At the end of this recent article Scott says “Attempts to jump-start the economy with demand-side fiscal stimulus merely cause the government to pile up more debt, with any growth effects being offset by the Fed.
And Jeffrey Frankel, also in a recent article, has similar worries about national debts. Frankel (surprise surprise) teaches at Harvard. I use the word “teach” advisedly: it’s debatable as to whether those who “teach” at Harvard impart knowledge or ignorance. After all, the roll-call of those with – er – a less than profound understanding of economics at Harvard is a long one: Rogoff, Reinhart, Niall Ferguson, etc.
Anyway, for the billionth time I’ll try to explain why refusing to let the debt expand is futile – a point that is obvious to MMTers, I think.
Private sector net financial assets (PSNFA).
Fiscal stimulus involves government borrowing $Xbn, spending it into the private sector and giving those it has borrowed from in the private sector $Xbn of bonds. The Fed may then print money and buy some or all of those bonds. Either way, the net effect is that PSNFA rises by $Xbn.
That gives rise to the well known “hot potato” effect: that is, the larger is PSNFA, all else equal, the more the private sector will try to dispose of it, or “spend” it. But the private sector can’t dispose of PSNFA because one person disposing of cash or debt means there must be a recipient. Net effect: demand rises.
The alleged problems with PSNFA.
Alleged problem No1. The bigger the stock of PSNFA, the more likely the private sector is to go on a spending spree and cause excess inflation.
Answer: that possibility is an INEVITABLE RESULT of giving households freedom of choice as regards what they spend per month. I.e. even if PSNFA were a quarter its present level, it’s still possible the private sector suddenly has a fit of irrational exuberance and causes excess inflation.
Alleged problem No2. Where a country has a large debt and interest rates rise, the country has a big problem.
Answer: no it doesn’t. The increased interest does not apply to EXISTING DEBT. It only applies to debt reaching maturity. Now what do you do if someone will only lend to you at an excessive rate of interest? It’s easy: tell them to bu*ger off.
It’s especially easy when you’re a monetarily sovereign country. That is, if PSNFA looks like being reduced excessively because would be lenders want too much interest, then the relevant country can keep PSNFA up to the required level by printing money. Problem solved.
And for the benefit of Neanderthals who react to the phrase
“print money” with the word “inflation”, excessive inflation will not occur where PSNFA is kept at the right level.
Of course actually keeping PSNFA at the right level is not easy. But then there is a high degree of uncertainty surrounding ALL THE OTHER TOOLS that governments and central banks use for trying to control demand: interest rate adjustments, fiscal measures, etc. And worse still, no one really knows at what level of unemployment inflation takes off (NAIRU or the so called “natural” level of unemployment). So the uncertainties surrounding PSNFA are no worse than all the other uncertainties.
Ralph Musgrave | Guest Post
4 comments:
The "debt" that the government "piles up," is held by the private sector and that "debt" is dollars. So fiscal stimulus entails the government piling up dollars into the hands of the non-government, which normally leads to an expanded output of goods and services (real wealth). Everyone benefits.
The Fed has nothing to do with this process other than to alter the composition of those dollar assets that the public holds. It cannot increase or reduce them.
Sumner doesn't understand this.
There is no inflation either. It is virtually impossible unless the economy is unable to produce anything or, very constrained in its ability to produce. Maybe, like, after a war or something, if all the means of production and infrastructure were destroyed. And if many, many, human beings were killed, not just domestically, but all around the world.
Sumner argues that monetary policy is so effective (using "expectations channels") that it swamps fiscal policy. I think that's a fairly silly view, but the mainstream does put a lot of weight on the power of monetary policy (most are probably less extreme than Sumner).
If one is optimistic and assumes that it is possible to convince people to think differently, it will be necessary to demonstrate that monetary policy is much weaker than the consensus believes. Right now, we are getting a fairly good laboratory demonstration of its ineffectiveness.
From where I sit, the main assumption is that the Central Bank will countermand what the elected government of a nation instructs.
In other words there is an assumption that a bunch of bankers are in charge of the nation and the government has to do as it is told by them.
The whole thrust of MMT is that it offsets the net-saving desires of the non-government sector. So if the non-government sector suddenly decides to net-save less, then MMT policies *automatically* stop spending as much, or start collecting more taxes.
Yes, the assumption is that the central bank, a bunch of unelected bureaucrats, will countermand the policy of the elected government. That is viewed as a good thing within the world of mainstream monetary economists. (I do mot endorse the view, just reporting it.)
I agree with your point on the net savings desires. I think that the stabilisers within a modern welfare state are far more powerful than monetary policy. A Job Guarantee would be a useful addition, but the stabilisers that already exist are effective, eventually.
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