4 ms·

If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >u

If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money? Deficits matter. They just matter in ways more complicated than we are used to, if you have the borrowing power of a first world nation behind you. Or rather, they don't matter until they do. Ask Greece or Italy. Or check the rate of return on Greek treasury bills. Growth is not the answer. Building your society on the concept of perpetual, unceasing, unpausing growth - that's the problem. The mentality of people who's only solution to financial incompetence, graft, greed and waste is 'throw some more furniture on the fire' - that's the problem.

colindoc84 15y ago
'Deficits dont matter' is a huge strawman. No where in the article does it imply this, it suggests that the government can mobilise resources and increase demand. In other words, it can organise people to produce more instead of sitting around, and use the surplus of that production to pay off who they owe. Having people sit around is bad, and adding to those people is worse. The government can get them to do something and that adds to the economy. Also, you used the example of Greece or Italy. I assume you put Spain in the same category, so its interesting to note that Spain was running a surplus in the years leading up to the crisis. Budget deficits are not the be all-end all of government finance. Deficits matter, but relative to other metrics.
nhaehnle 15y ago
Your questions are neatly answered by Modern Monetary Theory, see e.g. the overview here: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money? The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation. So taxation is necessary to take spending power away from private citizens and enterprises, to open up supply capacities that the government can then buy with its own spending, to fulfill whatever mandates are given to it, hopefully via a democratic process. This is the obvious part. The more interesting question is: How much taxation is needed? The answer to that is more subtle, but the key observation is that when private citizens and enterprises voluntarily refrain from using all their spending power, e.g. by paying down debt, saving, or simply hoarding cash (all of these things are happening these days), then obviously the amount of money removed from the private sector via taxation should be less than the amount of money that the government gives to the private sector via spending. In fact, MMT economists argue that in the current situation, the budget deficit actually needs to become larger if the unemployment problem is to be resolved. Finally, MMT tells you that the cases of the Italian and Greek governments are fundamentally different from the case of the US federal government. It is clear that the US federal government will always be capable of paying back its debt, because it is the currency issuer of the US$, and its debts are only denominated in US$ (so the fact that almost a third of the debts are held by foreign owners is irrelevant). The only possibility is that the government might become unwilling to pay back its debt, but since congress is full of rich people who own a lot of government bonds, that scenario is quite unlikely. This is very different from Italy and Greece, both of which do not have their own currency. Their governments are currency users like you and me, and they can become incapable of paying back their debt.
- WalterSear 15y ago
  "The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation." In other words, deficits [can] matter. Where do you think we are right now?
  - nhaehnle 15y ago
    Where do you think we are right now? You mean with respect to the size of the deficit? I think additional spending targeted at direct job creation would be a good thing. Even more so if the jobs created go towards improving the future economic capacity of the country, e.g. by improving schools, making the country more self-sufficient in terms of energy, think solar plants in southern states combined with updates to the electrical grids and storage capabilities, things like that. Actually, many MMT economists also argue in favor of a Job Guarantee, i.e. a government program that ensures full employment simply by providing such WPA-like jobs at a minimum wage. The theory is that such a program can never be inflationary. At least the kind of inflation that is caused by bidding for higher prices cannot happen since the wages in a Job Guarantee are fixed by legislation.

colindoc84 15y ago

'Deficits dont matter' is a huge strawman. No where in the article does it imply this, it suggests that the government can mobilise resources and increase demand. In other words, it can organise people to produce more instead of sitting around, and use the surplus of that production to pay off who they owe. Having people sit around is bad, and adding to those people is worse. The government can get them to do something and that adds to the economy. Also, you used the example of Greece or Italy. I assume you put Spain in the same category, so its interesting to note that Spain was running a surplus in the years leading up to the crisis. Budget deficits are not the be all-end all of government finance. Deficits matter, but relative to other metrics.

nhaehnle 15y ago

Your questions are neatly answered by Modern Monetary Theory, see e.g. the overview here: http://pragcap.com/resources/understanding-modern-monetary-system http://pragcap.com/resources/understanding-modern-monetary-s... If deficits don't matter, then why isn't the government borrowing money and just paying for everything that its citizens desire? Why tax at all? Why not send >us< money? The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation. So taxation is necessary to take spending power away from private citizens and enterprises, to open up supply capacities that the government can then buy with its own spending, to fulfill whatever mandates are given to it, hopefully via a democratic process. This is the obvious part. The more interesting question is: How much taxation is needed? The answer to that is more subtle, but the key observation is that when private citizens and enterprises voluntarily refrain from using all their spending power, e.g. by paying down debt, saving, or simply hoarding cash (all of these things are happening these days), then obviously the amount of money removed from the private sector via taxation should be less than the amount of money that the government gives to the private sector via spending. In fact, MMT economists argue that in the current situation, the budget deficit actually needs to become larger if the unemployment problem is to be resolved. Finally, MMT tells you that the cases of the Italian and Greek governments are fundamentally different from the case of the US federal government. It is clear that the US federal government will always be capable of paying back its debt, because it is the currency issuer of the US$, and its debts are only denominated in US$ (so the fact that almost a third of the debts are held by foreign owners is irrelevant). The only possibility is that the government might become unwilling to pay back its debt, but since congress is full of rich people who own a lot of government bonds, that scenario is quite unlikely. This is very different from Italy and Greece, both of which do not have their own currency. Their governments are currency users like you and me, and they can become incapable of paying back their debt.

WalterSear 15y ago
"The government is definitely capable of doing that, but think about the consequences. If the government were to spend without any limits at all, it would push aggregate demand to the point where the economy cannot grow quickly enough to satisfy the demand. The result will be inflation." In other words, deficits [can] matter. Where do you think we are right now?
- nhaehnle 15y ago
  Where do you think we are right now? You mean with respect to the size of the deficit? I think additional spending targeted at direct job creation would be a good thing. Even more so if the jobs created go towards improving the future economic capacity of the country, e.g. by improving schools, making the country more self-sufficient in terms of energy, think solar plants in southern states combined with updates to the electrical grids and storage capabilities, things like that. Actually, many MMT economists also argue in favor of a Job Guarantee, i.e. a government program that ensures full employment simply by providing such WPA-like jobs at a minimum wage. The theory is that such a program can never be inflationary. At least the kind of inflation that is caused by bidding for higher prices cannot happen since the wages in a Job Guarantee are fixed by legislation.