I read an article in the Financial Times earlier this week (September 23, 2023) -…
Its my Friday lay day so less blog more other things. I noted yesterday that I can sense that the tide is turning in the policy debate. There is now increased commentary that talks up the need for larger deficits and claiming we should not be worried about debt ratios and all the rest of the irrelevant financial ratios that blight the political capacity of governments to maintain high levels of employment and growth. The IMF and the OECD is increasingly urging governments to spend more on infrastructure even though they retain their blighted (and wrong) notion of ‘fiscal space’. Just a few years ago these organisations led the charge for austerity. The evidence has not supported their previous zeal. While those who desire a more evidence-based and theoretically consistent macroeconomics debate applaud the shift in rhetoric and sentiment, there is still the danger that the debates will be based on erroneous principles or blurred reasoning. It is good that the tools and arguments of Modern Monetary Theory (MMT) are being use in the mainstream media to analyse important economic issues. But we also have to be careful to make sure our stories that accompany those tools and concepts don’t just create more fog – and resistance. The evidence suggests that there is still a long way to travel yet … but the tide is slowly turning. I will just keep at it!
There was an article this week (October 28, 2015) from a mainstream financial commentator in the Fairfax media (Malcolm Maiden) – The D word: Suddenly it’s safe to use it for infrastructure – which is representative of this new tide of opinion.
The article basically argues that there is a growing relaxation about government debt. He says:
that both the government and the opposition are not only talking about ways to create the right conditions, but talking about the government taking on new debt …
The scaremongering about fiscal deficits that has characterised federal politics over the last 5 or so years appears to be abating.
There have been some immediate changes in Federal policy since Tony Abbott (a master scaremonger) was sacked as Prime Minister by his own party.
Within their mainstream framework:
both sides now are … acknowledging that with interest rates and government bond yields still close to record lows, government debt funding is part of the solution …
The journalist says that “having both sides talk openly about Commonwealth debt funding for infrastructure is a big step forward”.
The argument is full of mainstream flaws but still it is light years ahead of where the debate has been in the past decades where government surpluses were revered and deficits and increased debt considered to be the exemplar of irresponsibility and catastrophe.
As another example, the sectoral balances are now featuring in the UK Guardian. The article by David Graeber (October 28, 2015) – Britain is heading for another 2008 crash: here’s why – uses the sectoral balances framework to suggest that the pursuit of fiscal austerity and the negative consequences for non-government balance sheets that arise from that policy orientation will generate another financial crisis.
David Graeber is an anthropologist.
I understand the limitations of an 800-word Op Ed space, which is why the blog platform is more appealing. But within that sort of constraint there is no room for error – by commission or omission.
The article is mostly correct although doesn’t provide enough insight for a non-educated (in this field) reader to fully grasp the argument.
David Graeber is correct that our understanding of macroeconomics is blighted by the role of taboos. I considered the role of taboos in my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
As the story goes, the British explorer Captain Cook introduced the word taboo into the English language after observing Tongan society in 1777.
There is a very detailed and diverse literature on the concept of taboos in western society. We learn early in life the things we can say and do in polite company, and those things that will attract opprobrium as forbidden behaviour.
We isolate individuals who step over these rather indistinct lines and consider their behaviour aberrant. Taboos are ways in which the status quo reinforces itself and resists change.
But taboos are not inscribed in marble and as social values evolve so does the list of taboos. Further, while there are some things that all societies and cultures consider to be taboo, there are other things that are culturally specific.
Dominant hegemonies also isolate options, as taboos, if they consider they would undermine their capacity to maintain ideological control over public policy.
In relation to macroeconomics, I might disagree with David Graeber that “the greatest taboo of all” relates to fiscal policy (taxation and spending). I still think that the ‘money printing creates hyperinflation’ is the basis of the greatest taboo facing a currency-issuing government, and the fiscal policy antagonism is seen as a lesser, though significant issue.
But that is by and by.
In this era of ‘anti-knowledge’ there are some huge myths surrounding the role of fiscal policy.
David Graeber produces a graph showing the UK sectoral balances – which are decomposed into the external balance, the private domestic balance and the government balance.
We should be clear what these balances actually are. They represent the difference between income (revenue) and outlays (spending) for each of the three major macroeconomic sectors. The external balance and the private domestic balance are decompositions of the non-government balance.
The government/non-government dichotomy is the most aggregated relationship in macroeconomics.
Importantly, these balances are not levels of spending or revenue flows. So a 2 per cent government deficit as a percent of GDP could be associated with very large government spending (and revenue) as a proportion of overall GDP just as much as it could be associated with a very small government relative to the rest of the economy.
The example might be as follows (I know it is extreme):
|Aggregate||Case A||Case B|
|Government Spending (G)||$900||$100|
|Government Taxation (T)||$880||$80|
|Fiscal Balance (G – T)||$20||$20|
|Fiscal Balance as a percent of GDP||2.0||2.0|
|G as a percent of GDP||90%||10%|
The balances also do not assume a constant GDP. Indeed, it is the movements in national income (GDP) that ensure that the balances maintain their unique relationship which is summarised by the statement:
Government deficit (surplus) exactly equals the Non-government surplus (deficit).
But that equality can occur with vastly different levels of GDP and rates of GDP growth.
So if we consider the sectoral balances to be exactly like a zero sum game (the example in the Guardian article is that there are only 40 Poker chips available) then we might get some false perceptions of what is going on.
David Graeber say that the sectoral balances just an application of maths rather than theory. Which on one level is correct but on a more intrinsic level completely mistaken.
How for example, if there is external balance (zero current account deficit), does the private domestic sector surplus increase $ for $ as the government deficit increases.
The answer is that we have to have theories of national income determination. First, we have to understand that the players in these balances are hardly equal in terms of their capacities within the monetary system.
The government issues the currency, which the non-government sector uses. The capacity to issue a currency means that the government is the only player in this story that can increase or decrease net financial assets in the monetary system by dint of its net spending decisions.
When it spends a $1, non-government net financial assets increase by $1 irrespective of the form in which those assets are held. It is anything but a zero sum game.
An increase in the government deficit, for example drives an equal increase in the non-government surplus because the non-government sector increases its income relative to its spending. How do we know that? Theory tells us that saving is a fucntion of income and an increased public deficit stimulates increases in national income, which promote higher saving.
Net spending decisions in the non-government sector do no change the net financial position of that sector. For example, when the non-government sector is spending more than it is earning, the increased indebtedness overall is exactly offset by an increase in assets overall – every liability must be matched by a corresponding asset within the sector.
That doesn’t mean that the increased non-government indebtedness may not become a problem (which is the point that David Graeber wishes to make). But it means that we have to have deeper than accounting understandings of the national accounts to appreciate the point.
Second, and relatedly, we have to have theories of household consumption and saving and private sector capital formation to understand why income changes impact on the private domestic balance. Accordingly, we learn that household saving is a residual after consumption decisions are taken and are influenced by the level of disposable income.
This is significant because saving was not always considered to be a function of income. Classical theory constructed saving as a function of the real interest rate which Keynes and others in the 1930s were at pains to debunk.
So there is deep theory underlying these balances even though they are by construct an accounting perspective of the measured national income flows.
The use of language is also important.
David Graeber says that:
So if the government runs a surplus, the private sector goes into deficit. If the government reduces its debt, everyone else has to go into debt in exactly that proportion in order to balance their own budgets.
The statement has two flaws. First, as anyone who risks their reputation by doing my Saturday quizzes [:-)] will attest, the Non-government sector cannot be equated with the private sector.
The Non-government sector is the sum of the external sector and the private domestic sector. The former included official (that is, foreign government) foreign transactions.
The correct statement is the one I have above which I repeat to match the quote:
So if the government runs a surplus, the non-government goes into deficit.
But the private domestic sector may, in fact, also be in surplus if the external sector (such as in Norway) is in surplus of
a sufficient magnitude to more than offset the spending drain coming from the government and private domestic surpluses taken together.
Second, the correct statement is that if the government reduces it debt (by running surpluses and not turning over the existing debt upon maturity) the non-government sector has to be running deficits and as a user of the currency that the government issues it has to fund the spending in excess of income. This might involve increasing its indebtedness after it has exhausted other funding sources (drawing down prior savings, selling assets).
But by personalising the statement with the use of the term “everyone”, David Graeber potentially misleads the reader. Everyone means each and everyone one of us. We know he is not referring to the ‘sector’ as a whole because he uses the plural “their own budgets” rather than ‘its budget’.
Applying that meaning to this context would lead to the conclusion that if the government is running surpluses then every private citizen is forced to increase their debt levels, which is clearly not true at all – perhaps not even remotely close to the reality.
Third, the statement “everyone else has to go into debt in exactly that proportion in order to balance their own budgets” is also misleading even aside from the ‘everyone’ problem.
The statement “balance their budgets” in usage means that the spending is equal to income. Households borrow to fund deficits in the spending-income relationship. So when the non-government sector is increasing its indebtedness it is because it is running deficits – that is, spending more than it is earning – and the borrowing is the way it maintains those deficits.
But the sector is not by any constructing balancing its budget in these situations.
He also later makes similar statements such as “if the government manages to balance its books, that means you can’t balance yours” which falls foul of the mistaken individual-sector analogy.
Further, if the government does “balance its books”, then the non-government is also doing the same thing – spending exactly the same amount it earns. And if the government fiscal balance is zero, the private domestic sector could still be in surplus if there is an external surplus.
So his rhetoric, which is an attempt to ‘personalise’ the sectoral balances fails. It is as equally fraught as comparing the government to a household when discussing is ‘budget’.
David Graeber then proceeds to inform the reader that there are distributional implications within a sector of the increased indebtedness that would accompany a fiscal surplus.
Once again he falls into the trap of equating the ‘private’ sector with the non-government sector. That conflation is problematic.
There are similar ‘mistakes’ when he talks about governments taxing people to pay off debt. But I will leave that for now.
It also appears that David Graeber borrowed a graph from one of my earlier blogs – The non-austerity British Labour party and reality – Part 2 (without credit I should add).
But the lack of attribution is not the issue. Rather the fact that in my own discussion of my graph I specifically talked about the private domestic vulnerability increasing when governments ran surpluses if there were external deficits.
The three recessions before the GFC – the Roy Jenkins’ austerity in the late 1960s, Nigel Lawson’s austerity in the late 1980s and Gordon Brown’s fiscal squeeze in the late 1990s – were all associated with increasing external deficits, which guaranteed that the fiscal surpluses were also associated with rising private domestic indebtedness.
The fiscal surpluses would not have had the same impact if there were strong net exports, for example.
So when David Graeber conflates government surpluses with increased “private debt” he is missing an essential element in the story. The increased precariousness of the private domestic sector also requires an increased financial exposure to the external sector via the current account deficits.
It was the deterioration in the private domestic balance sheet that has caused the period of appalling economic performance since the GFC. The unsustainable private debt accumulation was not just the result of a few periods of fiscal surplus.
I agree that the same dynamics are in place again – the government is relying on increased private sector indebtedness for growth as it engages in fiscal austerity and that that strategy is doomed to fail.
Eventually, the private domestic sector’s willingness to increase its level of indebtedness will stall as will its spending. Then the fiscal drag will be shown to be unsustainable.
But you cannot leave out the external sector from this narrative as noted above.
So while it is good that the tools of Modern Monetary Theory (MMT) are being use in the mainstream media to analyse important economic issues, we also have to be careful to make sure our stories that accompany those tools don’t just create more fog – and resistance.
ARC Grant Success
I mentioned a few weeks ago how research groups within Australian universities have to rely on gaining grants from increasingly competitive funding systems for their on-going existence. My research group is no exception. All our funding is derived from grants that I am able to win from various funding agencies and schemes.
Today, my colleague at Griffith University, Professor Scott Baum and I were awarded a large Australian Research Council (ARC) grant which will help fund our work until the end of 2018. This is the apex of the funding schemes in Australia and typically provides three-year funding flows of some significance.
Scott and I were also successful last year in the same funding scheme and the funds flowing from these two grants will allow me to continue supporting the researchers at my research centre – the Centre of Full Employment and Equity (CofFEE).
The project for which we were successful this year:
… explains the nature of individual employment dynamics during and after the global financial crisis in the context of the social and economic characteristics of individuals and the characteristics of the local labour markets in which they operate. Understanding how the dynamic paths through various employment states vary according to both individual (people-based) and place-based influences has important implications for the development of sustainable labour market policies and reducing the impact of disadvantaged employment outcomes. These issues are investigated using new functional economic regions and state of art modelling. The project seeks to improve policy responses to and academic understanding of uneven employment outcomes across Australia.
Technical stuff. But then the funding agencies won’t fund Modern Monetary Theory (MMT) (yet!).
I also note that last year the Federal Government funded ARC distributed $A250,044,435 whereas this year (for grants starting in 2016) the pool was cut to $244,935,035 and the success rate for applications dropped. So much for our innovation nation aspiration.
But at any rate, a happy day for our research group – so we need some music …
Music – Social Message from Skully and Bunny!
This is what I have been listening to this morning while I have been working. It is from the foundation members of the Jamaica all Stars, which brings together some of the greatest recording artists in Caribbean music history.
Skully Simms is blind and was one of the original Jamaican recording artists. He started recording in the early 1950s and is still going.
He is known for his vocals and keteh drumming techniques (which were the foundations of mento music, the 1950s precursor to ska then rock steady then reggae) and features on many top recordings as a percussionist.
This song – All Rudies in Jail – showcases their gorgeous harmonies.
“Be a good rudie, listen to your mother and your father. And don’t be a rudie. If not the police will come at you”.
Here is a great interview with the pair who were school mates.
I love Skully answering the phone during the interview and then at 3:11 they break out into a great duet reprising their first audition. Beautiful.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.