By Nora Apter
Another great video by a student in Eric Tymgoine’s modern money course.
In a telephone interview I gave to the Harvard International Review (published on-line on October 16, 2011), I said the following:
Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment.
Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc.
From a macroeconomic point of view, the spending and tax decisions of government should be such that total spending in the economy is sufficient to produce the level of real output at which firms will employ the available labor force. This is the goal, and the particular budget outcomes must serve this goal.
None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation. In saying that, however, we would also stress that inflation is the risk of any kind of overspending, whether investment, consumption, export, or government spending. Any component of aggregate demand could push the economy to that point where we get inflation. Excessive government spending is not always to blame.
In sum, we’re quite categorical that we believe that budget deficits can be excessive and can be deficient as well. Deficits can be too large, just as they can be too small, and the aim of government is to make sure that they’re just right to employ all available productive capacity.
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia
.....there is no possible parallel that can be drawn between a household budget and the budget of a sovereign government. Mainstream macroeconomics starts with this flawed analogy between the household and the sovereign government as a means to justify the imposition of fiscal discipline on the government..
They argue that any excess in government spending over taxation receipts has to be “financed” in two ways: (a) by borrowing from the public; and/or (b) by “printing money”. They claim the second option is always inflationary so deficits have to be funded via debt-issuance.
Neither characterisation is remotely representative of what happens in the real world in terms of the essential nature of the operations that define transactions between the government and non-government sector.
Further, the basic analogy is flawed at its most elemental level. The household must work out the financing before it can spend. The household cannot spend first. The government can spend first and ultimately does not have to worry about financing such expenditure.
The idea that it is necessary for a government, which has currency sovereignty, to stockpile financial resources to ensure it can provide services required for, say, an ageing population in the years to come, has no application. It is not only invalid to construct the problem as one being the subject of a financial constraint but even if such a stockpile was successfully stored away in a vault somewhere there would be still no guarantee that there would be available real resources in the future.
Discussions about “war chests” completely misunderstand the options available to a sovereign government in a fiat currency economy.
The best thing governments can do now is to maximise incomes in the economy by ensuring there is full employment. This requires a vastly different approach to fiscal and monetary policy than is currently being practised.
Third, if there are sufficient real resources available in the future then their distribution between competing needs will become a political decision which economists have little to add.
Long-run economic growth that is also environmentally sustainable will be the single most important determinant of sustaining real goods and services for the population in the future.
Principal determinants of long-term growth include the quality and quantity of capital (which increases productivity and allows for higher incomes to be paid) that workers operate with. Strong investment underpins capital formation and depends on the amount of real GDP that is privately saved and ploughed back into infrastructure and capital equipment.
Public investment is very significant in establishing complementary infrastructure upon which private investment can deliver returns. A policy environment that stimulates high levels of real capital formation in both the public and private sectors will engender strong economic growth.
If we adequately fund our public universities to conduct more research which will reduce the real resource costs of health care in the future (via discovery) and further improve labour productivity then the real burden on the economy will not be anything like the scenarios being outlined in the “doomsday” reports. But then these reports are really just smokescreens to justify the neo-liberal pursuit of budget surpluses.
The historical reality is that national governments very rarely run down their overall stock of debt. A debt instrument is a commitment by the national government to pay a certain principal at a specified time, and in the meantime pay some yield or interest on that debt. So governments pay back debt in that individualized context, but overall, in a macroeconomic sense, governments generally don’t run down their overall stock of debt.
There are some rare instances where governments have run down their overall stock of debt, like in Australia between 1996 and 2007. The conservative government of the period was enamored of this neoliberal idea that it would get rid of all its holdings of outstanding debt, and so it started running very large surpluses and paying back its debt. After about five years, the public bond markets became so thin—that is, there was such a small amount of debt left in the system—that the big investment banks started to protest, since they relied on government debt as a risk-free asset upon which to benchmark all other risk. Curiously, the Austrialian federal government agreed that even though it would continue to run budget surpluses, it would also continue to issue debt at a certain amount to ensure that the corporate sector would have its risk-free asset. So while the Wall Street Journal runs op-eds condemning the evils of debt, the reality is that the financial sector can’t get enough of it. This is a very beautiful example of the function of debt in modern times.
In MMT, we see public debt as private wealth and the interest payments as private income. The outstanding public debt is really just an expression of the accumulated budget deficits that have been run in the past. These budget deficits have added financial assets to the private sector, providing the demand for goods and services that have allowed us to maintain income growth. And that income growth has allowed us to save and accumulate financial assets at a far greater rate than we would have been able to without the deficits.
The only issues a progressive person might have with public debt would be the equity considerations of who owns the debt and whether there an equitable provision of private wealth coming from the deficits. There is a debate to be had about that, but there is no reason to obsess over the level of outstanding public debt. The government can always honor its debt; it can never go bankrupt. There’s no question that the debt obligations will be met. There’s no risk. What’s more, this debt provides firms, households, and others in the private sector a vehicle to park their saved wealth in a risk-free form.