Can governments ever run out of money?
from Lars Syll
Whether it’s more nurses, frozen tax promises, free broadband internet or more social housing in the UK; or tax cuts and green energy investments in America, public spending is set to surge. This sudden abandonment of fiscal rectitude comes amid the rise in prominence of a way of thinking about money, spending and the economy – Modern Monetary Theory (MMT).
According to its key architect, US businessman Warren Mosler, it is based on a simple idea – that countries that issue their own currencies can never run out of money in the same way a business or person can. This is important to understand because it means when someone says the government can’t do something for want of money, that’s simply not applicable, says Mr Mosler. A government can no more run out of money than a football stadium can run out of goals scored …
MMTers say they do believe in being fiscally responsible, and that critics misunderstand. The story starts with any government’s desire to fund public services, which it does through taxation. Citizens need money to pay that tax, and they work to get it, Mr Mosler says …
The tax-and-spend orthodoxy embraced by most governments should be rethought. What’s actually going on is tax liabilities come first, then spending, and then payment of taxes, which paints guiding economic principles such as the debt and deficit in entirely different lights.
In modern times legal currencies are based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.
In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.
What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!
It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.
That governments can spend whatever amount of money they want is a fact. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much of government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.
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We need a modern model of money flows, money creation, asset prices, incomes, and commodity prices. Beliefs about inflation are based on ancient economies where people grew potatoes or made steel with diminishing returns and a constrained supply of labour. Today’s economy is much more formal and less real, currencies and certificates intermix, and the main constraints on productivity are legal or from lack of demand. Modern Monetary Economics please, not just this isolated naive model of the money supply.
MMT has been outmoded for a long time now. Governments no longer need to even pretend that they have some form of legitimacy. We are surrounded by so much poverty, misery and homelessness and on the up in these freezing times of winter months in the rich economies (one is aware that we hardly ever address the difficulties of the poor ones here) that it is difficult not to ask for new discussions to start, new analysis to be presented so that we can hopefully move forward just a little bit at a time in the new year.
MMT has been outmoded for a long time now. Governments no longer need to even pretend that they have some form of legitimacy. We are surrounded by so much poverty, misery and homelessness and on the up in these freezing times of winter months in the rich economies (one is aware that we hardly ever address the difficulties of the poor ones here) that it is difficult not to ask for new discussions to start, new analysis to be presented so that we can hopefully move forward just a little bit at a time in the new year.
Sorry for double posting.
This is a striking but by no means the most striking example, of conflicts historically about what an economy is and why and how it’s supposed to work. In the posting MMT shows us this scenario to answer these needs. “What’s actually going on is tax liabilities come first, then spending, and then payment of taxes, which paints guiding economic principles such as the debt and deficit in entirely different lights.” Today’s orthodoxy, only partially the creation of professional economists is very different. Taxes are the final consideration, as they are of least importance. As trivial and harmful to individual welfare, taxes should not be the focus of thought of any rational person. If paid at all they should be small and voluntary. Otherwise the rights of the individual are violated. It follows that government, which operates based on these taxes tends to be a predation on the individual. And thus, should be supported at only the absolute lowest level possible to provide services that protect individuals and commerce (e.g., military, border security, police). An ideology intended to protect and aid the plutocrat and large business owner. Economists since the capitalist revolution that set the stage for the industrial revolution have provided the scholarly camouflage for these changes in 18th and 19th century culture that changed first Europe, then America, and finally the world. MMT provides a fix for only a small part of this camouflage. I can’t say I believe MMT will succeed in even this small effort to fix our zero-sum economic arrangements. Most people can no longer even imagine any other sort of arrangements. Economists have done a good job with their scholasticism and public propaganda. With this way of life strongly entrenched, government will often “run out of money.” Particularly, for those whose only possible salvation is government help to protect their equality and right to be heard in creating a just and decent society. There’s no part in this for economists. Or, so say many of them. They’re wrong. That’s why you so called heterodox economists need to work harder to either fix the discipline or see to it that economics is abolished. That includes the nonsense that even some heterodox economists continue to support. Such as micro and macro, markets as the only viable economic arrangements, and price being the balancing factor in economic actions. Just over 100 years ago economics took a wrong turn in terms of benefiting the community. We either reverse the turn or must start all over again.
I meet quite a few economists in my daily life. Not one of them believes a government deficit is necessarily inflationary.
I have never met an economist who thought that governments could not print or manufacture as much money as they wanted.
And if economists believe that central banks need to use monetary policy to regulate the economy and employment then they obviously can’t believe in Says Law, which holds that supply creates its own demand.
In short Lars is writing an unusual degree of nonsense.
Where the private sector wants to save more than to invest on a regular basis the government not only can but should run a permanent deficit without inflation – as it does in Japan. When it fails to run such a deficit in those circumstances there is a huge external surplus – as in Germany. Note that Germany is not praised but criticised by most economists for that policy. It is a slander to write as if all economists were crazed believers in some Chicago-school caricature text book.
Some people seem to think, though, that demand creates its own supply – a sort of inverted Says law. In some circumstances it can do so but there are limits to the proposition. In the last century British and French governments demonstrated those limits. They tried a “dash for growth” the idea being a burst of spending and easy money would raise output, encourage investment, raise productivity so leading to permanently faster growth. They didn’t stop the policy because they ran out of money; they stopped because they ran out of supply response. The result was a ballooning external deficit, a sinking exchange rate and rising inflation.
Right now the world suffers from a shortage of demand and more government spending would be a good idea, especially in surplus countries like Germany. But there are limits. Keynesian policy is essential for counter-balancing, countercyclical work. As a means to raise the trend growth rate it is much less reliable.
Example of dash for growth: Barber boom UK, 1972. Mitterand in France 1981. Come to that, LBJ in the USA fighting the Vietnam War and launching the Great Society reforms without raising taxes – a combination that eventually led to the depreciation of the dollar and the end of the Bretton Woods pegged exchange-rate system and to floating exchange rates.
You comment, ‘Right now the world suffers from a shortage of demand and more government spending would be a good idea, especially in surplus countries like Germany. But there are limits. Keynesian policy is essential for counter-balancing, countercyclical work. As a means to raise the trend growth rate it is much less reliable.” It’s the first two words that interest me, “right now.” This calls attention to something concluded long ago by anthropologists. Anthropologists have studied many societies in different parts of the world and have come up with almost no social laws that apply throughout specific regions, much less that apply globally. Put differently, anthropology tends to be an idiographic or particularizing discipline, rather than a nomothetic or generalizing one. It’s my view this is one of the great, perhaps the greatest errors of economists of the current form. Frank Knight is just as direct, though he doesn’t share all the observational history that back up his contentions. “[When] Professor Linton says: ‘… the economic problems of “primitive” man are essentially the same as our own and many of them can be studied even better in “primitive” societies, because they manifest themselves in simpler form’ … he simply doesn’t know what he is talking about.’ My interest is the assumption that Knight counters. That the forms of life, including economic life are simpler in primitive societies. Anthropologists once made this error. And learned from it that ‘it ain’t necessarily so.’ There are as far as we can tell no universal principles that work in all societies. This must remain foremost in our minds as we consider issues of resource availability, exchange, resource provision, the creation, use, and abuse of money, etc. They differ from one society to another; sometimes even missing from some while present in others. Common or semi-common social laws may exist for a time within a single or even within several cultures, but no such laws exist for every time period and every society. Assuming they do and then pursuing these via what Knight calls, “inference from clear and abstract classical categories of economics” is a wild goose chase. The principles by which we identify capitalism are mostly normative rather than empirical (even recognizing the impossibility of gathering uncultured data). That ideal, as laid out by Knight is the desire of people to “make their activities and organization more ‘efficient’ and less wasteful … [T]he anthropologist, sociologist, or historian seeking to discover or validate economic laws by inductive investigation has embarked on a ‘wild goose chase’. Economic principles cannot be even approximately verified – as those of mathematics can be, by counting and measuring” (recognizing that mathematics principles share the same limitation).
I am not ‘making’ this complex. It is complex! Every action and concept of humans is based on judgment. Including those in science. One of the bases of science is repeatedly measuring the same factor and then comparing the results in search of relationships. Just about everything in this sentence is uncertain. Measuring is created by humans and must be re-created and judged the same as a previous measurement each time humans measure. How do we decide if the results are the same? Using lots of rules, we judge appropriate for the task, we then interpret the rules and reach a conclusion each time the work is repeated. Similarly, we make judgments that we’ve measured the same factor. Then using the tools from our discipline and our experience we judge if patterns exist and that they do or do not repeat from one measurement to the next. The names and general activities of each of these judgments can after a time become institutionalized. That is, be accepted by the members of a particular culture (e.g., science) as the proper steps for their work. But each time we use our knowledge of the institution, we still must judge if we understand and use it correctly. Sometimes our actions are tacit, so we hardly notice them. Other times debates over interpretations and judgments can become fierce, even destructive. And are fully public.
This helps us grasp why two cultures in the same geographic area might clash, even war on one another. In America, for example, the largest and most influential Indian nation was the Comanche. Compared with the arriving Europeans the Comanche saw their economic life differently: a domestic economy of hunting and gathering, a commercial economy of trade and raid, and a political-diplomatic economy. It’s the last that that differs from all other Indian nations. Most Indian nations tolerated the European settlers, so long as they did not interfere with hunting, raiding, and trading. The Comanche wanted to reach out to non-Indian settlers, not just for trade but for political and diplomatic alliances and treaties. This alone allowed the Comanche to survive as an independent nation long after most other American ‘horse-cultures’ had been destroyed. Economies clash or coexist based on how each views itself and the questions it must answer and how each of these is interpreted in actually operating an economy.