Question #2133

Given that most governments are sovereign in their own currencies, there is no limit on the expenditure that these governments can introduce to deal with the coronavirus emergency.

• True
• False

Answer #10729

Answer: False

Explanation

The answer is False.

The question was designed to ensure you are careful in articulating each of the concepts mentioned accurately and not drawing quick but false associations.

The first part of the question lures you into thinking about a series of other propositions that follow for such a government.

So we know that the following summary features describe a government that is sovereign in its own currency:

• A national government which issues its own currency is not revenue-constrained in its own spending, irrespective of the voluntary (political) arrangements it puts in place which may constrain it in spending in any number of ways.
• The only constraints facing such a government other than the political pressures it has to manage are real - there must be real resources available for sale for government spending to purchase.
• A sovereign government can buy whatever is for sale at any time but should only net spend up to the desire by the non-government sector to save otherwise nominal spending will outstrip the real capacity of the economy to respond in quantity terms and inflation will result.
• A government that wants to increase its share of resource usage must work out ways to deprive the existing non-government users of those resources if there is full employment.
• A deficiency of spending overall relative to full capacity output will cause output to contract and employment to fall.
• Government net spending funds the private desire to save while at the same ensuring output levels are higher than otherwise.
• A government deficit (surplus) will be exactly equal ($-for-$) to a non-government surplus (deficit).
• Public debt issuance of a sovereign government is about interest-rate maintenance and has nothing to do with "funding" net government spending.

The "knee-jerk" answer would be true if after a careless reading you reasoned that when governments spend they always use up real resources in the economy.

But the question asked you to relate nominal expenditure to availability of real resources. All spending is nominal but whether it has a real effect depends on state of overall demand in the economy and also on price movements in particular areas of the economy.

You could imagine that with the health care providers holding market power which translates into price setting power and the coronavirus emergency being so large, that increased demand for health care resources could be met by price adjustments and draw in no further real resources into the sector.

Funding the response to the coronavirus will never be an issue for currency-issuing governments. Finding sufficient real resources (beds, skills, etc) will be and is proving to be so.