I read an article in the Financial Times earlier this week (September 23, 2023) -…
Well the conservatives are scrapping between themselves, which is just as well because it might derail their drivel campaign about the trillion (whatever!) dollar debt wave that we are about to drown under. Me, I will surf it out with my longboard and enjoy the experience! Anyway, seems Mike wants to end our little engagement which is fine because tomorrow I will be talking about “R we or R we not”. National Accounts are out at 11.30. So this blog summarises where I think we are at. Remember that it started with the blog – Neoliberals invade The Greens! and the space theme continued with Mike conjuring up the Mitchell Strikes Back and today The return of Mitchell. Whatever, it is more clear than ever that the conservative macroeconomics has The Greens in its grip – sadly.
Mike agrees that a sovereign government is not revenue-constrained. Okay! That is progress.
Mike agrees that a sovereign government should “run deficits, especially in a recession”. He also notes that “Many perfectly orthodox, neoclassical-Keynesian economists would agree here also.” Yes the deficit doves!
But if you recall I objected to Principle 8 espoused in the The Australian Greens official economic policy that says:
8. government finances must be sustainable over the long run; budget deficits and surpluses must balance each other over the business cycle.
Mike’s intervention, presumably was to defend this official policy aim of The Greens. But it is unclear what he is agreeing to now – deficits only during a recession or when. This is crucial because a neo-liberal will allow deficits to be run during a recession as long as they are balanced by surpluses of at least equal value other times. The balanced budget on average is the line in the sand for a neo-liberal and it seems The Australian Greens. Given they both agree, I concluded naturally that The Greens had been invaded by the neo-liberals. Anyone would!
Well for me this is a nonsensical policy aim because it makes no reference to the role of the deficit in ensuring that the non-government spending gap is filled – that is, it makes no reference to non-government savings.
What it means is that on average The Greens believe that the structural balance (or full employment balance) should be zero on average over the cycle which amounts to them saying that on average non-government saving should be zero? I noted that they also were aiming to reduce our coal exports and other mining products that may boost our net exports which means they are not banking on a Norway-type situation where the net exports are so strong that government sector surpluses will not undermine the saving ambitions of the private domestic sector.
By construction, and this is just accounting rather than any eccentric theory I made up, the only way the budget balance can be zero over the cycle is if the non-government sector doesn’t net save in the currency of issue on average over the cycle. With the foreign sector in surplus (current account deficit) then this means the private domestic sector will dissave on average over the cycle – which means become increasingly indebted.
That is the state that The Greens aspire to. It would be nigh on impossible to achieve full employment with this type of policy or sustain growth for very long. So the macroeconomic stance of The Greens with respect to the fiscal budget would deny their chances of achieving another stated official goal (Principle 17 from its Policy G2: Employment and Industrial Relations which claims they stand for “full employment, and job security for all who seek employment.”).
Sorry, they would not achieve this goal if they actually tried to target this particular federal budget outcome in Australia.
So Mike was fairly silent on that key criticism of The Greens and his final statement doesn’t help either.
Drawing on an understanding of how the expenditure and income generation system (the macroeconomy) works leads one to conclude that if the Government tried to to run surpluses to balance on average over the cycle then they would undermine employment and the capacity of the private domestic sector to net save. Ultimately, this would deliver deficits anyway as output and income levels contracted and the automatic stabilisers kicked in.
We fundamentally disagree on what constitutes a constraint on federal spending. Mike says:
The limits to government expenditure are macroeconomic. They concern the value of the currency, both in terms of goods and services (the price level) and in terms of other currencies (the exchange rate). Governments have the power to print as much money as they like, and print whatever numbers they like on the bills, but they have no control over the quantities of goods, services and financial assets they exchange for. (Mitchell objects to the money-printing metaphor, and I’m not suggesting most money is created with the printing press, but it’s the standard metaphor.)
First, language is very important in paradigm development. Language is a way that paradigms reinforce themselves and protect themselves when degenerating. Language is a way of indoctrinating foot soldiers who perpetuate the slippery propositions that degenerative paradigms rely on for their “authority”. The term printing money is a conservative contrivance and has deep ideological significance. It is always intended to discipline the reader or listener against the notion of government spending.
Macroeconomics textbooks use the term in the same sentence as inflation! It is a highly significant neo-liberal token which has permeated the public consciousness and biased all thinking against fiscal activism.
For that reason alone progressive thinkers should not the term.
But moreover, it doesn’t actually describe the process that it purports to describe and is deeply tied up with the fallacious notion that governments are revenue-constrained and therefore need to “finance” their spending. In orthodox (mainstream) (neo-liberal) macroeconomics textbooks, the chapter on fiscal policy will confront the reader with three sections: (a) spending financed by taxation; (b) spending financed by debt; and (c) spending financed by printing money. The chapter then analyses the impacts of these different types of “financing” and concludes that (c) is the most expansionary (because it has monetary effects as well) but is also inevitably inflationary.
Well this sort of analysis is inapplicable to a fiat monetary system which dictates that the sovereign government is not revenue-constrained. Mike at least agrees with that last fact!
Accordingly, all government spending could be seen as “printing money” in the sense that it works in exactly the same way each day irrespective of what else the government (consolidated treasury and central bank) does in addition to spending. Spending adds to bank reserves. That’s it – that is all there is too it. That is the same process irrespective of what the government does about it taxation policy, its debt issuance policy, or its ambitions to fly to the moon!
So it is better not to use misleading terminology, especially when it is predicated on the false assertion (the gold standard assertion) that the sovereign government is revenue-constrained.
Second, there is a difference between how much a $ of government spending buys and the capacity to spend that $. The sovereign government can always purchase whatever goods and services are available for sale in the market. They can buy the entire market if it was available to them!. A non-government entity cannot because they are financially constrained. So the limits on a sovereign government’s spending are not financial as Mike suggests but real. They cannot buy what is not offered for sale!.
The question then is what is the best way to proceed for a government. Clearly this depends on its aims. But a government which aimed to achieve full employment would want to work out how best to employ all available labour without driving the economy up against the inflation gap where the production system no longer responded to nominal spending injections with real responses (production increases).
In that sense, the national government should first purchase all labour that is not wanted by the market. In that way it cannot be competing for resources that other players in the market want to deploy. That is, they would be bidding for labour that has not bid price in the private market. Buying all that labour at a fixed price cannot be inflationary in itself. It also sure beats the standard Keynesian solution which posits that the government should compete in the market for resources (buy things at market prices) until output levels are sufficient to employ the available labour.
If the Job Guarantee put pressure on prices, then the Keynesian solution will be hyper-inflationary! The reality is that the Job Guarantee would not be inflationary but a generalised Keynesian expansion may be. Further, the latter doesn’t have a nominal price anchor and has to create unemployment again if inflation takes off. The Job Guarantee, however, never creates unemployment. It uses employment buffers to discipline the price level.
It may be that once the Job Guarantee was introduced there was still scope to expand nominal demand further and spend on public infrastructure, better schools, better hospitals, more public service career positions and more. But at least you would be making this decision from a position of “loose” full employment (that is, with the Job Guarantee everyone has a job but there is no inflationary bias as a result – that is what I mean by “loose”).
Mike then says:
The rational reason for governments to ‘fund’ deficits by borrowing, i.e., issuing bonds, rather than just issuing new currency, is to take money out of the private sector to ‘make way’ for their own spending. This is why I say (federal) government finance is a macroeconomic issue, and not an accounting issue. In fact, decisions about interest rates and the quantities of government debt and currency out there ought to be made on quite different principles than principles of budgeting. And in reality they have been ever since monetary policy emerged as a practice, because much of monetary policy is the art of providing to the private sector the ‘right’ amount and/or price of liquidity, so that the amount of government debt and currency in private sector hands is not a function of fiscal policy alone.
Sovereign governments do not fund deficits! That is a neo-liberal conception.
They may tell us they are funding them. They may institute voluntary arrangements between the treasury and the central bank that makes it looks as though they are raising finance. But the logic of a fiat monetary system – the essence of what that sort of monetary system means – tells us that all these arrangements and all the rhetoric are just a chimera – an ideological veil to discipline our thinking against the use of active fiscal policy such that we sustain full employment.
The claim that there is only x room for spending and so the government has to take some “money” out before it can spend is a neo-liberal conception. The fundamental purpose of a government deficit is to ensure that the spending gap left by non-government net saving is not left unfilled. If the economy was already at full employment (that is, there was no capacity to respond to nominal spending increases with real output increases) then clearly the government would have to reduce the capacity of the non-government sector to spend before it could increase its nominal spending.
This is one of the principles of functional finance that Abba Lerner developed. The government could use taxation and debt issuance to reduce some private spending capacity to ensure that nominal spending didn’t exceed the real capacity of the economy. So that is an anti-inflationary strategy. It has nothing at all to do with “funding” government spending.
The reason governments (consolidated) issues debt is to provide the central bank with the capacity to maintain its target interest rate as I have noted often. It has nothing at all to do with substantiating the fiscal capacity of the sovereign government.
The major disagreement though is about inflation it seems. Mike whether he likes to think it or not of himself ultimately advocates a NAIRU-conception of the world. He may come at it from different principles to a Monetarist and he talked yesterday about distributional struggle within a capitalist system – the Marxian conflict version of the NAIRU.
But the NAIRU says that there is a unique level of unemployment beyond which any attempts to reduce unemployment further will be inflationary. So the NAIRU is the ultimate discpline on fiscal policy in the argument. Mike thinks that deficits will give the banks a greater capacity to lend which will ultimately degrade the value of the currency (that is, cause inflation).
The fact remains that if additional currency has entered the system from ‘unfunded’ deficits, this currency is available to fuel non-bank private sector borrowing for whatever purpose, including asset-price or currency speculation.
The banks do not need reserves to lend. To think otherwise and to connect government deficits with the increased ability of the banks to lend is a neo-liberal (money multiplier) statement.
It may be that the banks will expand loans when there are better economic times (driven by a deficit). But this is because there might be more credit-worthy customers and has nothing to do with more “money” sloshing around.
I say that deficits which fund the non-governments desire to net save in the currency of issue will invoke real responses from the economy not nominal responses. That is, they will maintain production and employment and not drive inflation. To make sure of that I advocate the Job Guarantee which is the minimum that the government has to do to ensure full employment.
The conduct of government fiscal policy does not change the commercial banks ability to expand credit.
I have not read anything in the last week that successfully refutes the claim that the neo-liberals have invaded The Greens. In fact, most of what has been presented to defend their policy is in total agreement with all the key neo-liberal macroeconomic postulates.
(a) deficits will ultimately be inflationary and should be offset with surpluses over the cycle;
(b) debt is needed to “fund” deficits but too much debt will scare the financial markets who will degrade the currency (causing inflation);
(c) full employment will spark inflation because it will provide more power to workers and the capitalists will revolt.
All key neo-liberal notions.
As for The Greens – let us see what the results of their policy review which is currently underway deliver to see whether they are capable of leaving the conservative macroeconomic rubbish they are currently constrained by behind.
So tomorrow – I guess I have to comment on the National Accounts.