I’ll just have to go on repeating it till I’m blue in the face.
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