Limits to government spending are not determined by private bond markets

Wednesday and a relatively short blog post after two rather long posts in the preceding two days. The first topic concerns the limits to government spending. The second brief topic reports on research where it was found that the music of AC-DC confounds Lady Beetles and soybean aphids. Who would have thought! Which was by far the most interesting research paper I have read this week after dealing with the likes of Stuart Holland on Monday and Tuesday. And then some music from around the world to smooth out the day.

Limits to government spending

There was a tweet being retweeted like there was no tomorrow last week which linked to an article in the Financial Times (July 14, 2018) – Fiscal hawks’ tales of doom do not fly with the young.

The article had a picture of the latest progressive political star – Alexandria Ocasio-Cortez with the caption that she:

… backs the view that restraints on a government’s spending are primarily set by the amount it can borrow without fuelling inflation.

Progressive types then thought it was useful to retweet this incessantly for a few days.

My response – I certainly hope that Alexandria Ocasio-Cortez does not back that construction of the limits on spending for a currency-issuing government.

And I certainly hope that progressives do not embrace it either.

Why?

It is fundamentally incorrect and just reframes the way neoliberals think and uses their sort of language.

The article was questioning the:

… warnings from some fiscal hawks about how financial markets would be overwhelmed by the wave of government bonds needed to fund the stimulus.

It noted that the evidence has not supported the fiscal hawk scaremongering.

It asks: “Where are the storied bond vigilantes?”

It also correctly notes that:

Because the US borrows in its own currency, warnings about too much Treasury issuance are in reality about two spectres: harmful increases in inflation, or a dose of political mismanagement so severe it would lead to a technical default by the US.

The “technical default” refers to the ridiculous process where the US Congress approves increases in the ‘debt ceiling’. The theatre around that process might one day see the US government ‘run out of money’ because the politicians have legally forced it to.

Of course, that process doesn’t negate the fact that the US government can never run out of US dollars if it doesn’t want to. We cannot say the same thing about, say, a Eurozone Member State government.

And it says that the deficit hawks:

… have now educated a generation in the risks of dogmatic opposition to government debt, and made austerity a more tangible threat to young Americans than harmful inflation. Small wonder then that Alexandria Ocasio-Cortez, the self-described democratic socialist, was recently nominated to represent New York in Congress.

I would not have used the word “education” to describe the propaganda pumped out by the hawks. Explicit lies are not education. Education is about enlightenment not deception.

Which is why the vast majority of students who undertake macroeconomics in universities around the world are not receiving an education. They are being indoctrinated with a particular ideological frame.

The FT article then goes off the rails when it says that:

She has backed the increasingly popular view that restraints on a government’s spending are primarily set by the amount it can borrow in its own currency without fuelling inflation – not its annual tax revenues.

Some economists may find this perspective uncomfortably liberal, but it is not necessarily inaccurate. It acknowledges global demand for US Treasuries, which is a more honest depiction of the government’s finances than a Treasury that is only capable of spending the amount it raises through tax revenues in any particular year.

She being Ocasio-Cortez.

The view might be popular and a challenge to the mindless mainstream economists (the hawks) but it is also incorrect.

It is also not a view that progressives should be propagating as it operates within a neoliberal frame.

Why?

Lying behind the view, implicit yet fundamental, is the myth that the US government (or any currency-issuing government) has to issue debt in order to spend.

The corollary, which is the proposition that progressives are meant to “back”, is that as long as the private bond markets are receptive to that debt issuance, the government can spend.

The related (and final) proposition in this flawed logic stream is that under those circumstances, the problem government spending has to address is its inflationary consequences, which become the limits on the deficits.

It sounds – sort of intuitively reasonable – to a lay person.

But intuition and common sense is a dangerous guide to follow in these matters.

I discussed the perils in this blog post – When common sense fails

The reality is as follows:

1. A currency-issuing government is only limited in its nominal spending capacity by the real resources (goods and services) that are available for sale in that currency.

2. Such a government can always purchase anything that is for sale in that currency, including all idle labour, irrespective of whether the inflation rate is 1 per cent or 10 per cent and independent of its past fiscal balance outcomes.

3. The requirement that deficit spending be matched by debt-issuance to the private sector is purely voluntary.

4. The government spending, in fact, provides the net financial assets, which allows the non-government sector to purchase the debt.

5. It is true that accelerating inflation might emerge before all available resources are fully utilised as a result of sectoral bottlenecks.

6. That is why, the government should introduce a Job Guarantee, which allows the government to guarantee ‘loose’ full employment using automatic stabilisers by purchasing at fixed rather than market prices. In other words, it can bring all labour into productive use without accelerating inflation.

7. Hitting an inflationary wall does not mean the government is unable to spend further in nominal terms. Financially, the government could just keep putting out orders for goods and services and chase the market price upwards, with hyperinflation the ultimate result if this behaviour persisted.

8. Such a strategy would be futile though.

You can see in those eight points, I have broken the nexus between spending, debt-issuance and inflation.

It should be further recognised that all spending (government and non-government) carries an inflation risk.

The following blog post considers some of these issues (among many others) – Real resource constraints and fiscal policy design (June 21, 2018).

AC-DC and the Lady Beetles

Some biologists from the US Mississippi State University published an article last week (July 10, 2018) – Testing the AC/DC hypothesis: Rock and roll is noise pollution and weakens a trophic cascade – which sought to study the impact of “Anthropogenic sound” on the environments using “lady beetles, soybean aphids, and soybean plants” as the “model for studying the direct and indirect effects of global change on food webs”.

Hmmm.

Here is a press report on the study – Rock and roll IS noise pollution, Mississippi State study shows – if you don’t feel like reading the scientific paper linked to above.

The scientists found that AC-DC’s null hypothesis that “Rock and Roll Ain’t Noise Pollution” could not be sustained.

Instead, the alternative was found to be statistically significant.

The researchers subjected an ecosystem of lady beetles, aphids and soybean plants to around the clock (“Shook all night long”) “rock music, country music and more conventional urban sounds to test the effects of noise on an environment.”

The ladybirds became “less effective predators, which resulted in higher aphid populations and lower biomass for soybean plants” when AC-DC was blasting out.

But just before you start calling for bans, the researchers also found that tractor noise had the same effect.

And here it is. From the 1981 album – Back in Black – Rock And Roll Ain’t Noise Pollution.

AC/DC alas, sadly, without Bon Scott and, more recently, Malcom Young, not to mention the retirement of bass player Cliff Williams and the criminal complexities surrounding drummer Phil Rudd.

Music from around the world …

I love Playing for Change organisation which cruises the world recording musicians and puts them together playing great songs.

This version of the Bob Dylan composition – All Along the Watchtower

In this version you get Lakota singers and dancers, sitar player in India, various hand drummers, guitar players from here and there, violin player from the US and Lebanon, and more.

And the Doors drummer John Densmore pops up playing his drums at Venice Beach.

One of the better covers of this song.

And here is the best version from one of the best albums ever – Electric Ladyland – recorded by Jimi Hendrix in 1967 and released in 1968 on Reprise.

I bought this album as an import (there was one shop in Melbourne that sold imports at the time) while still a teenager. I still play it.

The 15 minute version of Voodoo Chile with Stevie Winwood on organ (recorded live in New York) is without equal.

The pop music reviewers of the day didn’t like the album – but I considered they just weren’t ready for its genius.

I have been listening to this album today while typing.

I would also add that the reference being “all along” a “Watchtower” confounded people as to what Dylan meant, but that is another story.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.