Questions and answers 2

This is the second Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about modern monetary theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the regular blogs under this category (Q&A) because it is likely it will be addressed in some form here. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.

It seems that a host of questions were spawned by the two simple teaching models (STMs) I have put up in recent weeks – Barnaby, better to walk before we run and Some neighbours arrive.

These posts should be read in conjunction with the following blogs – A simple business card economy and What causes mass unemployment?.

And then – to map the models into the real world I would recommend you read the following trilogy: Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3.

Question 1:

I’m assuming cards are equivalent to currency. Is that correct?

Let’s assume there is no gov’t other than currency and debt. That is G=0 and T=0. What would the model look like?

The cards are fiat currency.

If G=0 and T=0 and there were no other central bank transactions with the non-government sector then there would be no fiat monetary system. There would be no transfer of private resources to the public sector. That is the purpose of the STMs – to show how these transfers work.

Question 2:

What effect do bank loans and asset inflation have on this? For example, a bank gives someone a loan to buy a house, which they later sell for a profit and pay off the loan. Is that resulting profit ultimately only a product of government deficit spending, is it ‘funny money’ based purely on the perceived value of the house, or has ‘money’ actually been created by the non-government sector?

This question is covered in the trilogy of blogs noted above. In short, the STMs are designed to highlight the vertical transactions between the government and non-government sector and ignores what we call the horizontal transactions between entities in the non-government sector (which include bank loans and real asset purchases etc).

Why do this? The reason is the vertical transactions are special and have characteristics not found in any of the horizontal transactions. Specifically, vertical transactions (such as government spending, taxation, foreign exchange interventions, gold sales) can create and destroy net financial assets in the currency of issue. That is the net position in the non-government sector is altered by the vertical transactions whereas the horizontal transactions within the non-government sector cannot alter the net position.

They can redistribute assets and liabilities but all the horizontal transactions net to zero. The horizontal transactions are not uninteresting and important to study but I find that most commentators and interested parties do not understand the nature of the vertical transactions at all and they are at the basis of how the currency functions.

The STMs are designed to highlight the exact nature of these vertical transactions and allow you to clearly understand two important features about the actual which are usually absent in mainstream debate:

• That all flows have to consistently add to stocks at the end of each period – for example, saving (a flow) adds to wealth (stock);
• The sectoral flows between the government and non-government sector sum to zero. So a government deficit must be equal $-for-$ with a non-government surplus (saving).

The latter point then allows us – in an expanded form by decomposing the non-government sector into private domestic and external – to understand what many commentators do not.

First, if there is an external deficit (net exports negative – exports less than imports) then there is a net leakage from the expenditure system.

Second, under these circumstances it is impossible for the remaining sectors (government and private domestic) to both be in surplus. Please read that as impossible. This is not my opinion or a forecast or a contingency.

It is impossible as a consequence of the way the national accounts are designed and calculated. Why is this important?

If you understand the relationships at this basic level – an understanding which is the STMs are aiming to provide – then you will be better able to sort out myths in the public debate.

For example, next time you hear a commentator claiming that we need public and private de-leverage when the nation they are discussing has an external sector deficit you will realise they don’t know what they are talking about.

Next time, you hear the deficit-terrorists calling for fiscal austerity and a move back into surplus in a nation with an external deficit you will understand that this strategy would push the private domestic sector into deficit – that is, dis-saving. The only way the private domestic sector could maintain spending growth under these circumstances would be to increase its level of indebtedness – exactly what has brought us unstuck in the current crisis.

Such as growth strategy is unsustainable and will plunge the economy into recession and the public budget back into deficit via the automatic stabilisers.

The STMs allow you to understand these relationships. That is all they aim to do. But getting that level of understanding is crucial for understanding other aspects of macroeconomic behaviour and that is why I focused on it in the models.

Many people just cannot cope with the idea that budget deficits are required to underpin private domestic saving when there is an external deficit. They have such a hatred for government that they go into denial at this point. The STMs show that whether these people like it or not that is an operational reality of the system they live in.

Finally, it is important to always keep in mind that I am a macro economist. So I am concerned with the position of overall sectors not those of any one individual. So when I say the private domestic sector is in deficit (and dis-saving) it doesn’t mean a private individual is not able to save. Clearly they can – but in aggregate they cannot save if the government is running surpluses when the external sector is in deficit.

Question 3:

What is your opinion that Rogoff and Reinhart as well as Niall Ferguson’s research and books that reach the conclusion that eventually printing currency leads to inflation and effective default on fiscal debt by currency debasement?

All of this gets back to the practical drawback of deficit spending and monetary QE and MMT – since the economy is composed of millions of people and billions of transactions and a few control the credit channel, these cannot be effectively targeted. Financial regulatory reform is incapable of preventing malinvestment. Ergo, inflation will eventually result. This isn’t to undermine your theory, which is far better in explaining the modern fiat monetary regime than arcane gold standard based theories, but to suggest that its application in practice remains out of reach of the world.

I covered the analysis of Rogoff and Reinhart in this blog – Watch out for spam! and in the last couple of days I have discussed the work of Ferguson in this blog – Person the lifeboats!.

As a basic construct – the term “printing money” is a left over from the gold standard and convertible currencies – see my blog – Gold standard and fixed exchange rates – myths that still prevail – to understand that system in more detail.

It doesn’t resemble the process that governments which are sovereign in a modern monetary system go through when they spend. Governments in our economies (barring those that have imposed gold standard/fixed exchange rate type restrictions on themselves) spend each day by making adjustments to the banking system. There is not “printing” going on at all unless you trivialise to mean someone printing of a bank statement to record what they have seen on their computer screen.

The additional reserves – which result after all the transactions that have followed the government spending are completed – do not constitute any inflation threat at all.

If the government was to continue spending so that nominal aggregate demand is pushed beyond the real capacity of the economy to respond to it (in output) then inflation will result. Price pressures may result in certain sectors prior to full capacity being exhausted.

But why would a government seek to drive the economy past that point where full employment is achieved? I cannot think of any reason yet Ferguson and his ilk seem to think governments have a financial constraint and they can use inflation to reduce their debt burden in real terms.

But the debt burden on a government is illusory when compared to a debt burden arising from private debt. In the latter, the debt holder has to forego consumption to repay the debt and service the interest payments during the life of the debt. For the government, there is no such constraint – they just credit bank accounts whenever interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school.

Ferguson’s claim is thus nonsensical in a fiat monetary system. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? The answers to all these questions is a resounding no!

Macroeconomic contraints are more powerful than any. This is often forgotten by commentators. An aggregate demand constraint imposed on the non-government sector can choke speculative bubbles much more quickly than a process whereby monetary policy authorities cause the cost of credit to creep up.

First, the monetary policy route is unreliable because of the distributional aspects. When interest rates rise, debtors lose but creditor gain. Those on fixed incomes gain. What is the net spending effect within normal interest rate ranges? It is difficult to judge. The Australian Treasury has reported that fiscal policy expansion in the current downturn was much more effective than the RBA’s decision to cut interest rate to relatively low levels.

Second, while there might be “millions of people and billions of transactions and a few control the credit channel” imposing a fiscal constraint on their activities is likely to choke them off – that is how an aggregate policy works. The collapse of credit (bank loans) in the current crisis is a testament to that.

Specific asset classes can be targetted with fiscal policy via taxation and/or spending initiatives to discourage or encourage activity in that sector. Monetary policy cannot be targetted to specific asset classes and impacts broadly and bluntly on all spending and regions.

So the claim that inflation is an inevitably is based on false premises and you can usually steer the person back to some version of the Quantity Theory of Money even if the person has never heard of the now discredited theory of inflation. I have discussed the QTM in the blogs referred to at the outset of this section. The QTM is flawed and is clearly irrelevant to economies with underutilised capacity.

Question 4:

If I’m reading this correctly, it appears that the national debt is held onto. Doesn’t it usually get spent so that the government needs to earn back both the principal and the interest?

The national debt is just the outstanding public debt held by the non-government sector (with some held by the central bank). It is a stock and reflects the wealth of the non-government sector held in this form.

It arises because governments operating fiat monetary systems have hung onto gold standard practices to voluntarily constrain their spending – that is, they issue debt $-for-$ to match their net spending. The debt is not to “finance” their spending because they are not revenue-constrained.

From an accounting perspective, the stock of debt is an expression of the cumulative budget deficits that have been run by the government in past years. Budget surpluses work in the opposite way – to undermine the growth in wealth held in the form of public bonds.

Further, they only borrow back what they have spent anyway.

Please read my blogs – Debt is not debt and On voluntary constraints that undermine public purpose – for more discussion on this point.

The government never has to “earn” the principle or the interest it pays on outstanding debt. In a fiat currency system, public spending does not come from anywhere – in the sense, that there is a stockpile of funds they spend out of. The government neither has or doesn’t have any money. It is an inapplicable concept when related to a sovereign government.

A household has or doesn’t have funds because they are financially constrained.

Question 5:

Idealized models look great in an insular economy in which there are no cross-border flows and no trade … but the model … fails to recognise that the central premise – that the government has effective control of monetary value (via the tax and legal tender function) becomes void at the border of that nation.

The first model – Barnaby, better to walk before we run – deliberately didn’t split the non-government sector into an external and private domestic in order to show the most simple sectoral relations and applications of stock-flow consistency.

A few days later to address concerns such as expressed in this question – I am being kind calling it a question – it was really just an uninformed assertion – I developed the partner model – Some neighbours arrive .

This incorporated an exchange rate and cross-border flows and broaden the national accounts to incorporate net exports.

What did we find? Nothing of consequence changes. Instead of government and non-government accounting balances having to concord we now have the three sectoral balances having to obey accounting constraints.

The stocks and flows work identically – we just have some more flows (exports and imports) and recognise that the external sector can accumulate financial claims on us in our currency if they are willing to net export to us.

We also derived the powerful result – if there is an external deficit, then the private domestic sector can only save if there is a public deficit.

The government maintains control of its currency in a fiat monetary system whether the borders are opened or shut. No-one else can add or subtract net financial assets in that currency as a result of policy interventions.

Please read my blog – Modern monetary theory in an open economy – for more discussion on open economies.

Question 6:

Why keep taxes at steady at 600 cards while trying to lower the “national debt”? Aren’t neo-liberals always arguing for lower taxes in addition to lower government spending?

Simply to ensure not too much is changing at once so that the reader can isolate more accurately what is going on. It is the net position of the public budget that matters and that can be altered in a number of ways.

Neo-liberals are arguing for lower tax rates which means in my model I would have had to cut employment even further to achieve the budget surplus I mindlessly pursued.

Question 7:

Isn’t the whole conservative/neo-liberal argument that the “kids” should not be looking for the government to provide most or even any of the goods/services that the 600 cards provides – that is, to “eat and live in the house”? Wouldn’t they say that the kids could/should be supplying/demanding those goods/services from each other, and so would have had no need to earn the government’s cards in the first place? Or, very much fewer of them at the least?

You have to see the model for what it is. It is abstracting from the transactions within the private economy that do not involve the government. It is doing that for the reasons I note above – to highlight the government relationship with non-government.

So in this “economy” if the kids declined to accept the government spending they would not be able to pay their taxes. The government has to spend at least as much as it taxes in its own currency to ensure that the private sector has the capacity to pay the taxes without reducing their saving.

That is what the model teaches you. It is am important lesson that most people who commentate on these matters fail to understand.

Whatever else the kids do – between themselves – it still remains that the non-government sector has to interact with the government sector to get their currency in aggregate.

Question 8:

If the kids represent the entire private sector as presented in the vertical graphic at the top of the page, then isn’t a system where the government pays all wages and determines the tasks to earn those wages describing a completely centralised, government directed economy … i.e., communism, or something very like it?

Imagination is a good thing. Abstraction requires imagination. The STMs are abstractions. The slither of the real monetary system represented by the transactions shown are as they occur in the real world – in an accounting sense and in a stock-flow sense. Some people have picked at the use of a poll tax etc. But these are simplications to make it easier to expose the stock-flow consistency and the national accounting relationships in a few thousand words with a 6 column table.

The level of detail presented and assumptions used are just enough to make my point.

But if you imagine a whole private sector tacked onto this model then you might have a very small public sector interacting with a very large (as a proportion of total income) private sector. The results I derive would be the same.

So this has nothing to do with the size of the government but rather its role!. Bringing in emotives such as communism is just missing the point altogether.

Question 9:

What happens when deficits balloon?

They balloon! But then that doesn’t get us very far because we do not know what balloon means. It is one of those weasel words that people use to invoke an irrational reaction from their readers.

If you mean – what happens when net public spending pushes nominal aggregate demand beyond the real capacity of the economy to respond to it (in output) – then the answer is obvious – inflation will result.

But the claim usually relates to continuous net spending positions over a long period.

I deliberately wrote the blog – A modern monetary theory lullaby – as a follow up to the STMs to ensure this point was addressed.

In summary, continuous budget deficits are the norm for a nation where the private domestic sector desires to save (spend less than they earn) and the external position doesn’t offset the decline in demand associated with this. History shows us that these continuous deficits do not “blow out” or generate accelerating inflation.

Question 10:

In the STMs I made the point that: “If the budget is balanced there can be no net saving or net accumulation of financial assets”. This induced the following question.

Assuming no debt, does that mean there is no private spending either?

No it doesn’t assume anything about private spending. The non-government sector overall cannot alter its net financial position by transacting internally. It can redistribute assets and liabilities within the non-government sector but cannot change the overall position.

Only transactions between the government and non-government sector can change the net financial position in the currency of issue of the non-government sector. It is crucial to understand that point if you want to really get to the bottom of the way the monetary system operates.

So the STMs do not include private spending because it doesn’t shed light on the way the government can change the net financial position in the currency of issue of the non-government sector – which is the main purpose of the STMs.

Question 11:

If you’re suggesting that because sustained surpluses don’t work then it implies that sustained deficits must then work. This seems clearly and obviously wrong, and I don’t even think it’s your point – but it is what “we” non-MMT’ers hear (correctly or incorrectly) when MMT practitioners argue against reducing the deficit – we hear “the US doesn’t need to balance their budget because government debts are different from household debts, the government doesn’t need to fund its spending with taxes or debt, and surpluses lead to bad things.” We turn around and reply “but that doesn’t mean we can accumulate endless debt and deficit – it has to end badly at some point” – IN THE REAL WORLD!

Whether any particular fiscal position can be sustained depends on what else is happening in the expenditure system and the growth of productive capacity.

For a country (such as Norway), which is currently running very strong net export positions, the government has to run surpluses or else aggregate demand would be so strong that it would outstrip domestic productive capacity and inflation would result. For them, they can have full employment (or very nearly), strong public sector services, high material standards of living and high private saving ratios and still run a surplus continuously.

But that model cannot apply to all countries because for external surpluses have to be offset elsewhere by external deficits. Most advanced nations now run external deficits.

In that case, to repeat what I said above – the only way the country can maintain growth strong enough to sustain full employment and rising standards of living without requiring its private sector to go increasingly into debt is for the government sector to run continuous deficits. You may not like that implication of the market system but it is then a case of “like it or lump it”.

I emphasise again that this is not my opinion or a forecast. The statement reflects the sectoral accounting constraints that all economies obey. There is no discretion.

So if non-MMT’ers don’t understand that then they cannot claim to speak with any authority about the way national accounts work, or how stock-flows consistently deliver these sectoral relationships and … ultimately, they cannot speak with any authority about how the monetary system we live in operates. It is as simple as that!

Further, no debt is endless. It always gets paid back on maturity. But the flows of net spending (deficits) can be endless as long as they promote real output and income growth and support private saving desires.

When have continuous deficits under these conditions ended badly? I have studied this stuff for years and I cannot find a single actual example of continuous deficits under these conditions ending badly – IN THE REAL WORLD (sorry for shouting at you all!).

It is always important to separate out the emotive responses to things that are presented to us with the reactions that are based on what we actually know as experts. Too often these sorts of questions are based on the former and upon further examination you quickly find out the questioning person doesn’t know much at all.

Question 12:

What makes the Chinas’ kids eager to work for foreign currency in their neighbor’s household? Maybe they have some spare time which they prefer to spend working second job, and they weren’t able to find such in their own household? What makes the foreign business cards valuable for them as they don’t need them to pay their own taxes – the possibility that they can exchange it for domestic money?

This relates to why nations are prepared to net ship real goods and services to other nations which could be enjoyed by their own citizens. It is always to build a portfolio of financial assets in the currency of the nation that is enjoying the excess of imports over exports.

Why would a nation want to do this? For many reasons mostly related to positioning itself in world trade.

The reason our cards are valuable is because at some later date they can be exchanged for net goods and services that we produce which the next door neighbours may enjoy – in the STMs – our labour. They can make real claims on our resources if they have financial assets denominated in our currency.

Question 13:

I often will say something along the lines of – for sovereign governments the financial “costs” are not worth considering” – because only real costs matter and a sovereign government cannot become insolvent.

This sort of rhetoric prompted the following question:

But as many governments do not issue their own currency and instead farm it out to private central banks, how are the interest payments on government deficits accounted for? Is this simply considered a leakage to the private sector?

I ask because it would just seem to me that while a sovereign government is in fact solvent, deficits in the end have the larger effect of simply padding the coffers of private individuals that are shareholders of central banks.

The exact “real world” way in which central banks and treasuries account for their dealings varies between nations. The US Federal Reserve system, which is privately owned, is rather unique in the world. Most central banks are set up as acts of statute.

However, all are controlled in one way or another by the elected government of the day.

But from an operational perspective it is always the case that the central bank and treasury operations should be seen as part of the consolidated government sector in that represent a vertical relationship (as explained above) with the non-government sector.

So a central bank gold purchase will add monetary base to the non-government sector (that is, add bank reserves) in just the same way as treasury spending will. From this perspective an interest payment on debt adds income to the non-government sector.

The distributional issues you raise – who owns the central bank etc – are separate from these macroeconomic considerations. They may be important from a political perspective but are tangential to my macroeconomic concerns.

Question 14:

Several people have been querying the operations in the Eurozone nations given the recent exposure of the Greek situation. The issue that seems to be driving uncertainty or confusion relates to whether a government in the EMU can make vertical transactions (that is, transactions with the non-government sector which create/destroy net financial assets in the currency of issue). The currency of issue in this context is the Euro.

So the following question is representative.

Does the STMs and MMT in general hold true for a country like Greece that does not have a sovereign currency and so government cannot spend money/reserves into existence?

Someone else asked whether the Greek government spending is a vertical transaction. It is the same issue really just a different way of approaching it.

What MMT tells us is that when a sovereign government spends it creates bank reserves (via central bank crediting reserves to bank accounts) which it at some future time collects as taxes and bond sales proceeds. This is what I have been referring above as vertical transactions.

We also know that when commercial banks extend credit (loans create deposits) these horizontal transactions net to zero because for every asset created their is an offsetting liability being held by someone else.

An EMU nation is like a state in a federal system such as California, New South Wales etc and is constrained accordingly. With a fixed exchange rate with the rest of the Eurozone, and a flexible exchange rate with the rest of the world the fiscal position of an EMU nation is constrained in a similar way to that of a gold standard nation.

When an EMU nation or any government borrows in order to spend (which is how the gold standard constraints worked), we consider its “savings” of financial assets falls and, in aggregate, the “other sector’s” net financial assets in the currency rise.

Some steps in this process will help us understand it better.

When a person buys bonds from an EMU government, their financial assets are unchanged because Euros are exchanged for bond entitlements.

For the EMU government their financial assets are also unchanged until they spend the funds. Then they reduce their financial assets while the stock of financial assets of the recipient of the spending rises.

An EMU government can also tax if its tax base is not mobile in the currency issued by the ECB. To get the Euros necessary to pay the tax a Greek (or whatever) taxpayer has to:

• Net export to another nation and get Euros;
• Be in receipt of Greek government spending; and/or
• Borrow euros from somewhere.

The financial asset implications then are extrapolates as above.

Question 15: Productive work etc

There were many people who wanted to extend the STMs into a debate about productive work and somehow wanting to tie this into the inevitability of asset bubbles.

So a typical question was:

What I remain unconvinced is that the government spending will be targeted to productive uses (at the margin maybe, but doesn’t seem to be the case in majority of the cases) rather than creating asset bubbles.

And then there was this sort of concern:

You also made a reference to “productive capacity” Trying to bring it back to real world relevance again: I’m still confused as to what you are suggesting in terms of full employment as it relates to the USA. Would it be okay if the government paid all unemployed people to dig holes and fill them in again? Or do the jobs have to be “productive”. If the jobs don’t have to be productive, then instead of paying people to dig holes and fill them in, why not just pay the people to sit at home and do nothing? Would it be okay if the government spent a billion dollars creating jobs that produced a fraction of that in “capacity”?

For the purposes of understanding the message of the STMs, it is irrelevant what the kids do. They might just go out and dig and fill in holes. That wouldn’t alter the national accounting and the stock-flow relations. But when I have stacks of other things I would want them to do including activities that will transfer skills to them which will be of later use why would I be so unimaginative?

But the discussion broadens.

First, the term “productive” is loaded. Neo-liberals claim that only the market can determine what is productive. But the current crisis must surely reinforce the view that the market fails in spectacular ways and destroys massive amounts of real value when it does.

Second, even mainstream textbooks acknowledge the concept of social costs and benefits and the fact that purely private calculations (costs and benefits) will under- or over-allocate resources when social costs and benefits are present in particular configurations.

We are taking a very narrow view of “productive” activity if we confine the concept exclusively to working for private profit.

There are many activities that go beyond the “private profit domain” that add value to a nation.

The claim that public sector job creation is always unproductive is a long-standing claim. Please read my blog – Boondoggling and leaf-raking … – for more discussion on this point.

In that blog I demonstrate that the term – boondoggling and leaf-raking – it meant to be the ultimate put down by the conservatives who laud the virtues of the private sector as they create hundreds of thousands of low-skill, low-paid, precarious and mind-numbing jobs but hate, with an irrational passion, the idea that the public sector could employ workers that the private sector doesn’t want and get them to work on community development projects at a minimum wage.

And to put a finer point on it … on projects that can leave massive positive legacies to all that follow.

I document the debate that occurred in this regard during the Great Depression. They realised then that with the private sector in full-scale retreat from job creation, the only remaining source of job creation was the public sector.

This remains the same now!

Were the large-scale programs successful? My understanding of the historical data is that the initiatives were extremely important in building infrastructure and protecting families and their communities.

The facts are clear. The Public Works Administration (PWA) created hundreds of thousands of jobs and the work helped restore ageing public infrastructure (such as, roads, dams and bridges). Many new buildings were constructed during this period (schools, recreational spaces, libraries, hospitals) and have delivered benefits to the generations that followed.

Around 8 million workers on construction and conservation projects and most of the workers were low and semi-skilled, the hardest hit by the Depression. The projects included “building athletic stadiums, making books for the blind, stuffing rare birds and improving airplane landing fields and army camps.”

The WPA engaged “Thousands of unemployed writers, actors, musicians and painters were given an opportunity to earn a modest livelihood from their artistic talents … and to enrich the lives of countless culturally-deprived citizens. The productions of the WPA Theater Project, for example, entertained a phenomenal audience totaling 60 million people, a great many who had never before seen a play.”

Further, targetted programs to engage American teenagers were organised under the Civilian Conservation Corps (CCC) which employed around 2.7 million jobless male teenagers. Kelber reports that they worked to “reclaim government-owned land and forests through irrigation, soil enrichment, pest control, tree planting, fire prevention and other conservation projects.”

There are huge reminders of the legacy of this era of public intervention by way of direct job creation. I can document similar things for Australia.

Please read my blogs – Income or employment guarantees? and In the spirit of debate … my reply Part 3 – for more on productivity and why it cannot possibly be an effective use of resources to run a policy regime that deliberately keeps people unemployed and therefore idle for extended periods of time.

Just the act of providing a job is productive when you consider the overwhelming evidence that children who grow up in jobless households inherit that disadvantage themselves. It is thus productive for the “kids” to see their parent(s) leaving for work each morning. These observations are taken into adult life and make a difference to their opportunities and outcomes that those kids will experience.

When considering “productive” one must think laterally and broadly.

Further, my actual practical work as an economist in developing countries in recent years, demonstrates without a doubt the massive benefits that public sector job creation programs deliver to local communities and the nations in general. I wonder if the people who have asked these questions have had any such experience.

Question 16: Ideology etc

And finally tonight, I come to the issue that the STMs are really a front for a “collectivist”, “stalinist”, “communist”, “dictatorial” and more type of system where unproductive (see Question 15) work is forced onto the powerless population.

So one rather insistent commentator said (several times):

Whether or not government should ensure full employment comes down to your view of what governments’ role should be in an economy/society. I agree with you in that I don’t think the government should be deciding how to keep the economy at full capacity. The Soviet Union operated at full capacity for a long time but they eventually discovered that the capacity was poor, the product poorer, and the people impoverished.

Most western nations also operated at full capacity for 3 decades or more following World War 2 and this just happened to be when national governments took responsibility to ensure aggregate demand was sufficient to generate enough jobs.

But let us be absolutely clear on this point. The STMs the underlying national accounting and stock-flows relations between the current government sectors and the current non-government sectors. They are not some prescription of a new world.

They are not “looking at Soviet Union as an economic model”. Where have I ever mentioned anything to do with the Soviet Union in the development of these models.

They are not a model of a “a collectivist, authoritarian state” although depending on the monetary system such a state adopted they may find themselves bound by the underlying national accounting and stock-flows relations that are described in the STMs. I would suspect, however, that the policy choices taken by such as state within such a monetary system would be rather different to those I would suggest given my understanding of how a fiat currency system operates.

The STMs also do not describe a “top-down management and full-employment” which apparently “is exactly what Billy advocates”. No he doesn’t. I am the only person who can tell you what I advocate.

If you want a clue as to my ideological persuasion is please go to the About page and see what my political compass score is. It is about as far away from this a “a collectivist, authoritarian state” with “top-down management and full-employment” as you can get.

I do advocate full employment strongly for many reasons.

No-one is ever out of work “because of productivity” which one commentator described as arising when “our economy produces what we need with less labour”.

Please read my blog – What causes mass unemployment? – for more discussion on this point.

The idea that if someone is unemployed they have to “create a new need (wash and fold laundry?), improve existing products, or re-enter the work force at a reduced rate” implies that employment is and all legitimate needs are created exclusively in the private sector. That is a violation of history.

Mass unemployment is a systemic failure to create enough jobs. The private sector never provides enough jobs to satisfy the demand for working hours from the willing and available workforce. There is only one other sector left to fill the breach – the public sector.

There are many areas of unmet need that the private calculus of profit will never meet. These are areas that can deliver substantial social benefits and which will only be produced if the public sector takes the initiative. They do not substitute activity for that already being performed by the private sector and add value to the community.

Please read my blog – Boondoggling and leaf-raking … – for more discussion on this point and it is related to the previous discussion of productivity.

After the accusations the the STMs were a communist front, some specific questions then appeared:

But why are your kids paying the same amount of tax that they were paying before their incomes fell? And what is happening to their expenses- are you charging them the same amount for food, rent, and utilities? If they are trading with each other why are the prices of trade-able goods and services not falling along with the supply of business cards? Perhaps the prices are staying high because China Family is spending the cards that they accumulated, buying up all of your kid’s Vegemite.

The tax rate was held constant so people could focus on the net government position only. Just a simplifying assumption that has no substantive relevance in the overall results.

There is no consumption in this model in order to focus on the national income accounting and the stock-flow relations between the government and non-government sector. We clearly need to understand those issues first and then complicate things later. Remember, the blog was entitled “walk before we run”.

There is only implicit trading within the non-government sector. The actual trading nets to zero and doesn’t alter the fact that transactions between the government and non-government sector do not net to zero and are therefore very important to understand.

There is no price level in the model – implied. There is an exchange rate but it is is unimportant in the accounting sense that I describe.

But the specific questions then fell back into the ideological issues:

You describe the economy: “there is no longer much work being done around the house. The garden is in a sorry condition and rubbish is piling up.” Why are your kids so lazy? Or is it that the Draconian Emperor (you as the govt) running the economy stubbornly refuses to bring their expenses down proportionately with income?

Like in the real world when employment falls productive output declines. It has nothing to do with laziness. Once a monetary system is imposed, laziness has nothing to do with anything. The demand for labour fell as I cut net spending.

Fiscal austerity programs do exactly the same thing and the STMs teach us the underlying impacts of such programs on the government and non-government sector.

Finally:

What happens when we introduce Arab Family who just discovered their house sits atop a geothermal energy source. They supply both your family as well as China family with heat and electricity. The winter is particularly cold and China family desires more heat so they send more of their spare cards to Arab Family in exchange for more heat. But Arab family only has a fixed supply and tells your family that they will have to either pay more for heat or get less heat. Your family would rather forgo a snack than be cold so they pay the higher price for heat. But now they have less to pay for Vegemite and so your kids are forced to go into your pantry so they can sell more Vegemite to China family so that they won’t have to go over the fence and earn back the purchasing power (work). In economic-speak, the inflation is eroding the purchasing power of your children and thus their quality of life sue to your resistance to any sort of restructuring.

As I have explained before an imported resource price shock amounts to a loss of real income for the nation in question. This can have significant distributional implications (as the OPEC oil price shocks in the 1970s had). How the government handles such a shock is critical.

But that takes the discussion far beyond what was intended when I wrote the STMs blogs. I think the failure of many critics to really just focus on discussing the national accounting and the stock-flow is telling. Launching off onto our favourite scare mongering may make one feel good but doesn’t contribute much to a reasoned discussion.

To understand more about the shift in energy demand and supply – please read my blog – Be careful what we wish for … – for more discussion.

Conclusion

Once again I stress that modern monetary economics is descriptive and analytical. In that sense it takes no sides in ideological debates unless you want to get absurd and say that the “construct of money” or “employment” is ideological. Of-course they are but if we are going to get post-modernist then we won’t get very far in our understanding.

But we should be smart enough to separate the analytical detail I develop in my work from my opinions. Conflating them and then dismissing the former because you don’t like the latter is the tactics of scoundrels.

If you want to know my opinion as a person then ask me and I will either tell you or not depending how you ask and who you are and what sort of mood I am in. That is the nature of personal values and opinions and conjectures etc.

But if you want to learn about MMT and discuss it on its own terms then I welcome all input and I will do my best to help given my professional expertise in the area.

Someone – in a dismissive way – said my blog was just an ideological device. My response is that all blogs are ideological devices in that they are the expression of some person. That also doesn’t get us very far.

That is enough for today!