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Rethinking public debt

from Lars Syll

wrong-focusPublic debt is normally — as emphasized again and again by MMT economists — nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

  1. August 30, 2020 at 10:41 pm

    Thanks Lars : We also point out in our Beyond GDP surveys with Globescan since 2007 , that until GDP has an asset account to balance the public investments , we will continue to mis-calculate debt to GDP ratios , which could be cut by 50% with a few keystrokes if these public assets were recorded too. See my recent article ” Steering Societies Beyond GDP to SDGs ” at ethicalmarkets.com

  2. Ikonoclast
    August 31, 2020 at 12:35 am

    What is crucial is the health, viability, longevity and sustainability of life-supporting real systems on earth. A real system is any system which obeys the discovered Laws of hard science. A formal system is any system of signs based on or forming a language, including mathematics. Quantities in real systems are real. Quantities in formal systems are nominal. A human being is a real system. An ecology, an environment, the biosphere and the climate are all real systems. The property, finance, accounting and money systems are formal systems.

    The only point of a formal system is to enable us to model and manipulate real systems. Ethically, from a consequentialist viewpoint, this would mean both manipulating and leaving alone various real systems selectively in order to preserve and enhance both human life and wildlife systems on earth. Without the bio-services of wildlife and the natural earth system humans will go extinct.

    A formal system with axioms can be used to generate theorems. Theorems are of limited use in dealing with real systems. Only if the axioms bear some genuine homomorphic correlation with some relations in a real system, are the theorems of some use in modelling and manipulating that real system. Theorems found useful will be found to possess only bounded application. The model will only “stretch so far”. This is due to what might be termed the unavoidable effects of “axiomatic reductionism”. To state an axiom, an a priori rule or assumption, is to engage in reductionism; making a reduction from the interconnected system complexity of the cosmos or world to the formal simplification(s) of the axiom(s). Euclidean geometry, classical physics and even modern physics have demonstrated, and have been demonstrated to have, this character of bounded or limited application.

    MMT is well and good (as I keep saying) and an advance on “sound finance” and austerity. However, the operations of even MMT are in turn limited and conditioned by the property axioms of capitalism. It is these property axioms of capitalism which are our central problem. The property axioms of capitalism first decree that what is abundant should be enclosed and made scarce wherever this is possible. The land and its free gifts from nature were the first things to be enclosed in this manner. The Lauderdale “Paradox” lays out how artificial scarcity is the precondition of private wealth. It is not really a paradox. It only appears to be a paradox to those brainwashed by capitalism and its notions of property rights.

    Certainly, the Lauderdale “Paradox” plays into the MMT debate. Public finance is made artificially scarce by the private monopoly, or rather oligopoly, on the creation of money as privately issues debt-credit money. MMT seeks to redress that artificial scarcity. However, only a thorough-going renovation of capitalist property laws will address all the enclosures which produce artificial scarcity. These enclosures have followed an historical path. First, there was the enclosure of land. Later, there were enclosures of waters, of inventions (copyright) and finally the enclosure of money creation itself. Each and very privatization is an enclosure. Property rights are nothing but a system of enclosures designed to produce rents as in the rent-seeking of rentier capitalism.

    Capitalism has not generated our current wealth. It has limited it and sequestered it in minority hands. Our wealth has been generated by cooperative human activity and network effects. It has been multiplied by the application of science and technology. It has been distributed fairly (where some fair distribution actually occurs) only by democratic and/or socialist principles. Capitalists are the parasites who sit on top of the remaining collective structures and take the surplus value.

    The remaining collective structures are substantial and are the only reason capitalism can still run. Once a critical mass of collective structures are privatized, capitalism will collapse by that very enclosure because capitalism creates scarcity, not wealth. All public infrastructures and monopolies are collectively owned. All unpaid, volunteer and community work is collective. This includes all unpaid work, mostly done by women, in having and raising children. All worker cooperation, even within capitalist enterprises and often including making management’s unrealistic directives work, is actually part of the collective structure. All small family businesses (mom and pop businesses) are essentially collective enterprises (though we see corporate monopolization has gone a long way to destroying mom and pop businesses). Everywhere, in plain sight, collective and community activity holds up the parasitic expropriations, exploitations and enclosures of capitalism as the capitalists beaver away at creating ever more artificial scarcity. When they create enough artificial scarcity the system will collapse.

    In the laboratory of the real world, we can now see the evidence of how the most unregulated and privatized capitalist system works, or rather does not work, under stress. The USA is performing the worst of all nations on earth in dealing with the COVID-19 challenge. One does not even have to adjust for development level. The USA is the absolute worst. On the other hand, China (the most socialist though not truly socialist and certainly not democratic nation) is doing the absolute best. This says something very serious. I hope people are paying attention.

    As one person in Australia said, “COVID-19 is like an X-ray of our society. It shows everything that is broken.” Capitalism is certainly broken. Without changing it we break everything. Capitalism now leads directly to catastrophic climate, ecological and societal collapse. We must change our system radically and totally. That is the empirical signal from the real systems of real population, real economy and real environment. From this point on the choice is for socialism or barbarism.

    • Craig
      August 31, 2020 at 6:11 am

      The monetary and economic system that integrates Abundantly Direct Monetary Distributism into the debt based system and that is guided by the various ethical and wise aspects of the natural philosophical concept of grace beats hell out of both capitalism and socialism. Enough of the dualistic obsession. Let us have a thirdeness greater oneness.

    • Grayce
      August 31, 2020 at 4:24 pm

      “Capitalists are the parasites who sit on top of the remaining collective structures and take the surplus value.” There’s more. At the same time, many capitalists, together with the operating officers inside some structures, are termites. Termites erode the productive capacity of the collective structure from the inside out. They use equity for compensation and cash buybacks. When one structure collapses, they find another. When that runs out, their counterparts in politics create new “revenue streams” such as for-profit charter schools from public monies.

      • Craig
        August 31, 2020 at 5:53 pm

        Correct. And Finance capitalists sit atop the capitalist business models who sit atop “the remaining collective structures”. Worse yet those business models are becoming more financialized with every passing day. The only way to stop it is to change the monetary and financial paradigm.

  3. August 31, 2020 at 10:46 am

    Somewhat against Ikonoclast’s capitalist understanding of property rights see https://www.weforum.org/agenda/2018/01/we-have-plundered-the-commons/.

    “The Charter of the Forest [1217, a foundation of the British and later the US constitutions].

    “Often called the world’s first environmental charter, seeking to balance the need to preserve natural resources with human needs, it was remarkable for reversing 150 years of [Norman] enclosure of land, returning it to the commons. It was also the first time that the state recognised that ALL FREE MEN HAD A RIGHT TO SUBSISTENCE and the right to make a home in the commons. It also marked a first modest advance for feminism, granting widows the right to refuse to be remarried and a right to subsistence – the right to ‘reasonable estovars’ (necessities) in the commons.

    “The Charter had another distinction, of staying on the statute books for longer than any other piece of legislation, 754 years [i.e. until 1971]. Yet while all schoolchildren are taught about the Magna Carta, few hear of the Charter. … The situation is made worse by what is known as the Lauderdale Paradox …”.

    Malvern having extensive commons, I well remember the Commons Registration Act of 1965, giving speculators time to fence off little-known parts of the common and hence exclude them from registration.

    • Craig
      August 31, 2020 at 5:45 pm

      Those are all fine reforms, but what economists need to get through their heads is that it’s a monetary economy not “a veil over barter” which view only serves to obfuscate the power of Finance’s monopolistic paradigm. In a monetary economy money is power, freedom, security and, with the correct strategically implemented policies, the road to sane ethical and ecological action.

      Reforms are nice. Paradigm changes are permanent progressions….and mega paradigm changes are broadly evolutionary opportunities for the entire species and the biosphere.

      In other words if you want to chip away at the enormous rock of the current monetary paradigm one little bird peck at a time recommend some change to an extraneous/off the mark aspect of the real problem. If you want to change an entire pattern’s realities focus on changing the problematic paradigm/pattern. “Upping one’s analytic game” makes all the difference in the world.

      • September 1, 2020 at 12:01 pm

        Craig, I don’t know what you mean by “Those are all fine reforms”, because we haven’t been discussing reforms, only ways of looking at the problem. You are looking at your own “value for money” way of seeing money without having committed yourself to a logical definition of either, whereas Ike and I have (like John Locke) been looking at the effects and history of enclosures. At this stage the solution as against the aim is not obvious, and if it is monetary we need to understand “why?”, i.e. the logical status of money and the property laws we are following: whether our understanding is or even can be true or false. “There is more than one way of skinning a cat”, and we need to evaluate these logically and compare their side-effects before committing ourselves to a particular one. That’s not far off what Abba Learner was suggesting above. Lars Syll rightly goes behind chrematistic capitalism to insist in capitalist terms that the true aims of [household] economics (reliable incomes for all) are “full employment and price stability”. Elsewhere, Ike drew our attention to the role of inventories (storage) in ensuring price stability; I’ve been arguing that “full employment” (following Nature’s model) is not everyone working forty hours a week, but doing jobs as and when needed. The public debt is then not monetary but jobs that need doing to replace what has been consumed and to provide for the future. Money is no more than a convenient logical variable, used in accounting for variable shopping lists (our personal and company “inventories”).

      • Craig
        September 1, 2020 at 7:35 pm

        “we haven’t been discussing reforms, only ways of looking at the problem.”

        That is precisely the problem. You’re all stuck in the theoretical analysis level which not only has already been done 13,000 ways from the middle and regurgitated here ad nauseum, but also fails to consider looking at the problem from the paradigmatic perspective, specifically the monetary and financial paradigmatic perspective. The pattern is the problem, not just the economic minutiae.

        The four major reform movements today of Minsky’s FINANCIAL instability hypothesis, Hudson’s FINANCIAL Parasitism, Modern MONETARY Theory and Public BANKING all point directly at what the paradigmatic problem actually is, and the entire system is correctly and pointedly labeled FINANCE capitalism. So lets begin to investigate the monetary and financial paradigm….on the paradigmatic level, that is, what is the current M & F paradigm concept and what is the new concept and where, when and how could it best be implemented in order to resolve the problems of the current paradigm?

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