Update: As I hit post, I realized that billyblog has links to video, running transcripts, et al. from the conference. Soak it up.
I got to attend the first discussion session at the Fiscal Sustainability Counter-Conference today, which was led by Bill Mitchell, who blogs at billyblog. If you read the comment threads here, then you’ll be familiar with the arguments. Basically, because governments issue fiat currency and collect taxes in that currency, they can afford to deficit spend as much as they please. The goal, the panelists argued, is full employment. Deficits are not costly- instead, allowing a key productive asset (labor) to go underutilized is an unrecognized huge opportunity cost. The government can spend and hire so long as there are enough resources to tap into. The government must balance the private sector, which does not always do its job.
I find these arguments compelling. They stem from the growing field of modern monetary theory, about which I’m learning more with every passing week. It’s becoming clearer to me that deficit and debt hysteria, is exactly that. Of course, the dialogue in our country is so far to the right in this debate that these ideas find little airing. “Serious” economists are required to sabre-rattle about deficits, and propose solutions for decreasing them- full employment is an utter afterthought.
Mitchell pointed to Australia, his home country, as an example of the opportunities that exist. By pursuing what amounted to full employment policies in the 1950s, the government grew the economy, and budget deficits did not strangle anything. The OPEC scare brought an end to these policies, but under false pretenses, as the supply constraints were completely exogenous to the budget situations of governments. Nevertheless, fears of inflation, which Mitchell and others argued is only a threat under full employment, have prevailed such that decades later, the rhetoric of deficit hysteria still dominates.
Mitchell and others argued that a real marketing campaign needs to occur- I suppose this is my contribution to it. Possible memes to spread the word: we don’t owe the debt, we own it; for the non-government sector to run a surplus (or save), the government must run deficits. At the country level, clearly some, if not most countries, must run deficits. I think the opportunity cost line of thinking may be another way to reach economists.
So, this is the agenda for full employment. I know there are counter-arguments to this line of thinking from both the left and the center, but those are for another day. As hard as it is to reason with neoclassical economists on these issues, it will be even harder to reason with politicians. However, that’s a fight I don’t really want to think about right now.
Glad to hear that you could make it, Nick. I regret that I could not be there. It will prove to have been an economically and politically historic event, I believe. You will be able to tell your grandchildren that you were there.
You wrote: “Basically, because governments issue fiat currency and collect taxes in that currency, they can afford to deficit spend as much as they please.”
That may be confusing to some people, who are likely to see it as inflationary. If I may clarify, I think what you mean is this: Under the present monetary system, the government is not financially constrained (although there are are real constraints).
A government that is the monopoly issuer of a nonconvertible currency with a flexible (floating) exchange rate is not financially constrained. As currency issuer, the government neither taxes to fund disbursements, nor borrows to finance them.
Taxes simply withdraw funds from nongovernment to prevent inflationary pressure. Similarly, the government does not finance itself with debt, and the securities it issues are bought with currency it issues. Debt simply drains excess reserves from the interbank system, allowing the central bank to hit its target rate. There is no financial reason that such a government needs to issue securities at all. It could just pay a support rate equal to the overnight rate.
The government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency in excess of capacity, demand will rise relative to the goods and services available, and inflation will occur due to a glut of money. If the government falls short in maintaining this balance, recession and unemployment result, due to a glut of goods and services. The government attempts to achieve the correct balance through fiscal policy (currency issuance and taxation) and monetary policy (interest rates), based on data and its analysis in terms of sectoral balances.
Nick and Tom,
I wrote a book about this more than 10 years ago (FREE MONEY), and have endured the slings and arrows of the debt hawks ever since. Welcome to the battle.
I have one area of disagreement with Warren Mosler and Randy Wray, which I have expressed to them many times: While I agree that inflation can be cured by raising taxes and/or reducing expenditures, those actions lead to recessions.
Because money is a commodity, its value is determined by risk and reward. And the reward for owning money is interest. Raising interest rates prevents/cures inflation.
Randy and Warren say that causes inflation, by raising prices. I see no evidence of that. What I do see is inflation being caused by energy prices (INFLATION
Rodger Malcolm Mitchell
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