Interest in modern monetary theory and related ideas continues to grow, which is great to see. The efforts of the academic modern monetary theorists and their fellow travelers and supporters continue to bring to light the economic challenges we face and the lies we are all up against. The thought that there will be readers who are relatively new to the approach reminds me that occasionally it is worth getting back to some of the basic insights. The purpose of this post is to illustrate a simple point. The simple point is that it is misguided to cut back public expenditure on services such as libraries, education, health services, and so on, as well as to slash welfare protections for those worst affected by the crisis, when private-sector activity is depressed. In a modern money system – one with a flexible exchange-rate fiat currency – financial affordability is not an issue. The government, as sovereign currency issuer, is not like a household.
The only sense in which affordability can be of concern to a sovereign currency issuer is in terms of real resources. In particular, if the available labor force became stretched to the limit, it might be hard to attract or retain sufficient staff to keep public libraries, schools, hospitals, and other publicly funded or subsidized social institutions operating at current levels without the measures being inflationary. At that point, the community would need to make a choice between cutting the provision of these services or raising taxes to free up resources currently utilized in the private sector. But if, instead, overall demand is weak, and unemployment is high, there is no need for generalized government spending cuts or tax increases, and to implement either would be foolish.
Read it at heteconomist.comPublic Spending Cuts in a Great Recession
by Peter Cooper